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

Remuneration from foreign enterprise – Deduction u/s. 80-O – A. Y. 1994-95 – Assessee conducting services for benefit of foreign companies – Services rendered “from India” and “in India” – Distinction – Report of survey submitted by assessee not utilised in India though received by foreign agency in India – Mere submission of report within India does not take assessee out of purview of benefit –

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CIT vs. Peters and Prasad Association; 371 ITR 206 (T&AP):

The assessee was an agency undertaking the activity of conducting services for the benefit of foreign companies or agencies. After conducting a survey on the assigned subject, the reports were submitted to the foreign agencies. For the A. Y. 1994-95, the assessee claimed deduction u/s. 80-O in respect of the remuneration received from the foreign enterprise for such services. The Assessing Officer denied the deduction on the ground that the survey report was submitted in India and thereby section 80-O was not attracted. The Tribunal allowed the assessee’s claim..

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

“i) It was not the case of the Revenue that the report of survey submitted by the assessee was utilised within India, though it was received by the foreign agency within India. It is only when it was established that the survey report submitted to the foreign agency was, in fact, used or given effect to, in India, that the assessee becomes ineligible for deduction.

ii) The mere fact that the submission of the report was within India, did not take away the matter from the purview of section 80-O. If that was to be accepted, the very purpose of providing the Explanation becomes redundant.

iii) Thus, the assessee was entitled to deduction u/s. 80-O.”

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Capital gain: Long-term or short-term – Sections 2(42A) and 45 – Written lease for three years – Assessee continuing to pay rent and occupying premises for 10 more years – Amount received on surrender of tenancy is long-term capital gain

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CIT vs. Frick India Ltd.; 369 ITR 328 (Del):

Under a written tenancy agreement for three years the assessee occupied premises on 15-03-1973. Thereafter the assessee continued to use and occupy the premises as a tenant. Rent was paid by assessee and was accepted by the landlord. On 18-02-1987 the tenancy rights were surrendered and consideration of Rs. 6.78 crore was received from a third party. The Assessing Officer held that the amount should be treated as short-term capital gains and not as long term capital gains. The logic behind the finding of the Assessing Officer was that the tenancy after the initial period of three years by way of a written instrument, was month to month. Thus the tenancy rights were extinguished on the last day of each month and a fresh or new tenancy was created. The Tribunal held that the amount was assessable as long-term capital gain.

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

“The tenancy rights had been held for nearly fourteen years and consideration received on surrender had been rightly treated as long-term capital gain.”

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Refund – Self-assessment tax – Interest – Sections 140A, 244A(1)(a),(b) and 264 – A. Y. 1994-95 – Excess amount paid as tax on self-assessment – Interest payable from date of payment to date of refund of the amount

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Stock Holding Corporation of India Ltd vs. CIT; 373 ITR 282 (Bom):

For the A. Y. 1994-95, the Assessing Officer did not pay interest u/s. 244A in respect of the excess amount paid by the petitioner as self assessment tax. The petitioner’s application u/s. 264 of the Income-tax Act, 1961 was rejected by the Commissioner.

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

“i) The requirement to pay interest arises whenever an amount is refunded to the assessee as it is a kind of compensation for use and retention of money collected by the Revenue.

ii) Circular No. 549 dated 31/10/1989, makes it clear that if refund is out of any tax other than out of advance tax or tax deducted at source, interest shall be payable from the date of payment of tax till the date of grant of refund. The circular even remotely did not suggest that interest is not payable by the Department on self-assessment tax.

iii) The tax paid on self-assessment would fall u/s. 244A(1)(b). The provisions of section 244A(1)(b) very clearly mandate that the Revenue would pay interest on the amount refunded for the period commencing from the date payment of tax is made to the Revenue up to the date when refund is granted by the Revenue. Thus, the submission that the interest is payable not from the date of payment but from the date of demand notice u/s. 156 could not be accepted as otherwise the legislation would have so provided in section 244A(1)(b), rather than having provided from the date of payment of the tax. Therefore, the interest was payable u/s. 244A(1)(b) on the refund of excess amount paid as tax on self-assessment u/s. 140A.”

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Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Disallowance u/s. 14A is not automatic upon claim to exemption – AO’s satisfaction that voluntary disallowance made by assessee unreasonable and unsatisfactory is necessary – In the absence of such satisfaction the disallowance cannot be justified

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CIT vs. I. P. Support Services India (P) Ltd.; 378 ITR 240 (Del):

In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).

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

“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.

ii) N o substantial question of law arises. The appeal is dismissed.”

Housing project: Deduction u/s. 80-IB(10): A. Y. 2007-08: Amendment w.e.f. 01/04/2005 requiring certificate of completion of project within four years of approval: Not applicable to projects approved prior to that date: Assessee entitled to deduction:

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CIT vs. CHD Developers Ltd.; 362 ITR 177 (Del):

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.”

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Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<

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Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):

The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.

The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.

The Gujarat High Court held as under:

“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.

ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.

iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”

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Income from house property: Section 23(2) of Income-tax Act, 1961: Allowance for self-occupation u/s.23(2) is available for HUF also.

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[CIT v. Hariprasad Bhojnagarwala, 342 ITR 69 (Guj.) (FB)]

The following question was considered by the Full Bench of the Gujarat High Court: “Whether the Appellate Tribunal is right in law and on facts in holding that the benefit of section 23(2) is available to a Hindu Undivided Family?”

The High Court held as under: “

(i) The benefit of relief in respect of self-occupied property u/s.23(2) of the Income-tax Act, 1961 is available only to the owner who can reside in his own residence. That means, the benefit of relief is available only to an individual assessee and not to an imaginary assessable entity.

(ii) A Hindu Undivided Family is nothing but a group of individuals related to each other by blood or in a certain manner. A Hindu Undivided Family is a family of a group of natural persons. The family can reside in the house, which belongs to the Hindu Undivided Family. A family cannot consist of artificial persons.

 (iii) There is nothing in the words used in section 23(2), which excludes its application to a Hindu Undivided Family.

(iv) The question is answered in favour of the assessee and against the Revenue.”

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Capital gains: Exemption u/s.54F of Incometax Act, 1961: A.Y. 2007-08: Purchase of residential house in joint names of assessee and his wife: Wife had not contributed: Assessee entitled to exemption u/s.54F to the full extent.

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[CIT v. Ravindra Kumar Arora, 342 ITR 38 (Del.)]

The assessee sold a land being a long-term capital asset and invested the sale proceeds in a residential house which was purchased in the joint name of the assessee and his wife. His wife had not made any contribution. The assessee’s claim for deduction u/s.54F of the Income-tax Act, 1961 was rejected by the Assessing Officer on the ground that the house had been purchased in the joint names of the assessee and his wife. The Tribunal allowed the assessee’s claim.

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

(i) Section 54F of the Income-tax Act, 1961, is a beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied on a hyper-technical ground.

(ii) The condition stipulated in section 54F stood fulfilled. It would be treated as the property purchased by the assessee in his name and merely because he had included the name of his wife and the property purchased in the joint names would not make any difference. The assessee was entitled to exemption u/s.54F.”

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Recovery of tax: Stay of recovery during pendency of appeal: Section 220(6) of Income-tax Act, 1961: If prima facie the case is in favour of the assessee, stay should be granted for the full demand.

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The assessee filed appeal against the order u/s.201 of the Income-tax Act, 1961 before the CIT(A). The assessee also filed an application for stay of the demand before the CIT(A). The CIT(A) observed that there is ‘enough strength in the plea of the assessee for stay of demand’. However, he directed to pay 30% of the demand.

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

(i) If on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. From the perusal of the materials brought on record, we are of the view that the Commissioner having himself expressed opinion on the order that there is enough strength in the plea of the assessee for stay of the demand, there was no occasion to direct for deposit of 30%.

(ii) In view of the above, we provide that during the pendency of the appeal the demand against the petitioner shall be kept in abeyance. However, the petitioner shall furnish adequate security in respect of the said 30% of the demand.”

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Recovery of tax: Attachment: Stay of recovery: Sections 220(1), 220(6) and 281B of Income-tax Act, 1961: Provisional attachment u/s.281B on 7-10-2011: Assessment order passed on 9-3-2012: Demand directed to be paid within 7 days instead of 30 days: Not proper: Application for stay of demand till disposal of appeal by CIT(A) rejected: Not just: High Court directed stay of recovery till disposal of appeal by CIT(A).

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[Firoz Tin Factory v. ACIT (Bom.), W.P. (L) No. 765 of 2012 dated 26-3-2012]

By an attachment order dated 7-10-2011, passed u/s.281B of the Income-tax Act, 1961 mutual funds of value Rs.36.54 crore were attached. The assessment order for the A.Y. 2010-11 was passed on 13-3-2012 raising a demand of Rs.36,56,61,776. Demand was directed to be paid within 7 days instead of 30 days as provided u/s.220(1) of the Act. The petitioner assessee filed an appeal before the CIT(A) and made an application u/s.220(6) of the Act dated 12-3-2012 for stay of demand till disposal of appeal by the CIT(A), which was rejected.

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

 “(i) The provisions of section 220(1) stipulate that the amount of demand shall be paid within 30 days of the service of the notice. The proviso stipulates that where the Assessing Officer has any reason to believe that it would be detrimental to the interest of Revenue if the full period of 30 days is allowed, he may direct, with the previous approval of the Joint Commissioner, that the demand shall be paid within a period less than 30 days. The power to reduce the period under the proviso cannot be exercised casually and without due application of mind. The question as to whether it would be detrimental to the interest of the Revenue to allow the full period of 30 days has to be addressed. The reasons as well as the approval which has been granted by the Joint Commissioner must be made available to the assessee where a copy of the reasons is sought from the Assessing Officer.

(ii) In the present case, a provisional attachment has already been made on 7-10-2011 u/s.281B. The attachment was to the extent of Rs.36.54 crore. That being the position, evidently there would have been no basis for forming a reason to believe that if the period of 30 days was to be observed u/s.220(1), that would be detrimental to the Revenue. Merely because the end of the financial year is approaching that cannot constitute a detriment to the Revenue. The detriment to the Revenue must be akin to a situation where the demand of the Revenue is liable to be defeated by an abuse of process by the assessee. This is of course illustrative, for what is detrimental to the Revenue has to be determined on the facts of each case and an exhaustive catalogue of circumstances cannot be laid down. Consequently, we find that there is absolutely no justification for the Assessing Officer for making an order of demand directing the assessee to deposit the entire demand by 16-3-2012. The action is highhanded and contrary to law.

(iii) The Revenue is adequately protected by the attachment u/s.281B. No coercive steps shall be taken for recovery of the demand, pending the appeal.”

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Recovery of tax: Stay of recovery during pendency of appeal: Section 220(6) of Incometax Act, 1961: AO and Appellate Authorities are not mere tax gatherers: They have to be fair to the assessee.

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[Nishit M. Desai v. CIT (Bom.), W.P. No. 653 of 2012; dated 15-3-2012]

The assessee is a professional. For the A.Y. 2009- 10, the Assessing Officer passed assessment order u/s.143(3) of the Income-tax Act, 1961 determining the total income at Rs.22.43 crore as against the returned income of Rs.19.41 crore and raised a demand of Rs.1.18 crore. A refund of Rs.78 lakh was due to the assessee for the A.Y. 2010-11. The assessee filed appeal before the CIT(A) and also filed an application for stay of recovery till the disposal of appeal. The CIT(A) directed that the refund of Rs.78 lakh be adjusted and the balance of Rs.41 lakh be paid. He held that considering ‘the financial status and affairs’ of the assessee, the payment of the balance demand would not cause financial hardship.

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

“(i) The power which vested in the Assessing Officer u/s.220(6) and on the CIT(A) to grant a stay of demand is a judicial power. It is necessary for both the Assessing Officer as well the Appellate Authorities to have due regard to the fact that their function is not merely to act as tax gatherers, but equally as quasi-judicial authorities, they owe a duty of fairness to the assessee. This seems to be lost [Nishit M. Desai v. CIT (Bom.), W.P. No. 653 of 2012; dated 15-3-2012] The assessee is a professional. For the A.Y. 2009- 10, the Assessing Officer passed assessment order u/s.143(3) of the Income-tax Act, 1961 determining the total income at Rs.22.43 crore as against the returned income of Rs.19.41 crore and raised a demand of Rs.1.18 crore. A refund of Rs.78 lakh was due to the assessee for the A.Y. 2010-11. The assessee filed appeal before the CIT(A) and also filed an application for stay of recovery till the disposal of appeal. The CIT(A) directed that the refund of Rs.78 lakh be adjusted and the balance of Rs.41 lakh be paid. He held that considering ‘the financial status and affairs’ of the assessee, the payment of the balance demand would not cause financial hardship. The Bombay High Court allowed the writ petition filed by the assessee and held as under: “(i) The power which vested in the Assessing Officer u/s.220(6) and on the CIT(A) to grant a stay of demand is a judicial power. It is necessary for both the Assessing Officer as well the Appellate Authorities to have due regard to the fact that their function is not merely to act as tax gatherers, but equally as quasi-judicial authorities, they owe a duty of fairness to the assessee. This seems to be lost sight of in the manner in which the authority has acted in the present case.

 (ii) The parameters for the exercise of jurisdiction to grant stay of demand has been set out in several judgments of this Court, including in KEC International v. B. R. Balakrishnan, 251 ITR 158.

(iii) The assessee’s submissions on merits require consideration. The CIT(A) ought to have devoted a more careful consideration to the issue as to whether a stay of demand was warranted. As out of total demand of Rs.1.18 crore, Rs.78 lakh has been adjusted, the balance has to be stayed.”

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Housing project: deduction u/s.80IB(10) of Income-tax Act 1961: A.Ys. 2004-05 and 2005- 06: Multiple housing projects in one acre plot is permissible.

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[CIT v. Vandana Properties (Bom.), ITA Nos. 3633 of 2009 and 4361 of 2010 dated 28-3-2012]

The assessee-firm was engaged in the business of construction and development of housing projects. On a plot of land admeasuring 2.36 acres in Mumbai the assessee had constructed buildings A, B, C and D over a period of years, in respect of which no deduction u/s.80IB(10) of the Income-tax Act, 1961 was claimed. In the year 2001, the assessee became entitled to construct an additional building ‘E’ on the said plot of land. IOD was approved by the Municipal Corporation on 11-10-2002 and the commencement certificate was issued on 10-03-2003. For the A.Ys. 2004-05 and 2005-06, the assessee’s claim for deduction u/s.80IB(10) was rejected by the Assessing Officer. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue the following issues were considered by the Bombay High Court:

(i) What is a housing project u/s.80IB(10)?

 (ii) Whether, if the approval for construction of ‘E’ building was granted by local authority subject to the conditions set out in the first approval granted on 12-5-1993 for construction of A and B buildings, construction of ‘E’ building is an extension of the earlier housing project for which approval was granted prior to 1-10-1998 and, therefore, benefit of section 80IB(10) cannot be granted?

(iii) Whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate for each building is less than one acre, deduction u/s.80IB(10) can be denied?

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

“(i) As the expression ‘housing project’ is not defined, it must have the common parlance meaning and means constructing a building or group of buildings consisting of several residential units. The approval granted to a building plan constitutes approval granted to a housing project. Construction of even one building with several residential units of the size not exceeding 1000 sq.ft. would constitute a ‘housing project’ u/s.80IB(10).

(ii) ‘E’ building is an independent housing project and not an extension of the housing project already existing on the plot, because when the earlier plans were approved, ‘E’ building was not even contemplated and came into existence much later. The fact that the approval was granted on the same terms as that granted to the other buildings does not make it an ‘extension’.

(iii) Section 80IB(10)(b) specifies the size of the plot of land but not the size of the housing project. While the plot must have a minimum area of one acre, it need not be a vacant plot. The object of section 80IB(10) is to boost the stock of houses. There can be multiple housing projects on a plot of land having minimum area of one acre.”

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Disallowance: Section 14A of Income-tax Act, 1961: A.Y. 2007-08: Section 14A does not apply to shares held as stock in trade.

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[CCI Ltd. v. JCIT (Kar.), ITA No. 359 of 2011 dated 28-2-2012]

 The assessee was in the business as a dealer in shares and securities. In the relevant year, the assessee had earned dividend income of Rs.46,67,190. The assessee had incurred an expenditure of Rs.28 lakh as broking charges for availing interest-free loan of Rs.14 crore for converting partly-paid shares into fully-paid shares. The Assessing Officer estimated the expenditure incurred on earning the dividend income at Rs.27,24,330 u/r. 8D and disallowed the same u/s.14A of the Income-tax Act, 1961. The Tribunal held that the Assessing Officer was not right in attributing the entire broking commission as relatable to earning of dividend income only. The broking expenditure has to be considered as business expenditure, as well. The Tribunal directed the Assessing Officer to bifurcate all the expenditure proportionately and allow the expenditure in accordance with law.

The assessee filed appeal before the Karnataka High Court and raised the following question of law:

“Whether the provisions of section 14A are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income?”

The Karnataka High Court decided the question in favour of the assessee and held as under:

“(i) When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all.

(ii) Though the dividend income is exempt from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions.

(iii) In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.”

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Capital asset v. Stock-in-trade: Section 50C of Income-tax Act, 1961: A.Y. 2006-07: Section 50C does not apply to land & building held as stock-in-trade.

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[CIT v. M/s. Kan Construction and Colonizers (P) Ltd. (All.), ITA No. 1 of 2012 dated 9-4-2012.]

In the A.Y. 2006-07, the assessee had sold a plot of land which was held by it as stock-in-trade. The Assessing Officer held that the land was a capital asset and computed the capital gain by applying the provisions of section 50C of the Income-tax Act, 1961. The Tribunal accepted the assessee’s claim that the land was a stock-in-trade and that the provisions of section 50C are not applicable.

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

(i) For applicability of section 50C, one of the essential requirements is that an asset should be a ‘capital asset’. Whether sale of land is sale of capital asset or stock-in-trade is essentially a question of fact. The assessee is a builder and the investment in purchase and sale of plots was ancillary and incidental to its business. The assessee had treated the land as stock-in-trade in the balance sheet.

(ii) The Tribunal has rightly held that the provisions of section 50C are not applicable with respect to the sale of land which was not a capital asset.”

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Income: Mutuality: A. Y. 2005-06: TDR premium paid by members to housing co-operative society for utilising extra FSI is exempt in the hands of society on the principle of mutuality:

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CIT vs. Jai Hind Co-operative Housing Society Ltd.; 259 CTR 501 (Bom):

The assessee is a co-operative housing society formed of plot owners, who had obtained a lease of land from the Maharashtra Housing Board. The society in turn entered into sub-lease agreements with its members. The society passed a resolution by which it resolved that if any member desires to avail of the benefit of TDR for carrying out construction on his/her plot, the member should apply for a no objection certificate which would be granted on the payment of a premium calculated at Rs. 250 per sq. ft. In the previous year relevant to the A. Y. 2005-06, the assessee society received a premium of Rs. 18.75 lakh from four members of the society. The Assessing Officer rejected the claim of the assessee society that the premium amount is governed by the principle of mutuality and accordingly is not chargeable to tax and added the said amount of Rs. 18.75 lakh to the total income. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) The principle of mutuality would clearly apply to a situation as to the present. The TDR premium is a payment made by a member to the society of which he is a member, as a consideration for being permitted to make an additional utilization of FSI on the plot allotted by the co-operative housing society.

ii) The society which looks after the infrastructure, requires the payment of the premium in order to defray the additional burden that may be cast as a result of the utilisation of the FSI. The point however is that there is a complete mutuality between the co-operative housing society and its members. The principles of mutuality would apply. Hence no substantial question of law arises.”

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Transfer pricing: S/s 92B and 92C: A. Y. 2004- 05: International transaction: Meaning of: Assessee a wholly owned subsidiary of Mauritius company which, in turn, was a wholly owned subsidiary of a US company: Assessee booked orders in India for equipments manufactured by US company and earned commission: Also rendered services against warranty given by US company: Apart from that, assessee entered into independent contracts with Indian customers for installation, commissioning and maintenance

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CIT vs. Stratex Net Works (India) (P.) Ltd; 215 Taxman 533 (Del): 33 taxman.com 168 (Del):

The assessee was a wholly owned subsidiary of a Mauritius company which, in turn, was a wholly owned subsidiary of a company of USA. US company was an associated enterprise of the assessee. All the equipments for microwave links were manufactured by the said associated enterprise (AE). The orders in India for installation of these equipments were booked by the assessee, for which it received commission from its AE. Services against warranty given by AE were also rendered by assessee. Apart from that, the assessee also undertook installation of the said equipment and was also undertaking annual maintenance to its Indian customers vide a separate contact. To compute profit level indicator (PLI) in respect of international transactions, the Transfer Pricing Officer had adopted the Transactional Net Margin Method (TNMM) as the most appropriate method u/s. 92C(1)(e). While computing the PLI, the Transfer Pricing Officer (TPO) took into account not only the operating revenue and operating costs of the international transactions involving warranty services and commission income, but also took into account the operating revenue and operating costs of the installation/commissioning and maintenance services which were domestic transactions and made TP adjustment to assessee’s income. The Commissioner (Appeals) deleted said addition. The Tribunal concurred with the order of the Commissioner (Appeals).

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

“i) It is evident that the Transfer Pricing Officer, himself, did not consider installation/commissioning and maintenance to be international transactions inasmuch as no adjustment was made by him in respect thereof. The adjustments made to the extent of Rs. 1,19,41,893/- were only with regard to the value of international transactions relating to commission on sales and warranty support service.

ii) On going through the order passed by the Commissioner (Appeals) as also the impugned order passed by the Tribunal, it was clear that both these authorities have returned a finding of fact that the installation/commissioning and maintenance services were not part of the international transactions. In fact, the Tribunal held that the installation/commissioning and maintenance agreements were independent agreements unconnected with the transactions of warranty support services and the transaction which generated the commission income.

iii) The Tribunal noted that the equipment had been supplied to 40 customers by the/assessee’s associated enterprise. However, only three of them had availed of the installation services from the assessee. The Tribunal also noted that a corroborative circumstance for construing the transactions of installation/commissioning and maintenance as domestic transactions was that, in the order of the TPO itself, no adjustment was made in respect of these transactions. The Tribunal further held that since the profit level indicator shown by the assessee on the international transactions of waranty service and commission income was 18.98%, there was no need for any adjustment in the arm’s length prices of these transactions inasmuch as the profit level indicator of the comparables were determined by the Transfer Pricing Officer at 16.34%, which was lower.

iv) It is in this backdrop that the Tribunal felt that there was no reason to examine the issue on the argument of the assessee that the Transfer Pricing Officer had not applied the proper comparables while working out the profit level indicator of comparables.

v) From the foregoing discussion, it is evident that the transactions pertaining to the installation/ commissioning and maintenance services were not international transactions as contemplated u/s. 92B(1). They were also not deemed international transactions u/s. 92B(2) of the said Act because none of the conditions stipulated therein of a prior agreement/existing between the customers of the assessee and the associated enterprise had been established as a fact. Moreover, there is no finding that the terms of the transaction of installation/commissioning as well as maintenance had been determined in substance between the customers and the assessee by the associated enterprise.

vi) In the absence of such findings, it cannot be deemed that the transaction of installation/commissioning as well as provision of maintenance services by the assessee to its domestic customers in India were international transactions falling within section 92B(2).

vii) As such, no substantial question of law arises for the consideration of this court.”

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Revision: Rectification: S/s. 154,155(14) and 263: A. Y. 1999-00: Assessee not claiming refund for non-availability of TDS certificates: Certificates produced later and rectification order allowing credit: Revision of rectification order by Commissioner u/s. 263: Provision permitting rectification not in force at time of rectification but in force at time of revision by Commissioner: Order of rectification not erroneous and could not have been revised:

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CIT vs. Digital Global Soft Ltd.; 354 ITR 489 (Kar):

For the A. Y. 1999-00, while filing the return of income, the assessee did not have TDS certificates in respect of Rs. 19,44,692/- and accordingly, could not claim credit of the said amount in the return of income. After receiving the intimation u/s. 143(1), the assesee received the TDS certificates in respect of the said amount. Thereafter, the assessee filed the said TDS certificates and claimed credit of the said amount by rectification u/s. 154 of the Act. The Assessing Officer allowed the claim by passing order u/s. 154. The Commissioner exercising his power u/s. 263 of the Act withdrew the said credit of Rs. 19,44,672/- given by the Assessing Officer u/s. 154. The Tribunal allowed the appeal filed by the assessee and set aside the order of the Commissioner passed u/s. 263.

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

“Whether the order passed by the assessing authority giving credit to the amount paid by way of tax deducted at source and consequently directing refund when the assessee has not claimed the said amount in the return filed under the purported exercise of power u/s. 154 of the Act is valid?”

The Karnataka High Court dismissed the appeal and held as under:

“i) As the provisions of section 155(14) were not in the statute book on the day the Assessing Officer passed the order u/s. 154, the order passed on 12th June, 2001, could not be strictly in accordance with law. It was erroneous. The amendment came into effect only from 1st June, 2002.

ii) But on the day the Commissioner exercised his power and passed order on 31st July, 2002, the amendment was in the statute book. Therefore, on 31st July, 2002, when revisional jurisdiction was exercised, the Commissioner could not have held that the order passed by the assessing authority was erroneous, as on that day the amended law provided for such rectification.

iii) Even if it was erroneous, unless the erroneous order was prejudicial to the interest of the Revenue, the Commissioner could not have exercised the power. The amount that was ordered to be refunded to the assessee was not an amount lawfully due to the Revenue at all, but an amount which the Revenue legitimately should have refunded if only the claim had been made in the return enclosing the certificates u/s. 203.

iv) Because the assesee was handicapped by such certificates not being forwarded to it and consequently not being able to make the claim, such a claim was not made. The moment it got possession of those certificates within two years from the end of the assessment year it had put forth the claim. The amount was not a lawful amount due to the Government. It was an amount which should have been refunded to the assessee.

v) In that view of the matter we do not see any merit in this appeal. The substantial question of law framed is answered in favour of the assessee and against the Revenue. The appeal is dismissed.”

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Presumptive income: Section 44AD r.w.s. 69: Assessee, a construction company: Books of account maintained by assessee were duly audited and there was no question of disbelieving them in absence of any cogent evidence: Benefit u/s. 44AD could be granted to assessee:

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CIT vs. Dolphin Builders P. Ltd.; 35 taxman.com 3 (MP):

The assessee, a construction company constructed 24 flats in two buildings and entered into agreement with ‘G’, according to which flats were sold through ‘G’ on an agreed commission. A raid was conducted in the premises of ‘G’ in which a note book was found, where in the column for cost of flats some figures were mentioned in respect of assessee’s apartments. The Assessing Officer taking view that the figures indicated the sale price of flats of assessee’s apartments, recomputed the income u/s. 44AD by calculating sale proceeds as per the seized document. Commissioner (Appeals) held that since gross receipts including those not accounted for exceeded Rs. 40 lakh, section 44AD was not applicable. On cross appeals before the Tribunal, the appeal of the assessee was allowed that no addition was required.

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

“i) On perusing the orders of the Assessing Officer, Income-Tax Commissioner, the ITAT it is agreed that the arguments advanced on behalf of assessee that no prima facie evidence of passing any money from ‘G’ to assessee was proved and for the papers seized from any other place i.e. ‘G’ assessee cannot be held liable, so, the tribunal has committed no error.

ii) On perusing the material in the matter it is found that there was no evidence in the matter that the excess amount, if any, was collected by ‘G’ or even if it was collected then it was passed on to the assessee. There was no search, survey or seizure of the premises of the assessee. Apart from this, the department had not examined any purchaser or flat owner to verify the correctness of the aforesaid noting that some higher amount was paid by the said purchaser to ‘G’ or the fact that actual price was much higher to the price which was recorded in the account books.

iii) The Tribunal has also found that if any amount was collected in excess to the agreed price then ‘G’ could have been liable for that and not the assessee. It is found that reasoning of the Tribunal to be reasonable. Though there may be some doubt about the price of the flats but until and unless it could have been proved by some evidence, aforesaid doubt cannot take place of proof. Until and unless such noting is corroborated by some material evidence, the Assessing Officer erred in making addition in the income.

iv) So far as the applicability of section 44AD is concerned, when the assessee had maintained accounts books, vouchers and other documents as required u/s/s. (2) of section 44AA and got them audited and furnished it along with audit report then such benefit should have been extended to the assessee. In the present case audited accounts books were maintained and there was no question of disbelieving them in absence of any cogent evidence.

v) The order passed by the Tribunal is based on proper appreciation of facts and there is no error in the order. In view of the aforesaid discussion, no merit and substance is found in the appeal and is, accordingly dismissed.”

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Penalty: Concealment: Section 271(1)(c): 1999- 00: Inadvertent mistake in claiming exemption: No concealment: Penalty u/s. 271(1)(c) not justified:

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CIT vs. Bennett Coleman & Co. Ltd.; 259 CTR 383 (Bom):

In the A. Y. 1999-00, the assessee had claimed exemption of interest on tax free bonds of Rs. 5,60,11,644/-. In the course of the assessment proceedings, the assessee was asked to give details of interest on tax free bonds. While preparing the said details, it was noticed that 6% Government of India Capital Index Bonds purchased during the year were inadvertently categorised as tax free bonds and therefore interest of Rs. 75,00,000 was wrongly claimed as exempt. The assesee offered the said amount to tax. The Assessing Officer levied penalty u/s. 271(1)(c) of the Income-tax Act 1961 on the said amount. The Tribunal found that by inadvertent mistake interest at the rate of 6% on the Government of India Capital Index Bonds was shown as tax-free bonds. The Tribunal concluded that there was no desire on the part of the assessee to hide or conceal the income so as to avoid payment of tax on interest from the bonds. Accordingly, the Tribunal deleted the penalty.

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

“i) The decision of the Tribunal is based on finding of fact that there was an inadvertent mistake on the part of the assessee in including the interest received of 6% on the Government of India Capital Index Bonds as interest received on tax free bonds. It is not contended by the Revenue that above finding of fact by the Tribunal is perverse.

ii) In these circumstances, we see no reason to entertain the proposed question. Appeal is dismissed.”

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TDS effect, Refunds, etc.: S/s. 139, 143(1), 154, 245, 200 and 244A: General problems faced by the taxpayers: Directions by Delhi High Court: Court On Its Own Motion vs. CIT and AIFTP vs. UOI; 352 ITR 273 (Del): 214 Taxman 335 (Del):

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258 CTR 113(Del): 31 taxman.com 31(Del)

A letter dated 30-04-2012, written by a Chartered Accountant was treated as a public interest litigation and marked to the Court. Subsequently, the All India Federation of Tax Practitioners fied another writ petition on identical or similar lines. The attention of the Court was drawn towards the numerous difficulties faced by income-tax assesses, consequent upon computerisation and central processing of income-tax returns. The difficulties arose due to faulty processing of returns and uploading of details of tax deducted at source by deductors resulting in creation of huge demands because of mismatch between the tax deducted at source claimed in the return and that reflected in the online computer records, i.e., in Form No. 26AS. Moreover, the Central Processing Unit set up in Bangalore, while issuing refunds in the later years adjusted demands for earlier years which may not have been communicated to the assessee. The Petitioners prayed for suitable directions to the Income Tax Department. By an interim order dated 31-08-2012 certain directions were issued by the Delhi High Court which has been summarised in the November 2012 Issue of the BCA Journal (In the High Courts). Further directions have been now given in this order. Briefly, the directions are as under:

1. Uploading of wrong or fictitious demand and delayed disposal of rectification applications

1.1 Each assessee has a right and can demand from the respondents that correct and true data relating to the past demands should be uploaded. CBDT should and must endeavour and direct the Assessing Officers to upload the correct data. Filing of applications u/s. 154 i.e. application for rectification and correction by the assessee would entail substantial expenses on the part of the assessee who would be required to engage a counsel or advocate or make repeated visits to the Income-tax office for the said purpose. This would defeat themain purpose behind computerisation i.e., to reduce involvement of human element.

1.2 As per Citizen Charter of Income tax Department, refund along with interest in case of electronically filed returns should be made within six months. In case of manually filed returns, refund should be made within nine months. The time commences from the end of month in which the return/application is received. Similarly, the Citizen Charter states that a decision on the rectification application u/s. 154 will be made within a period of two months. The Board has, however, issued instructions that rectification application u/s. 154 should be disposed of within 4/6 months. There is a general grievance that the Assessing Officers do not adhere to the said time limits and the assessees are invariably called upon to file duplicate applications or new applications in case they want disposal. It is stated that there are no dak or receipt counters or register for receipt of applications u/s. 154. Thus, there is no record/register with the Assessing Officer with details and particulars of application made u/s. 154, the date on which it was made, date of disposal and its fate. Therefore, the respondents are to examine the necessity for proper dak/receipt counters for receipt of applications u/s. 154 by hand or by post. It would be desirable that each application received should be entered in a diary/register and given a serial number with acknowledgement to the applicant indicating the diary number. It was also suggested that details of applications u/s. 154 should be uploaded on the website as this would entail transparency. The website should indicate the date on which the application was received and date of disposal of the application by the Assessing Officer concerned.

1.3 Uploading of the details of the said registers should be made online preferably within a period of six months. This would be in accordance with the mandate of the Citizen Charter of the Department which states that the respondents believe in equity and transparency.

2. Regarding adjustment of refund contrary to the mandate of section 245

2.1 Section 245 requires that an opportunity ofresponse/reply should be given and after considering the stand and plea of the assessee, justified and valid order or direction for adjustment of refund can be made. The section postulates two stage action; prior intimation and then subsequent action when warranted and necessary for adjustment of the refund towards arrears.

2.2 CPC, Bengaluru stated that after handing over of old demands to the CPC and commencement of processing of returns by CPC, the procedure u/s. 245 was being followed by CPC before making adjustment of the refunds and assessees were being given full details with regard to the demands which were being adjusted. The intimation u/s. 143(1) issued from CPC incorporated the full details of the existing demands that were adjusted against the refunds. Further, when the processing of a return at CPC resulted in demand, the communication u/s. 245 was incorporated into the intimation itself. As far as the demands uploaded by the Assessing Officers to CPC portal were concerned, CPC had already issued a communication to the taxpayers through e-mail (wherever e-mail address is available) and by speed post informing him the existence of the demand in the books of the Assessing Officer and that such demand was liable for adjustment against refund u/s. 245.

2.3 The respondents accept that when a return of income is processed u/s. 143(1) at Central Processing Unit at Bengaluru, the computer itself adjusts the refund due against the existing demand, i.e., there is adjustment but without following the two stage procedure prescribed in section 245.

2.4 In the order dated 31-08-2012, the respondents were directed to follow the procedure prescribed u/s. 245 before making any adjustment of refund payable by the CPC at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply must be considered and examined by the Assessing Officer before any direction for adjustment is made. The process of issue of prior intimation and service thereof on the assessee would be as per the law. The assessees would be entitled to file their response before the Assessing Officer mentioned in the prior intimation. The Assessing Officer wouldthereafter examine the reply and communicate his findings to the CPC, Bengaluru, who would then process the refund and adjust the demand, if any payable. The final adjustment will also be communicated to the assessee.

2.5 The said interim order is confirmed. It is noticed that the respondents have taken remedial steps to ensure compliance of section 245 as they now give an option to the assessee to approach the Assessing Officer.

3. Regarding past adjustments

3.1 The problem relating to ‘past adjustment’ before passing of the interim order on 31-08-2012, still persists and has to be addressed.

3.2 Inspite of the opportunity given to the Revenue to take steps, prescribe, adopt a just procedure, to correct the records, etc., nothing has been done and they have not taken any decision or steps. In these circumstances, direction is issued, which will be applicable only to cases where returns have been processed by the CPC Bengaluru and refunds have been fully or partly adjusted against the past arrears while passing or communicating the order u/s. 143(1) without following the procedure u/s. 245. In such cases, it is directed that :

A. All such cases will be transferred to the Assessing Officer;

B. The Assessing Officers will issue notice to the assessee which will be served as per the procedure prescribed;

C. The assessees will be entitled to file response/ reply to the notice seeking adjustment of refund;

D.    After considering the reply, if any, the Assessing Officers will pass an order u/s. 245 permitting or allowing the refund;

E.    The Board will fix time limit and schedule for completing the said process.

4.    Regarding interest on refund u/s. 244A

4.1  An assessee can certainly be denied interest if delay is attributable to him in terms of s/s. (2) to section 244. However, when the delay is not attributable to the assessee but is due to the fault of the Revenue, then interest should be paid under the said section.

4.2 False or wrong uploading of past arrears and failure to follow the mandate before adjustment u/s. 245, cannot be attributed and treated as a fault of the assessee. These are lapses on the part of the Assessing Officer i.e. the Revenue.

4.3 Interest cannot be denied to the assessees when the twin conditions are satisfied and in favour of the assessee.

5.    Regarding uncommunicated intimations under section 143(1)

5.1 The grievance of the petitioner is with regard to the uncommunicated intimations u/s. 143(1) which remained on paper/file or the computer of the Assessing Officer. This is a serious challenge and a matter of grave concern. The law requires that intimation u/s. 143(1) should be communicated to the assessee, if there is an adjustment made in the return resulting either in demand or reduction in refund. The uncommunicated orders/ intimations cannot be enforced and are not valid.

5.2 The onus to show that the order was communicated and was served on the assessee is on the Revenue and not upon the assessee. If an order u/s. 143(1) is not communicated or served on the assessee, the return as declared/ filed is treated as deemed intimation and an order u/s. 143(1) . Therefore, if an assessee does not receive or is not communicated an order u/s. 143(1), he will never know that some adjustments on account of rejection of TDS or tax paid has been made. While deciding applications u/s. 154, or passing an order u/s. 245, the Assessing Officers are required to know and follow the said principle. Of course, while deciding application u/s. 154 or 245 or otherwise, if the Assessing Officer comes to the conclusion and records a finding that TDS or tax credit had been fraudulently claimed, he will be entitled to take action as per law and deny the fraudulent claim of TDS etc. The Assessing Officer, therefore, has to make a distinction between fraudulent claims and claims which have been rejected on ground of technicalities, but there is no communication to the assessee of the order/intimation u/s. 143(1). In the latter cases, the Assessing Officer cannot turn around and enforce the demand created by uncommunicated order/intimation u/s. 143(1).

6.    Regarding credit of tax deducted at source (TDS)

6.1 The said problem can be divided into two categories; cases where the deductors fail to upload the correct and true particulars of the TDS, which has been deducted and paid as a result of which the assessee does not get credit of the tax paid, and the second set of cases where there is a mismatch between the details uploaded by the deductor and the details furnished by the assessee in the income tax return. The details of TDS credited /uploaded in the case of each assessee are available in form 26AS.

6.2 This being a PIL, no specific direction is being issued but the Board must re-examine the said aspect and if they feel that unnecessary burden or harassment will be caused to the assessees, suitable remedial steps should be taken.

6.3 Also, there can be mismatch because of deductor and the assessee following different methods of accounting. Further, the assessee may treat the income on which tax has been deducted as income for two or more different years. The respondents must take remedial steps and ensure that in such cases TDS is not rejected on the ground that the amounts do not tally. Of course, while issuing corrective steps, the respondents can ensure that fraudulent or double claims for TDS are not made. As it is a technical matter no specific direction is issued, but the respondents should take remedial steps in this regard.

7.    Regarding unverified TDS under different headings

7.1 The respondents will fix a time limit within which they shall verify and correct all unmatched challans. This will necessarily require communication with the deductor and steps to rectify. The time limit fixed should take into account the due date of filing of the return and processing of the return by the Assessing Officer. An assessee as a deductee should not suffer because of the fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee.

8.    Regarding failure of deductor to file correct TDS statements in time

8.1 It is directed that when an assessee approaches the Assessing Officer with requisite details and particulars, the said Assessing Officer should verify whether or not the deductor has made payment of the TDS and if the payment has been made, credit of the same should be given to the assessee. These details or the TDS certificate should be starting point for the Assessing Officer to ascertain and verify the true and correct position. The Assessing Officer will be at liberty to get in touch with the TDS circle, in case he requires clarification or confirmation. He is also at liberty to get in touch with deductors by issuing a notice and compelling them to upload the correct particulars/details. The said exercise must be and should be undertaken by the Revenue i.e., the Assessing Officer as an assessee who suffers in such cases is not due to his fault and can justifiably feel deceived and defrauded.

8.2 The stand of the Revenue that they can only write a letter to the deductor to persuade him to correct the uploaded entries or to upload the details cannot be accepted. Power and authority of the Assessing Officer cannot match and are not a substitute to the beseeching or imploring of an assessee to the deductor. Section 234E will also require similar verification by the Assessing Officer. In such cases, if required, order u/s. 154 may also be passed.

Scientific research expenditure: Section 35(2AB): Explanation to section 35(2AB)(1) does not require that expenses included in said Explanation are essentially to be incurred inside an approved in-house research facility: Assessee-company incurred various expenses on clinical trials for developing its pharmaceutical products outside approved laboratory facility: Assessee entitled to weighted deduction in respect of said expenses:

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CIT vs. Cadila Healthcare Ltd;(2013) 31 taxman.com 300(Guj)

The assessee carried out scientific research in its facility approved by the prescribed authority. It incurred various expenditure including on clinical trials for developing its pharmaceutical products. These clinical trials were conducted outside the approved laboratory facility. The assesee’s claim for weighted deduction u/s. 35(2AB) of the Income-tax Act, 1961 was rejected by the Assessing Officer on the ground that such expenditure not having been incurred in the approved facility could not form part of the deduction provided u/s. 35(2AB). The Tribunal allowed the assessee’s claim and held that merely because an expenditure was not incurred in the in-house facility, it could not be discarded for the weighted deduction u/s. 35(2AB)

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

“i) Section 35(2AB) provides for deduction to a company engaged in business of bio-technology or in the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. The Explanation to section 35(2AB) (1) provides that for the purpose of said clause, i.e. clause (1) of section 35(2AB), expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under the Central State or Provincial Act and filing an application for a patent under the Patents Act, 1970.

ii) The whole idea appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could be put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on.

iii) Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If one gives such restricted meaning to the term expenditure incurred on in house research and development facility, one would on one hand be completely diluting the deduction envisaged u/s.s. (2AB) of section 35 and on the other, making the Explanation quite meaningless.

iv) As noticed earlier that for the purpose of the said clause in relation to drug and pharmaceutical, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the revenue would completely make the Explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an Explanation.

v) Therefore, the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be sufficient to deny the benefit to the assessee u/s. 35(2AB). It is not as if that the said authority was addressing the issue for deduction u/s. 35(2AB) in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises.” Therefore, no question of law arises.”

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Provisional attachment: Section 281B: Provisional attachment of bank accounts aggregating to over Rs. 33 lakh: Assessment raising demand of Rs. 9,62,378/-: Attachment should be restricted to the demand:

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Nirmal Singh vs. UOI; 352 ITR 396 (P&H):

The bank accounts of the assessee aggregating to over Rs. 33 lakh were provisionally attached u/s. 281B. The assessee challenged the attachment by filing writ petition. In the mean while the assessment was completed raising a demand of Rs. 9,62,378/-. The assessee contended that the provisional attachment could be operative only up to the assessment and once assessment had been framed, the Revenue was entitled to attach the account to the extent of the demand raised and not all the bank accounts of the assessee.

The Punjab and Haryana High Court allowed the petition and held as under:

“i) The bank accounts of an assessee are provisionally attached to secure the interest of the Revenue pending assessment proceedings to meet the eventuality of demand of tax to be raised against such assessee. Once the assessment had been completed, the Revenue would be justified to attach the account to the extent of the demand raised against the assessee and not the entire amount standing to the credit of the assessee.

ii) The action of the Revenue in extending the period of attachment in respect of all the bank accounts of the assessee and in respect of over Rs. 33 lakh in these circumstances was wholly unjustified and illegal.”

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TDS: F. Y. 2012-13: Certificate u/s. 197: Cannot be denied on the ground that the assessee had violated the provisions of TDS and proceedings u/ss. 276B and 271C were pending:

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[Serco BPO (P) Ltd. Vs. ACIT ; 253CTR 410 (P&H):]

On 03/04/2012, the assessee filed an application u/s. 197 of the Income-tax Act, 1961 for issuance of a Nil tax deduction certificate for the F.Y. 2012-13. The application was rejected on the ground that proceedings u/ss. 276B and 271C of the Act were pending.

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

“i) Issue of certificate u/s. 197(1) of the Act is mandatory on fulfillment of conditions enumerated under the rules.

ii) Rejection of application of assessee on the ground that the assessee had violated the provisions of TDS and proceedings u/ss. 276B and 271C were pending was not sustainable. None of these grounds validly form part of reasons for rejecting an application filed by an assessee u/s. 197(1) r/w. r. 28AA.

iii) The Assessing Officer is directed to redecide the application within a period of two weeks.”

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Speculative business: Section 43(5) proviso (d): A. Y. 2006-07: Proviso (d) to section 43(5) inserted w.e.f. 01-04-2006: Transactions in derivatives on recognised stock exchange not deemed speculative: Rule prescribing conditions for notification framed on 01-07-2005: Notification in January 2006: Notification has retrospective effect: Loss in derivative transactions during July 2005 and September 2005 is not deemed speculative:

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CIT vs. NASA Finelease P. Ltd.; 358 ITR 305:

The assessee was engaged in the business of dealing in securities and investments. The assessee had claimed a loss of Rs. 1,90,29,988 in derivative transactions during the period July, 2005 and September, 2005 and claimed that it is not deemed speculative in view of exclusion in proviso to clause (d) to section 43(5) of the Income-tax Act, 1961 and Notification dated 25th January, 2006 notifying the National Stock Exchange and Bombay Stock Exchange for that purpose. The Assessing Officer held that the loss was speculative loss u/s. 73, and since the derivative transactions were during the period July, 2005 to September, 2005, they were violative of proviso (d) to section 43(5) and the benefit of Notification dated 25th January, 2006 is not applicable for those transactions. The Tribunal allowed the assessee’s appeal and held that the assessee was entitled to the benefit u/s. 43(5) proviso (d) read with the said Notification dated 25th January, 2006.

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

“i) Notification No. 2 of 2006, dated 25-01-2006, issued by CBDT does not specify any particular date and simply notifies the National Stock Exchange and Bombay Stock Exchange under proviso (d) to section 43(5) of the Act. Issue of notification obviously had to take some time as it involved processing and examination of applications etc. This was a matter relating to procedure and the delay in issue of notification or even framing of the Rules was due to administrative constraints.

ii) The delay occasioned, as procedure and formalities have to be complied with, should not disentitle or deprive an assessee, specially, when the transactions were carried through a notified stock exchange. The notification was procedural and necessary adjunct to the section enforced w.e.f. 01-04-2006.

iii) The rule and notification issued in the present case effectuate the statutory and the legislative mandate. There was no reason to interfere with the findings of the Tribunal.”

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Penalty: Concealment: Section 271(1)(c): A. Y. 2002-03: Assessee, a limited company, made a claim for deduction of loss in the course of assessment proceedings: AO rejected the claim and imposed penalty u/s. 271(1)(c): Penalty not justified: Liberal view is required to be taken as necessarily the claim is bound to be scrutinised both on facts and law:

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CIT vs. DCM Ltd.; 262 CTR 295 (Del):

For the A. Y. 2002-03, in the course of the assessment proceedings u/s. 143(3), the assessee company made a claim that the loss of Rs. 95.55 lakh on account of loan granted to its subsidiary DCM International Ltd., which was written off, was deductible as business expenditure or in alternative as capital loss. The Assessing Officer disallowed the claim and also imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal deleted the penalty.

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

“i) It is not disputed or denied that the loan in fact was granted and has been also written off. There was no concealment or furnishing of inaccurate facts. Case is completely covered by Explanation 1 to section 271(1)(c). It is not disputed that full factual matrix or the facts were before the Assessing Officer at the time of assessment when this claim was made. The fact that scrutiny assessment was pending is a relevant and important circumstance to show the bona fides of the assessee as he was aware that the claim would be examined and would not go unnoticed.

ii) Secondly, the claim was rejected in view of the legal position, which was against the assessee and not because of statement of incorrect or wrong facts. Law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible. When such a claim is made during the course of regular or scrutiny assessment, liberal view is required to be taken as necessarily the claim is bound to be carefully scrutinised both on facts and in law. Full probe is natural and normal.

iii) Threat of penalty cannot become a gag and/ or haunt on assessee for making a claim which may be erroneous or wrong, when it is made during the course of the assessment proceedings. Normally penalty proceedings in such cases should not be initiated unless there are valid or good grounds to show that factual concealment has been made or inaccurate particulars on facts were provided in the computation.

iv) There is no merit in the present appeal and the same has to be dismissed.”

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Industrial undertaking: Deduction u/s. 80-I: A. Ys. 1993-94 and 1994-95: Profit must be derived from industrial undertaking: Ownership of industrial undertaking is not a condition precedent:

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Krishak Bharti Co-operative Ltd. vs. Dy. CIT: 358 ITR 168 (Del):

The assessee had an ammonia/urea plant at H. Just next to it and within its premises, the Hazira ammonia extension plant, which manufactured heavy water, had been set up and established by the Heavy Water Board, which was part of the Department of Atomic Energy, Government of India. There was an agreement between the assessee and the Government of India whereby the assessee operated and maintained the heavy water plant. The heavy water plant belonging to the Heavy Water Board and the ammonia/urea plant of the assessee were both integrated with each other. The process of manufacture of the heavy water plant was dependent on the supply of synthesis gas enriched with deuterium which was a by-product of the assessee’s ammonia/ urea plant. The assessee received service charges from the Heavy Water Board and claimed deduction u/s. 80-I in respect of it. The claim was rejected by the Assessing Officer. The Tribunal upheld the order of the Assessing Officer on the ground that the industrial undertaking manufacturing heavy water was not a part of the ammonia/urea plant of the assessee. It held that the service charges received by the assessee from the Heavy Water Board could not be treated as having been derived from an industrial undertaking of the assessee.

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

“i) A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally.

ii) A plain reading of section 80-I(1) and (2) of the Income-tax Act, 1961, would indicate that the ownership by the assessee of an industrial undertaking from which assessee derives profits and gains is not a stipulated condition. The only thing that has to be seen is whether the source of the profit or gains is an industrial undertaking.

iii) The service charges received by the assessee were profits and gains derived from an industrial undertaking and were eligible for a deduction u/s. 80-I.”

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Business expenditure: TDS: Works contract: Disallowance u/s. 40(a)(ia) r/w. section 194C: Assessee running coaching classes for competitive exams: Agreement with franchisees: Not a works contract: Tax not deductible at source on payment to franchisees: Amount paid to franchisees not disallowable u/s. 40(a)(ia):

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CIT vs. Career Launcher India Ltd.; 358 ITR 179(Del):

The assessee was a company engaged in providing education and training for various preparatory examinations like IIM, IIT, designing, etc. These services were provided across the country through education centres run by the assessee itself or by its franchisees. For the A.Ys. 2005-06 and 2006-07, the Assessing Officer disallowed the amounts paid to the franchisees relying on section 40(a)(ia) on the ground that the assessee had not deducted tax at source which it was obliged to do u/s. 194C of the Act. The Tribunal deleted the disallowance and held that the agreement was not for making any payment to licensee for any work done for the assessee and that it was a case of sharing of fees for carrying out respective obligations under a contract. It held that neither section 194C nor section 40(a) (ia) was applicable.

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

“i) The agreements with franchisees were not the simple cases of the assessee engaging certain other persons to conduct the learning centres for which they were to be paid. The agreements were much more complex and reflected a business arrangement, as opposed to a contract for carrying out a work. Both the parties, the assessee and the licensee had entered into this agreement only in their mutual interest and for mutual gains. It was a simple case of permitting the use of its trade name or reputation by the licensees for a consideration.

ii) The provisions of section 194C and section 40(a)(ia) were not applicable to the facts of the case.”

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Business expenditure: TDS: Disallowance u/s. 40(a)(ia) r/w. s/s. 9(1)(vii) and 195: A. Y. 2007- 08: Circular in force during relevant year not obliging to deduct tax at source: Disallowance u/s. 40(a)(ia) not proper: Subsequent withdrawal of Circular not relevant:

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CIT vs. Model Exims; 358 ITR 72(All):

In the A. Y. 2007-08, the Assessing Officer disallowed an amount of Rs. 57,49,489 paid to overseas entities as commission relying on section 40(a)(ia) on the ground that tax is not deducted at source u/s. 195 of the Act. The Assessing Officer rejected the contention of the assessee that the assessee was not obliged to deduct tax at source on the said payments in view of the Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000 and accordingly the said payments were not taxable in the hands of the recipients. The CIT(A) deleted the disallowance and held that the Circular No. 7 of 2009 withdrawing the above said circulars was operative only from 22nd October, 2009, and not prior to that date and had no bearing in the instant assessment year. The Tribunal confirmed the order of the CIT(A) and dismissed the appeal filed by the Revenue. On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) The Circulars did not oblige the assessee to deduct tax at source. The assessment in question for the A. Y. 2007-08 would be governed by the Circular, which was operative at the relevant time. The assessee was not entitled to deduct tax at source.

ii) Circular No. 7 of 2009, dated 22-10-2009, withdrawing the earlier Circulars became operative only from that date. The Circulars in the relevant year were binding on the Department and the Assessing Officer did not have any right to ignore the Circulars and to disallow u/s. 40(a) (ia) of the Act, for non-deduction of tax at source u/s. 195.”

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TDS: Section 194C: A. Y. 2005-06: Contract for purchase of natural gas: Transportation charges paid to seller: Transportation part of sale transaction: No works contract or contract for carriage of goods: Section 194C not attracted:

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[CIT Vs. Krishak Bharati Co-operative Ltd.; 349 ITR 68 (Guj): 253 CTR 402 (Guj):]

Assessee was engaged in the manufacture of fertilisers. It consumed natural gas which was supplied by different agencies through pipelines. The Department took the view that the agreement involved works contract for transport of the gas and the assessee was required to deduct tax at source at the appropriate rate u/s. 194C on the transportation charges. The Tribunal held that the assessee did not hire any service of carriage of goods and that, therefore, the case would not fall in clause (c) of Explanation III to section 194C of the Act.

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

“i) The contract of sale of gas itself envisaged that gas would be supplied by the seller to the assessee at the receiving point of the assessee’s factory. For such purpose, the seller would be laying down its pipelines and other equipment and would maintain such paraphernalia. The seller would also have the right to use such pipelines and equipment for the purpose of distributing gas to other gas consumers. The ownership of the gas was passed on from the seller to the assessee only at the point of delivery and not before.

ii) The agreement essentially was for purchase and sale of gas. Transportation of gas was only a part of the entire sale transaction. The clear understanding of the parties that the ownership of gas would pass on to the buyer at the delivery point, showed that the transport of gas by the seller was a step towards execution of contract for sale of gas and there was no contract for carriage of goods.

iii) Thus the case was not covered u/s. 194C. The transportation charges did not depend on the consumption of quantity of gas but were a fixed monthly charges to be borne by the assessee as part of the agreement between the parties. Therefore, the application of section 194C did not arise.”

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Income: Interest: Accrual: A. Y. 1992-93: Assessee-company promoted by State Government: Amount received from Government towards share capital: Interest earned on short term deposits: Agreement that interest would belong to Government: Interest not assessable in hands of assessee:

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Gujarat Power Corporation Ltd. vs. ITO; 354 ITR 201 (Guj):

The assessee was promoted by the Government of Gujarat and the Gujarat Electricity Board to augment power generating capacity in the State of Gujarat. The Gujarat Government sanctioned a sum of Rs. 5 crore towards equity share capital. It was agreed that, pending the allotment of shares whatever income was earned by way of interest by the assessee would belong to the Government of Gujarat. In the accounting year relevant to the A. Y. 1992-93, the assessee earned interest of Rs. 53.92 lakh from such short-term deposits. The assessee claimed that the interest amount belonged to the State Government and accordingly was not assessable in its hands. The Assessing Officer did not accept the contention and assessed the interest in the hands of the assessee. The Tribunal confirmed the addition.

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

“i) Merely because the initial agreement between the parties did not make any provision with respect to the treatment of such interest, that would not be sufficient to change the nature and basic character of such income. In the absence of specific stipulation to the contrary, such interest must be treated to be held by the assessee in trust for the Government.

ii) Further, on 17th September, 1992, the Government of Gujarat and the assessee after due deliberation, agreed that the best solution would be to transfer such income to the Government. The amounts were not assessable in the hands of the assessee.”

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Income: Accrual: S/s. 5 and 145: A. Y. 1989-90 and 1990-91: Assessee selling lottery tickets to stockists subject to return of unsold tickets before one day of draw: Income on sale of tickets accrues on the date of draw:

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CIT vs. K. & Co.: 259 CTR 398 (Del):

The assessee was engaged in the business of printing of lottery tickets and organising lotteries on behalf of, inter alia, the Government of Sikkim. The following question of law was raised by the Revenue in appeal before the Delhi High Court:

“Whether, on the facts and the circumstances of the case, the Tribunal was right in law in holding that the tickets sent to the stockists do not become a sale on their dispatch but assumes the character of a sale on the happening of various events including the draw taking place?”

According to the Revenue, the moment the assessee dispatches the tickets to its stockists, a sale takes place. Therefore, the fact that the tickets were sent to the stockists within the accounting year would mean that the sales had been finalised during that year. It is also the contention of the revenue that it is irrelevant as to when the draw actually takes place.

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

“i) After going through the agreement, the Tribunal had observed that the arrangement by which the assessee sent tickets to the stockists who in turn sold the same to their agents did not indicate that the sale took place at the point of dispatch of tickets to the stockists. We also notice that the unsold tickets are to be returned to the organising agent of the assessee at least one day before the actual date of the draw and any tickets received thereafter would not be accepted and treated as sold by the stockists.

ii) This makes it clear that those tickets which are returned by the stockists cannot be treated as having been sold. The corollary to this is that mere dispatch of tickets to the stockists would not entail a sale. It is only those dispatches of tickets which are not returnable in the manner indicated as above which would be recorded as sales.

iii) Thus, till the date of the draw or just prior to the date of the draw it cannot be ascertained as to whether the dispatched tickets were actually sold or not.

iv) We, therefore, agree with the view taken by Tribunal and, consequently, decide this question in favour of the assessee and against the Revenue.”

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Charitable purpose: Educational institution: Exemption u/s. 11 r.w.s. 13: A. Ys. 1998-99 to 2002-03: CBSE denied recognition to SSSPL being a corporate entity and insisted for a society structure: Assessee society formed by SSSPL was granted recognition by CBSE: Assessee running educational institution in the set up of SSSPL: Paid rent and royalty to SSSPL: No violation of section 13: Assessee entitled to exemption u/s. 11:

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Chirec Education Society vs. Asst. DIT; 354 ITR 605 (AP):

CBSE denied recognition to SSSPL, which established a corporate run school, on the ground that the school was run by a private limited company and insisted that a properly registered society of non-proprietary character was required to be constituted. Thereafter, SSSPL formed the assessee society. It took on lease, premises belonging to SSSPL. It was granted affiliation by the CBSE. It paid rent for the building and playground that belonged to SSSPL and royalty for using its name. The Assessing Officer denied exemption u/s. 11, on the ground that SSSPL was taking out huge receipts of the assessee in the shape of rent and royalty which has the effect of violating section 13(1)(c). The Tribunal upheld the disallowance of the claim for exemption.

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

“i) If the assessee had taken the infrastructure and the trade name of somebody, other than SSSPL, it could not be disputed that the assessee would incur similar expenditure like the one being paid to SSSPL towards royalty as no reasonable man would transfer user rights of name and other benefits without charging adequate consideration. Merely because such facility was provided by SSSPL and royalty was being paid to it by the assessee in that behalf, the Revenue could not contend that it was impermissible.

ii) Therefore, the Revenue’s contention that this amounted to diversion of funds by the assessee to SSSPL and clause (g) of s/s. (2) of section 13 was attracted was misconceived since the payment of royalty was necessary to secure the use of trade name and infrastructure of SSSPL.

iii) Merely because the assessee was registered by SSSPL to run the school after SSSPL’s application for approval was rejected by the CBSE, it could not be said that the assessee’s payment by way of royalty to SSSPL was prohibited and consequently the assessee shall be deprived of exemption u/s. 11. The assessee was entitled to the benefit of section 11.”

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Capital gain: Exemption u/s. 54F: A. Y. 2007- 08: Sale of agricultural land and residential house on 20-06-2006: No deposit in capital gains account: Paid substantial amount and took possession of residential house on 30- 03-2008: Paid balance amount of Rs. 24 lakh on 23-04-2008: Assessee entitled to exemption u/s. 54F:

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CIT vs. Jagtar Singh Chawla: 259 CTR 388 (P&H):

On 20-06-2006, the assessee sold an agricultural land and a residential house for Rs. 2,16,00,000/- and Rs. 8,25,000/- respectively. In the A. Y. 2007- 08, the Assessing Officer disallowed the assessee’s claim for exemption of long-term capital gain of Rs. 76,85,829/- on the ground that the sale proceeds were not deposited in the specified capital gains account before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961. The assessee claimed that on 20-06-2006 itself the assessee had written a letter to the bank to deposit the said amount in the capital gains account, but the said amount was deposited in a “flexi general account”, which is a saving as well as fixed deposit account. Assessee purchased a residential house from the sale proceeds and took possession on 30-03-008. A substantial amount was paid before 31-03-2008 and the balance amount of Rs. 24 lakh was paid on 23- 04-2008. The Tribunal allowed the assessee’s claim on the ground that the assessee has purchased the residential house within the period prescribed for filing return of income u/s. 139 of the Act.

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

“i) In the present case, the assesee has proved the payment of substantial amount of sale consideration for purchase of a residential property on or before 31-03-2008, i.e. within the extended period of limitation of filing of return. Only a sum of Rs. 24 lakh was paid out of total sale consideration of Rs. 2 crore on 23-04-2008, though possession was delivered to the assessee on execution of the power of attorney on 30-03- 2008.

ii) Since the assessee has acquired a residential house before the end of the next financial year in which sale has taken place, therefore, the assessee is not liable to pay any capital gains tax. Such is the view taken by the Tribunal.

iii) In view of the above, we do not find any merit in the present appeal. Hence, the same is dismissed.”

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Appeal before Tribunal: Agricultural land: Capital asset: S/s.2(14) and 253: A. Ys. 2008- 09 and 2009-10: AO did not doubt the land being used for agriculture: Tribunal did not consider the ground taken by the Revenue that the land is not agricultural land: Tribunal was right in doing so:

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CIT vs. Nirmal Bansal; 215 Taxman 693 (Del): 33 taxman. com 511 (Del):

The assessee sold different plots of land, which were claimed to be agricultural land, situated at distance of more than 8 kms. from municipal limits. In support of his contention, the assessee furnished certificate of Tehsildar and letter of District Town Planner stating that the land was situated beyond 8 kms from Municipal Committee. However, the Assessing Officer did not accept the contention of the assessee that it was not a capital asset u/s. 2(14) (iii) of the Income-tax Act, 1961, taking a view that there was possibility of some other shorter distance between the plots of land and the municipal limits, being less than 8 kms. The Commissioner (Appeals) allowed assessee’s claim. The Tribunal upheld the order of Commissioner (Appeals).

In appeal by the Revenue, it contended by the Revenue that the Tribunal did not consider the question raised by the revenue that the lands in question were not agricultural lands at all. The Delhi High Court dismissed the appeal and held as under:

“i) The Tribunal noted that the Assessing Officer had made the disallowance merely on the ground that there was the possibility of a shorter distance, which would be less than 8 kms from the outer limits of the municipal corporation. The Tribunal noted that the Assessing Officer had not doubted the nature of the land being for agriculture. It was in these circumstances that the Tribunal rejected the plea of the revenue that the matter be restored to the file of the Commissioner (Appeals) for verification of the fact as to whether the lands were agricultural in nature or not.

ii) The decision in National Thermal Power Co. Ltd. vs. CIT [1998] 229 ITR 383 (SC) would be of no assistance to the revenue. In the said decision it has been clearly noted that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the Income-tax authorities and which had a bearing on the tax liability of the assessee. The point to be noted is that the question of law which could be raised before the Tribunal would have to arise from the facts as found by the Income-tax authorities.

iii) In the present case, the Assessing Officer had not doubted the fact that the lands in question were agricultural in nature. There was no foundational fact that the lands were not agricultural in nature. As such the plea raised by the revenue before the Tribunal could not be gone into by the Tribunal as there was no foundational basis for the same. Clearly, the decision in National Thermal Power Co. Ltd. (supra) would be of no avail to the revenue in the facts of the present case.

iv) In view of the foregoing, no interference is called for with the impugned order of the Tribunal. The appeals are dismissed.”

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Appeal to High Court: Section 260Aa: Territorial jurisdiction: Order of Tribunal passed within the jurisdiction: Appeal lies to that High Court:

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CIT vs. Shree Ganapathi Rolling Mills P. Ltd.; 356 ITR 586 (Gauhati):

Revenue preferred appeals against the orders of the Gauhati Bench of the Tribunal before the Gauhati High Court. The issue in those cases was covered in favour of the assessee by the judgment of the Gauhati High Court in CIT vs. Meghalaya Steels Ltd.; (2013) 356 ITR 235 (Gauhati). The learned Solicitor General appearing on behalf of the Revenue contended that the orders, which were impugned before the learned Tribunal, were orders passed by the Assessing Officer in the State of Meghalaya and, hence, this court does not have the territorial jurisdiction to decide the appeals.

The Gauhati High Court dismissed the appeals filed by the Revenue following its decision in the case of Meghalaya Steel Ltd. and held as under:“

i) U/s. 20 of the Code of Civil Procedure, 1908, suits are to be instituted, where the defendents reside or where a cause of action, wholly or in part, arises. An appeal is nothing but an extension of a suit. Hence, a place where the cause of action, wholly or in part arises, is the legal venue for institution of an appeal under the Income-tax Act, 1961.

ii) The orders challenged in this set of appeals had been passed within the local limits of the territorial jurisdiction of the court and, hence, the court had the jurisdiction to try the appeals.”

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Salary: Perquisite/Profit in lieu of salary: S/s 15 and 17: Keyman Insurance policy for employee/directors: Assignment of policy to employee/director receiving surrender value: Difference between actual premia paid and surrender value not assessable as salary:

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[Maturity value of policy not assessable: CIT Vs. Rajan Nanda; 349 ITR 8 (Del):]

The employer company took keyman insurance policies on the lives of two employees/directors in different years. After paying premia for a certain period, they were assigned to the two employees/directors receiving the surrender value from them. For the remaining period of the policies, the insurance premia were paid by the assignees. The Assessing Officer held that the difference between the premia paid by the employer and the surrender value paid by the employee is the benefit to be taxed in the hands of the employees. The Tribunal deleted the addition and held that merely by assignment in a particular year when the policy was still continuing, no taxable event had taken place and, therefore, no tax could be charged. It also held that the amount in question could not be taxed as perquisite so as to fall within the scope of section 17(3).

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

“i) Explanation to section 10(10D) gives the meaning to “keyman insurance policy” and only that sum received under this policy would be treated as income. Sub-clause (ii) of clause (3) of section 17 taxes “any sum received in a keyman insurance policy”. The word “received” assumes significance. The Legislature in its wisdom thought to tax only that payment, which is received by the employee assessee under the keyman insurance policy. The purport of sub-clause (ii) is all together different. Such an amount due or received by the assessee has to be : (a) before joining any employment; or (b) after cessation of its employment. No such contingency occurred when the keyman insurance policy was assigned by the company in favour of the director assessee. The tax event did not occur, as no such amount was received at the time of assignment of the policy by the company as employer to the director assessee, as employee. The amounts were not taxable in the hands of the directors.

ii) There is no prohibition on the assignment or conversion of keyman insurance under the Act. Once there is an assignment, it leads to conversion and the character of the policy changes. The Insurance Company had itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. Hence, the policy in question was not a keyman insurance policy and when it matured, the advantage drawn therefrom was not taxable.”

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Salary: Perquisite: S/s 17(2)(iii) and 17(2)(iv) of I. T. Act, 1961 and Rule 3 of I. T. Rules, 1962: Expenditure on repairs of residential accommodation occupied by employee:

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[Not a perquisite: Scott R. Bayman Vs. CIT; 253 CTR 233 (Del): ]

The assessee was an employee (President and CEO) of a company M/s. GE. In the relevant year, the employer had spent an amount of Rs. 50 lakhs towards repair and renovation of the residential accommodation occupied by the assessee. The Assessing Officer treated this amount as perquisite and added in the salary income of the assessee. The Tribunal confirmed the addition.

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

“i) Express provisions of Rule 3 which elaborates various contingencies in relation to perquisite of rent free accommodation rules out the intention of the Parliament to treat expenses in relation to improvement, repairs or renovation as falling within the meaning of “perquisite”.

ii) Argument on behalf of the Revenue that the repairs and renovation expenses constituted an obligation of the employee, which was borne by his employer is meritless. Lease deed nowhere spells out any obligation on the employee to carry out repairs and renovations. Section 17(2) (iv) cannot be made applicable.

iii If the Assessing Officer had returned a finding that the premises were to be valued at market value (of the rental), in case it is increased as a result of the renovations, the only prescribed mode was to apply the method indicated by Rule 3(a)(iii).

iv) In view of the above, the appeal has to succeed. The impugned order of the Tribunal is hereby set aside. The cost of repairs and renovation shall be deleted from the taxable income of the assessee.”

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Revision: Section 264: A. Y. 2007-08: Claim for exemption in return but by mistake not shown in computation: Intimation u/s. 143(1) denying exemption: Rejection of application for revision: Not justified:

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[Sanchit Software and Solutions P. Ltd. Vs. CIT; 349 ITR 404 (Bom):]

For the A. Y. 2007-08, in the return of income, the assessee made a claim for exemption u/ss. 10(34) and 10(38) in respect of the dividend and long-term capital gains. However, by mistake, included the dividend of the long term capital gain in the total income in the computation. Intimation u/s. 143(1) of the Act denied the exemption. The assessee filed an application for rectification u/s. 154. The assessee also filed revision petition u/s. 264 of the Act which was rejected by the Commissioner.

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

“i) The entire object of administration of tax is to secure revenue for the development of the country and not to charge the assessee more tax than that which is due and payable by the assessee. On April 11, 1955, the CBDT issued a circular directing the Assessing Officer not to take advantage of the assessee’s ignorance or mistake.

ii) The Commissioner committed a fundamental error in proceeding on the basis that no deduction on account of dividend income and income from capital gains u/s. 10 of the Act was claimed. Therefore, there was an error on the face of the order and the order was not sustainable.

iii) The Assessing Officer was directed to treat the application dated 08/02/2010, as a fresh application at the earliest preferably within six weeks of the order.”

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Export profit: Deduction u/s. 80HHC: Retrospective amendment to section 80HHC(3) by Taxation Laws(Second Amendment) Act, 2005 to get over decision of Tribunal is not valid: Amendment prospective:

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[Vijaya Silk House (Bangalore) Ltd. Vs. UOI; 349 ITR 566 (Bom):]

Dealing with the validity of the retrospective amendment to section 80HHC(3) of the Income-tax Act, 1961 the Bombay High Court held as under:

“i) The amendment made by the Taxation Laws (Amendment) Act, 2005, in order to overcome the decision of the Tribunal by insertion of the third and fourth provisos to section 80HHC(3) of the Income-tax Act, 1961, is violative for its retrospective operation and for depriving the benefit earlier granted to a class of assessees whose assessments were still pending, although such benefit will be available to assessees whose assessments have already been concluded. In this type of substantive amendment, retrospective operation can be given only if it is for the benefit of assessees and not in a case where it affects even a small section of assessees.

ii) Accordingly, the amendment could be given effect from the date of the amendment and not in respect of earlier assessment years in case of assessees whose export turnover is above Rs. 10 crore. In other words, the retrospective amendment should not be detrimental to any of the assessees.”

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Capital gains: Section 50C: A. Y. 2003-04: Stamp duty value higher than sale consideration: Reference to DVO: Report of DVO binding on AO:

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[CIT Vs. Dr. Indira Swaroop Bhatnagar; 349 ITR 210 (All):]

In the previous year relevant to the A. Y. 2003-04, the assessee sold an immovable property for a consideration of Rs. 51,75,000/-. The Assessing Officer applied section 50C and substituted the stamp duty value of Rs. 1,38,00,000/- for the consideration. Assessee’s registered valuer valued the property at Rs. 48,37.500/. Assessing Officer rejected the said value and referred the matter to the DVO for determining the market value. The DVO determined the market value of the property at Rs. 58,50,000/- The Assessing Officer rejected the DVO’s report and adopted the stamp duty valuation. The Tribunal held that the valuation by the DVO had to be adopted.

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

“i) Section 50C of the Act provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A. Generally, when the Assessing Officer has obtained the report of the DVO it is binding on him.

ii) The valuation of the DVO had to be adopted.”

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Capital gain: Exemption u/ss. 54 and 54EC: A. Y. 2007-08: Long term capital gain: investment in residential property and bonds: Inclusion of husband’s name as joint owner: Assessee entitled to exemption of entire investment:

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[DI(Int Tax) Vs Mrs. Jennifer Bhide; 349 ITR 80 (Kar):]

In A. Y. 2007-08, the assessee sold her residential property and from the sale proceeds, purchased residential property and bonds. The property and the bonds were purchased in the joint names of herself and her husband. The assessing Officer allowed 50% of the claim for deduction. The Tribunal allowed the full claim.

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

“i) It was nobody’s case that the assessee’s husband had contributed any portion of the consideration for acquisition of the property or the bonds. The source for acquisition of the property and the bonds was the sale consideration.

ii) Once the sale consideration was utilised for the purpose mentioned u/s. 54 and 54EC, the assessee was entitled to the benefit of those provisions. As the entire consideration had flowed from the assessee and no consideration had flowed from her husband, merely because either in the sale deed or in the bond her husband’s name was also mentioned, in law he would not have any right. Therefore, the assessee could not be denied the benefit of deduction.”

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Exemption u/s. 10A: A. Ys. 2002-03 and 2003-04: Current losses as well as brought forward losses of the non-EPZ unit cannot be deducted or reduced from the profits of the EPZ unit for computing the deduction u/s. 10A:

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CIT vs. Tei Technologies (P) Ltd.; 259 CTR 186 (Del):

In the relevant years, the assessee claimed exemption u/s. 10A, 1961 by computing the exempt amount without setting off the loss of non eligible units. The Assessing Officer computed the amount after setting off the loss from the non -eligible units against the profit of the eligible units. The Tribunal allowed the assessee’s claim.

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

“i) Even after the amendment by the Finance Act, 2000, section 10A has been retained in Chapter III of the Act, notwithstanding the change in the language of s/s. (1) thereof. Secondly, though s/s. (1) provides for a deduction of the eligible profits, it further states that the deduction “shall be allowed from the total income of the assesee”.

ii) Determination of total income is the last point before the tax is charged, and once the total income is determined or quantified, there is absolutely no scope for making any further deduction. If this is the true legal position, it is not possible to understand s/s. (1) of section 10A as providing for a “deduction” of the profits of the eligible unit “from the total income of the assessee”. The definition of the expression “total income” given in section 2(45) cannot be imported into the interpretation of s/s. (1) having regard to the context in which it is used and the scheme of the Act relating to the charge of tax.

iii) The form of the return of income prescribed by the Rules gives a further indication that section 10A provides for an exemption and not merely a deduction. Steps given in the return form ITR-6 are also an indication that the relief u/s. 10A has to be given before the adjustment of the losses of the current year and the brought forward losses from the past years.

iv) Incomes which are enumerated in Chapter III have traditionally been considered as incomes which are exempt from tax rather than as deduction in the computation of total income. The fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction. Admittedly, there is ambiguity and lack of clarity or precision in the language employed in section 10A(1) which says that deduction shall be made from the total income, when the Act contains no provision to allow any deduction from the total income.

v) Thus, it is not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction even after the amendment by Finance Act, 2000 w.e.f. 01-04-2001.

vi) S/s. (4) of section 80A cannot defeat such construction. Sole object of s/s. (4), is to ensure that double benefit does not enure to an assessee in respect of the same income, once u/s. 10A or 10B or under any of the provisions of Chapter VI-A and again under any other provisions of the Act. This s/s. does not militate against the view that section 10A or section 10B is an exemption provision.

vii) Contents of Circular No. 5 of 2010 dated 03-06- 2010, accord with the aforesaid view. Therefore, the current losses as well as brought forward losses of the non-EPZ unit cannot be deducted or reduced from the profits of EPZ unit for computing the deduction u/s. 10A.”

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Charitable trust: Certificate u/s. 80G(5): Amendment by Finance Act (No.2) of 2009 and Circular Nos. 5 and 7 of 2010 issued by CBDT: Certificate once granted operates in perpetuity: Withdrawal, if any, should be as per the procedure:

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CIT vs. Bhhola Bhandari Charitable Trust: 259 CTR 279 (P&H):

The assessee, a charitable trust was granted certificate u/s. 80G(5), which was valid upto the F.Y. 2010-11 ending 31-03-2011. The assessee filed an application for renewal on 25-04-2011 which was withdrawn on 30-05-2011 in view of the amendment by Finance Act (No. 2) of 2009 and Circular Nos. 5 of 2010 and 7 of 2010 wherein it was stated that the Certificate granted u/s. 80G(5) which is existing on 01-10-2010 would continue till perpetuity unless it is withdrawn as per law. However, CIT passed order dated 05-12-2011 withdrawing the certificate. The Tribunal set aside the said order.

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

“i) We find that the order of the Tribunal setting aside the order of CIT is based on sound reasoning. The assessee had valid exemption on 01-10-201, when the provisions of section 80G of the Act were amended so as to dispense with the periodic renewal of the exemptions. Such statutory provisions were clarified by Circular No. 5 of 2010 and Circular No. 7 of 2010 issued by the CBDT. Once the statute has given perpetuity to the exemptions granted u/s. 80G(5) of the Act, the same could not be withdrawn without issuing show cause notice in terms of the statutory provisions in the manner prescribed by law.

ii) In view of the said fact, we do not find that any substantial question of law arises for consideration.”

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Charitable trust: S/s. 11(1)(d) and 80G(5): A. Y. 2005-06 to 2007-08: Certificate u/s. 80G(5); Refusal to continue on the ground that the conditions u/s. 11(1)(d) not satisfied: Refusal not proper: Department directed to pay Rs. 1,00,000/- to the trust:

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DIT (Exemption) vs. Sri Ramakrishna Seva Ashram: 258 CTR 201 (Kar):

The assessee, a charitable trust, was registered u/s. 12A of the Income-tax Act, 1961 in May 1991 and was allowed exemption u/s. 11 of the Act since then. A certificate u/s. 80G(5) of the Act was also issued to the assessee trust. The assessee’s application dated 02-02-2009 for continuation of certificate u/s. 80G was rejected on the ground that the donations to the rural project fund are not corpus donations, as such, the same are not credited to corpus account. No details of the donors is furnished in spite of the specific directions. Such donations have not been considered for computation of 85% application u/s. 11(1) of the Act for the A. Ys. 2005-06 to 2007-08. The Tribunal allowed the assessee’s appeal and directed the DIT(Exemption) to grant continuation of the 80G certificate.

On appeal by the Revenue, the following question was raised before the Karnataka High Court:

“If the assessee receives contributions for charitable purposes and does not show them in the statement of account as the ‘corpus fund’, but, shows the said amount under a different specific head, does it cease to be a corpus fund to be eligible for the benefit u/s. 11(1)(d) of the Act.?”

The High Court upheld the decision of the Tribunal, dismissed the appeal filed by the Revenue and held as under:

“i) The word ‘corpus’ is used in the context of IT Act. This can be understood in the context of a capital opposed to expenditure. It is a capital of an assessee; a capital of an estate, capital of a trust; a capital of an institution. Therefore, if any voluntary contribution is made with a specific direction, then it shall be treated as the capital of the trust for carrying on its charitable or religious activities. Then such an income falls u/s. 11(1)(d) and is not liable to tax. Therefore, it is not necessary that a voluntary contribution should be made with a specific direction to treat it as corpus.

ii) If the intention of the donor is to give that money to a trust which they will keep in trust account in deposit and the income from the same is utilized for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemption from payment of tax levied. From whatever angle it may be seen, the deposited amount cannot be said to be income in the hands of the recipient trust.

iii) Similarly, the assessee after receiving the amount keeps the amount in deposit and only utilises the income from the deposit to carry out the charitable activities, then also the said amount would be a contribution to the corpus of the trust and the nomenclature in which the amount is kept in deposit is of no relevance as long as the contribution received are kept in deposit as capital and only the income from the said capital which is to be utilised for carrying on charitable and religious activities of the institute/corpus of the trust, for which section 11(1)(d) is attracted and the said income is not liable to tax under the Act. In so far as the argument that the person who made these contributions do not specifically direct that they shall form part of the corpus of the trust is concerned, it has no substance. In view of the language employed in section 11(1)(d), the requirement is that the voluntary contributions have to be made with a specific direction. The law does not require that the said direction should be in writing. In the absence of the direction in writing, the only way that one can find out whether there was a specific direction and to find out how the money so paid is utilised. If the money so received by way of voluntary conrtributions, if it is meant to be used for the leprosy patients and is credited to a particular account and from the income from the said capital, the said activity is carried on, the requirement of section 11(1)(d) is complied with.

iv) In the instant case from records it is seen that those people who have paid by way of donation that includes the cheque with a letter with a specific direction, which is in compliance with section 11(1)(d). But, in case the contributions are made without cheque, i.e., by cash, and oral direction has been issued to the trust to utilise the said fund for the purpose of treating the leprosy patients and if such amounts are credited to the account meant for it, even then the requirement of section 11(1)(d) is complied with.

v) The attitude of the IT authorities is surprising who are over-technical in denying the benefit to the deserving institutions which are rendering laudable services to the rural masses. By not granting tax exemption, which they deserve, the authorities have hampered the said social activities of the trust and they are made to waste their precious time, energy and money in fighting this litigation. Unfortunately, the persons who took a decision to file an appeal before this court are wasting the precious time of the trust which could have been used in the social service. Public money and the time of this court is also wasted. This attitude on the part of the Department cannot be countenanced. Therefore, it is appropriate to impose cost incurred by the assessee for fighting litigation so that the Department would be more careful in taking decision to file appeal in such frivolous cases by ignoring the policy of the Government, viz., National Litigation Policy, 2011.

vi) Hence, the appeal is dismissed with cost of Rs. 1,00,000/-, to be deposited by the Department within one month from today in favour of the rural project fund of the assessee trust.”

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Business income or house property income: S/s. 22 and 28: A. Y. 2003-04: Assessee owner of property: Hotel run in property by company of which assessee was director: No lease of property: Share of profits received by assessee: Assessable as business income:

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CIT vs. Francis Wacziarg; 353 ITR 187 (Del):

Assessee was the owner of the property. Hotels were run in the property by a company in which assessee was director. There was no lease agreement. The assessee was entitled to a certain share in the gross operating profit calculated in terms of the agreement. The asessee disclosed the income as business income and claimed deduction of expenditure and depreciation. The Assessing Officer assessed the income as income from house property and disallowed the claim for deduction of expenditure and depreciation. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The Commissioner (Appeals) had given a detailed factual finding why income earned by the assessee from the three properties was taxable under the head “Income from business or profession” and not under the head “Income from house property”. This finding had been upheld by the Tribunal. The findings were not perverse and were based on documents and material placed on record. This income was assessable as business income.

ii) Once it was held that the income from the three properties was taxable under the head “Income from business or profession” depreciation had to be allowed under the provisions of section 32. Similarly, disallowance of 80% from the expenses deleted by the Commissioner (Appeals)/Tribunal had been explained and supported by cogent reasoning. The depreciation and the expenditure were deductible.”

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Business expenditure: S/s. 2(24)(x), 36(1)(va) and 43B: A. Y. 2001-02: Employees’ contribution towards ESI: Deposited before due date for filing return though after due date prescribed under ESI Act, 1948: Deduction to be allowed: No distinction to be made between employer’s contribution and employees’ contribution: Amendment of section 43B by Finance Act, 2003 deleting second proviso is retrospective:

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CIT vs. Nipso Polyfabriks Ltd; 258 CTR 216 (HP):

For the A. Y. 2001-02, the assessee’s claim for deduction of employees’ contribution to ESI was disallowed by the Assessing Officer on the ground that the same was deposited after the due date prescribed under the ESI Act though it was deposited before the due date for filing the return of income. The Tribunal allowed the assessee’s claim.

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

“Whether the Tribunal was correct in holding that amounts received by the assessee from employees for crediting to their accounts in provident fund and ESI but not so credited on or before the due dates specified under the respective statutes, were allowable deductions u/s. 36(1) (va) of the IT Act?”

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

“i) By the Finance Act, 1987 section 2(24)(x) was inserted and the sums collected by the assessee from his employees as contribution to provident funds and ESI were to be treated as income. By the same Act, section 36(1)(va) was introduced. Resultantly, the contribution of the employees collected by the employer was treated as his income. At the same time, the same was allowed as deductible expense if deposited within a particular time. Section 43B was also amended in the year 1987 itself and the two provisos were inserted. As per the amendment, there was no differentiation between the employer’s or employees’ contributions. Both had to be deposited by the due date as defined in the Explanation below cl. (va) of s/s. (1) of section 36. By the Finance Act of 2003, which came into effect from 1st April, 2004, the second proviso to section 43B which specifically made reference to section 36(1)(va) was deleted. The amendment was curative in nature and hence would apply with retrospective effect from 1st April, 1988.

ii) The second proviso to section 43B(b) specifically referred to the due date u/s. 36(1)(va) and as such, it cannot be urged that the provisions of section 43B and section 36(1)(va) should not be read together. It is clear that the law was enacted to ensure that the payment of the contributions towards the provident funds, the ESI funds or other such welfare schemes must be made before furnishing the return of income u/s. 139(1).

iii) Though the amount was not deposited by the due date under the Welfare Acts, it was definitely deposited before furnishing the returns. That is no reason to deny him the benefit of section 43B, which starts with a non obstante clause and which clearly lays down that the assessee can take benefit of deduction of such contributions, if the same are paid before furnishing the return. There is no reason to make any distinction between the employees’ contribution or the employer’s contribution.”

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Bad debts: Section 36(1)(vii): A. Y. 2007-08: Assessee taking all assets and liabilities of two web portals from its holding company as going concerns: Debt due to holding company: Assessee is entitled to write off: Bad debt allowable:

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CIT vs. Times Business Solutions Ltd. 354 ITR 25 (del):

Consequent
upon a scheme of demerger, the assessee company had acquired all the
assets and liabilities of two web based portals that were hitherto being
operated by the assessee’s holding company. The portals were acquired
as going concerns. In the A. Y. 2007-08, the Assessing Officer rejected
the claim for deduction of bad debt of Rs. 3,63,31,432/- on the ground
that these debts related to the years 2003 to 2006 when the web portals
were run and operated by the holding company and that the assessee could
not have written off the bad debts as such contravened section
36(1)(vii). The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i)
When the original owner would have been entitled to write off the bad
debts, the successor who acquires the assets and liabilities from the
previous owner would also be entitled to treat the bad debts in the same
manner in which the original owner was entitled under law.

ii)
The assesee had acquired all the assets and liabilities of two web based
portals from its holding company. The assessee, for the A. Y. 2007-08,
had written off the bad debts acquired from the holding company.
Therefore, the asessee was entitled to write off the irrecoverable bad
debts related to the years 2003 to 2006 when the web portals were run by
the holding company.

iii) The appeal is dismissed.”

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Search and seizure: Block assessment: S/s. 69A, 80-IB(10) and 158BB: Block Period 1-4- 1995 to 21-2-2002: Assessee in construction business eligible for deduction u/s. 80-IB(10): Disclosure of construction income: Assessee is entitled to deduction u/s. 80-IB(10):

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CIT vs. Sheth Developers (P) Ltd.; 254 CTR 127 (Bom):

The assessee carried on business as a builder and was entitled to deduction u/s. 80-IB(10). In the course of the search action u/s. 132 of the Act, on 21/02/2002, the assessee had made a declaration of undisclosed income of Rs. 7 crore. In the block return, the assessee offered undisclosed income of Rs. 3.5 crore. The assessee claimed that at the time of making the statement, the director of the assessee was unaware of the deduction u/s. 80-IB of the Act. The Assessing Officer did not allow the claim for deduction u/s. 80-IB(10) of the Act and computed the undisclosed income at Rs. 7.68 crore. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Consequent to the amendment by the Finance Act, 2002 with retrospective effect from 1-7-1995, the total income or loss has to be computed in accordance with the provisions of the Act. Consequently, w.e.f. 1-7-1995, the total income/ loss for the block period has to be computed in accordance with the provisions of the Act and the same would include Chapter VI-A. Section 80-IB is a part of Chapter VI-A. In view of the above, while computing the undisclosed income for the block period, the respondent assessee is entitled to claim deduction from its income u/s. 80-IB.

ii) It is not the case of the Revenue that the money found in possession of the assessee could not be explained and/or its source could not be explained to the satisfaction of the Assessing Officer. In the present case, undisclosed income found in the form of cash was explained as having been acquired while carrying on business as builder and this explanation was accepted by the Assessing officer by having assessed the undisclosed income for the block period as income from profits and gains of business or profession.

iii) In the present case, no question of application of sections 68, 69, 69A, 69B and 69C arises as the same has not been invoked by the Department. It is an admitted position between the parties as reflected even in the order of the Assessing Officer that undisclosed income was in fact received by the assessee in the course of carrying out its business activities as a builder. In view of the above, the order of the Tribunal cannot be faulted.”

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Reassessment: S/s. 115AD, 147 and 148: A. Y. 2006-07: Validity to be determined with reference to reasons recorded for belief: Assessment u/s. 143(1) determining Nil income: Notice u/s. 148 on the ground that that section 115AD may be applicable: Not valid:

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Indivest Pte Ltd. vs. Addl. DIT; 350 ITR 120 (Bom):

The assessee company was owned by the Government of Singapore. For the A. Y. 2006-07, in the return of income, the assessee had claimed that the profits earned from the transactions in Indian securities are not liable to tax in India in view of Article 7 of the India-Singapore tax treaty. Accordingly, the assessee had returned Nil income. The assessment was completed u/s. 143(1) of the Income-tax Act, 1961 determining Nil income. Subsequently, the Assessing Officer issued notice u/s. 148 dated 16-3-2011 on the ground that the possibility of escapement of income taxable as STCG under the Act may not be ruled out.

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

“i) The Assessing Officer has power to reopen an assessment, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reason must have a live link with the formation of the belief. The validity of the notice reopening the assessment u/s. 148 of the Act, has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the Assessing Officer of reopening the assessment. Those reasons cannot be supplemented or improved upon subsequently.

ii) Reading the reasons of the Assessing Officer, it was evident that there was absolutely no tangible material on the basis of which the assessment for the A. Y. 2006-07 could have been reopened. Upon the return of income being filed by the assessee both in electronic form and subsequently in the conventional mode, the assessee received an intimation u/s. 143(1).

iii) While disposing of the objections of the assessee, the Assessing Officer had purported to state that the assessee had filed only sketchy details in its return filed in the electronic form. The relevant provisions expressly make it clear that no document or report can be filed with the return of income in the electronic form.

iv) The notice was not valid and was liable to be quashed.”

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Industrial undertaking: Deduction u/s. 80-IC: A. Y. 2004-05: Interest received for delay in payment for goods: Is income derived from industrial undertaking: Eligible for deduction u/s. 80-IC:

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CIT Vs. Universal Pipes (P) Ltd.; 254 CTR 311 (Gau):

The assessee was engaged in the manufacture and sale of PVC pipes. The assessee was entitled to deduction u/s. 80-IC. In the relevant year, the assessee had received an amount of Rs. 3,13,19,602/- by way of interest from the irrigation department, as per the order of the High Court, for the delay involved in the payment in connection with delivery of goods. The Assessing Officer disallowed the claim for deduction u/s. 80-IC in respect of this amount. The Tribunal allowed the assessee’s claim.

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

“Interest received from the Irrigation Department as per the order of the Court for the delay involved in the payment in connection with delivery of goods to Irrigation Department constituted income derived from the industrial undertaking of the assessee and is eligible for deduction u/s. 80-IC.”

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Income from undisclosed sources: Reference to DVO: S/s. 69 and 142A: A. Y. 1989-90: Rejection of books of account is prerequisite for valid reference to DVO for valuation u/s. 142A: Report of DVO pursuant to invalid reference could not be a basis for addition u/s. 69:

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Goodeluck Automobiles (P) Ltd. vs. ACIT; 254 CTR 1 (Guj):

In the previous year relevant to the A. Y. 1989-90, the assessee had constructed a building and had declared the cost of construction to be Rs. 13,23,321/-. The Assessing Officer made a reference to the DVO for valuation who computed the cost of construction at Rs. 19,13,100/-. The Assessing Officer made the addition of the difference of Rs. 5,89,779/- as undisclosed income u/s. 69 of the Income-tax Act, 1969. The reference to the DVO and the addition was upheld by the Tribunal.

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

“i) Expression used by the Legislature in the heading of section 142A as well as in the opening part of the said section is “estimate”. Question of estimate arises only when the books of account of the assessee are not reliable. For the purpose of resorting to the provisions of section 142A, the Assessing Officer is first required to record a satisfaction that the assessee has made investments which are not recorded in the books of account. As a necessary corollary, he would then reject the books of account as not reflecting the correct position and then proceed to make the assessment on the basis of the estimation. Thus, it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable. Accordingly, the Assessing Officer is first required to reject the books of account before making a reference to the Valuation Officer.

ii) Report of the Valuation Officer cannot form the foundation for rejection of the books of account. In the instant case, the Assessing Officer has categorically recorded a finding to the effect that the assessee’s accounts are duly audited and complete details are available. He made reference to the valuation Officer merely to seek expert advice regarding the cost of construction. There is nothing in the assessment order to suggest that the Assessing Officer had any doubt regarding the cost of construction or that he was not satisfied regarding the correctness or completeness of the books of account.

iii) Prior to making the reference to the valuation Officer, the Assessing Officer has not ascertained what was the defect in the cost of construction disclosed by the assessee in its return. Except for the difference between the estimated cost determined by the Valuation Officer and the actual cost shown by the assessee, the Assessing Officer has not brought any material on record to establish that the assessee has made any unaccounted investment in the construction of the building in question and that the books of account do not reflect the correct cost of construction.

iv) Hence, the reference made to the Valuation Officer not being in consonance with the provisions of law was invalid. Accordingly, the report made by the valuation Officer pursuant to such invalid reference could not have been made the basis of the addition u/s. 69.

v) In view of the above discussion, the Tribunal was not justified in holding that the reference made by the Assessing Officer to the Valuation Officer for estimating the cost of construction was not invalid. The Tribunal was also not justified in holding that the addition made by the Assessing officer u/s. 69 of the Act was correct.”

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Income: Accrual of: Section 5: A. Y. 2004-05: Amount (Rs. 3,037 crore) for transfer of indefeasible right of connectivity for 20 years: Assessee correctly spread the entire fee of Rs. 3,037 crore over a period of 20 years and accordingly paid tax: Entire amount was not assessable during the relevant year:

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CIT vs. Reliance Communication Infrastructure Ltd.; 254 CTR 251 (Bom):

In the previous year relevant to the A. Y. 2004-05, the assessee had received an amount of Rs. 3,037 crore as fees for grant of Indefeasible Right of Connectivity for a period of 20 years. The assessee spread the amount over a period of 20 years and accordingly paid the tax. The Assessing Officer allowed the claim. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the entire amount was income accrued to the assessee in the relevant year i.e. A. Y. 2004-05 itself. The Tribunal upheld the assessee’s claim.

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

“i) The Tribunal has on examination of the agreement dated 30-4-2003 entered into between RI Ltd and the assessee concluded that RI Ltd in terms of the agreement had only a right to use the network during the tenure of 20 years agreement. Further, the agreement was liable to be terminated at the sole discretion of RI Ltd. and consequently, the amount received as advance for 20 years lease period would have to be returned on such termination for the balance unutilised period.

ii) Further, the Tribunal held that the agreement dated 30-4-2003 was only in the nature/form of a lease agreement. On application of AS-19 formulated by the ICAI, a lease income arising from operating lease should be recognised in the statement of profit and loss in a straight line method over the term of the lease. Therefore, the assessee had in terms of AS-19 correctly spread the entire fee of Rs. 3,037 crore over the period of 20 years and to pay tax thereon over the entire period.”

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Expenditure: Capital or revenue: Section 37: A. Y. 1997-98: Amounts paid by assessee to clubs for obtaining membership is revenue expenditure:

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CIT vs. Infosys Technologies Ltd. (No. 3); 349 ITR 598 (Kar):

In the relevant year, the Assessing Officer disallowed the claim of the assessee for deduction of the amount paid to the clubs for obtaining membership holding the same as capital expenditure. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, Karnataka High Court upheld the decision of the Tribunal and held that the amount paid to the clubs for obtaining membership is revenue expenditure.

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Charitable trust: Registration: S/s 12A and 12AA: Statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust:

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DI vs. Foundation of Opthalmic and Optometry Research Education Centre; 254 CTR 133 (Del):

The assessee society had applied for registration u/s. 12AA on 10-7-2008. The Director of IT(Exemption) refused to grant registration on the ground that no charitable activity had in fact taken place since the society was a newly established one. The Tribunal allowed the assesse’s appeal.

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

“i) Facially, the provisions of section 12AA would suggest that there are no restrictions of the kind which the Revenue is reading into this case. In other words, the statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust. The statute does not prescribe a waiting period, for a trust to qualify itself for registration.

ii) Tribunal was right in holding that while examining the application u/s. 12AA(1)(b) r.w.s. 12A, the concerned CIT/Director is not required to examine the question whether the trust has actually commenced and has, in fact, carried on charitable activities.

iii) The appeal is accordingly dismissed.”

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Reassessment: S/s. 143(1), 143(3), 147 and 148: A. Y. 2002-03: No distinction to be made while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3): In the absence of “fresh material” assessment cannot be reopened: Change of opinion is not a valid basis for reopening assessment:

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CIT vs. Oriented Craft Ltd.(Del); ITA No. 555 of 2012 dated 12/12/2012:

For the A. Y. 2002-03, the assessee filed the return of income claiming deduction of Rs. 13.35 crore u/s. 80HHC of the Income-tax Act, 1961. The returned income was accepted by an order u/s. 143(1) of the Act. Subsequently, the Assessing officer issued notice u/s. 148 of the Act and reopened the assessment on the ground that the sale proceeds of the quota was wrongly considered as export turnover and that it was business profits and 90% thereof had to be reduced for computing deduction u/s. 80HHC. The assessee challenged the reopening on the ground that there was no “fresh material” as contemplated by the Supreme Court in the case of CIT Vs. Kelvinator of India Ltd; 320 ITR 561 (SC). The Tribunal accepted the assessee’s contention and held that the Assessing Officer had no jurisdiction to reopen the assessment made u/s. 143(1) of the Act.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Section 147 permits an assessment to be reopened if there is “reason to believe”. It makes no distinction between an order u/s. 143(3) or an intimation u/s. 143(1) of the Act. Accordingly, it is not permissible to adopt different standards while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3). The Department’s argument that the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of a section 143(3) assessment cannot apply to a section 143(1) intimation is not acceptable because it would place an assessee whose return is processed u/s. 143(1) in a more vulnerable position than an assessee in whose case there is a full-fledged scrutiny assessment u/s. 143(3).

ii) Whether the return is put to scrutiny or accepted without demur is not a matter which is within the control of assessee. An interpretation which makes distinction between the meaning and content of the expression “reason to believe” between a case where a section 143(3) assessment is made and one where an intimation u/s. 143(1) is made may lead to unintended mischief, be discriminatory and lead to absurd results.

iii) In CIT vs. Kelvinator India Ltd; 320 ITR 561(SC) it was held that the term “reason to believe” means that there is “tangible material” and not merely a “change of opinion” and this principle will apply even to section 143(1) intimation.

iv) On facts, the Assessing Officer reached the belief that there was escapement of income on going through the return of income filed by the assessee. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer. There is no whisper in the reasons recorded of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of power conferred u/s. 147.

v) Appeal of the Revenue is accordingly dismissed.”

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Business expenditure: TDS: Disallowance u/s. 40(a)(ia): A. Y. 2009-10: Tax deducted at source on salaries of employees paid by another party on behalf of assessee: Assessee not required to deduct tax on reimbursement to that party: Disallowance u/s. 40(a) (ia) cannot be made:

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CIT vs. Victor Shipping Services (P) Ltd.; 357 ITR 642
(All):

In the A. Y. 2009-10, M paid salary to the employees of the assessee on behalf of the assessee and also deducted tax at source as per law. The assessee reimbursed the amount to M. The Assessing Officer disallowed the payment made to M relying on the provisions of section 40(a)(ia), on the ground that no tax was deducted at source on such payment to M. The CIT(A) allowed the assessee’s appeal and held that since M had deducted tax at source on salaries paid by it on behalf of the assessee, the assessee was not required to deduct tax at source on reimbursement made by it to M, and when the expenses incurred by the assessee were totally paid and did not remain payable as at the end of the accounting period, the provisions of section 40(a) (ia) of the Act were not applicable. The Tribunal affirmed the decision of the CIT(A).

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

“i) Tax was deducted at source from the salaries of the employees paid by M, and the circumstances in which such salaries were paid by M for the assessee were sufficiently explained. For disallowing expenses from business and profession on the ground that tax has not been deducted at source, the amount should be payable and not which has been paid by the end of the year.

ii) The Tribunal had not committed any error in recording on facts, and no question of law arose for consideration in appeal.”

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(2011) 133 ITD 77 (Mum) RBS equities India Ltd. vs. Deputy Commissioner of Income Tax Assessment Year : 2004-05 Date of order: 26-08-2011

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Section 271(1)(c) Explanation 7 – AO charged penalty for – Concealment in computation of Arm’s Length Price (ALP). The assessee – RBS equities India Ltd. had computed ALP as per Transactional Net Margin Method (TNMM) which resulted in reduced tax liability of Rs.2,13,25,474 and AO was of the view that the same should have been calculated as per Comparable Uncontrolled Price Method(CUP).

Facts

AO exercised option u/s. 92CA(1) to calculate ALP with reference to the transaction between the assessee and ABN Amro Asia (Mauritius) Ltd (Associated Enterprise). The assessee had provided stock broking services in respect of clearing house trade to Associated Enterprise (AE) and had earned brokerage at the rate of 0.24%. The assessee had provided the same service to FIIs @ 0.408% & to FIs @ 0.22%. The AO contended that AE being FII should have charged @ 0.408%. The AO levied penalty u/s. 271(1)(c) under Explanation 7 to section 271(1)(c). The AO rejected TNMM on the ground that CUP method could be applied to facts of case and accordingly rejected the method without any specific reasons for inapplicability of said method and on the ground that direct method was preferable.

Held:

ALP (Arms Length Price) was computed by assessee in accordance with section 92C in good faith and due diligence as per rule 10C. AO’s view is that ALP could be computed correctly by CUP method only and hence, it cannot be the proper ground to invoke provisions of section 271(1)(c). As the assessee was of the view that TNMM was the appropriate method to determine ALP and the same was derived by assessee in accordance with the provisions of section 92C and as per Rule 10C, deeming fiction under 271(1)(c) cannot be invoked.

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Waiver of interest: Section 220(2A): Provision to be construed liberally: Application for stay of recovery proceedings cannot be construed as non-cooperation: Partial relief granted:

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Arun Sunny vs. CCIT ; 350 ITR 147 (Ker):

For the A. Y. 2006-07, the Chief Commissioner rejected the assessee’s application for waiver of interest u/s. 220(2A) of the Income-tax Act, 1961 on the ground that the assessee blocked recovery by obtaining stay against attachment notices and the assessee had not cooperated in recovery proceedings and payment of interest would not cause any genuine hardship to the assessee.

On a writ petition challenging the rejection order, the Division Bench of the Kerala High Court directed the Assessing Officer to reduce 25% of interest and held as under:

“i) Section 220(2A) is an incentive to defaulter assessee to co-operate with the Department and to remit the tax voluntarily at the earliest and, therefore, compliance should be rewarded by taking a liberal view and approach. What is indicated by the provision is that relief to be granted u/s. 220(2A) should be proportionate to the extent of satisfaction of the conditions stated therein. In other words, if the conditions are partially satisfied, the assessee should be given partial relief, i.e. partial waiver which should be in proportion to the extent of satisfaction of the conditions.

ii) The right to move for stay against recovery during pendency of an appeal is a statutory right, exercise of which cannot be said to be an indication of assessee’s lack of co-operation. Lack of co-operation happens when the assessee makes recovery difficult for the Revenue by transferring or siphoning off his assets leading to protracted enquiry and continuation of recovery proceedings by the Department.

 iii) The assessee voluntarily remitted the entire amount of tax before the Department started chasing the assessee with steps for recovery such as attachment of movables and immovables, sale thereof in public auction etc. In fact, the entire arrears were paid within six months from the date of payment based on the assessment. During the pendency of the stay, the assessee was not required to remit the tax which was contested in appeal. Therefore, all the three conditions were to some extent satisfied and the refusal of the Chief Commissioner to grant reduction in interest was not justified. Partial relief had to be granted, taking into account the amount of tax paid by the assessee on the interest earned on term deposits, the retention of which delayed payment of tax that led to levy of default interest.”

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Penalty: Concealment: Section 271(1)(c): Sale of immovable property for Rs. 2,51,50,000 which was valued at Rs. 5,19,77,000 for stamp duty: Assessee computed capital gain by taking actual consideration of Rs. 2,51,50,000: AO applied section 50C and also imposed penalty u/s. 271(1)(c): Penalty not justified:

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CIT vs. Madan Theatres Ltd.; 260 CTR 75 (Cal):

The assessee had sold an immovable property for a consideration of Rs. 2,51,50,000. The said property was valued at Rs. 5,19,77,000 for the purpose of stamp duty. The assessee computed the capital gain by taking actual consideration of Rs. 2,51,50,000. The Assessing Officer computed the capital gain taking deemed consideration u/s. 50C at Rs. 5,19,77,000 being the stamp duty valuation. The assessee did not dispute the said computation as it would not have made any difference because the capital gain still remained a loss. The Assessing Officer also imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal cancelled the penalty.

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

“Revenue having failed to produce any evidence to the effect that the assessee has actually received more amount than that shown by it on the sale of property, penalty u/s. 271(1)(c) cannot be levied simply because the Assessing Officer has worked out the capital gain by taking into account deemed sale consideration by invoking section 50C(1) instead of actual sale consideration shown by the assessee.”

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Waiver of interest: Section 220(2A) of Income-tax Act, 1961: A.Y. 1989-90: Power to waive should be exercised judiciously: Finding that all conditions for waiver were satisfied: Waiver of part interest is not valid.

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[E. M. Joseph v. CCIT, 342 ITR 379 (Ker.)]

For the A.Y. 1989-90, the assessee made an application for waiver of interest of Rs.1,95,570 u/s.220(2A) of the Income-tax Act, 1961. The Chief Commissioner gave the finding that all the three conditions regarding genuine hardship to the assessee, default in tax being not due to the circumstances attributable to the assessee and the co-operation of the assessee were satisfied. However, the Chief Commissioner limited the waiver to an amount of Rs.24,408 which was the balance amount due from the assessee.

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

(i) The Commissioner had found that all the three conditions were satisfied. In the order, the Commissioner merely said that “payment of further interest will cause hardship to them” and did not state any reason for limiting or reducing the waiver.

(ii) The discretion has not been properly exercised by the Commissioner. His order was liable to be quashed to the extent it failed to consider waiver of the amounts already paid.

(iii) The Chief Commissioner was to pass fresh order in accordance with the observations.”

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Speculative loss: Section 73: A.Y. 1996-97: Service charges Rs.2.25 crore, share trading loss Rs.2.23 crore and dividend income Rs.4.7 lakh: Exception in Explanation to section 73 applicable: Assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).

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[CIT v. Darshan Securities (P) Ltd., 249 CTR 199 (Bom.)]

For the A.Y. 1996-97, the assessee returned an income of Rs.2.25 crore from service charges, share trading loss of Rs.2.23 crore: and dividend income of Rs.4.7 lakh. The assessee claimed that in computing the gross total income for the purpose of Explanation to section 73 of the Income-tax Act, 1961, the income from service charges have to be adjusted against the loss in share trading. The Assessing Officer did not accept the claim and disallowed the share trading loss as speculation loss. The Tribunal accepted the assessee’s claim.

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

(i) Explanation to section 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that s.s (1) of section 73 can apply.

(ii) In computing the gross total income the normal provisions of the Income-tax Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. In the present case, both the income from service charges of Rs.2.25 crore and the share trading loss of Rs.2.23 crore, would have to be taken into account in computing the income under the head business, both being sources under the same head.

(iii) The assessee had a dividend income of Rs.4.7 lakh. The Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).”

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Set-off of loss of EOU: Exemption or deduction: Sections 10B, 70, and 80-IA(5) of Incometax Act, 1961: A.Y. 2005-06: Section 10B as amended w.e.f. 1-4-2001 is not a provision for exemption but a provision for deduction: Loss sustained from such an eligible unit can be set off against business income from other units.

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[CIT v. Galaxy Surfactants Ltd., 343 ITR 108 (Bom.); 249 CTR 38 (Bom.)]

In the previous year relevant to the A.Y. 2005-06, the assessee’s EOU which was eligible for deduction u/s.10B of the Income-tax Act, 1961 incurred loss. The assessee claimed the set-off of the said loss against the profits of the other units. The Assessing Officer disallowed the claim for set-off of the loss holding that the loss sustained by the eligible units cannot be set off against the profits of the other units. The Tribunal allowed the assessee’s claim.

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

(i) Section 10B as it stands after substitution by the Finance Act, 2000 w.e.f. 1-4-2001, is not a provision for exemption, but a provision which enables an assessee to claim a deduction.

(ii) The loss which is sustained by an eligible unit can be set off against the income arising from other units under the same head of profits and gains of business or profession.”

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Revision: Section 263 of Income-tax Act, 1961: A.Y. 1996-97: Limitation: Order of assessment does not merge in orders of reassessment as regards issues not forming subject-matter of reassessment: Limitation for revision of assessment in respect of those issues runs from date of original assessment order and not from date of reassessment orders.

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[CIT v. ICICI Bank Ltd., 343 ITR 74 (Bom.)]

For the A.Y. 1996-97, the assessment order u/s.143(3) of the Income-tax Act, 1961 was passed on 10-3-1999 allowing the deduction claimed u/ss. 36(1)(vii) and (viia) and the foreign exchange rate difference. Subsequently, a reassessment order u/s.147 was passed on 22-2-2000 reworking the deduction u/s.80M. An appeal against the order u/s.143(3) was decided by the Commissioner (Appeals) on 28-3-2001. Thereafter, another reassessment order u/s.147 was passed on 26-3-2002, for reworking of the deduction u/s.36(1) (viii). On 28-3-2003, the Commissioner passed an order u/s.263 for disallowance u/s.36(1)(vii) and (viia) and in respect of foreign exchange rate difference. The Tribunal set aside the order as barred by limitation.

On appeal by the Revenue, it was contended that when the Assessing Officer passed the reassessment order on 26-3-2002, the Explanation to clause (vii) of section 36(1) had been introduced on the statute book and the Assessing Officer was duty bound to apply the law as amended, which he failed to do, and that Explanation 3 to section 147 of the Act having been amended to provide that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and coming to his notice subsequently in the course of the proceedings.

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

(i) Where the jurisdiction u/s.263(1) is sought to be exercised with reference to an issue which is covered by the original assessment order u/s.143(3) and which does not form the subject-matter of reassessment, limitation must necessarily begin to run from the order u/s.143(3).

(ii) Neither in the first reassessment, nor in the second reassessment was any issue raised or decided in respect of the deductions u/s.36(1) (vii), (viia) and the foreign exchange rate difference. The order of the Commissioner u/s.263(2) had not been passed with reference to any issue which had been decided either in the order of the first reassessment or in the order of second reassessment, but sought to revise issues decided in first order of assessment u/s.143(3) dated 10-3-1999.

(iii) The order dated 10-3-1999, did not merge with the orders of reassessment in respect of issues which did not form the subject-matter of the reassessment. Consequently, Explanation 3 to section 147 would not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice u/s.148(2). This, however, will not obviate the bar of limitation u/s.263(2). The invocation of the jurisdiction u/s.263(2) was barred by limitation.”

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Export profit: Deduction u/s.80HHC: A.Y. 2001-02: Assessee purchasing goods from one foreign country and transporting it to another foreign country: No condition that exports must be from India: Receipt on sale proceeds in convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

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[Anil Kumar v. ITO, 343 ITR 30 (Karn.)]

The assessee was engaged in purchase and sale of non-ferrous metals, etc. The purchases were made from one country and exported to another country at a margin of profit by arranging direct shipment from the selling country to the purchasing country. The bills were settled through Bank of Baroda in India. The proceeds were through convertible foreign currency and payments were made on convertible foreign currency. For the A.Y. 2001-02, the assessee claimed deduction u/s.80HHC of the Income-tax Act, 1961 in respect of such exports. The Assessing Officer and the Tribunal held that the assessee was not entitled to the deduction. The Tribunal held that to be eligible for the benefit of section 80HHC, foreign exchange is to be earned by exporting goods from India.

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

(i) Section 80HHC is an incentive to an assessee to carry on export business so that in turn, the country earns foreign exchange. While interpreting this provision, if two views are possible, it is settled law that the view which is favourable to the assessee is to be preferred by the courts.

(ii) Now section 80HHC provides that to an assessee who is engaged in the business of export out of India of any goods or merchandise, to which the section applies deduction to the extent of profits referred to in s.s (1)(b) is allowed. In the entire provision, there are no express words which provide that the export of such goods is to be from India.

(iii) The Explanation read with the main section does not in any way indicate that, to be eligible for the benefit of deduction u/s.80HHC, the goods or merchandise has to emanate from India. In section 80HHE the words used are ‘export out of India’. But to be eligible for deduction under the aforesaid provision mere export out of India is not sufficient. What is to be exported out of India should be from India to a place outside India by any means. Such a wording is conspicuously missing in section 80HHC.

(iv) The stress in section 80HHC is only on earning of foreign exchange, not the goods and merchandise to be exported out of India. They do not necessarily have to be from India. Therefore, the law does not require the goods to be physically exported out of India. There need not be a two-way traffic of bringing the goods from a foreign country into the Indian shores and thereafter exporting those goods from Indian shores.”

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Export of computer software: Exemption/ deduction u/s.10A r.w.s 80-I: A.Ys. 1995-96 to 1998-99: No material to show that assessee indulged in arrangement with foreign buyer so as to produce higher profits to assessee: AO not entitled to presume such arrangement and determine reasonable profits.

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[CIT v. H. P. Global Soft Ltd., 342 ITR 263 (Karn.)]

The assessee company carried on the business of manufacture of hardware and software and exported its products. For the A.Ys. 1995-96 to 1998-99, the assessee claimed exemption u/s.10A in respect of two units. The Assessing Officer took the view that the exemption claimed in respect of the two units involved in creation of software was not merely unusually high in comparison to the assessee’s other business, but having regard to the close relationship between the assessee company and its foreign buyer the provisions of section 80-I(9) were to be applied in terms of 10A(6) of the Act. He, therefore, allowed exemption at the percentage of profit in respect of the entire turnover of the assessee inclusive of the export turnover. The Tribunal allowed the assessee’s claim.

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

(i) While there did exist a close connection between the assessee and the foreign buyer the other requirement as to the nature of the arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, had not been disclosed by the Assessing Officer.

(ii) The finding of the Appellate Authority was that the profit margin as revealed by the assessee was a reasonable profit margin in comparison to other similar units.

(iii) There being no material to indicate that the course of business had been so arranged as to inflate profits, i.e., to show a higher profit margin to the two export units of the assessee, the Tribunal was justified in holding that the Assessing Officer could not presume the existence of close connection or arrangement for the purpose of invoking section 80-I(9) of the Act.”

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Business expenditure: Section 37(1): A.Y. 1997-98: Expenditure on higher education of two directors: Disallowance on ground that directors are children of managing director: Not proper.

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[Krishna Fabrications Ltd. v. JCIT, 343 ITR 126 (Karn.)]

The assessee company was engaged in the business of manufacture and supply of automobile components. The assessee sponsored two of its directors for higher education in connection with the specialised intensive training in the field of general management, marketing, finance and information technology, including project strategy, with a condition that after securing higher education, they should serve the assessee as directors. The claim for deduction of the expenditure was disallowed by the Assessing Officer and the Tribunal on the ground that they were the children of the managing director.

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

(i) Just because the two directors were the children of the managing director of the company, that could not be the ground for the Assessing Officer to reject the claim of the assessee, until and unless it was established that these two children of the managing director, sponsored to acquire higher education were not connected with the business of the assessee, even though they were directors.

(ii) Since the issue had not been considered by the Assessing Officer and such a mistake was committed by the Commissioner (Appeals) as well as the Tribunal, the matter was remanded to the Assessing Officer for fresh consideration.”

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Business expenditure: Bad debts: Section 36(1)(vii) and 36(2) of Income-tax Act, 1961: A.Y. 1998-99: Assessee share-broker: Nonrecovery of amount receivable from clients against purchase of shares: Non-recoverable amount is bad debt deductible u/s.36(1)(vii) r.w.s 36(2).

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[CIT v. Shreyas S. Morakhia, 249 CTR 30 (Bom.); 19 Taxman.com 64 (Bom.)]

The assessee was a share-broker. For the A.Y. 1998-99, the assessee claimed deduction of Rs. 28.24 lakh representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf, u/s.36(1)(vii) claiming that the amount has become irrecoverable. The Assessing Officer disallowed the claim. The CIT(A) allowed the assessee’s claim. The Revenue filed appeal before the Tribunal and contended that since the assessee had credited only the amount of the brokerage to the P&L a/c, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or any earlier previous year and accordingly, the condition stipulated in section 36(2) was not satisfied. The Tribunal upheld the decision of the CIT(A).

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

(i) Brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Brokerage as well as the value of the shares constitute a part of the debt due to the assessee, since both arise out of the same transaction.

(ii) Value of the shares transacted by the assessee as a stock-broker on behalf of his clients is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. Brokerage having been credited to the P&L a/c of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

(iii) The assessee was therefore entitled to deduction u/s.36(1)(vii) if the Act.”

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Assessment: Change of status: Validity: A.Y. 1972-73: If the status of the assessee is required to be modified, the only option is to assess the income in the appropriate status, if permitted by law: CIT(A) modifying the status of assessee: Not valid.

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[Gutta Anjaneyulu v. CIT, 249 CTR 106 (AP)]

For the A.Y. 1972-73, assessment was made in the status of AOP consisting of 3 persons.

 In appeal, the CIT(A) modified the status from AOP to BOI comprising 2 persons. The Tribunal upheld the decision of the CIT(A). On appeal by the assessee, the Andhra Pradesh High Court reversed the decision of the Tribunal and held as under:

“If the status of the assessee is required to be modified, the only option available to the ITO is to assess the income in the appropriate status, if permitted by law, by issuing a notice to the assessee in that particular status. The CIT(A) was not justified in modifying the status from AOP to BOI.”

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Appeal to CIT(A): Additional ground: A.Y. 2001-02: Claim for benefit of proviso to section 112(1) not made in the return: Could be accepted by CIT(A): Assessee is entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the AO.

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[Smt. Raj Rani Gulati v. CIT, 249 CTR 51 (All.)]

For the A.Y. 2001-02, the assessee had not made the claim for the benefit of proviso to section 112(1) , while computing the capital gains tax. The claim was first time made before the CIT(A). The CIT(A) allowed the assessee’s claim. By relying on the ratio laid down by the Supreme Court in the case of Goetze India Ltd. v. CIT, (2006) 204 CTR 182 (SC); (2006) 284 ITR 323 (SC) the Tribunal allowed the appeal filed by the Department and set aside the order of the CIT(A).

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

(i) Needless to mention that the proviso to section 112(1) was introduced w.e.f. 1-4-2000 by the Finance Act, 1999. In other words, it was introduced during the assessment year under consideration and the assessee was not aware about latest amendment introduced by the Finance Act, 1999 w.e.f. 1-4-2000.

(ii) Though ignorance of law has no excuse, but it can be excused in tax matters. It is not expected that the Department shall take the advantage of the assessee’s ignorance as per CBDT Circular No. 14(XL-35) of 1955, dated 11- 4-1955. Even under the bona fide belief, the assessee has shown the long-term capital gain @ 20%, but it was expected from the Assessing Officer to know the latest amendment.

(iii) The mistake might have been corrected by passing an order u/s.154. The question of law which arose from the fact as found by the IT authority and legal issue can be raised at any stage. The assessee was entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the Assessing Officer.

(iv) The CIT(A) has rightly adjudicated the statutory right of the assessee and directed to allow the longterm capital gain at 10%.”

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Penalty: Section 271(1)(c): Short term capital gains assessed as business income: Penalty u/s. 271(1)(c) not justified:

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CIT vs. Amit Jain; 351 ITR 74 (Del):

The assessee had declared an income of Rs. 2,60,73,558/- from short term capital gains in the return of income. The Assessing Officer assessed it as income from business. He also levied penalty of Rs. 58,45,899/- u/s. 271(1)(c). The Tribunal deleted the penalty.

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

“i) The amount in question, which formed the basis for the Assessing Officer to levy penalty, was in fact truthfully reported in the return. In view of this circumstance, that the Assessing Officer chose to treat the income some other head could not characterise the particulars reported in the return as “inaccurate particulars” or as suppression of facts.

ii) Therefore, the Tribunal was not in error in deleting the penalty.”

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Export profit: Deduction u/s. 80HHC: A. Y. 2003-04: Computation: Scrap is by-product of manufacturing activity: There were no expenses which could be excluded from sale of scrap:

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R. N. Gupta Co. Ltd. vs. CIT; 213 Taxman 85(P&H): 30 Taxman.com 424 (P&H):

The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a by-product of manufacturing activity. The assessee included the receipts on sale of scrap as business income for computing the deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer rejected the claim for deduction in respect of scrap sales. The CIT(A) allowed the assessee’s appeal and also held that no expenditure is incurred in generation and sale of scrap. Accordingly, the whole of the sale proceeds was includible in the business profit. The Tribunal held that only the profit on sale of scrap is includible and estimated such profit at 7.5%.

On appeal by the assessee, the Punjab and Haryana High Court held as under:

“i) Mr. Katoch, learned counsel for the revenue has argued that the scrap value has to be included in the total turn-over but cannot be included in business profit as only the profit after deducting the expenses of generation of scrap can be added in the business profit.

ii) We find that the argument raised by Mr. Katoch is wholly untenable. The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is by-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap.

 iii) Since the question of law stands answered by this Court in favour of assessee in the above mentioned judgments, therefore, the first substantial question of law is answered in favour of the assessee and against the Revenue.”

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Educational Institution: Exemption u/s. 10(23C) (vi): A. Y. 2011-12: Institution should exist wholly for education: Government grant, incidental surplus, upgrading facilities of college including for purchase of library books and improvement of infrastructure: Not a ground for denial of exemption:

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Tolani Education Society vs. DDIT(Exemption); 351 ITR 184 (Bom):

The assessee, an educational institution, made an application for approval for exemption u/s. 10(23C) (vi) of the Income-tax Act 1961. The Chief Commissioner rejected the application on the ground that the assessee was in receipt of the Government grant which formed a substantial part of the total receipt and, consequently, the case of the assessee would not fall within the purview of section 10(23C)(vi) for the reason that an institution which is wholly or substantially financed by the Government falls within the ambit of sub-clause (iiiab). Sub-clause (vi) applies to those institutions which do not fall within the ambit of sub-clause (iiiab) or sub-clause (iiiad). He was of the view that an institution which was in receipt of substantial grants from the Government would consequently not fall within the ambit of sub-clause (vi). The Chief Commissioner held that the fees which were collected by the assessee for the year ending 31-03-2011, would indicate that the assessee did not exist solely for educational purposes. He had also noted that the assessee had collected from students utility fees, project work fees, industrial visit fee and a magazine fee from which it was sought to be deduced that the assessee did not exist solely for educational purposes. Moreover, there was an increase in the asset base with the generation of surplus which indicated that the activities of the assessee were not devoted solely for educational purposes.

The Chief Commissioner held on that basis that the assessee existed for the purposes of profit. The Bombay High Court allowed the writ petition challenging the order and held as under:

 “i) The Income-tax Act, 1961, does not condition the grant of an exemption u/s. 10(23C) on the requirement that a college must maintain the status quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption u/s. 10(23C).

 ii) Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of section 10(23C) cannot be interpreted regressively to deny exemptions.

iii) Though the Chief Commissioner inquired into the question for the purposes of his determination under sub-clause (vi) of section 10(23C), the requirement that an institution must exist solely for educational purposes and not for the purposes of profit is common both to sub-clause (iiiab) as well as sub-clause (iiiad). Hence, the grievance of the assessee was that while on the one hand the Chief Commissioner had held that sub-clause (vi) would not be applicable to an institution which was in receipt of substantial grants from the Government (such an institution being governed by sub-clause (iiiab)), at the same time, the finding that the assessee did not exist solely for educational purposes and not for the purposes of the profit would, in effect, not merely lead to the rejection of the exemption under sub-clause (vi) but would also affect the claim of the assessee to the grant of an exemption under sub-clause (iiiab) as well.

iv) The sole and dominant nature of the activity was education and the assessee existed solely for the purposes of imparting education. An incidental surplus which was generated, and which had resulted in additions to the fixed assets was utilised as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant.

v) The assessee was entitled to exemption u/s. 10(23C)(vi).”

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Interest u/s. 234A: A. Y. 1996-97: Tax paid before due date but return filed late: Interest u/s. 234A not leviable

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Bharatbhai B. Shah vs. ITO; 255 CTR 278 (Guj):

The due date for filing of the return of income for the A. Y. 1996-97, was 31-8-/1996. The assessee had filed the return of income late, on 27-3-1998. However, he had paid tax of Rs. 10 lakh u/s. 140A of the Income Tax Act, 1961 on 30-8-1996. The Assessing Officer processed the return u/s. 143(1)(a) of the Act and assessed the tax at Rs. 15,08,474/- and after deducting the TDS of Rs. 25,533/-, determined the tax liability at Rs. 14,82,941/-. He also levied the interest u/s. 234A of the Act on the said amount ignoring the amount of Rs. 10 lakh paid on 30-8-1996.

The assessee filed a writ petition contending that interest u/s. 234A could be levied not on the entire amount of Rs. 14,82,941/-, but only on the amount of Rs. 4,82,941/- after reducing the amount of Rs. 10 lakh paid before the due date.

The Gujarat High Court allowed the petition and held as under:

“i) If the Revenue is allowed to recover interest on the tax which is already paid within the due date, merely because the return was not filed in time, would make the provision penal in nature and expose it to challenge of its vires.

ii) In the present case, the assessee had already deposited tax of Rs. 10 lakh before the due date of filing return. The return, of course, was filed belatedly. While framing the assessment of such belated return, the Assessing Officer held that the assessee should pay further tax of Rs. 4,82,941/-. Thus, the Revenue’s demand for interest for the entire amount of Rs. 14,82,941/- u/s. 234A would fall foul to the ratio of the decision of the Delhi High Court in the case of Dr. Prannoy Roy vs. CIT; 254 ITR 755 (Del) which has been confirmed by the Supreme Court in CIT vs. Pranoy Roy; 309 ITR 231 (SC).

iii) Revenue can collect interest u/s. 234A only on the additional sum of Rs. 4,82,941/- and not on the entire amount.”

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Housing project: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2008-09: Built-up area of some flats exceeding 1500 sq.ft.: Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area

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Viswas Promoters (P) Ltd. vs. ACIT; 255 CTR 149 (Mad)

The assessee was engaged in the business of development and construction of flats. The assessee was eligible for deduction u/s. 80-IB(10). Out of its four projects, two projects had all the flats of the specified built-up area less than 1500 sq.ft. In respect of these two projects, the Assessing Officer allowed the claim for deduction u/s. 80-IB(10) of the Act. In the remaining two projects, there were 32 flats of built-up area more than 1500 sq.ft. in one project and one flat of built up area more than 1500 sq. ft. in the other project. The assessee claimed deduction u/s. 80-IB(10) in respect of these two projects on proportionate basis corresponding to the flats of built-up area of less than 1500 sq. ft. The Assessing Officer disallowed the claim in respect of these two projects, on the ground that the condition as regards the built-up area of the flats is not satisfied. The CIT(A) allowed the assessee’s claim. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“i) Going by the definition of the “housing project” under Explanation to section 80HHBA as the construction of “any building” and the wordings in section 80-IB(10), the question of rejection in entirety of the project on account of any one of the blocks not complying with the conditions, does not arise.

ii) In respect of each of the blocks, the assessee is entitled to have the benefit of deduction in respect of residential units satisfying the requirement of built up area of 1500 sq.ft. u/s. 80-IB(10)(c). The assessee would be entitled to the relief on a proportionate basis.”

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Deduction u/s. 80JJA: A. Ys. 2003-04 and 2004- 05: Business of making fuel briquettes from bagasse: Bagasse is a biodegradable waste and the same is collected on consideration by assessee from sugar factory: Assessee entitled to deduction u/s. 80JJA

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CIT vs. Smt. Padma S. Bora; 255 CTR 1 (Bom)

Assessee was engaged in the business of manufacturing fuel briquettes from bagasse purchased from sugar factory for consideration. For the A. Ys. 2003- 04 and 2004-05, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80JJA of on the following grounds:

“i) Bagasse is not a waste;

ii) It is not generated in municipal/urban limits i.e., by local authorities;

iii) It is not collected but it is purchased; and

 iv) The process does not involve any treatment or recycling of a biodegradable waste.

The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Bagasse is a biodegradable waste and the same is collected on consideration by the assessee from the sugar factory. Term “waste” has to be understood contextually i.e., place where it arises and the manner in which it arises during the processing of some article. The fact that the sugar industry regards bagasse as waste is evident from circular dated 4-2-2006, issued by the Sugar Commissioner, Maharashtra State. Besides, the ITC classification of Exim Policy also classifies bagasse as a waste of sugar industry under Chapter 23, Heading 23.20 thereof. Further, Central Excise Teriff Act, 1985 also regards bagasse as waste of sugar manufacture and has classified the same under Chapter 23, Heading 23.01.

ii) Contention of the Revenue that collection means collecting free of charge and not by purchasing is not tenable. Word “collecting” means to gather or fetch. It is a neutral word and does not mean collection for consideration or collection without consideration. In the instant case, the assessee has collected bagasse from sugar factories after making payment for the same. Thus, the requirement of collecting biodegradable waste as provided u/s. 80JJA is satisfied.

iii) Circular No. 772 dated 23rd December, 1998 does not restrict its benefits only to local bodies. In any event, the circular cannot override the clear words of section 80JJA which provides deduction in respect of profits and gains derived from the business of collecting and processing/treating of biodegradable waste for making briquettes for fuel.

iv) Therefore, Tribunal was justified in allowing deduction u/s. 80JJA on the profits derived from the business of manufacturing fuel briquettes from bagasse.”

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Charitable or religious trust: Section 11: A. Ys. 1998-99 to 2000-01: Exemption of income from property held under trust: Accumulation of income: For purposes of section 11(2), Form No. 10 could be furnished during reassessment proceedings

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Association of Corporation & Apex Societies of Handlooms vs. Asst. DIT; 30 Taxman.com 22 (Del)

The Tribunal rejected the assessee’s claim for accumulation of income u/s. 11(2) of the Income Tax Act, 1961 on the ground that Form No. 10 had not been furnished along with the return, but was filed during the course of reassessment proceedings.

On appeal by the assessee, the assessee contended as under:

“i) The assessment included reassessment as was evident from section 2(8).

ii) Whether the assessment was an original assessment or a part of reassessment, it would not make any difference and it would be entitled to file Form No. 10 in either of the two proceedings and the revenue would have to take the said form into account.

The contention of the Department was that in view of the judgment of the Supreme Court rendered in the case of CIT vs. Nagpur Hotel Owners Association [2001] 247 ITR 201/ 114 Taxman 255 (SC) during reassessment proceedings the Form No. 10 could not be furnished by an assessee.

The Delhi High Court reversed the decision of the Tribunal, allowed the assessee’s appeal and held as under:

“i) One has to keep in mind the fact that while reopening of an assessment cannot be asked for by the assessee on the ground that it had not furnished Form No. 10 during the original assessment proceedings, this does not mean that when the revenue reopens the assessment by invoking section 147, the assessee would be remediless and would be barred from furnishing Form No. 10 during those assessment proceedings.

ii) Therefore, Form No. 10 could be furnished by the assessee-trust during the reassessment proceedings.”

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Deemed income: section 41(1): A.Y. 1995-96: Cheques not presented by creditors within validity period: No remission of liability: Amount not assessable u/s.41(1).

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For the A.Y. 1995-96, the assessee credited to its profit and loss account a sum of Rs.5,02,646 as liabilities no longer required to be written back since the cheques for the amounts issued to the creditors were not presented within the validity period. The assessee claimed that the sum is liable to be excluded from the profit and could not be taxed u/s.41(1) of the Income-tax Act, 1961. The Assessing Officer treated the amount as the assessee’s income u/s.41(1) of the Act. The Commissioner (Appeals) and the Tribunal upheld the addition.

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

“(i) The words ‘obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure’ incurred in any previous year in section 41(1)(a) of the Income-tax Act, 1961, refers to the actual receiving of cash of that amount. The amount may be actually received or it may be adjusted by way of any adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words ‘has obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure in the past’.

(ii) The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone, but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of debt even after expiry of the normal period of limitation as provided in the limitation Act.

(iii) It has not been established that due to nonencashment of cheques in question, the money involved had become the money of the assessee because of limitation or by any other statutory or contractual right. The amount was not assessable u/s.41(1).”

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Bad debts: Deduction u/s. 36(1)(vii): A. Y. 2004- 05: Where books of account are not closed and not signed by Board of Directors and not adopted by shareholders as per Companies Act, it is legally permissible to make adjustments before they are finally adopted: Where accounts of assessee were open and subject to correction by auditors, bad debts could be written off even after closure of accounting period, as there is neither any condition nor any provision u/s. 36(1)(vii), that writing off of

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CIT vs. U.P. Rajkiya Nirman Nigam Ltd.; [2013] 36 taxmann.com 96 (All):

For the A. Y. 2004-05, the assessee’s claim for deduction of bad debts u/s. 36(1)(vii) of the Income-tax Act, 1961 was disallowed by the Assessing Officer on the ground that the decision to write off bad debt was not taken in the relevant previous year. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following questions were raised before the High Court:

“i) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that assessee can keep his accounts open for an indefinite period and pass an entry at a later stage even after 12 months from the closure of the accounting period?

ii) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the claim of bad debts of the assessee on the ground that it has been written off in the accounts of the relevant previous year while failing to appreciate that decision to write off bad debt was not taken in the relevant previous year and the same were actually not done in the previous year by 31st March?”

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

“i) On perusal of the provisions, it reveals that the only requirement for allowing the bad debt u/s. 36 (1) (vii) of the Income-tax Act, is that any bad debt or part thereof is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. In the instant appeal, neither the department nor the assessee disputes that the debt had become bad and it was written off.

ii) The prescription as provided is to write off bad debt by the assessee in the accounts ‘for the previous year’, but it does not say to write off bad debt ‘in the previous year’. Thus, there is a vast difference if the word ‘in’ would have been there in place of ‘for’. Further, the words ‘accounts of the assessee’ are qualified with further words ‘for the previous year’. Thus, it only means that the accounts in which the Act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee in the relevant accounting year. There is neither any condition nor any provision that the writing off should be done in the previous year, i.e. before end of the financial year.

iii) In the present case, debts relating to the period 1987-88 and 1998-99 claimed in the accounts which were prepared up to 31-03-2004 and as the accounts of the assessee are open and subject to corrections by the Auditors, as per the Companies Act, then such writing off can be done in those account books. No new legal proposition has been brought to our notice for treating the debt as bad or irrecoverable should be taken in the previous year itself. In other words, where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted.

iv) Further, it is admitted that the original return, on the basis of unaudited accounts, was filed on 01-11-2004. After audit had taken place and report of the Auditors was accepted, revised return was filed on 18-08-2005 and it is only in the revised return, the debts to the tune of Rs. 2 crore and odd had been declared as bad. The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration, i.e. 2004-05 is contrary to the provisions of section 36 (1) (vii) of the Income-tax Act, and further in view of the interpretation as stated here-in-above. Therefore, the Tribunal has rightly allowed the appeal of the assessee.

v) In view of above, the questions are answered in the negative, i.e., against the Revenue and is in favour of the assessee.”

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Appellate Tribunal: Power and scope: Section 80-IA: A. Ys. 2002-03 to 2008-09: CIT(A) holding rental income from towers constructed in industrial park was business income and eligible for deduction u/s. 80-IA: Revenue not challenging this finding before Tribunal: Tribunal cannot pass remand order for further enquiry on issue of character of receipt:

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R. R. Industries Ltd. vs. ITO; 356 ITR 97 (Mad):

The assessee constructed towers in the industrial park and let them out to software concerns providing a platform with plug and play infrastructure. It claimed deduction u/s. 80-IA of the Income-tax Act, 1961, treating the rental income as business income. The Assessing Officer assessed the income as income from house property and disallowed the assessee’s claim for deduction u/s. 80-IA. The Commissioner (Appeals) held that the assessee had complied with section 80-IA(4)(iii) and accordingly was eligible for deduction u/s. 80-IA. He held that the income received by the assessee was to be assessed as income from business. He also agreed in principle that the deduction u/s. 80-IA would be allowed, even if the rental income was assessed as income from house property.

Before the Tribunal the Revenue challenged the view of the Commissioner (Appeals) only on his holding the income derived from letting out of industrial park buildings as income from business as against the finding made by the Assessing Officer that it was to be treated as income from house property. No question was raised on the view of the Commissioner (Appeals) that irrespective of the character of the receipt, the deduction was available. On considering the nature of the receipt, the Tribunal agreed with the submission of the assessee that income derived by developing and operating or maintaining an industrial park was assessable under the head “profits and gains of business and profession” as could be inferred from the provisions of section 80-IA(4)(iii) of the Act. The Tribunal held that the assessee as well as the Revenue had not brought out any materials to show that the facilities developed by the assessee after completion of the development was treated as an industrial park by any authority and it was not clear whether the alleged industrial park was so notified by the Central Government or not. In the absence of any material to show that what was predominant in the letting out in the building and whether the facilities were incidental, the Tribunal viewed that it was necessary to restore the issue back to the Assessing Officer for proper verification.

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

“i) When the Revenue had accepted the view of the Commissioner (Appeals) on section 80-IA that the assessee had complied with section 80-IA(4)(iii), nothing remained for an enquiry either as to the nature of the receipt or for that matter the facilities developed to be treated as an industrial park to consider the question of deduction u/s. 80-IA(4)(iii).

ii) The view of the Commissioner (Appeal) in this regard did not call for any interference. The Revenue did not challenge the order of the Commissioner on the section 80-IA deduction before the Tribunal.

iii) Thus, when the character of the receipt was not a question to be gone into in the matter of considering the claim of deduction u/s. 80-IA(4)(iii), no useful purpose would be served for the Revenue to again insist on a decision on the character of the receipt.

iv) The order of the Tribunal was set aside and the appeals filed by the assessee are allowed.”

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Software Technology Park: Exemption u/s. 10A: A. Y. 2003-04: Approval by Director of Software Parks of India is valid: Approval by Inter-Ministerial Standing Committee not necessary:

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CIT vs. Technovate E Solutions P. Ltd.; 354 ITR 110 (Del):

For the A. Y. 2003-04, the assessee claimed exemption u/s. 10A and furnished a registration issued by a director of the Software Technology Parks of India in support of the claim. The Assessing Officer rejected the claim on the ground that the approval of the director of the Software Technology Parks of India was not a valid approval from a specified authority. He held that only the Inter-Ministerial Standing Committee was competent to grant approval to units functioning within the Software Technology Park for the purposes of exemption u/s. 10A. The Tribunal allowed the assessee’s claim.

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

i) The CBDT in Instruction No. 1 of 2006, dated 31-03- 2006, clarified that the claim of deduction u/s. 10A should not be denied to the software technology park units only on the ground that the approval/ registration to such units had been granted by the Director of Software Technology Parks of India. In the Instruction, the Board also made a reference to the Inter-Ministerial communication dated 23-03-2006, issued by the Secretary, Minister of  Communications and Technologies to the effect that the approvals issued by the director of the Software Technology Parks of India had the authority of the Inter-Ministerial Standing Committee and that all approvals granted by director of the Software Technology Parks of India were, therefore, deemed to be valid.

ii) The position was also clear from a letter dated 6th May, 2009, issued by the Board to the Joint Secretary, Minister of Commerce and Industry wherein a distinction had been drawn between the provisions of sections 10A and 10B and in which it had been clarified that a unit approved by a director under the Software Technology Park Scheme would be allowed exemption only u/s. 10A as a software technology park unit and not u/s. 10B as 100% export oriented unit.

iii) Therefore, approval granted by the director of the Software Technology Parks of India would be deemed to be valid in as much as the directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee.

iv) Thus the Tribunal was right in coming to the conclusion that the approval granted by the director of the Software Technology Parks of India was sufficient approval so as to satisfy the conditions relating to approvals u/s. 10A.”

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Reassessment: Reason to believe: Change of opinion: S/s. 147 and 148: A. Y. 2007-08: Information regarding bogus companies engaged in providing accommodation entries to which assessee was allegedly a beneficiary was in possession of AO while making assessment u/s. 143(3): In response to query raised by AO the assessee furnished all information including alleged accommodation entry providers with their confirmations: Subsequent notice u/s. 148 and the consequent reassessment are not valid:

Pardesi Developers & Infrastructure (P) Ltd. vs. CIT: 258 CTR 411 (Del):

For the A. Y. 2007-08, the assessment was originally completed by an order u/s. 143(3) dated 30-12-2009. Subsequently, a notice u/s. 148 dated 30-08-2011 was issued for reopening the assessment. The Delhi High Court allowed the writ petition challenging the notice and held as under:

“i) It is an admitted position that the information regarding the alleged accommodation entry providers had been circulated to all the AOs on 30-04-2009 which included the AO of the assessee. In other words, the AO of the assessee had received the said information with regard to the alleged accommodation- entry providing companies. Thereafter, on 09-11-2009, the assessee furnished a reply to the questioner which had been issued on 18-02-2009. In that reply, the assessee gave details of share capital raised by the assessee. These details included the sums received from the alleged accommodationentry providers. Along with the said reply dated 09-11-2009, confirmations from the said parties were also furnished. A similar reply was again furnished on 27-11-2009. Despite the furnishing of these details, the AO, in order to further verify and confirm the said facts, issued notices u/s. 133(6) to the said companies directly, on 27-30th November 2009. All the concerned parties responded to those notices and affirmed their respective confirmations, which they had earlier provided to the AO. It is only subsequent thereto that the assessment was framed.

ii) In the backdrop of these facts, it is difficult to believe the plea taken in the purported reasons that the said information was “neither available with the Department nor did the assessee disclose the same at the time of assessment proceedings”. From the aforesaid facts it is clear that the information was available with the Department and it had been circulated to all the AOs. There is nothing to show that the AO did not receive the said information. And, there is nothing to show that the AO had not applied his mind to the information received by him. On the contrary, it is apparent because he was mindful of the said information that he issued notices u/s. 133(6) directly to the parties to confirm the factum of application of shares and the source of funds of such shares.

iii) Therefore, the very foundation of the notice u/s. 148 is not established even ex facie. Consequently, it cannot be said that the AO had the requisite belief u/s.147 and, as a consequence, the impugned notice dated 30-08-2011 and the order on objections dated 03-08-2012 are liable to be quashed.”

Reassessment: S/s. 147 and 148: A. Y. 2000-01: Notice u/s. 148 at the instance of the audit party: Not valid:

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Gujarat Fluorochemicals Ltd. vs. ACIT; 353 ITR 398 (Guj):

For the A. Y. 2000-01, the assessment was originally completed u/s. 143(3). Subsequently, a notice u/s. 148 was issued at the instance of the audit party.

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

“i) Though an audit objection may serve as information, on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own.

ii) It was contended on behalf of the assessee that the Assessing Officer held no independent belief that income chargeable to tax had escaped assessment. He submitted that the Assessing Officer was under compulsion by the audit party to issue for reopening of assessment though she herself held a firm belief that no income had escaped assessment. The assessing Officer in her affidavit did not deny this.

iii) In the affidavit what was vaguely stated was that the Department was apprehensive about the source of information on the basis of which such averments were made. Inter-departmental correspondence was strictly confidential. On a direction from the Court the Revenue made a candid statement that the file containing exchanges between the Assessing Officer and the audit party was not traceable.

iv) The Revenue not having either denied the clear averments of the asessee made in the petition on oath nor having produced the original files to demonstrate the independent formation of the opinion by the Assessing Officer though sufficient time was made available, the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid.”

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Income: Lottery: Sections 2(24)(ix) and 115BB : Assessee was allotted a Contessa car as the first prize under the National Savings Scheme: Not a lottery: Not income liable to tax:

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CIT vs. Dr. S. P. Suguna Seelan; 353 ITR 391 (Mad):

The assessee was allotted a Contessa car as the first prize under the National Savings Scheme. The Assessing Officer treated the prize as winnings from lotteries within the meaning of section 2(24) (ix), 1961, and subjected to the special rate u/s. 115BB. The Tribunal held that the prize won by the assessee was not covered by section 2(24)(ix) and allowed the assessee’s appeal.

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

“The car won by the assessee on draw of lots under the incentive scheme of the National Savings Scheme was not a lottery and was not liable to tax.”

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Deemed dividend: Section 2(22)(e): A.Y. 1999-00: Gratuitous loan deemed to be dividend: Shareholder permitting his immovable property to be mortgaged to bank enabling company to obtain loan: Loan by company to shareholder not deemed dividend.

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The assessee holding substantial shareholding in a private company permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. In spite of request of the assessee, the company was unable to release the property from mortgage. Consequently, the board of directors of the company passed a resolution authoring the assessee to obtain from the company interest-free deposit up to Rs.50,00,000 as and when required. In the A.Y. 1999-00, the assessee obtained from the company a sum of Rs.20,75,000 by way of security deposit. A sum of Rs.20,00,000 was subsequently returned by the assessee to the company. For the A.Y. 1999-00, the Assessing Officer added the sum of Rs.20,75,000 as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961. The Tribunal upheld the addition.

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

“(i) The phrase ‘by way of advance or loan’ appearing in sub-clause (e) of section 2(22) of the Incometax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares . . . . . ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act.

(ii) Thus gratuitous loans or advance given by a company to those class of shareholders would come within the purview of section 2(22), but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

(iii) For retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee, such decision was not to give gratuitous advance to its shareholder, but to protect the business interest of the company. The sum of Rs.20,75,000 could not be treated as deemed dividend.”

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Capital gain: Sections 10B and 50(2): A.Y. 1993- 94: Assessee eligible for exemption u/s.10B sold assets to sister concern after expiry of period of exemption. Purchase of assets of same rate of depreciation: Assessee entitled to benefit u/s.50(2).

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The assessee had an export-oriented unit. After expiry of the term of benefit u/s.10B, in the A.Y. 1993-94, the assessee transferred the unit to a closely held company. There was a difference of Rs.71,42,904 between the value of the assets, as shown in the balance sheet as on date of transfer and the value of the assets adopted by the company. The Assessing Officer treated the difference as short term capital gains without allowing the benefit u/s.50(2). The Tribunal confirmed the order of the Assessing Officer.

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

“(i) The assessee carried on the same line of business, both as an export undertaking as well as in domestic trade. The assessee made an addition of 25% in the block of assets, viz., plant and machinery, during the previous year. Given the fact that the depreciation in respect of the assets transferred and purchased carried the same rate of depreciation and, hence, fell under ‘block of assets’, the assessee was justified in his claim on capital gains, that with the cost of the machinery added to the written down value of the machinery and the sale of the machinery during the relevant previous year, he was entitled to relief u/s.50(2).

(ii) Going by the provisions u/s.10B, the Revenue would not be justified in treating the assets of an export-oriented unit in isolation on the expiry of the tax holiday period, particularly when section 10B(4)(iv) recognises deemed grant of the depreciation allowance during the currency of the tax holiday, which means that at the expiry of the period of five years, the written down value of the plant and machinery continues to be available for the business of the assessee, which goes for normal assessment under various provisions of the Act.”

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Business expenditure: Section 43B: In A.Y. 1996- 97 the assessee paid a sum of Rs.322.46 lakh on account of excise duty being the liability for the A.Y. 1997-98: Assessee is entitled to the deduction in the A.Y. 1996-97 in view of section 43B(a) r/w. Expl. 2.

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During the previous year relevant to the A.Y. 1996-97, the assessee paid a sum of Rs.322.46 lakh on account of excise duty, the liability for payment of which was incurred in the previous year relevant to the A.Y. 1997-98. Relying on the provisions of section 43B of the Income-tax Act, 1961, the assessee claimed the deduction of the said amount in the A.Y. 1996-97. The Assessing Officer disallowed the claim. The Tribunal upheld the disallowance.

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

“The assessee cannot be deprived of the benefit of deduction of excise duty actually paid during the previous year, although in advance, according to the method of accounting followed by him. Section 43B(a) r/w. Expln. 2 allows deduction in such cases.”

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Interest u/s.220(2): A.Y. 1994-95: Original assessment order set aside by Tribunal: Interest u/s.220(2) to commence after thirty days from the date of service of demand notice pursuant to fresh assessment order.

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For the A.Y. 1994-95, the assessment was completed u/s.143(3) of the Income-tax Act, 1961 on 28-2-1997 determining the total income at Rs.2.05 crores. By a demand notice dated 28-2-1997 a demand of Rs.1.76 crore was raised. The assessment order was set aside by the Tribunal. Fresh assessment order was passed on 24-12-2006 computing the income at Rs.44.88 lakhs and raising a demand of Rs.22.02 lakhs. The Assessing Officer held that the assessee was liable to pay interest u/s.220(2) of the Act commencing from the day after thirty days from the date of service of the original demand notice dated 28-2-1997. The CIT(A) and the Tribunal accepted the claim of the assessee that the liability to pay interest u/s.220(2) commences from the day after thirty days from the date of service of the demand notice dated 24-12-2006 pursuant to the fresh assessment order.

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

“(i) The argument of the Revenue is that even though the original assessment order dated 28-2-1997 was set aside by the ITAT, once the fresh assessment order is passed, the demands arising therefrom would relate back to the date of service of the original demand notice dated 28-2-1997.

(ii) We see no merit in the above contention. U/s.156 of the Act, service of the demand notice is mandatory. Section 220(2) of the Act provides that if the amount specified in any notice of demand u/s.156 is not paid within the period prescribed u/ss.(1) of section 220, then, the assessee shall be liable to pay simple interest at the rate prescribed therein.

(iii) As per section 220(1) of the Act, the assessee was liable to pay the demand within thirty days from the service of the demand notice dated 24-12-2006. It is only if the assessee fails to pay the amount demanded, within thirty days of service of the demand notice dated 24-12-2006, the assessee was liable to pay interest u/s.220(2) of the Act. If the liability to pay interest u/s.220(2) arises after thirty days of service of the demand notice dated 24-12-2006, the question of demanding interest for the period prior to 24-12-2006 does not arise at all.

(iv) From the facts of the present case, the decision of the ITAT in holding that the assessee is liable to pay interest u/s.220(2) of the Act, from the end of thirty days after the service of notice of demand dated 24-12-2006 till the date on which the amount demanded was paid cannot be faulted.”

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Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F

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The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under:

“It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.”

The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue.

Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F.

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The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under: “It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.” The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue. Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Salary: Perquisites: S/s. 17(2), r.w.s. 10(10CC): Assessees were employees of a foreign company, working in India: Tax arising in India on income of employees was borne by foreign employer: Amounts paid directly by employer to discharge employees’ incometax liability is exempt u/s. 10(10CC): Not a perquisite: Social security, pension and medical insurance contributions paid by employer are not taxable as perquisites: Where tax is deposited in respect of non-monetary perquisite, it is exempt u/s<

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Yoshio Kubo vs. CIT; [2013] 36 taxmann.com 1 (Delhi)

The
assessees were employees of a foreign company who were seconded to
India to serve in the Indian subsidiary. The foreign employers bore the
tax arising in India on the income of the employees. The foreign
employer also made contributions towards social security, pension and
medical insurance in compliance with the legal requirements in the
country of its incorporation. The revenue sought to bring to tax such
contributions as well as the tax paid by the employer as perquisite u/s.
17(2), in the hands of the employees. The revenue also contended that
the tax borne by the employer was a monetary perquisite and further tax
should be added to the salary by a multiple stage grossing up process.
The revenue also included the tax refunds in the income of the assessee
employees, as the tax had been borne by the employer.

In appeals
before the High Court the assessee contended that such perquisites were
exempt u/s. 10(10CC). The Delhi High Court held as under:

”1. Whether income tax paid by employer on behalf of assessee was exempted non-monetary perquisite:

1.1
A plain reading of section 10(10CC) reveals that if the perquisite that
is – ‘not provided for by way of monetary payment’ – u/s. 17 (2), the
tax paid on such income would be excluded from the calculation of income
altogether; it would not be deemed a perquisite.

1.2 Section
17(2) has not undergone any substantial change by the amendment of 2002.
The only change is in the introduction of section 10(10CC) which states
that tax actually paid by the employer to discharge an employee’s
obligation – ‘not amounting to a monetary benefit’ would not be included
as the employees’ income. If seen from the context of section 17(2),
and the previous history to that provision, as well as the pre-existing
provision of section 10(5B) and the interpretation placed on section
17(2), read with other provisions which disallow payments made on behalf
of the employee, by the employer, so long as the benefit is not
expressed in monetary terms in the hands of the employee, in the sense
that it is not funded as part of the salary, but paid in discharge of
the obligation, of any sort, either contractual (i.e., rent, services,
etc . availed of by the employee) or legal (tax) directly by the
employer, it should not be treated as a monetary benefit. The reason for
this is that section 10(10CC) is neutral about the kind of benefit
availed by the employee.

1.3 Parliament was aware of the
pre-existing law, and therefore, stepped in to clarify that only a
monetary benefit directly in the hands of the employee as a payment by
the employer would be excluded from section 10(10CC). This may be in the
form of any benefit to pay rent, or discharge any manner of obligation,
tax not excluded. This intention is manifest from the expression –
‘tax’ on such income actually paid. To construe this newly introduced
provision in any other manner would be to defeat the Parliamentary
intent. Section 40(a)(v) fortifies the interpretation of this court in
providing that while calculating income of the employer, the tax paid by
the employer on non-monetary perquisites is not deductible. This
provision too was introduced in 2002. The logic of excluding, as a
non-monetary perquisite, amounts paid to discharge obligations of the
employee, from the meaning of income, by virtue of section 10(10CC) is
that now, with the introduction of section 40(c)(v), such amounts are
not deductible in the employer’s hands.

1.4 In the light of the
above discussion, it is held that amounts paid directly by the employer
to discharge its employees’ income tax liability do not fall within the
excluded category of monetary benefits payable to the employee; they
fall within the included category, u/s. 10(10CC) as amounts paid
directly as taxes. Correspondingly, they cannot now be claimed as
deductions by virtue of section 40(c)(v ). The revenue’s appeals on this
aspect fail.

2. Whether social security, pension and medical insurance contributions by employer are perquisites:

2.1
The revenue’s contentions are insubstantial and meritless. The assessee
does not get a vested right at the time of contribution to the fund by
the employer. The amount standing to the credit of the pension fund
account, social security or medical or health insurance would continue
to remain invested till the assessee becomes entitled to receive it. In
the case of medical benefit, the revenue could not support its
contentions by citing any provision in any policy or scheme which was
the subject matter of these appeals, where the vesting right to receive
the amount under the scheme or plan occurred. One cannot be said to
allow a perquisite to an employee if the employee has no right to the
same. It cannot apply to contingent payments to which the employee has
no right till the contingency occurs. The employee must have a vested
right in the amount. In the case of CIT vs. Mehar Singh Sampuran Singh
Chawla [1973] 90 ITR 219 (Delhi), it was held that the contribution made
by the employer towards a fund established for the welfare of the
employees would not be deemed to be a perquisite in the hands of the
employees concerned as they do not acquire a vested right in the sum
contributed by the employer.

2.2 When the amount does not result
in a direct present benefit to the employee, who does not enjoy it, but
assures him a future benefit, in the event of contingency, the payment
made by the employer, does not vest in the employee.

2.3 In view
of the above discussion, it is held that the revenue’s appeals have to
fail; amounts paid by employers to pension, or social security funds or
for medical benefits, are not perquisites within the meaning of the
expression, u/s. 17(2)(v), and therefore, the amounts paid by the
employer in that regard are not taxable in the hands of the
employee-assessee.

3. Regarding grossing up:

3.1
It has been discussed and concluded that what is not exempt u/s.
10(10CC), is perquisite in the shape of monetary payment to the
employee. If it is a payment to a third party like payment of taxes to
the government, it would be exempt u/s. 10 (10CC).

3.2 The
Tribunal in the present cases, held that tax paid by the employer on
behalf of the employee is a non-monetary perquisite. In other words,
taxes paid by the employer can be added only once in the salary of the
employee. Thereafter, tax on such perquisites is not to be added again.

3.3
Whenever tax is deposited in respect of a non-monetary perquisite, the
provision of section 10(10CC) applies, thus excluding multiple stage
grossing up. The purpose and intent of introducing the amendment to
section 10(10CC) was to exclude the element of income, which would have
arisen otherwise, as a perquisite, and as part of salary. Once that
stood excluded, and option was given to the employer u/s. 192(1A) to
honour the agreement with the employee, Parliament could not have
intended its inclusion in any other form, even for the purpose of
deduction at source. Doing so would defeat the intent behind section
10(10CC). This court, therefore, answers the question in favour of the
assessee and against the revenue.

4. Regarding assessability of TDS refunds

4.1 In this case, it is clear that the amount was not paid to the employee or due to him, from the employer, according to the terms of the contract governing the relationship. It was paid to the Government, over and above the tax due on the salary. It was not for benefit of the assessee. It never, therefore, bore the characteristic of salary or perquisite. Till assessment was made, the amount could not be refunded to the assessee.

4.2 The revenue’s position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax, the nature and character of the receipt in the hands of the recipient has to be considered. Every receipt or monetary advantage or benefit in the hands of its recipient is not taxable unless it is established to be due to him. If the amount is not due, the recipient, in this case, the employee is obliged to pay back the sum to the person, to whom it belongs. A perquisite or such amount, to be taxed, should be received under a legal or eq-uitable claim, even contingent.

4.3 The receipt of money or property, which one is obliged to return or repay to the rightful owner, as in the case of a loan or credit, cannot be taken as a benefit or a perquisite. The amounts paid in excess by the employer, and refunded to the employee never belonged to the latter; he cannot be therefore taxed. The question of law is therefore, answered against the revenue, and in favour of the assessees.”

Provisional attachment: Section 281B: A. Y. 2011-12: Provisional attachment should be commensurate with claim of revenue:

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KDH Properties P. Ltd. vs. ACIT; 356 ITR 1 (Mad):

For the A. Y. 2011-12, the assessee company had filed return of income computing loss of Rs. 2,67,00,000. Subsequently, pursuant to survey u/s. 133A of the Income-tax Act, 1961, the Assessing Officer impounded books of account and documents. The Assessing Officer also passed provisional attachments of properties and also the debts and security deposits due from third parties.

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

“i) The provisional attachment made in terms of section 281B of the Income-tax Act, 1961, should be commensurate with the claim of Department, more particularly to safeguard the interests of the Revenue. The Assessing Officer should form an opinion as to what extent of property is required to protect the interest of the Revenue. It cannot be an arbitrary claim based on no materials. It should stand the test of reasonableness and avoid arbitrariness.

ii) If the petitioner were able to establish the valuation of the property as stated by cogent and proper materials acceptable to the Department subject to final assessment, the property could continue to be under provisional attachment as per section 281B and all other debts and security deposits due from third parties could be released from the provisional attachment.”

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Housing Project: Income from: Deduction u/s.80-IB(10): Interest on delayed payment by purchasers due from contractors and suppliers: Part of income derived from development of housing project: Entitled to deduction u/s. 80-IB(10):

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CIT vs. Pratham Developers: 355 ITR 507 (Guj):

The assessee was in the business of developing and building housing projects and accordingly was entitled to deduction u/s. 80-IB (10) of the Income-tax Act, 1961. The Assessing Officer made an addition of Rs. 11,05,556 ( Rs. 4.36 lakh – interest received from purchasers on delayed payments and Rs. 8.70 lakh – balances written off in case of contractors and suppliers) by way of disallowance out of the claim for deduction u/s. 80-IB(10). The Assessing Officer held that these sums did not represent the assessee’s income from the development of housing project. The CIT(A) and the Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) Interest received on delayed payments by the purchasers was part of income derived from the business of the assessee. It was entitled to special deduction u/s. 80-IB (10) in respect of the amount.

ii) During the course of the business in developing the housing project, the assessee had made payments to suppliers towards various purchases made. On such payments, the assessee would occasionally deduct sum amounts and pay the bill. The difference between the bill amount and the payment actually made would be the amount generated during the course of business. The assessee was entitled to special deduction u/s. 80-IB(10) in respect of such sum.”

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Educational institution: Exemption u/s. 10(23C)(vi); Rule 2CA of I. T. Rules, 1962: Assessee society running a degree college made application for approval u/s. 10(23C) (vi) for A. Y. 2009-10 onwards: Commissioner rejected application on grounds that (i) approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while memorandum of assessee stipulated other objects as well,

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Neeraj Janhitkari Gramin Sewa Sansthan vs. CCIT; [2013] 36 taxmann.com 105 (All):

The assessee, a society, was registered under the Societies Registration Act, 1860. It was running a degree college in Mainpuri. It was also registered with the Income-tax Department. It made an application for approval for exemption u/s. 10(23C)(vi) for assessment year 2009-10 onwards. The Commissioner rejected the said application on the grounds that (i) the approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while the memorandum of the assessee-society stipulated other objects as well, and (ii) the application for approval should have been filed by the educational institution while it had been made by the society.

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

“i) The first and foremost question which is required to be considered is whether the application for approval u/s. 10(23C)(vi) at the instance of the assessee-society was maintainable or not. The Supreme Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT [2008] 301 ITR 86/ 170 Taxman 306 had considered the effect of insertion of clause (vi) in section 10(23C) by the Finance (No. 2) Act, 1998, w.e.f. 01-04-1999 and held that the provisions of clause (vi) of section 10(23C) are analogous to provisions of section 10(22). The Punjab and Haryana High Court had the occasion to consider the effect of section 10(23C)(vi) in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73/ 188 Taxman 402 and while replying to a specific question whether a society registered under the Societies Registration Act, 1860 was eligible to apply for approval u/s. 10(23C)(vi) held that the application for approval u/s. 10(23C)(vi) was maintainable at the instance of a society. Similar view had been taken by the Delhi High Court in the case of Digember Jain Society for Child Welfare vs. DGIT (Exmp.) [2010] 329 ITR 459/185 Taxman 255. Therefore, the application filed by the assessee-society cannot be rejected on the ground that it is not at the instance of ‘educational institution’ as referred to u/s. 10(23C)(vi) and rule 2CA.

ii) The next question which now arises for consideration is whether the assessee’s application for approval u/s. 10(23C)(vi) can be rejected on the ground that the memorandum of association provides for various other objects apart from educational activities. In this regard, the argument of the assessee is that even though under the unamended bye-laws of the society various other aims and objects were mentioned, but according to application for approval the society is only carrying on educational activities. In the application, there is a specific assertion that the only source of income of the society is the nominal fees being charged from students and it has no other source of income. The assessee has placed strong reliance on the judgment of the Allahabad Court in the case of C.P. Vidya Niketan Inter College Shikshan Society vs. Union of India [Writ petition No. 1185 of 2011, dated 16-10-2012].

iii) Perusal of the impugned order shows that the pleading in this regard has not been taken into consideration. Further in the impugned order although there is a finding that the assesseesociety is having many objects other than educational, but there is no application of mind to the assertion made by the society that it is only pursuing the educational activity and no other. Where a society is pursuing only educational objects and no other activity, then the application by such a society for grant of approval u/s. 10(23C)(vi) cannot be rejected on the ground that its aims and objects contain several other objects apart from educational and application by such a society is perfectly maintainable.

iv) Therefore, the impugned order passed by the Commissioner was liable to be quashed. The matter required to be sent back to the Commissioner for a fresh decision in accordance with the observations made above.”

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Capital gains: Section 50C: r.w.ss. 16A and 24 of W. T. Act, 1957: Sale of immovable property for consideration of Rs. 2,06,18,227: Stamp duty value – Rs. 4,04,48,000: Value as per DVO – Rs. 2,83,19,289: Value as per Registered valuer of assessee – Rs. 2,23,41,000: AO adopted value of Rs. 2,83,19,289 as per DVO: Tribunal adopted value of Rs. 2,23,41,000 as per registered valuer without giving opportunity to DVO: Tribunal not justified in doing so:

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CIT vs. Prabhu Steel Industries Ltd.: [2013] 36 taxmann. com 393 (Bom):

The assessee admitted long-term capital gains from sale of immovable property and adopted actual sale consideration of Rs. 2,06,18,227 as basis for computation. The Assessing Officer found that as per concerned Stamp Valuation Authority, the market value of the property was Rs. 4,04,48,000. On reference, the valuation officer estimated the fair market value on the date of transfer to be Rs. 2,83,19,289. Meanwhile, the assessee submitted a report of Registered Valuer disclosing fair market value on the date of transfer to be Rs. 2,23,41,000. The Assessing Officer worked out long-term capital gain on basis of report of valuation officer and made addition. The Tribunal held that the fair market value worked out by the assessee’s registered valuer alone should have been used for computing the longterm capital gain, as it was reasonably arrived at after making allowances for various encumbrances attached to the subject property and rejected the valuation arrived at by the Valuation Officer after noting that the Valuation Officer treated stamp duty valuation as base rate, instead of actual sale instance value. Further, it held that though such report is binding on Revenue Authorities, it is not binding on the Tribunal.

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

“i) It is apparent from section 16A of Wealth Tax Act that these provisions mandate that after the Assessing Officer receives report of Valuation Officer u/s. 50C, he has to act in conformity with the valuation of the capital asset worked out therein. Thus, an order of Valuation Officer determining the market value of the asset on the date of transfer u/s. 50C(2) is made appealable even for the purpose of Income-tax Act, 1961 as per scheme in section 23A of Wealthtax Act. S/s. (6) of section 23A stipulates that when the valuation of any asset is objected to in an appeal, the Commissioner (Appeals) has to extend an opportunity of hearing to the Valuation Officer, who has made order u/s. 16A. It therefore, follows that when in an appeal, such exercise of valuation officer is disputed, the Appellate Authority has to extend an opportunity of hearing to the Valuation Officer.

ii) Section 24 speaks of further appeals to the Appellate Tribunal. As per section 24(5) of the Wealth Tax Act, 1957; the Appellate Tribunal has to extend opportunity of hearing to the Valuation Officer, and this provision is pari materia with section 23(6) above. Therefore, when order of CIT (Appeal), is questioned in further appeal before the Tribunal, the Tribunal has to keep in mind the provisions of section 24(5) of the Wealth Tax Act, 1957 and has to extend an opportunity of hearing to the Valuation Officer.

iii) As per the statutory scheme when the report/order of Valuation Officer u/s. 50C(2) is objected to by assessee, the CIT (Appeals) or Tribunal are obliged to extend an opportunity of hearing to such Valuation Officer.

iv) The Tribunal has found faults with the report/ order of District Valuation Officer. Admittedly, the said Valuation Officer had not been heard and no opportunity was extended to him. This is contrary to obligation cast upon it by the proviso of section 24(5) of the Wealth Tax Act, 1957 as attracted by section 50C(2).

v) In this situation, a mandatory requirement of law has been violated in present matter. Hence, the impugned order of the Tribunal is hereby quashed and set aside and the proceedings are restored back to the file of the Tribunal for taking decision afresh, in accordance with law.”

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Business expenditure: Capital or revenue expenditure: Section 35DDA: A. Y. 2007-08: Payment to employees under voluntary retirement scheme: Compliance with Rule 2BA is for benefit u/s. 10(10C): No such compliance mandatory for deduction in the hands of employer u/s. 35DDA: Deduction allowable:

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CIT vs. State Bank of Mysore; 356 ITR 468 (Kar):

For the A. Y. 2007-08, the assessee, a public sector bank, had claimed deduction of Rs. 7,09,53,323.23 as deductible expenditure incurred to meet the claims of employees who had taken voluntary retirement. The Assessing Officer allowed the deduction as revenue expenditure. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the expenditure was in the nature of capital expenditure and disallowed the amount on the ground, inter alia, that even applying the provisions of section 35DDA the voluntary retirement scheme was not in consonance with rule 2BA of the I. T. Rules 1962. The Tribunal held that this was a case where the scheme was covered u/s. 35DDA. The condition imposed in Rule 2BA with reference to the recipient for the purpose of section 10(10C) was not attracted to the provisions of section 35DDA. Since under the provisions u/s. 35DDA the entire amount could not be allowed as deduction, but it could be spread over a period of five years, one-fifth of the expenditure could be allowed and the balance spread over the following four assessment years.

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

“i) There was no mention of any rule in section 35DDA. On the other hand, in rule 2BA there is a specific reference to section 10(10C). The language of rule 2BA made it clear that the amount received is by the employee and for the purpose of claiming the benefit u/s. 10(10C). This has nothing to do with the employer’s claim, which is a different claim u/s. 35DDA.

ii) The Tribunal rightly took the view that rule 2BA is attracted and applicable only to a circumstance, where the benefit u/s. 10(10C) is sought for and not in a situation where the provisions of section 35DDA are called in aid.”

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Business expenditure: Disallowance u/s. 43B(b) r/w.s. 36(va): Contribution to provident fund: Due date mentioned in section 36(va) is due date mentioned in section 43B(b): Contribution made after due date specified by Provident Fund Authority but before due date for filing return: Amount deductible:

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CIT vs. Kichha Sugar Co. Ltd.: 356 ITR 351 (Uttarakhand):

The assessee employer, had deposited the employees’ contribution towards provident fund before the due date for filing of the return but after the due date specified by the Provident Fund Authority. The Assessing Officer disallowed the claim for deduction and treated the amount as income relying on the provisions of section 36(1)(va) of the Income-tax Act, 1961. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal, the Revenue contended that in view of section 36(1)(va) r.w.s. 2(24)(x), such payment though made to the provident fund authorities, should be treated to be income of the assessee. The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The due date as mentioned in section 36(1) (va) is the due date as mentioned in section 43B(b), i.e. payment/contribution made to the provident fund authority any time before filing the return for the year in which the liability to pay accrued along with the evidence to establish the payment thereof.

ii) The Assessing Officer proceeded on the basis that “due date” as mentioned in section 36(1) (va) is the due date fixed by the provident fund authority, whereas in the matter of culling out the meaning of the word “due date”, as mentioned in the section, the Assessing Officer was required to take note of section 43B(b) and by not taking the note of the provisions contained therein committed a gross error, which was correctly rectified by the Commissioner (Appeals) and rightly confirmed by the Tribunal.

iii) The appeal fails and the same is dismissed.”

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Industrial undertaking: Deduction u/s. 80-IA/80-IB: Computation: A.Ys. 1997-98 to 1999-00, 2003-04 and 2004-05: Assessee printing and publishing magazines: Four units: One unit doing job work of printing for publishing unit: Expenses attributable to publishing unit not to be allocated to printing unit for computation of the amount deductible u/s. 80-IA/80-IB:

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CIT vs. Delhi Press Patra Prakashan Ltd. (No. 1); 355 ITR 1 (Del):

The assessee was engaged in the business of printing and publishing magazines. It had four units. One unit was doing the job work of printing for the publishing unit. The assessee had maintained separate accounts in respect of which deduction u/s. 80-IA/80-IB was claimed. Relying on sections 80-IA(8), (9) and (10), the Assessing Officer held that profits of the printing unit are required to be recomputed by allocating to the printing unit the expenses relating to the cost of paper and other expenses of the publishing unit inasmuch as section 80-IA(7) requires that the profits from the eligible business must be computed as if the eligible business was the only source of income for the assessee. Accordingly, he recomputed the profits of the printing unit and the amount deductible u/s. 80-IA/80-IB. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) There was no material to support the view that the job work charges charged by the printing units from the publishing unit were not at market rates. In the absence of any defect or manipulation found by the Assessing Officer in the books maintained for the printing unit and in the absence of any material to indicate that the amounts charged by the printing unit from the publishing unit was not at comparable market rates, it would not be open for the Revenue to disregard the profits of the printing unit as disclosed by the assessee only on the basis that the profits were significantly higher than the profits earned by the assessee from other undertakings.

ii) The printing unit carried on job work of printing only and the expenses attributable to the publishing unit which relate to the publishing business could not be allocated to the printing unit. Only those expenses which related to the printing work carried on by the assessee in the printing unit were liable to be deducted from the job charges to arrive at the profits eligible for deduction u/s. 80-IA/80-IB, as the case may be.”

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Income: Accrual: Retention money: Sections 4 and 5: A. Y. 2003-04: Amount retained to ensure satisfactory performance of contract does not accrue: Not income of that year:

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DIT vs. Ballast Nedam International; 355 ITR 300 (Guj):

The assessee executed contracts. In terms of the contracts, the amounts at the rate of 10% on the onshore activities, and at the rate of 15% on the construction and erection activities, were withheld by the principal towards retention money. For the A. Y. 2003-04, the assessee claimed that the retention money of Rs. 14.31 crore did not accrue and accordingly cannot be assessed as income. However, the Assessing Officer held that the amount is the accrued income and made addition. The Commissioner and the Tribunal allowed the assessee’s claim.

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

“i) Unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him.
ii) The amount retained had not accrued to the assessee in the accounting year relevant to the A.Y. 2003-04.”

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Depreciation: Actual cost: Subsidy: Section 43(1), Expln. 10: A.Ys. 2001-02 and 2002-03: Assessee a Government Company took over the telecommunication business from Government Department: Assets transferred at book value: Consideration in form of shares, debts and reserves: Reserve not a subsidy, grant or reimbursement for meeting cost of assets transferred: Reserves not to be reduced from fixed assets to arrive at actual cost: Reopening of the assessment for reducing the actual cost by reserve<

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BSNL vs. Dy. CIT; 355 ITR 188 (Del):

The assessee company was incorporated to provide the telecommunication services which were being provided earlier by the Department of Telecommunications of the Government of India. The assets were transferred at book value. Consideration was paid in the form of shares, debts and reserves. The Assessing Officer found that the consideration included reserves. He held that the cost of assets was being met by the reserves and therefore held that the reserve is required to be reduced from the cost of the assets in terms of Explanation 10 to section 43(1). He therefore reopened the assessments for the A.Ys. 2001-02 and 2002-03 and recomputed the depreciation by reducing the reserve from the cost of assets.

On a writ petition filed by the assessee, the Delhi High Court accepted the assessee’s claim and held as under:

“i) There was no basis for the Assessing Officer’s assumption that whereas value of share capital issued to the Government as part consideration for transfer of business to the assessee was limited only to the face value of the shares, reserves represented a subsidy, grant or reimbursement for meeting the cost of assets transferred.
ii) Free reserves and surpluses of a company could not be considered anything but part of shareholders’ funds. The book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The scheme of hiving off the business of telecommunication services by the Government of India to a corporate entity entailed incorporation of a wholly owned Government company (i.e., the assessee) and the transfer of the business as a going concern along with all its assets and liabilities to the company. Reserves was an integral part of the shareholders funds.
iii) The Government of India had transferred the assets to the assessee company at their book value and the book value of the Government of India’s holding on the assessee company as shareholder and a creditor aggregated the book value of the assets transferred. The configuration of the capital structure of the assessee had no impact on the value of the Government’s holding in the assessee as reserve(s) of a company are subsumed in the book value of its capital.
iv) There is no plausible reason to assume that the value of shareholders’ holding in a company is limited to the face value of the issued and paid up share capital and the reserves represent subsidy or a grant or reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of the company are met.

v) We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and the proceedings initiated on the basis of such reasons are liable to be quashed.”

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Charitable institution: Exemption u/s. 10(23C) (iv): Sections 2(15) and 10(23C)(iv): A.Ys. 2006- 07 to 2011-12: Charitable purpose: Applicability of proviso to section 2(15): Assessee’s activities fall in section 2(15) as existed prior to 01-04-2009 under the category of advancement of any other object of general public utility: Activity of assessee in conducting coaching classes is integral to its activity of conducting course in accountancy: Cannot be equated with private coaching classes:

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Assessee entitled to exemption u/s. 10(23C)(iv): ICAI Vs. DGIT; 260 CTR 1 (Del):

The petitioner Institute was constituted under the Institute of Chartered Accountants Act, 1949, with the object to regulate the profession of Chartered Accountants in India and to ensure that the standards of professional knowledge and skill are met and maintained. Up to the

A.Y. 2005-06, the petitioner was granted approval for exemption u/s. 10(23C)(iv). Subsequent applications for approval were rejected on the ground that the Petitioner was holding coaching classes for preparing students for the examinations conducted by the Petitioner and was charging fees for the same.
The Delhi High Court allowed the writ petition filed by the petitioner against the said denial and held as under:

“i) Assessee’s activities fall within the definition of ‘charitable purpose’ in section 2(15) as it existed prior to 01-04-2009, under the category of ‘advancement of any object of general public utility’.
ii) The activity of the assessee in conducting coaching classes is integral to its activity of conducting the course in accountancy and the same cannot be equated with private coaching classes being conducted by organisations on commercial basis for preparing students to take entrance or other examinations in various professional courses.
iii) The reasoning of the DGIT that conducting interviews for a fee for the purposes of placement of its students by the assessee amounts to carrying on of a business is not sustainable. Campus interview is only a small incidental activity carried on by the assessee Institute like Universities for the placement of their students in gainful employment. This too is an activity ancillary to the educational programme being conducted by the assessee and cannot be considered as a business.
iv) The reasoning of the DGIT that since the assessee institute charges a uniform fee from all students it cannot be said to be carrying on a charitable activity is also erroneous. It is well settled that eleemosynary is not an essential element of ‘charitable purpose’ as defined under the Act. If the object or purpose of an institution is charitable, the fact that it collects certain charges does not alter the character of the institution.
v) Expression “trade”, “commerce” and “business” as occurring in the first proviso to section 2(15) must be read in the context of the intent and purport of section 2(15) and cannot be interpreted to mean any activity which is carried on in an organised manner. Purport of the first proviso is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. Thus, where the dominant object of an organisation is of charitable nature, any incidental activity for furtherance of the object would not fall within the expression “business”, “trade” or “commerce”.
vi) Impugned orders passed by the DGIT refusing to grant exemption u/s. 10(23C)(iv) are set aside and he is directed to recognise the assessee as eligible for exemption u/s. 10(23C)(iv) as an institution established for charitable purposes.”

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