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

Search and Seizure — Assessment in search cases — Undisclosed Income — Penalty — Change of Law — New Provision specially dealing with penalty in search cases — No incriminating document seized during search — Penalty could be imposed only under section 271AAB and not under section 271(1)(c).

Search and seizure operation was carried out on one J group on 3rd September, 2014. Assessee was one of the members of the J Group. During the course of search, no incriminating material was found in the case of assessee. Pursuant to the search, the AO issued a notice under section 153A of the Income-tax Act, 1961, and required the assessee to file its return of income. Initially, the assessee filed its return, declaring a loss. However, subsequently, the AO confronted the assessee with audited financial statements, the assessee revised its return of income and declared profit. The AO, therefore, imposed penalty under section 271(1)(c) of the Act for concealing the particulars of its income, and furnishing inaccurate particulars of such income.

On appeal, the CIT(A) allowed the appeal of the assessee on the ground that penalty can be imposed upon the assessee under section 271AAB and not under section 271(1)(c) of the Act. The Tribunal upheld the view of the CIT(A).

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

“i)    According to section 271AAB of the Income-tax Act, 1961, where a search u/s. 132(1) was initiated on or after July 1, 2012, penalty is leviable on the undisclosed income at the rate and conditions specified u/s. 271AAB(1) for the specified previous year. The section also defines the term “undisclosed income” and “specified previous year” and starts with non obstante clause and excludes the applicability of section 271(1)(c), if the undisclosed income pertains to the specified previous year.

Recovery of tax — Stay of demand — Factors to be considered — Assessee having strong prima facie case — Assessment at a high-pitched rate — Demand causing undue financial hardship to the assessee — Stay ordered.

The assessee was formerly formed for the benefit of the employees of the erstwhile Bajaj Auto Limited. The assessee was formerly known as “Bajaj Auto Employees Welfare Fund No. 4” and was allotted PAN in the status of a Firm. As per the scheme of demerger approved by the Court, the automobile business was transferred to Bajaj Auto Limited and finance was transferred to Bajaj Finserv Limited with effect from 31st March, 2007, and Bajaj Auto Limited’s name was changed to Bajaj Holdings and Investment Limited (“BHIL”) on 5th March, 2008. Pursuant to the scheme of demerger, the name of Bajaj Auto Welfare Employees Fund was changed to BHIL Employees Welfare Fund No. 4 as per trust deed dated 16th February, 2015, and on application, the assessee was allotted PAN with the status of Trust.

On 31st March, 2021, the AO issued notice under section 148 of the Income-tax Act, 1961 under the old name and PAN of the assessee on the ground that the assessee failed to file income tax return. Thereafter, notices were issued under section 142(1) under the old name and PAN of the assessee calling for various details. In December 2021, the assessee filed a response, stating inter alia that the Income-tax Utility did not allow the assessee to select any status other than the Firm on account of which the assessee was not able to file the return of income. Further, the assessee submitted that even if the assessment was re-opened, the re-opening should be conducted in the new PAN and not the old one. Thereafter, further notices were issued by the Department against which the assessee responded its inability to file the return of income due to technical difficulties. The assessment was completed ex-parte and the assessment order was passed under section 144 r.w.s. 144B and 147 of the Act and demand of Rs. 9,62,39,316 was raised.

Against the order of assessment, the assessee filed appeal before the CIT(A) and also filed application for stay of entire demand before Respondent No. 1. The assessee’s application for stay was granted subject to fulfilment of conditions, inter alia that 20 per cent of the demand be paid within 15 days. On application for stay of demand before the Respondent No. 2 for A.Ys. 2014–15 and A.Y. 2017–18, the stay of demand was granted for A.Y. 2017–18 on the condition that the assessee has to pay 10 per cent of the disputed demand. However, meanwhile, Respondent No. 1 addressed a letter to the assessee calling upon the assessee to pay 20 per cent of the demand and was informed that the failure to make the payment would result in penalty under section 221 of the Act. The assessee filed application for stay of demand before the CIT(A) and requested for early hearing of the appeal.

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

“i)    In the case of UTI Mutual Fund (supra) this Court held that in considering whether a stay of demand should be granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case is made out and serious triable issues are raised that would warrant a dispensation of deposit. It was further held that calling upon petitioner to deposit, would itself occasion undue hardship where a strong prima facie case has been made out. We are of the opinion that the respondents have failed to consider the ratio of the judgment in its true letter and spirit inasmuch as respondents called upon the petitioner to deposit 10% of the demand when the petitioner had a strong prima facie case. In our view, the deposit would itself occasion undue hardship to the petitioner who are Trust created for the purpose of benefiting the employees.

Reassessment — Validity — Proper procedure to be followed — Reasons for notice and satisfaction note for approval not furnished to assessee — Documents relied on for issue of notice not furnished to assessee — Order of reassessment Not Valid.

The AO issued notice under section 148 of the Income-tax Act, 1961, dated 31st March, 2021, for re-opening of assessment for the A.Y. 2013–14. The AO claimed that the notice was being issued after obtaining necessary satisfaction of the PCIT. Thereafter, on 26th January, 2022, the AO issued notice under section 142(1) of the Act, calling upon the assessee to furnish the accounts and documents. In response to the said notice as also the notice dated 31st March, 2021, issued under section 148 of the Act, the assessee filed its reply on 27th January, 2022, and requested the AO to furnish a copy of reasons recorded for re-opening of assessment. On the same day, the assessee also filed its return of income. The AO, vide notice dated 5th February, 2022, provided the reasons recorded for re-opening. As per the reasons recorded, a survey was conducted under section 133A on 14th December, 2016, at the premises of Shri Shripal Vora at Bhavnagar and unaccounted cash was seized from the premises. From the statements on oath recorded under section 131 of the Act, it was revealed that the assessee was involved in the business of providing accommodation entry and charging commission at the rate of 2.75 per cent of the transaction. On receipt of reasons recorded, the assessee, vide letter dated 21st February, 2022, requested the AO to provide satisfaction note of the PCIT, whose approval had been obtained for issuing the notice under section 148 of the Act. There was no reply from the AO on this and on 24th February, 2022, the AO fixed a hearing without providing the documents requested by the assessee. On 28th February, 2022, the assessee once again requested for details called for earlier and requested for virtual hearing through video conference. Thereafter, various communications were exchanged between the assessee and the AO and the AO passed the order dated 31st March, 2022 and held that an amount of Rs. 2 Crores had escaped assessment.

The assessee filed writ petition and challenged the notices and the order of reassessment. The Bombay High Court allowed the writ petition and held as under:

“i)    The Assessing Officer was duty bound to issue, with the notice u/s. 148 of the Act, the reasons which formed the basis for reopening of assessment, the satisfaction note and order of the Principal Commissioner, who granted approval to issuance of the notice with the note of the Assessing Officer in support of his request for approval, the appraisal report from the Deputy Director of Income-tax (Investigation) and the statements of V at Bhavnagar, recorded under section 131 in the search and seizure of the premises of S Ltd, which were referred to in the notice.

iv)    The matter was remanded back to the Assessing Officer with specific direction to provide the assessee with the satisfaction note of the Principal Commissioner of Income-tax, granting approval for issue of notice and all other documents and material which formed the basis of reasons recorded by the Assessing Officer for issuing notice u/s. 148 of the Act and after giving opportunity to the assessee proceed to pass order.”

Reassessment — Notice under section 148 — Limitation — Law applicable — Effect of amendments made by Finance Act, 2021 — Notice bared by limitation under unamended provisions — Notice issued on 30th June, 2021 to reopen assessment for A.Y. 2014–15 — Not valid.

For the A.Y. 2014–15, a notice under section 148 (unamended) of the Income-tax Act, 1961 was originally issued on 30th June, 2021. The said notice was treated as show-cause notice under section 148A(b) of the Act in the light of the decision of the Supreme Court in Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); and thereupon, the order under section 148A(d) was passed on 21st July, 2022. Consequential notice under section 148, dated 21st July, 2022 was also issued.

The assessee filed writ petition and challenged the order under section 148A(d), dated 21st July, 2022 and the notices under section 148. The Gujarat High Court allowed the writ petition and held as under:

Deduction of tax at source — Recovery of demand — Bar against direct demand on assessee — Employer deducted tax at source from assessee’s salary but not paid into Government account — Assessee cannot be denied credit for tax deducted at source — Assessee is entitled to refund with interest of amount if any adjusted towards demand.

The assessee was a pilot working with Kingfisher Airlines. The assessee received notice from the AO seeking recovery of outstanding demand of Rs. 19,40,707 for A.Y. 2011–12 and Rs. 25,12,913 for A.Y. 2012–13. In fact, the assessee was eligible for a refund of Rs. 45,570 for A.Y. 2012–13. However, since the amount deducted as TDS had not been deposited by the Airlines to the Central Government, the assessee’s claim for credit of TDS was denied. As a result, demand was raised along with interest.

“i)    Section 205 of the Income-tax Act, 1961 provides that when tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which the tax has been deducted from that income. Its applicability is not dependent upon the credit for tax deducted being given under section 199.

ii)    The Department could not deny the assessee the benefit of tax deducted at source by the employer from his salary during the relevant financial years. Credit for tax deducted at source should be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee was entitled to the refund with statutory interest.”

Business expenditure — Capital or revenue expenditure — Corporate social responsibility expenditure — Amendment providing for disallowance of — Not retrospective — Expenditure in discharge of assessee’s obligation as mandated by law — Utilisation of funds by recipient irrelevant — Corporate social responsibility expenditure incurred by assessee for earlier years allowable.

The assessee was a public sector undertaking. The AO disallowed the assessee’s claim of the corporate social responsibility expenditure on the ground that the expenditure was made of enduring long-term benefits for the communities in which the assessee operated, and included establishments of medical facilities, sanitation, schools and houses and vocational training centres, and that it was to be treated as capital expenditure.

The CIT(A) held that the assessee did not establish any direct nexus between the incurring of the corporate social responsibility expenditure and the running of its business and upheld the order of the AO. The Tribunal held that prior to the insertion of Explanation 2 to Section 37(1) of the Income-tax Act, 1961 with effect from 1st April, 2015, the settled legal position was that corporate social responsibility expenditure was allowable under section 37(1) until a specific bar for allowing such expenditure was introduced prospectively in 2014, and allowed the deduction.

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

Business expenditure — Broken period interest paid for purchase of securities held as stock-in-trade — Deductible expense.

The assessee, a banking company, filed its return of income for A.Y. 1998–99 and claimed deduction of broken period interest paid by it on purchase of securities which were held by the assessee bank as stock-in-trade. The AO denied the claim of the assessee by relying upon the decision of the Supreme Court in the case of Vijaya Bank Limited vs. Addl.CIT (1991) 187 ITR 541(SC), wherein it was held that such expenditure was required to be capitalised and cannot be allowed as deduction. This view was confirmed by the CIT(A).

The Tribunal decided the issue in favour of the assessee and held that the assessee had purchased the securities to hold them as stock-in-trade, and therefore, the interest paid for broken period was allowable as deduction.

On appeal by the Department, the Telangana High Court upheld the view of the Tribunal and held as follows:

“i)    We find that it is the contention of the respondent that respondent had been holding its securities all along as stock-in-trade which is not in dispute. For successive assessment years, Revenue has accepted the fact that respondent had been holding the securities as stock-in-trade.

iv)    We are in agreement with the finding returned by the Tribunal. That apart, this is a finding of fact rendered by the Tribunal and in an appeal u/s. 260A of the Income-tax Act, 1961 we are not inclined to disturb such a finding of fact, that too, when the legal position is very clear.”

Appeal to Commissioner (Appeals) — Limitation — Appeal should be heard within reasonable time.

The assessee is an Individual. The assessment for A.Y. 2017–18 was completed in November 2019 by way of best judgment assessment order passed under section 144 of the Income-tax Act, 1961. The assessee filed appeal before the CIT(A) under section 246A of the Act in February 2020. The appeal was not taken up for hearing till March 2023. In the meanwhile, notice was issued for attaching the bank account of the assessee.

The assessee filed a writ petition seeking direction for expedited hearing of the appeal. The Telangana High Court allowed the writ and held as under:

“i)    Grievance of the petitioner is that the appeal filed by him against the assessment order has not yet been taken up for hearing though three years have passed by and in the meanwhile, garnishee notices have been issued by respondent No. 2 to the banker of the petitioner.

iii)    That being the position, we direct respondent No. 1 to take on board the appeal filed by the petitioner on February 23, 2020 against the assessment order dated November 14, for the A.Y. 2017–18 and dispose of the same within a period of three months from the date of receipt of a copy of this order.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“i) The Transfer of Property Act, 1882 was amended by the Registration and Other Related Laws (Amendment) Act, 2001 which stipulates that if an agreement such as a joint development agreement is not registered, it shall have no effect in law for the purposes of section 53A of the 1882 Act. The Supreme Court in CIT vs. BALBIR SINGH MAINI [2017] 398 ITR 531 (SC), held that in order to qualify as a “transfer” of a capital asset u/s. 2(47)(v) of the Income-tax Act, 1961 there must be a ”contract” which can be enforced in law u/s. 53A of the 1882 Act. The expression “of the nature referred to in section 53A” in section 2(47)(v) was used by the Legislature ever since sub-clause (v) was inserted by the Finance Act of 1987, with effect from April 1, 1988. All that is meant by this expression is to refer to the ingredients of applicability of section 53A to the contracts mentioned therein. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the 2001 Act, yet the aforesaid expression “of the nature referred to in section 53A” would somehow refer only to the nature of contract mentioned in section 53A, which would then in turn not require registration. There is no contract in the eye of law in force u/s. 53A after 2001 unless the contract is registered.

ii) Since the development agreement was not registered, it would have no effect in law for the purposes of section 53A which bodily stood incorporated in section 2(47)(v) of the Income-tax Act, 1961. Thus, the Tribunal was right in allowing the assessee’s appeal and granting the relief sought for, namely deletion of the addition to income of the consideration received on transfer of land for development.”