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

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

35. Venkat Rao Paleti vs. CIT(A)
[2023] 455 ITR 48 (Telangana):
A.Y. 2017–18: Date of order: 13th March, 2023
Sections 246A and 250 of ITA 1961]

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

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

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

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

ii)    Sub-section (6A) of section 250 of the Income-tax Act, 1961 says that in every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under sub-section (1) of section 246A of the Act. Though the provision pertains to appeals filed u/s. 246A of the Act, none the less the objective behind the provision is to hear an appeal as early as possible.

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

Search and seizure — Assessment of undisclosed income — Notice u/s 153A should be based on material seized u/s 132 or documents requisitioned u/s 132A.

71. Underwater Services Co. Ltd. and Anr. vs. ACIT
[2022] 448 ITR 691 (Bom.)
A.Y.: 2012-13
Date of order: 21st October, 2021
Sections: 132, 132A and 153A of ITA, 1961

Search and seizure — Assessment of undisclosed income — Notice u/s 153A should be based on material seized u/s 132 or documents requisitioned u/s 132A.

The assessee filed a writ petition and challenged the validity of the notice dated 29th November, 2018 issued u/s 153A of the Income-tax Act, 1961 on the grounds that the notice has been issued without jurisdiction. The assessee-petitioner contended that there is no incriminating material in possession of the AO and any notice u/s 153A can be issued only on the basis of incriminating material discovered during the course of the search.

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

“i) Although section 153A of the Income-tax Act, 1961, does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material.

ii) Obviously, an assessment has to be made u/s. 153A only on the basis of seized material. Issuance of a showcause notice is the preliminary step which is required to be undertaken. The purpose of a show-cause notice is to enable a party to effectively deal with the case made out by the respondent. Section 153A provides that an assessment has to be made under the section only on the basis of the seized material, and hence the notice should mention whether the seized material was u/s. 132 or books of account, other documents or any assets requisitioned u/s. 132A.

iii) The Department did not indicate in its notice what were the seized material u/s. 132 or books of account or other documents or any assets requisitioned u/s. 132A. The notice was bereft of any material. The Department had not mentioned in the notice the basis for issuing the notice u/s. 153A so that the assessee could comply with it as prescribed. The notice issued u/s. 153A was not valid.”

Search and seizure — Assessment of undisclosed income — Meaning of “books of account” — Loose sheets and diaries do not constitute books of account — Assessment based only on evidence available in loose sheets and diaries — Not valid.

70. Sunil Kumar Sharma and Anr. vs. Dy. CIT
[2022] 448 ITR 485 (Kar.)
A.Ys.: 2012-13 to 2018-19
Date of order: 12th August, 2022
Sections: 127, 132 and 153C of ITA, 1961

Search and seizure — Assessment of undisclosed income — Meaning of “books of account” — Loose sheets and diaries do not constitute books of account — Assessment based only on evidence available in loose sheets and diaries — Not valid.

A search was conducted at the premises of the assessee and similar search also took place at premises of one R at New Delhi. During the search at the premises of R, certain diaries and entries relating to the affairs of the assessee were recovered and statements of both the assessee and R, came to be recorded. Notices were issued to the assessee u/s 153C of the Income-tax Act, 1961.

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

“i) S ection 132 of the Income-tax Act, 1961, enables seizure of books of account. “Book” ordinarily means a collection of sheets of paper or other material, blank, written, or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed ”book” for they can be easily detached and replaced. Section 34 of the Evidence Act, 1872 provides that entries in book of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the court has to inquire but such statements shall not alone be sufficient evidence to charge any person with liability. It is established in law that a sheet of paper containing typed entries and in loose form, not shown to form part of the books of account regularly maintained by the assessee or his business entities, do not constitute material evidence.

ii) The action taken by the Department against the assessee based on the material contained in the diaries and loose sheets were contrary to the law. In that view the notices issued u/s. 153C of the Act, based on the loose sheets and diaries were contrary to law, and are required to be set aside.”

Reassessment — Powers of AO — Power to assess other income not mentioned in notice of reassessment — Power can be exercised only if notice is valid — Notice found to be invalid on basis of reasons given in it — Other income cannot be assessed on basis of invalid notice.

69. CIT(Exemption) vs. B. P. Poddar Foundation for
Education
[2022] 448 ITR 695 (Cal.)
A.Y.: 2009-10
Date of order: 13th September, 2022
Sections: 147 and 148 of ITA, 1961

Reassessment — Powers of AO — Power to assess other income not mentioned in notice of reassessment — Power can be exercised only if notice is valid — Notice found to be invalid on basis of reasons given in it — Other income cannot be assessed on basis of invalid notice.

For the A.Y. 2009-10, the scrutiny assessment order u/s 143(3) of the Income-tax Act, 1961 was passed on 1st March, 2011. Subsequently, pursuant to a survey u/s 133A, the assessment was reopened by issuing notice u/s 148 dated 13th March, 2016 for the reasons recorded that certain deposits of Rs. 59,42,709 represented income escaping assessment. In the reassessment order, the said amount was added as undisclosed income. Also, an amount of Rs. 3,65,97,000 was added as undisclosed income. Further, after taking into consideration the statements recorded from various persons who are said to have given donations for securing admission to professional colleges, the AO held that the assessee is not carrying out its activities as per the objects of the trust. Accordingly, the amount said to have been received as donation was added back to the income of the assessee u/s 69A.

The Commissioner (Appeals) deleted the addition of Rs. 59,42,709 but upheld the other additions. After taking note of the factual position, more particularly, that the addition of Rs. 59,42,709 which was made in the reassessment proceedings having been deleted by the Commissioner of Income-tax (Appeals), the Tribunal held that the reassessment on the heads which were not part of the reasons recorded for the reopening of the assessment is not sustainable. The Tribunal placed reliance on the decision of the Bombay High Court in CIT vs. Jet Airways (I.) Ltd. [2011] 331 ITR 236 (Bom) and the decision of the Delhi High Court in Ranbaxy Laboratories Ltd. vs. CIT [2011] 336 ITR 136 (Delhi). On the above grounds the appeal filed by the assessee was allowed.

Following questions were raised before the Calcutta High Court in the appeal filed by the Revenue:

“(i) Whether on the facts and circumstances as well as in law the Income-tax Appellate Tribunal was correct in law in holding that the other additions made in the order under section 147/143(3) of the Income-tax Act, 1961, which were not part of the reasons recorded for reopening the assessment were not sustainable in the eyes of law even after insertion of Explanation 3 to section 147 of the Act by the Finance (No. 2) Act, 2009 when the addition was made by the Assessing Officer on the ground of reopening?

(ii) Whether on the facts and circumstances of the case the learned Income-tax Appellate Tribunal correctly interpreted the decision reported in the case of CIT v. Jet Airways (I.) Ltd. reported in [2011] 331 ITR 236 (Bom) and Ranbaxy Laboratories Ltd. v. CIT reported in [2011] 336 ITR 136 (Delhi) on facts in the instant case?”

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

“i) S ection 147 of the Income-tax Act, 1961, postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income. After the insertion of Explanation 3 to section 147 of the Act even if the issue was not one of the reasons recorded while reopening the assessment, the Assessing Officer has power to assess other income which comes to his notice subsequently, in the course of the proceedings u/s. 147 of the Act. The two parts of the section which have been joined with the words “and also”, and cannot be read as conjunctive but have to be read as disjunctive. Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice u/s. 148, he accepts the contention of the assessee and holds that the inome which he has initially formed a reason to believe had escaped assessment, has, as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice u/s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.

ii) An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory.

iii) The basis of issuing notice u/s. 148 was on a wrong assumption of fact that the assessee had invested money with specified persons. The solitary reason recorded by the Assessing Officer for reopening of the assessment was deleted by the Commissioner (Appeals) and in such circumstances, the assessment under the other heads done by the Assessing Officer which were not shown as reasons for reopening was illegal.

iv) In the result, the appeal filed by the Revenue is dismissed and the substantial questions of law are answered against the Revenue.”

Reassessment — Notice — Change of law — New procedure — Show-cause notice — Mandatory condition — Foundational allegation in respect of share transactions missing in show-cause notice — Cannot be incorporated by issuing supplementary notice

68. Catchy Prop-Build Pvt. Ltd. vs. ACIT
[2022] 448 ITR 671 (Del.)
A.Y.: 2018-19
Date of order: 17th October, 2022
Sections: 147, 148, 148A(b) and 148A(d) of ITA, 1961

Reassessment — Notice — Change of law — New procedure — Show-cause notice — Mandatory condition — Foundational allegation in respect of share transactions missing in show-cause notice — Cannot be incorporated by issuing supplementary notice.

A writ petition was filed by the assessee challenging the show-cause notice dated 16th March, 2022 issued u/s 148A(b) of the Income- tax Act, 1961, the order passed u/s 148A(d) and the notice issued u/s 148 (both dated 31st March, 2022) for A.Y. 2018-19 on the grounds that the show-cause notice had been issued in violation of the provisions of section 148A(b), since it merely mentioned the transaction entered into by the assessee of purchase and sale of shares undertaken by it but did not contain any allegation of escapement of income for A.Y. 2018-19. The Delhi High Court allowed the writ petition and held as under:

“i) In the notice issued u/s. 148A(b), the assessee was never asked to explain the source of funds that were used by the entity that had amalgamated with the assessee to purchase the shares of another entity. The show-cause notice issued under section 148A(b), the order passed u/s. 148A(d) and the notice issued u/s. 148 for the A.Y. 2018-19 were quashed.

ii) If the foundational allegation was missing in the show-cause notice issued u/s. 148A(b), it could not be incorporated by issuing a supplementary notice.

iii) However, if the law permitted, the Department was at liberty or take further steps in the matter. If and when such steps were taken and if the assessee had a grievance it was at liberty to seek remedies in accordance with law.”

Reassessment — Notice u/s 148 — Validity — Condition precedent for notice — Notice should be issued by the AO who has jurisdiction over assessee.

67. Charu K. Bagadia vs. ACIT
[2022] 448 ITR 563 (Mad.)
A.Y.: 2011-12
Date of order: 27th June, 2022
Sections: 147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Condition precedent for notice — Notice should be issued by the AO who has jurisdiction over assessee.

The appellant-assessee’s return of income for the A.Y. 2011-12 was processed u/s 143(1) of the Income-tax Act, 1961. Thereafter, after five years, she received a notice dated 28th March, 2018 issued by the first respondent u/s 148 for reassessment. In response, she submitted a reply dated 26th April, 2018 stating that the first respondent has no jurisdiction to issue such a notice u/s 148 of the Act and therefore, she requested that the reassessment proceedings be dropped. Subsequently, the first respondent transferred the files pertaining to the appellant to the second respondent. Thereafter, the second respondent continued the reassessment proceedings by issuing a notice dated 14th December, 2018 u/s 143(2) r.w.s. 129, directing the appellant to appear and file return of income to the notice u/s 148 of the Act along with supportive documents.

The Appellant filed a writ petition and challenged the validity of notices. The Single Judge of the Madras High Court dismissed the writ petition (Charu K. Bagadia vs. Asst. CIT (No. 1) [2022] 448 ITR 560 (Mad)). The Division Bench allowed the appeal and held as under:

“i) At the outset, be it noted, it is settled law that “a jurisdiction can neither be waived nor created even by consent and even by submitting to jurisdiction, an assessee cannot confer upon any jurisdictional authority, something which he lacked inherently”. The said ratio squarely applies to the case on hand.

ii) Notice u/s. 148 of the Income-tax Act, 1961, is mandatory to reopen an assessment and reassess the income of the assessee and such a notice should have been issued by the competent Assessing Officer, who has jurisdiction. The jurisdictional Assessing Officer, who records the reasons for reopening the assessment as contemplated under sub-section (2) of section 148, has to issue notice u/s. 148(1). Only then, would such a notice issued u/s. 148(1) be a valid notice. The officer recording the reasons u/s. 148(2) of the Act and the officer issuing the notice u/s. 148(1) has to be the same person. Section 129 is applicable when in the same jurisdiction, there is a change of incumbent and one Assessing Officer is succeeded by another; and when once the initiation of reassessment proceedings is held to be invalid, whatever follows thereafter must also, necessarily be invalid.

iii) The first respondent who recorded the reasons for reopening the assessment u/s. 148(2), had no jurisdiction over the assessee, to issue notice dated March 28, 2018 u/s. 148(1). Though the files pertaining to the reassessment proceedings of the assessee were transferred, the second respondent had no authority to continue the reassessment proceedings u/s. 129 and hence, the notice dated December 14, 2018 issued by him was also invalid. The invalid notices so issued vitiated the entire reassessment proceedings initiated against the assessee. The notices and the consequent proceedings were invalid.”

Income — Computation of income — Disallowance of expenditure incurred on exempt income — Amendment providing for disallowance even if assessee has not earned exempt income — Amendment not retrospective — Not applicable for A.Y.: 2013-14 — Tribunal deleting disallowance on ground assessee had not earned exempt income — Proper.

66. Principal CIT vs. Era Infrastructure (India) Ltd.
[2022] 448 ITR 674 (Del.)
A.Y.: 2013-14
Date of order: 20th July, 2022
Section: 14A of ITA,1961

Income — Computation of income — Disallowance of expenditure incurred on exempt income — Amendment providing for disallowance even if assessee has not earned exempt income — Amendment not retrospective — Not applicable for A.Y.: 2013-14 — Tribunal deleting disallowance on ground assessee had not earned exempt income — Proper.

The Tribunal deleted the disallowance made by the AO under rule 8D of the Income-tax Rules, 1962 r.w.s. 14A of the Income-tax Act, 1961 holding that no disallowance u/s 14A could be made if the assessee had not earned any exempt income.

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

“i) The Memorandum Explaining the Provisions of the Finance Bill, 2022 ([2022] 440 ITR (St.) 226) explicitly stipulates that the amendment made to section 14A of the Income-tax Act, 1961 will take effect from April 1, 2022 and will apply in relation to the A Y. 2022-23 and subsequent assessment years. The amendment of section 14A which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.

ii) The Tribunal had not erred in deleting the disallowance made by the Assessing Officer under rule 8D read with section 14A. Though the judgment followed by the Tribunal had been challenged and was pending adjudication before the Supreme Court, there had been no stay of the judgment till date. The order passed in the appeal should abide by the final decision of the Supreme Court in the special leave petition.”

Export — Loss — Set off — Scope of section 10B — Section 10B provides for deduction and not exemption — Loss sustained in unit covered by section 10B can be set off against other business income.

65. Principal CIT vs. Sandvik Asia Pvt. Ltd.
[2022] 449 ITR 312 (Bom.)
A.Y.: 2005-06
Date of order: 8th September, 2022
Section: 10B of ITA, 1961

Export — Loss — Set off — Scope of section 10B — Section 10B provides for deduction and not exemption — Loss sustained in unit covered by section 10B can be set off against other business income.

The assessee-company was a part of the S group being a subsidiary of S Sweden, which was the holding company of the assessee. For A.Y. 2005-06, the assessee had made a provision for finished goods obsolescence of Rs. 19,52,000. However, this amount was disallowed by the AO, who held that the closing inventory had to be valued either at cost price or at market price. In its return of income, the assessee adjusted the loss of its newly set up export-oriented unit against the profits earned by its other units. In the return of income the assessee claimed that it had made a payment of Rs. 4,41,44,973 on account of management services to S Sweden. The AO referred the matter to the Transfer Pricing Officer (TPO). The TPO, however, was of the view that there was no evidence with regard to the receipt of services by the assessee and, therefore, made an adjustment of Rs. 4.41 crores. The Commissioner, held, based upon the additional evidence that the management services were rendered to the assessee. The AO accordingly deleted the addition of Rs. 4,41,44,973 based on the transfer pricing adjustment made by the TPO.

The Tribunal, in the appeal filed by the Revenue, upheld the order of the Commissioner. The Tribunal allowed the set off of losses claimed by the assessee.

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

“i) After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of profits and gains derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. There is no provision in section 10B by which a prohibition has been introduced by the Legislature on setting off a loss sustained from one source falling under the head of profits and gains of business against income from any other source under the same head. On the other hand, there is intrinsic material in section 10B to indicate that such a prohibition was not within the contemplation of the Legislature.

ii) A reading of the clauses of the agreement made it quite clear that the management services could be rendered by all or any of the S companies and such operations would be on behalf of S Sweden. The Tribunal committed no error in deciding the issue in favour of the assessee especially when the management service fees received by S Sweden had been taxed by the Assessing Officer in charge of assessment of S Sweden, as provider of such services.

iii) The Commissioner (Appeals) deleted the addition of Rs. 19,52,000 made by the Assessing Officer on account of closing stock of obsolete inventory, and this was upheld by the Tribunal following its order passed in the case of the assessee for the A.Y. 2004-05. The appeal preferred by the Department against the order of the Tribunal for the A.Y.2004-05 was dismissed on the ground that the assessee had been consistently following the method of evaluating the stock which had been accepted by the Department. No different view could be taken on an issue arising between the same parties, which had already been raised and rejected by the court, although for a different assessment year, when there was no change in the factual or legal matrix of the case.

iv) The Tribunal was right in allowing set off of the losses suffered by the newly set up export oriented unit against its other business income.”

Business expenditure — Disallowance u/s 40(a) (ia) — Payments liable to deduction of tax at source — Scope of section 40 — Amount paid to non-resident for technical services — Amount not debited to profit and loss account and not claimed as deduction in computing business income — Amount could not be disallowed.

64. Principal CIT vs. Linde India Ltd.
[2022] 448 ITR 682 (Cal.)
A.Y.: 2007-08
Date of order: 5th September, 2022
Section 40(a)(ia) of ITA, 1961

Business expenditure — Disallowance u/s 40(a) (ia) — Payments liable to deduction of tax at source — Scope of section 40 — Amount paid to non-resident for technical services — Amount not debited to profit and loss account and not claimed as deduction in computing business income — Amount could not be disallowed.

The assessee-company is engaged in the business of manufacture and sale of various industrial and mechanical gases, cryogenic and non-cryo- genic plants and vessels. A show-cause notice was issued to the assessee alleging that tax was not deducted at source in terms of the provisions of section 40(a)(ia) of the Income-tax Act, 1961 in respect of the advances as on 31st March, 2007 for import of capital goods. In reply to the show-cause notice, the assessee contended that the said advances was made towards import of capital goods on free on board (FOB) basis at foreign sea ports, leading to transfer of title to the goods outside India, and hence there is no income chargeable to tax in India and therefore the provisions of section 195 of the Act are not attracted. It was also contended that such advances to suppliers had also not been charged to the profit and loss account for the relevant assessment year. The AO completed the assessment u/s 143(3) by an order dated 30th December, 2010. The AO made disallowances aggregating to Rs. 72,89,71,972 u/s 40(a)(ia).

The Commissioner (Appeals) deleted the addition. The Tribunal upheld the decision of the Commissioner (Appeals) and held that no disallowance could be made u/s 40(a)(i)/40(a)(ia).

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

“i) An amount can be deducted in computing the business or professional income by taking away the amount from the total profits and gains of such business and profession. While preparing the profit and loss account of a business or profession an amount can be deducted from the professional or business income by debiting the profit and loss account prepared in connection with such profession or business with such amount. Such amount may also be deducted while computing the profits and gains of business or profession for the purpose of arriving at the business or professional income chargeable to tax. Therefore, if the disputed amount is neither debited from the profit and loss account of the business or profession nor has been deducted while computing the profits and gains of business or profession, section 40 of the Act does not come into operation as such amount cannot be said to have been deducted in computing the income chargeable under such head. Therefore, if an assessee has paid any amount on account of fees for technical services outside India or in India to a non-resident but has not debited such amount to the profit and loss account and has also not claimed it as deduction in computing the income chargeable under the head “Profits and gains of business or profession”, no disallowance in respect thereof can be made by invoking the provisions of section 40(a)(ia) of the Act.

ii) D uring the course of assessment proceedings the assessee-company had filed complete details of work-in-progress and the party-wise details. The first appellate authority specifically held that the payment of Rs. 84,40,14,000 which was a part of capital advance and appearing in the capital work-in-progress included a sum of Rs. 72,33,40,648 made to L and there was a payment of Rs. 56,31,324 to the German company appearing under the head “Loans and advance”. The sum of Rs. 72,33,40,648 was part of the capital work-in-progress and not charged to the profit and loss account and the sum of Rs. 56,38,324 was shown in the balance-sheet under the head “Loans and advance” and such amount was also not charged to the profit and loss account. The first appellate authority was justified in deleting the disallowance made by the Assessing Officer invoking the provisions of section 40(a)(i) and the Tribunal was justified in affirming it.”

Search and seizure — Release of seized assets — Unexplained investment — Gold jewellery seized from third party — Findings of fact recorded by Commissioner (Appeals) that purchase of gold by assessee duly substantiated by evidence and finding attaining finality — Seized gold to be released to assessee.

63. Rakeshkumar Babulal Agarwal vs. Principal CIT[2022] 448 ITR 133 (Guj.)
A.Y.: 2018-19
Date of order: 7th March, 2022
Ss. 69, 132, 143(3) and 153C of ITA,1961

Search and seizure — Release of seized assets — Unexplained investment — Gold jewellery seized from third party — Findings of fact recorded by Commissioner (Appeals) that purchase of gold by assessee duly substantiated by evidence and finding attaining finality — Seized gold to be released to assessee.

The assessee carried on business in gold jewellery. Pursuant to a search carried out in the case of one S u/s 132 of the Income-tax Act, 1961, and in the case of one P, the gold jewellery received through courier by the assessee as consignee was also seized by the Department. The AO passed an assessment order against the assessee u/s 143(3) r.w.s.153C for A.Y.2018-19 making an addition on account of unexplained investment u/s 69 of the value of seized gold jewelry received through courier by the assessee as consignee. The assessee stated he had purchased the gold from P.

The Commissioner (Appeals) on the facts found that the assessee had purchased the gold from P and the payment was made through banking channels, that the purchases were recorded in the assessee’s books of account, and that though P in his statement had denied any transactions with the assessee, the assessee had provided the necessary supporting documents and had duly recorded the purchases in the books of account. The Commissioner (Appeals) held that such purchases were not held to be inflated or bogus by the AO and no disallowance was warranted and deleted the protective addition made by the AO. However, the Department refused to release the seized gold jewelry.

The Gujarat High Court allowed the writ petition to release the seized gold jewelry and held as under:

“i) In view of the findings recorded by the Commissioner (Appeals) on the facts that the assessee had purchased gold from P and had made payment through the banking channels and since this finding of fact had attained finality since the Department had not challenged the order passed by the Commissioner (Appeals) before the Tribunal the contention of the assessee that he had purchased the gold in question from P and had also accounted for it in his books of account was accepted.

ii) Therefore, the Department could not withhold the seized gold jewelry and had to release it. The Principal Commissioner should accord approval for the release of seized gold jewellery to the assessee at the earliest.”

Reassessment — Notice — Death of assessee brought to knowledge of the assessing authorities — Reassessment proceedings and passing of assessment order against deceased assessee without issuing notice to legal heir of assessee — Notice and consequent assessment order invalid and unsustainable.

62. Shobha Mehta (through legal heir Sh. Kanhaya Lal Mehta) vs. ACIT
[2022] 448 ITR 25 (Raj.)
A.Y.: 2015-16
Date of order: 15th September, 2022
Ss. 147 and 148 of ITA, 1961

Reassessment — Notice — Death of assessee brought to knowledge of the assessing authorities — Reassessment proceedings and passing of assessment order against deceased assessee without issuing notice to legal heir of assessee — Notice and consequent assessment order invalid and unsustainable.

Notice u/s 148 of the Income-tax Act, 1961, issued by the Assistant Commissioner and the consequent assessment order u/s 147 r.w.s.144 was challenged by the legal heir of the deceased assessee on the ground that the order was passed against the deceased assessee and was addressed to the legal heir of the assessee but no prior notice of the reopening of the assessment proceedings had been given to the legal heir.

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

“The plea of the assessing authorities that they were not intimated regarding the death of the assessee was factually incorrect. The original assessment order for the A.Y.2015-16 u/s.143(3) indicated that the Deputy Commissioner had been intimated regarding the death of the assessee and had been passed taking into account the fact that the assessee had expired. Notice of reassessment u/s. 148 was issued to the assessee who had expired about six years back. No notice whatsoever was issued to the legal representative of the assessee before undertaking the reassessment proceedings. Therefore, the reassessment and the assessment order u/s. 147 read with section 144 having been passed against the deceased assessee were invalid and unsustainable.”

Reassessment — Jurisdiction — Condition precedent — Approval of prescribed authority — Recording satisfaction with signature of prescribed authority mandatory — Prescribed authority’s digitally signed approval obtained after issue of notice without recording of satisfaction — AO had no jurisdiction at point of time of issue of notice — Notice without jurisdiction and invalid — Notice and subsequent reassessment proceedings quashed.

61. Vikas Gupta vs. UOI
[2022] 448 ITR 1 (All.)
A.Ys.: 2013-14, 2014-15, 2015-16
Date of order: 8th September, 2022
Ss. 147, 148, 151 and 282A of ITA,1961

Reassessment — Jurisdiction — Condition precedent — Approval of prescribed authority — Recording satisfaction with signature of prescribed authority mandatory — Prescribed authority’s digitally signed approval obtained after issue of notice without recording of satisfaction — AO had no jurisdiction at point of time of issue of notice — Notice without jurisdiction and invalid — Notice and subsequent reassessment proceedings quashed.

In a batch of writ petitions before the Allahabad High Court, the admitted facts were that on the basis of an unsigned alleged digital approval u/s 151 of the Income-tax Act, 1961, the AO issued notices to the assessees u/s 148. The point of time when the aforesaid approval u/s 151 was signed is subsequent to the issuance of notices by the AO u/s 148.

The Allahabad High Court held as under:

“i) According to the provisions of section 151 of the Income-tax Act, 1961 an Assessing Officer gets jurisdiction to issue notice to an assessee u/s. 148 to reopen the assessment u/s. 147 after the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issuing such notice. Section 151 specifically provides for the recording of satisfaction by the prescribed authority, on the reasons recorded by the Assessing Officer that it is a fit case for the issue of notice u/s. 148. Unless such satisfaction is recorded, the Assessing Officer does not get jurisdiction to issue notice u/s. 148. A satisfaction, to be a valid satisfaction u/s. 151 has to be recorded by the prescribed authority under his signature on application of mind and not mechanically.

ii) The first and foremost condition under sub-section (1) of section 282A is that notice or other document to be issued by any Income-tax authority shall be signed by that authority. The word “and” has been used in sub-section (1), in a conjunctive sense meaning thereby that such notice or other document has first to be signed by the authority and thereafter it may be issued either in paper form or may be communicated in electronic form by that authority. The expression “shall be signed” used in section 282A(1) makes the signing of the notice or other document by that authority a mandatory requirement. It is not a ministerial act or an empty formality which can be dispensed with. Therefore, a notice or other document as referred to in section 282A(1) will take legal effect only after it is signed by that authority, whether physically or digitally. The usage of the word “shall” makes it a mandatory requirement.

iii) In the facts of the case, no valid satisfaction was recorded by the prescribed authority u/s. 151 when the Assessing Officer issued the notices to the assessee u/s. 148. Subsequent to issuance of the notices by the Assessing Officer, the satisfaction u/s. 151 was digitally signed by the prescribed authority. Therefore, at the point of time when the Assessing Officer issued notices u/s. 148 he did not have the jurisdiction to issue the notices. Consequently, the notices issued by the Assessing Officer were without jurisdiction. The notices issued u/s. 148 and the reassessment orders u/s. 147, if any, passed by the Assessing Officer and all consequential proceedings were quashed. The concerned authority was at liberty to initiate proceedings, if still permissible, strictly in accordance with law and on due observance of the relevant provisions of the Act and the Rules framed thereunder.”

Housing project — Special deduction — Whether assessee owner or developer — Approvals granted in name of assessee and taxes related to land paid by assessee — Tribunal granting special deduction on analysis of facts and applying correct principles to facts — Proper.

60. CIT vs. Abode Builders
[2022] 448 ITR 262 (Bom.)
A.Y.: 2007-08
Date of order: 16th February, 2022
S. 80-IB(10) of ITA,1961

Housing project — Special deduction — Whether assessee owner or developer — Approvals granted in name of assessee and taxes related to land paid by assessee — Tribunal granting special deduction on analysis of facts and applying correct principles to facts — Proper.

The assessee was a developer and builder. For the A.Y. 2007-08, the AO disallowed the assessee’s claim u/s 80-IB(10) of the Income-tax Act, 1961 on the grounds that (a) the assessee was not the owner of the land on which the project was constructed; (b) the assessee not having invested in the construction activity or done construction, could not be considered as a developer; and (c) the project was approved and commenced before the stipulated date of 1st October, 1998.

The Commissioner (Appeals) allowed the assessee’s claim for deduction, and this was affirmed by the Tribunal.

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

“i) The Assessing Officer had not disputed the findings of fact of the Tribunal that the assessee had through one of its partners been involved in the project from the beginning with the signing of the principal agreement and primary acquisition of the development rights for the land in question, that the intimation of disapproval issued by the Municipal Corporation and the commencement certificate were in the name of the assessee, that all taxes related to the land were paid by the assessee from the year 1998 onwards and that the assessee had even made payment for the development rights.

ii) Unless the assessee had any role in the development of the project, the joint venture partner would not agree to share 50 per cent of the profit in the project with the assessee. The assessee had submitted the original plan to the concerned authorities on November 7, 1996 for which the intimation of disapproval was granted in the year 1997, and therefore, even if a subsequent intimation of disapproval had been obtained in terms of the Explanation to section 80-IB(10) where the approval for the concerned project was given more than once, the date of final approval would be the operative date of approval.

iii) The Tribunal had found that the project, as completed, was different from the project for which initial approval had been obtained. The life of the intimation of disapproval once granted under the Maharashtra Regional Town Planning Act, 1966 was four years. The original lay-out plan had become invalid after January 7, 2001. The assessee had applied for intimation of disapproval for the second time on November 22, 2001 and was granted permission on July 21, 2002. The Tribunal had concluded on the facts which were not disputed that the second project proposal was only for three buildings as against the four for which the permission was sought earlier and intimation of disapproval for different buildings were granted on different dates and therefore the project for which permission was granted was not the same as that for which the intimation of disapproval had lapsed in the year 2001. When the facts and circumstances had been properly analysed and the correct test was applied to decide the issues no question of law arose.”

Exemption u/s 10(10AA) — Encashed earned leave by employees — Scope of section 10(10AA) — Complete exemption for employees of Central Government or State Government — Meaning of Government employee — Tamil Nadu Agricultural University — Completely funded by State Government and under its complete control — Retired employees of Tamil Nadu Agricultural University — Entitled to complete exemption in respect of encashed earned leave.

59. Dr. P. Balasubramanian and Ors. vs. CCIT(TDS)
[2022] 448 ITR 318 (Mad.)
Date of order: 10th August, 2022
Ss.10(10AA) of ITA,1961

Exemption u/s 10(10AA) — Encashed earned leave by employees — Scope of section 10(10AA) — Complete exemption for employees of Central Government or State Government — Meaning of Government employee — Tamil Nadu Agricultural University — Completely funded by State Government and under its complete control — Retired employees of Tamil Nadu Agricultural University — Entitled to complete exemption in respect of encashed earned leave.

The petitioners are employees of the Tamil Nadu Agricultural University. The employees had retired from service in 2017, and at the time of retirement, had been granted a surrender of leave salary. An objection was raised by the local fund audit on the grounds that tax ought to have been deducted under the provisions of the Income-tax Act, 1961. Thus, the University sought clarification from the local fund audit as well as from the Income-tax Department.

The petitioners challenged the audit objections issued by the local fund audit calling upon the petitioners to remit the Income-tax on surrender of leave salary on the grounds that tax has not been deducted at source in terms of the Income-tax Act, 1961.

The Madras High Court allowed the writ petitions and held as under:

“i) Section 10(10AA) of the Income-tax Act, 1961, deals with exemption on encashed earned leave by employees. Section 10(10AA) has two limbs or clauses. Clause (i) deals with the tax treatment of surrender of leave salary at the time of retirement of Central/State Government employee and states that the entire amount will stand exempt from the levy of Income-tax. Clause (ii) states that surrender of leave salary paid to any other employee, barring Central and State Government employees, is subject to a pecuniary limit as prescribed.

ii) The Tamil Nadu Agricultural University is a university that is constituted under a State Act. Section 7 of the Tamil Nadu Agricultural University Act, 1971 provides for an unfettered right of the State to inspect and conduct enquiry into the management of the university, its various activities including teaching, the work conducted by the university, conduct of examinations as well as person or persons who are connected with the administration or finances of the university, by the State. The power exercised by the State Government in the functioning and management of the university is unbridled. The Governor of Tamil Nadu is, in terms of section 9 of the Act, the Chancellor of the University. The funding of the university is entirely at the behest of the State Government. Hence the Tamil Nadu Agricultural University is a part of the State and employees of the Tamil Nadu Agricultural University are Government servants, entitled to the benefit of exemption u/s. 10(10AA)(i) of the Act.

iii) Accordingly, the circular dated February 17, 2015 and consequent communications dated October 30, 2018, March 19, 2019 and November 14, 2016 issued to the petitioners, employees of the Tamil Nadu Agricultural University, by the University, were contrary to law and liable to be set aside.

iv) To be noted that the petitioners are direct employees of the University, and not employees of allied institutions or constituent colleges and the ratio of this decision will apply only to those employees who are under the direct employment of the University per se.”

Estimate of income — Accounting — Rejection of accounts — Estimate should be fair — Local knowledge and circumstances of assessee should be taken into consideration — Modification of estimate of AO by Tribunal based on material on record — Justified — No question of law arose.

58. Principal CIT vs. Smart Value Products and Services Ltd
[2022] 448 ITR 145 (HP)
A.Y.: 2009-10
Date of order: 28th March, 2022
S. 11 of ITA, 1961

Estimate of income — Accounting — Rejection of accounts — Estimate should be fair — Local knowledge and circumstances of assessee should be taken into consideration — Modification of estimate of AO by Tribunal based on material on record — Justified — No question of law arose.

In the return of income for the A.Y.2009-10, the assessee had declared gross turnover to the tune of Rs. 91,90,10,669 and net profit to the tune of Rs. 1,06,69,510. Thus, the net profit rate was 1.16 per cent. The AO rejected the accounts. The AO prepared the trading account and the gross profit of the assessee came out to be Rs. 36,39,54,887 against sales of Rs. 71,24,69,335 and, as a result, the gross profit rate came to 51.8 per cent. Consequently, an addition of Rs. 14.48 crores was made by the AO.

Since in the subsequent years, the Revenue Department accepted the net profit rate in the case of the assessee at 2.53 per cent and 2.99 per cent, therefore, the Commissioner (Appeals) applied the average of the net profit of assessed income of the subsequent two years for the purpose of determining the profit of the assessee. This was upheld by the Tribunal.

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

“i) Section 145 of the Income-tax Act, 1961 empowers the Assessing Officer to reject the books of account of the assessee if he finds them defective. The estimate of income made in consequence should be fair. The Assessing Officer should not act dishonestly or vindictively or capriciously. History, knowledge of previous returns, local knowledge, circumstances of the assessee are to be considered to arrive at a fair and proper estimation.

ii) The appellate authority as well as the Tribunal had carefully gone through the record of the case and had found that the Assessing Officer had computed the month wise and quarter wise trading account for enhancing the gross profit. The Assessing Officer had failed to consider the genuine purchases and sales made by the assessee, which had been duly entered in the books of account. The nature of business carried on by the assessee was also not considered by the Assessing Officer. The assessee was receiving goods throughout the year from different warehouses, through bills or challans. Lump-sum payments were made to the different suppliers throughout the year. All the records, i.e., books of account, sales and purchase vouchers had been fully produced by the assessee.

iii) In the subsequent assessment years, the Assessing Officer had passed the orders u/s. 143(3) of the Act in respect of the same business activities of the assessee, which gave rise to net profit of 2.53 per cent. and 2.99 per cent. In the facts and circumstances of the case, the Tribunal had rightly dismissed the appeal filed by the Revenue.”

(A) Double taxation avoidance — Deduction of tax at source — Effect of section 90 — Provisions of DTAA applicable wherever more beneficial to assessee — Contract between Indian company and American company — Provisions of DTAA more beneficial for purposes of deduction of tax at source — Provisions of DTAA applicable — Definition in DTAA of technical services more beneficial to assessee — Tax not deductible at source as payment to American company by way of reimbursement of employees of American company seconded to it.
(B) Deduction of tax at source — Certificate for deduction at lower rate or nil deduction — Difference between sections 195 and 197 — Application u/s 195 to be made by person making payment.

57. Flipkart Internet Pvt. Ltd. vs. Dy. CIT(IT)
[2022] 448 ITR 268 (Kar.)
A.Y.: 2020-21
Date of order: 24th June, 2022
Ss. 90, 195 and 197 of ITA, 1961 and
Art.12 of India-US DTAA

(A) Double taxation avoidance — Deduction of tax at source — Effect of section 90 — Provisions of DTAA applicable wherever more beneficial to assessee — Contract between Indian company and American company — Provisions of DTAA more beneficial for purposes of deduction of tax at source — Provisions of DTAA applicable — Definition in DTAA of technical services more beneficial to assessee — Tax not deductible at source as payment to American company by way of reimbursement of employees of American company seconded to it.

(B) Deduction of tax at source — Certificate for deduction at lower rate or nil deduction — Difference between sections 195 and 197 — Application u/s 195 to be made by person making payment.

The assessee was engaged in the business of providing information technology solutions and support services for the e-commerce industry. In the course of its business, the assessee made payments in the nature of ‘pure reimbursements’ to W of USA for the A.Y. 2020-21 and requested the Department for issuance of a ‘certificate of no deduction of tax at source’. The payment of salaries to the deputed expatriate employees was made by W for administrative convenience and the assessee made reimbursements to W. With respect to such payments, the assessee applied for a certificate u/s 195 of the Income-tax Act, 1961. W and F of Singapore had entered into an inter-company master services agreement dated 28th May, 2019 for the secondment of employees and provision of services. In terms of the master services agreement (MSA), either of the parties or its affiliates could use the seconded employees, and the party placing the secondees would invoice the compensation and the wage cost of secondees incurred in the home country. The MSA had two distinct parts: (i) relating to the provision of services and (ii) the secondment of employees. In terms of the MSA, W seconded four employees to the assessee and entered into a ‘global assignment arrangement’ with the seconded employees, which provided that the seconded employees would work for the benefit of the assessee. In response to the invoices raised by W as regards the payments made towards salaries of the seconded employees, the assessee intended to make payments to W and in that context, made an application u/s 195(2) requesting for permission to remit the cost-to-cost reimbursements to be made without deduction of tax at source. The application was rejected.

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

“i) Section 90(2) of the Income-tax Act, 1961, provides that where the Central Government has entered into an agreement with a country outside India for the purpose of granting relief of tax or for avoidance of double taxation in relation to the assessee, the provisions of the Act would apply to the extent they are more beneficial to the assessee. The Supreme Court in Engineering Analysis Centre Of Excellence Pvt. Ltd. v. CIT [2021] 432 ITR 471 (SC) has clarified that where the provisions of the “Double Taxation Avoidance Agreement” are more beneficial than the provisions of the Act, it is the Agreement that should be treated as the law that requires to be followed and applied.

ii) Section 195 of the Act deals with deduction of tax in cases where payment is to be made to a non-resident. Section 195(2) and section 197 of the Act are in the nature of safeguards for the assessee and are to be invoked to avoid consequences of a finding eventually after assessment that the payer ought to have made deduction and in such case, it would be open to treat the assessee as “an assessee-in-default” in terms of section 201 of the Act, leading to prosecution being initiated under section 276B against the payer and disallowance of expenses u/s. 40(a)(ia) of the Act.

iii) The recourse to section 195(2) was perfectly in consonance with the object of section 195. It was maintainable.

iv) Article 12(1) of Double Taxation Avoidance Agreement between India and the United States of America provides for taxation of royalties and fees for included services arising in a contracting State and paid to a resident of the other contracting State. Further, article 12(2) provides that royalties and fees for included services may also be taxed in the contracting State in which they arise. “Fees for included services” is defined in article 12(4). Section 195(2) of the Act, placed an obligation on the assessee to make deduction of tax under sub-section (1) where payment of any sum chargeable under this Act was being made to a non-resident. The words “chargeable under this Act” if read in conjunction with provisions of article 12(4) of the Double Taxation Avoidance Agreement and the obligation u/s. 195(2), it becomes clear that the definition of “fees for included services” under article 12(4) was more beneficial to the assessee in so far as its obligation to deduct the tax was concerned. Accordingly, article 12(4) was to be applied to determine the liability to deduct tax.

v) In terms of article 12(4)(b) for the purpose of construing fees for included services, it is necessary that the rendering of technical or consultancy services must make available technical knowledge, experience, skill, know-how or processes. Further, it may also consist of development and transfer of a technical plan or technical design. It is not a mere rendering of technical or consultancy services, but the requirement of make available in terms of article 12(4)(b) that has to be fulfilled. The master services agreement, if subjected to scrutiny as regards the aspect of secondment did not reveal the satisfaction of the requirement of “make available” which is a sine qua non for being fees for included services. The fact that the employees seconded has the requisite experience, skill or training capable of completing the services contemplated in secondment by itself was insufficient to treat it as fees for included services de hors the satisfaction of the “make available” clause. The “make available” requirement that is mandated under article 12(4) granted benefit to the assessee and accordingly, the question of falling back on the provisions of section 9 of the Act did not arise. On this score alone, the conclusion in the order of the payment for the service falling within the description u/s. 9 of the Act as “deemed income”, had to be rejected. The only order that could now be passed was of one granting “nil tax deduction at source”.”

The court clarified that the finding as regards to the deduction of tax at source u/s 195 of the Act is tentative and the question of liability of the recipient was to be decided subsequently. Accordingly, there was no question of prejudice to the Revenue at the stage of the section 195 order.

(A) Appeal to High Court — Powers of High Court — Has power to consider question of jurisdiction even if not raised before Tribunal.
(B) Penalty u/s 271(1)(c) — Concealment of income or furnishing inaccurate particulars thereof — Notice — Validity — Notice must clearly specify nature of offence — Notice which is vague is not valid.

56. Ganga Iron and Steel Trading Co. vs. CIT
[2022] 447 ITR 743 (Bom.)
Date of order: 22nd December, 2021
Ss. 260A and 271(1)(c) of ITA,1961

(A) Appeal to High Court — Powers of High Court — Has power to consider question of jurisdiction even if not raised before Tribunal.

(B) Penalty u/s 271(1)(c) — Concealment of income or furnishing inaccurate particulars thereof — Notice — Validity — Notice must clearly specify nature of offence — Notice which is vague is not valid.

Penalty u/s 271(1)(c) of the Income-tax Act, 1961, imposed by the AO, was upheld by the Tribunal. In the appeal before the High Court, the assessee raised the following question of jurisdiction for the first time:

“Whether the show-cause notice dated February 12, 2008 issued to the appellant without indicating that there was concealment of particulars of income or furnishing of incorrect particulars of such income would vitiate the penalty proceedings or whether such notice as issued can be held to be valid?”

The Bombay High Court admitted the question, decided the case in favour of the assessee and held as under:

“i)   An appeal u/s. 260A can be entertained by the High Court on the issue of jurisdiction even if that issue was not raised before the Appellate Tribunal.

ii)    A penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour. Assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.

iii)    In the show-cause notice dated February 12, 2008, the Assistant Commissioner was not clear as to whether there was concealment of particulars of income or whether the assessee had furnished inaccurate particulars of income. Issuance of such show-cause notice without specifying whether the assessee had concealed particulars of his income or had furnished inaccurate particulars of the same had resulted in vitiating the show-cause notice. The notice was not valid.”

Refund — Interest on refund — Interest paid by the assessee u/s 234D(2) and section 220(2) — Reduction in income on recomputation — Interest claimed by assessee does not tantamount to “interest on interest” — Substantive right of assessee and obligation of department to grant interest.

Principal CIT vs. Punjab and Sind Bank
[2022] 447 ITR 289 (Del.)
A.Y.: 2001-02
Date of order: 4th August, 2022
Sections: 220(2), 234D(2), 244A(1)(b) of ITA, 1961

55. Refund — Interest on refund — Interest paid by the assessee u/s 234D(2) and section 220(2) — Reduction in income on recomputation — Interest claimed by assessee does not tantamount to “interest on interest” — Substantive right of assessee and obligation of department to grant interest.

For A.Y.2001-02, the assessee had paid the demand of interest u/s 234D(2) and section 220(2) of the Income- tax Act, 1961. Upon subsequent recomputation of the income on rectification, the taxable income was reduced. Consequently, the assessee was entitled to a refund of sum deposited as interest u/s 234D(2) and u/s 220(2). The claim was rejected by the AO.

The Commissioner (Appeals) held that the claim of “interest” by the assessee for the refund amounted to “interest on interest” which was beyond the scope of section 244A and dismissed the appeal. The Tribunal held that the assessee was entitled to interest u/s 244A(1)(b) on the sum refunded to the assessee on recomputation as a result of the reduction in its income.

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

i) The assessee had been found entitled to refund of amount deposited by it upon recomputation by the Department and interest thereon was liable to be paid u/s. 244A(1)(b).

ii)    The contention of the Department that since the refunded amount was deposited by the assessee towards “interest” due to the Department any award of interest on the refund would amount to “interest on interest” was factually incorrect. The refund u/s 234D(2) and section 220(2) was not “interest” in the hands of the assessee, i.e., the recipient. The refund did not bear the character of “interest” either in the hands of the assessee, i.e., the payee or in the hands of the Department, i.e., the payer. The payment of refund by the Department to the assessee admittedly did not satisfy either of the twin conditions set out in the definition of “interest” in section 2(28A) and it was therefore not interest. The sum directed to be refunded to the assessee was a debt in the hands of the Department and therefore to term “payment of this debt” as “interest” was fallacious. It was on the payment of this debt that the assessee demanded that the Department was liable to pay interest for the period that it had retained the money. The assessee therefore, sought interest on the debt owed to it by the Department and not “interest on interest”.

iii)    The Department had not disputed that the payment of interest by the assessee u/s. 234D(2) and section 220(2) was in pursuance of the demand raised and which demand subsequently had been found to be incorrect and the money had become due and payable by it to the assessee. There was no substance in the contention of the Department that the present appeal must await the decision of the larger Bench in Preeti N. Aggarwala v. Chief CIT [2017] 394 ITR 557 (Delhi).

iv)    There was no infirmity in the order of the Tribunal granting interest u/s. 244A(1)(b) on the sum refunded to the assessee on recomputation of income. No question of law arose.”

Reassessment — Notice u/s 148 — Validity — Law applicable — effect of sections 148A and 149 — Notice after three years — No evidence that income which had escaped assessment exceeded Rs. 50 lakhs — Notice not valid

Abdul Majeed vs. ITO [2022] 447 ITR 698 (Raj.)
A.Y.: 2015-16
Date of order: 29th June, 2022
Sections: 148, 148A and 149 of ITA,1961

54. Reassessment — Notice u/s 148 — Validity — Law applicable — effect of sections 148A and 149 — Notice after three years — No evidence that income which had escaped assessment exceeded Rs. 50 lakhs — Notice not valid

On 15th March, 2022, the AO issued notice under clause (b) of section 148A of the Income-tax Act, 1961 proposing to reassess the income of A.Y.2015-16 u/s 147. The notice was sent along with the details of the cash deposits in the account of the assessee maintained with the Corporation Bank, which according to the notice disclosed deposit of a total amount of Rs. 52,75,000. Replying to the said notice, the petitioner-assessee stated that the initiation of proceedings on the basis that the cash deposits during the relevant financial year are Rs. 52,75,000 is factually incorrect and according to the petitioner-assessee, the total amount of cash deposit in his bank account in the Bank was only Rs. 19,39,000. The petitioner- assessee, to satisfy the authority that the total cash deposits in that particular financial year were only Rs. 19,39,000, also annexed along with the reply, complete bank statement of transactions done during the financial year in question. However, the AO passed an order for issuance of notice u/s 148 on 29th March, 2022.

The assessee filed a writ petition and challenged both the orders. The Rajasthan High Court allowed the writ petition and held as under:

“i) On a conjoint reading of the provisions contained in section 148A of the Act and what has been provided u/s. 149 of the Act, it is vividly clear that in order to initiate proceedings u/s. 148A of the Act, it is not enough that in a case where notice is proposed to be issued u/s. 148 of the Act after three years have elapsed from the end of the relevant assessment year that there should exist material available on record to reach the conclusion that some income chargeable to tax has escaped assessment, but the amount should be more than Rs. 50 lakhs.

ii) Undisputedly this was a case where more than three years had elapsed from the end of the relevant assessment year. In that case, in order to initiate proceeding u/s. 148 of the Act, it was not only required to be shown that some income chargeable to tax had escaped assessment, but also that it amounted to or was likely to amount to Rs. 50 lakhs or more than for that year. The material available on record did not show any cash deposits more than what was asserted by the assessee, which was far less than the amount as stated in the notice u/s. 148A(d) of the Act. However, the officer had proceeded to hold that there may be one or more accounts in the Corporation Bank in his name or permanent account number. It was on this surmise, bereft of any material on record that the authority seemed to justify its action and order dated March 29, 2022. The material available on record before the authority did not disclose any cash deposit or any other transactions which could be said to have escaped assessment, which was more than Rs. 50 lakhs. The order and proceedings were unsustainable in law.”

Housing project — Special deduction u/s 80-IB(10) — Projects comprising eligible and ineligible units — Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

Principal CIT vs. Kumar Builders Consortium [2022] 447 ITR 44 (Bom.)
A.Y.: 2011-12
Date of order: 18th July, 2022 Section: 80-IB(10) of ITA, 1961

53. Housing project — Special deduction u/s 80-IB(10) — Projects comprising eligible and ineligible units — Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

The assessee developed residential projects. On the question whether the Tribunal was justified in allowing the assessee’s claim to deduction u/s 80-IB (10) of the Income-tax Act, 1961 on pro rata basis in respect of eligible flats though the assessee did not comply with the limit on built-up area prescribed under this section in respect of few flats in two of its projects, the Bombay High Court held as under:

“i) Section 80-IB(10) does not support the interpretation that even if a single flat in a housing project is found to exceed the permissible maximum built-up area of 1500 sq.ft., the assessee would lose its right to claim the benefit of deduction in respect of the entire housing project u/s.80-IB(10). Clause (c) of section 80-IB(10) only qualifies an eligible residential unit and no more and if there is such a residential unit, which conforms to the requirement as to size in a housing project, all other conditions being fulfilled, the benefit of deduction cannot be denied in regard to such residential unit. Section 80- IB(10) nowhere even remotely aims to deny the benefit of deduction in regard to a residential unit, which otherwise conforms to the requirement of size at the cost of an ineligible residential unit with a built-up area of more than 1500 sq.ft.

ii) Therefore, the Tribunal was right in directing the Assessing Officer to compute the pro rata deduction u/s. 80-IB(10) in regard to the eligible residential units of the assessee’s projects need not be interfered with.”

Charitable purpose — Exemption u/s 11 — Rule of consistency — Exemption consistently granted in earlier assessment years — Concurrent findings by appellate authorities that no change in activities of assessee and no activity carried out with profit motive — Supervision or monitoring of activities by donor not sufficient to hold that any profit motive is involved — Grant of benefit of exemption by tribunal proper

CIT vs. Professional Assistance For Development Action
[2022] 447 ITR 103 (Del.)
A.Y.: 2011-12
Date of order: 15th July, 2022 Section: 11 of ITA, 1961

52. Charitable purpose — Exemption u/s 11 — Rule of consistency — Exemption consistently granted in earlier assessment years — Concurrent findings by appellate authorities that no change in activities of assessee and no activity carried out with profit motive — Supervision or monitoring of activities by donor not sufficient to hold that any profit motive is involved — Grant of benefit of exemption by tribunal proper

The assessee was engaged in activities for the upliftment of the poor, providing training and skill development in rural areas in the backward districts of certain states and got grants from the Central and State Governments and donations from various organisations. The assessee was allowed the benefit of exemption u/s 11 of the Income-tax Act, 1961 continuously up to A.Y. 2010-11. For the A. Y. 2011-12, the AO denied the exemption invoking the proviso to section 2(15).

The Commissioner (Appeals) allowed the exemption u/s 11 with all consequential benefits. The Tribunal found that the AO did not bring on record any evidence which suggested that the activities of the assessee were carried out with a profit motive and that in A.Ys. 2009-10 and 2010-11, the AO had held that the assessee was engaged in providing relief to the poor within the meaning of section 2(15). The Tribunal following the rule of consistency dismissed the appeal of the Department.

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

“The Department could not controvert the fact that the assessee had not charged any fee from clients except the cost of the project actually incurred. Even in the sanction letter of grant to the assessee, there was mention of supervision or monitoring of activities by the donor, but that in itself was not sufficient to hold that any profit motive was involved. The Tribunal’s holding that it was normal that a donor would want to verify whether the grants had been incurred for the intended purpose did not in any manner establish that the activities of the assessee was business activity. No question of law arose.”

Business expenditure — Disallowance u/s 40(a) (ia) — Deduction of tax at source — Remuneration paid to the director of the assessee — Shortfall in tax deducted at source — No disallowance can be made — Proper course of action is to invoke section 201

Principal CIT vs. Future First Info Services Pvt. Ltd.
[2022] 447 ITR 299 (Del.)
A.Y.: 2009-10
Date of order: 14th July, 2022
Sections: 37, 40(a)(ia), 197(1), 201 of ITA, 1961

51. Business expenditure — Disallowance u/s 40(a) (ia) — Deduction of tax at source — Remuneration paid to the director of the assessee — Shortfall in tax deducted at source — No disallowance can be made — Proper course of action is to invoke section 201

For A.Y. 2009-10, the AO made a disallowance u/s 40(a) (ia) of the Income-tax Act, 1961 on the grounds that the assessee had made a short deduction of tax on the remuneration paid to its director in violation of section 197(1).

Both the Commissioner (Appeals) and the Tribunal gave concurrent findings that the higher salary paid to the assessee’s director was accepted as remuneration by the AO during the scrutiny assessment in the subsequent assessment year and that the AO did not bring any evidence or material for making disallowance u/s 40A(2)(b) and deleted the disallowance u/s 40(a)(ia). The Tribunal upheld the decision of the Commissioner (Appeals) and held that the AO, without any reason or material facts, had arbitrarily disallowed 50 per cent of the remuneration of the director without giving cogent reasons to conclude that the remuneration paid was not commensurate with the market value of the services rendered by the director.

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

“There was short deduction of tax at source, disallowance could not be made u/s. 40(a)(ia) and the correct course of action would have been to invoke the provisions of section 201. No question of law arose.”

Business expenditure — Compensation — Capital or revenue expenditure — Assessee owner of hotel managed by third party under agreement — Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures — Expenditure arising out of business — No acquisition of new capital asset — Allowable revenue expenditure

Principal CIT vs. Elel Hotels and Investments Ltd. [2022] 447 ITR 92 (Del.)
Date of order: 31st May, 2022 Section: 37 of ITA, 1961

50. Business expenditure — Compensation — Capital or revenue expenditure — Assessee owner of hotel managed by third party under agreement — Compensation paid towards termination of agreement to receive back possession of building and furniture and fixtures — Expenditure arising out of business — No acquisition of new capital asset — Allowable revenue expenditure

The assessee was the owner of a hotel in Mumbai which was initially being managed by ITC Ltd. under a hotel operator agreement effective from 1986. In 1993, the hotel was severely damaged as a result of bomb blasts during the riots in Mumbai. Thereafter, disputes and differences arose between the assessee and ITC Ltd. with respect to responsibility to repair and restore the damaged portion and other consequential issues. The assessee went into litigation with ITC Ltd. Ultimately, the assessee terminated the operator-cum-management agreement with ITC Ltd. and paid a sum of Rs. 43.10 crores during A.Y. 2006-07 to ITC Ltd. which in turn handed over vacant and peaceful possession of the hotel property. On the question whether the amount of Rs. 30.86 crores paid by the assessee out of the total amount of Rs. 43.10 crores was capital or revenue expenditure u/s 37 of the Income-tax Act, 1961 the Delhi High Court held as under:

“i) The compensation paid by the assessee had arisen out of business necessity and was revenue expenditure u/s. 37. There had been no addition of capital asset of enduring nature in the hands of the assessee and after the payment of the amount there had been no change in the capital structure of the assessee. It had paid the amount to get back possession of its own asset which had been given on licence basis under the hotel operator agreement and not for acquisition of an asset that the assessee did not already own or possess.

ii) The expenditure was to facilitate its business and trading operations. The expenditure was revenue. No question of law arose.”

Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant

L. K. P. Merchant Financing Ltd. vs Dy. CIT [2022] 447 ITR 507 (Bom.)
A.Y.: 1991-92
Date of order: 18th July, 2022 Sections: 36(1)(vii), 36(2) of ITA, 1961

49. Bad debt — Writing off — Condition precedent — Assessee must arrive at bona fide decision that the debt not recoverable — Legal action taken by assessee in winding up proceedings against debtor lessee company — Assessee’s decision to write off debt in view of amended section 36(1)(vii) — Commercial expediency — Allowable — Change in method of accounting by assessee irrelevant

The assessee was a NBFC engaged in the business of lease finance. It entered into a lease agreement with a company, the lessee, of lease of certain equipment for which, it had already made payments to the suppliers. It received one instalment of lease rental from the lessee which defaulted in further instalments. The assessee following the mercantile system of accounting had offered these incomes totaling to Rs. 23.62 lakhs in A.Ys. 1987- 88, 1988-89 and 1989-90. In view of the dispute with the lessee, the assessee filed a winding up petition against the lessee in the Bombay High Court. For A.Y.1991-92 in the reassessment proceedings u/s 147, the AO held that according to the mercantile system of accounting followed by the assessee, the accrued lease incomes were taxable in the respective years and disallowed the written off bad debt on the ground that the write off was premature.

The Commissioner (Appeals) directed the AO to allow deduction of an amount of R20.69 lakhs to be written off by the assessee for A.Y. 1991-92. The Tribunal held that even if the claim of the assessee in respect of bad debt was correct, it could not be considered since the assessee had accounted for lease rentals and had also claimed depreciation and reversed the order of the Commissioner (Appeals).

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

“i) Once a business decision has been taken by the assessee to write off a debt as a bad debt in its books of account and the decision is bona fide, it should be sufficient to allow the claim of the assessee. The method of accounting has no relevance to the issue.

ii)    The written off lease rental amount had not been reversed from the income entry in Schedule-16. Writing off of the bad debt was in accordance with the provisions of section 36(1)(vii). The Commissioner (Appeals) had recorded in his order that the lessee company had become a sick company. Obviously, the prospects of recovery of lease rentals were quite bleak and the assessee considering that the debt could not be recovered in the foreseeable future had decided to write off a debt of Rs.20.69 lakhs as bad debt during the previous year relevant to the A.Y.1991-92. The assessee had taken a business decision to write off the debt as a bad debt.

iii)    The reversal of lease rentals of Rs. 20.69 lakhs, might be a change of the method of accounting by the assessee from mercantile to cash and might even be a breach of the accounting principles but it was not a requirement of section 36(1)(vii) for allowing a debt as a bad debt. A prudent practice had been adopted by a limited company of informing its shareholders about the remote possibility of recovery of the amounts and the decision to reverse and that it would be accounted for as and when received. The order of the Tribunal was set aside and the Assessing Officer was directed to allow the claim of bad debt of Rs. 20.69 lakhs.”

Advance tax — Interest — Income earned from abroad — Settlement of case — Levy of interest by Settlement Commission on shortfall of advance tax due on income earned abroad by assessee on which tax not deducted — Assessee not liable to pay interest

John Baptist Lasrado vs. ITSC [2022] 447 ITR 231 (Mad.)
A.Ys.: 1996-97 to 2005-06
Date of order: 27th November, 2017 Sections: 234A, 234B, 245D(4) of ITA,1961

48. Advance tax — Interest — Income earned from abroad — Settlement of case — Levy of interest by Settlement Commission on shortfall of advance tax due on income earned abroad by assessee on which tax not deducted — Assessee not liable to pay interest

The assessee was an employee of a multinational company. For the salary received in India, tax was deducted at source by the employer. With regard to the salary received by him outside India the employer did not deduct tax at source. The sale proceeds of shares held by the assessee outside India were credited in his bank account abroad. For A.Ys. 1996-97 to 2005-06, the assessee had filed his returns of income not disclosing only the income earned abroad. The assessee filed an application u/s 245C before the Settlement Commission wherein he offered all the income earned abroad in A.Ys. 1996-97 to 2005-06. The Settlement Commission passed an order u/s 245D(4) and granted the assessee immunity from penalty and prosecution but charged interest u/s 234B on the excess of the tax assessed over the advance tax paid for all the assessment years. The Settlement Commission rejected the assessee’s miscellaneous petition against the levy of interest holding that where the person responsible for paying salary in foreign currency was a non-resident and hence not responsible u/s 192, the assessee was liable to pay advance tax u/s 208 r.w.s. 209 since the assessee was in receipt of income from deposits abroad which were not liable for deduction of tax and hence, the assessee could not have excluded tax on these while computing the advance tax liability. The Settlement Commission held that the interest u/s 234B and u/s 201(1A) were for two types of defaults and that it could not be held that there was any double levy for the same default.

On a writ petition filed by the assessee the Madras High Court held as under:

“i) For the purposes of section 234B of the Income-tax Act, 1961 the question would be as to whether the assessee, who is the payee, had any role in deducting or collecting the tax, if the answer to this question is in the negative and it was not the duty of the assessee, the question of payment of interest would not arise as the assessee cannot be treated to be an “assessee-in-default”.

ii) The employer abroad had paid the interest u/s 201(1A) and tax having already been remitted it could not be recovered from the assessee once again. The assessee was not liable for payment of interest under section 234B in respect of the salary income earned by him outside India. In respect of any other income the Assessing Officer could proceed to levy interest in accordance with law. The order charging interest was set aside.”

Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

47 Patel Engineering Ltd. vs. Dy. CIT
[2022] 446 ITR 728 (Bom.)
A.Y.: 2012-13
Date of order: 25th January, 2022
Ss. 133A, 147 and 148 of ITA, 1961

Reassessment — (A) Notice after four years — Condition precedent — Notice based on information during survey of third party that assessee beneficiary of contract with surveyed party — Reasons recorded for reopening assessment not mentioning information withheld by assessee or any new material found by assessing authority — Assessee disclosing all material facts fully and truly — Reasons cannot be improved upon or supplemented — Notice and order rejecting objections of assessee set aside

(B) Principles of natural justice — Failure to provide assessee copies of judgments relied upon by AO — Violation of principles of natural justice — Notice and order rejecting objections of assessee set aside

For the A.Y. 2012-13, in response to the notice u/s 142(1) r.w.s. 129 of the Income-tax Act, 1961, the assessee furnished the details required by the Assessing Officer which included the receipt of Rs. 14,92,47,452 from SECPL and submitted that the amount was declared as income. Thereafter, the assessment order u/s 143(3) was passed. After four years the Assessing Officer issued a notice against the assessee u/s 148 to reopen the assessment u/s 147 on the ground that according to a survey conducted u/s 133A on SECPL, the assessee had received a contract for an amount of Rs. 24,22,57,252. The objections raised by the assessee were rejected.

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

“i) The reopening of assessment having been proposed after expiry of four years from the relevant A.Y. 2012-13 and since the assessment was completed u/s. 143(3) the proviso to section 147 applied. The onus was on the Department to disclose what was the material fact that the assessee had failed to disclose truly and fully. The reasons recorded for reopening did not disclose anywhere that there was failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer had not even stated whether the assessee had executed the contract and received any income.

ii) The survey on SECPL had been conducted before the assessment order was passed against the assessee for the A.Y. 2012-13. Therefore, the Assessing Officer should have been aware of any such information but still chose not to raise it during the assessment proceedings and had not verified the facts with the data available with him and simply on the basis of information received from the Deputy Director had issued the notice to the assessee. Therefore the condition precedent for reopening the assessment u/s. 147 that mandated that it was exclusively the satisfaction of the assessing authority based on some direct, correct and relevant material had not been satisfied. To the reasons recorded, the Department has not annexed the information received by them. To the extent of not furnishing to the assessee the information received from the Deputy Director with the reasons recorded the action of the Department was in breach of the orders of the court in Sabh Infrastructure Ltd. vs. Asst. CIT [2017] 398 ITR 198 (Delhi).

iii) The reasons recorded for reopening could not be improved upon or supplemented. In the order disposing of the assessee’s objections, the Assessing Officer had relied upon various judgments of which copies were not provided nor were they brought to the notice of the assessee before the order rejecting the objections was passed so that the assessee could have suitably dealt with those judgments or orders. Therefore, there was breach of principles of natural justice by the Assessing Officer, who as a quasi-judicial authority had an obligation to adhere strictly to the principles of natural justice. He had also gone beyond the reasons recorded for reopening inasmuch as according to him no bank statements or works contract receipts were required or submitted during the original assessment proceedings based on which the actual amount and the nature and genuineness of the work done by the assessee for SECPL could have been verified.

iv) In the circumstances, the petition is allowed in terms of prayer clause (a). (i.e., notice u/s. 148 and the order rejecting objections were quashed).”

Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

46 Ajay Bhandari vs. UOI
[2022] 446 ITR 699 (All.)
A.Y.: 2014-15
Date of order: 17th May, 2022
Ss. 147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Law applicable — Effect of amendments with effect from 1st April, 2021 and CBDT Circular dated 11th May, 2022

For the A.Y. 2014-15 a notice u/s 148 of the Income-tax Act, 1961 was issued on 1st April, 2021. The recorded reasons read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year.”

The reassessment order dated 31st March, 2022 was passed u/s 147 r.w.s. 144B of the Act, 1961. The assessee filed writ petition and challenged the notice and the reassessment order.

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

“i)    Section 147 of the Income-tax Act, 1961, as it existed till March 31, 2021, empowers the Assessing Officer to assess or reassess or recompute the loss or depreciation allowance or any other allowance, as the case may be, for the assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A precondition to initiate proceedings under section 147 is the issuance of notice under section 148. Thus, notice under section 148 is jurisdictional notice. Section 149 provides the time limit for issuance of notice under section 148. The time limit is provided under the unamended provisions (as existing till March 31, 2021) and the amended provisions (effective from April 1, 2021) as amended by the Finance Act, 2021. According to clauses 6.2 and 7.1 of the Board’s Circular dated May 11, 2022 ([2022] 444 ITR (St.) 43), if a case does not fall under clause (b) of sub-section (1) of section 149 of the Act for the assessment years 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs.50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

ii)    The notice u/s 148 of the Act issued on April 1, 2021 for the A.Y. 2014-15 and the notice dated January 13, 2022 u/s. 144 of the Act and the reassessment order dated January 13, 2022 u/s. 147 read with section 144B of the Act for the A.Y. 2014-15 were liable to be quashed.”

Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

45 Parveen Amin Bhathara vs. ITO
[2022] 446 ITR 201 (Mad.)
A.Y.: 2011-12
Date of order: 27th June, 2022
Ss. 147, 148 and 149 of ITA, 1961

Reassessment — Notice u/s 148 — Limitation — Doctrine of substantial compliance —Mere signing of notice is not sufficient — Date of issue would be date on which notice was served on assessee — Notice dated 31st March, 2018 served on assessee through e-mail on 18th April, 2018 for A.Y. 2011-12 — Notice barred by limitation — Order and notice set aside

On 18th April, 2018, the assessee writ petitioner received an e-mail from the Assessing Officer with a notice u/s 148 of the Income-tax Act, 1961 dated 31st March, 2018, proposing to reopen the assessment for the A.Y. 2011-12. The Assessee filed a writ petition and challenged the notice on the ground that the notice has been issued and served on 18th April, 2018, the date on which the limitation period of six years for reopening the assessment, came to an end.

The Single Judge Bench of the Madras High Court dismissed the writ petition by observing that it was sufficient if the notice u/s 148 of the Act had been signed and issued by the authority and that the delay in receiving the documents would not provide any ground for quashing the entire proceedings.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i)    U/s. 149 of the Income-tax Act, 1961 the issuance of notice u/s. 148 for reopening the assessment u/s. 147 is complete only when it is issued in the manner as prescribed u/s. 282 read with rule 127 of the Income-tax Rules, 1962 prescribing the mode of service of notice under the Act. The signing of notice would not amount to issuance of notice as contemplated u/s 149 of the Act. The requirement of issuance of notice u/s 149 is not mere signing of the notice u/s. 148, but it has to be sent to the proper person within the end of the relevant assessment year.

ii)    The notice u/s. 148 for reopening the assessment was not sent to the assessee within the time stipulated u/s 149 and hence, the reassessment proceedings initiated u/s 147 were vitiated. The notice dated 31/03/2018 issued by the Assessing Officer was served on the assessee through e-mail, only on 18/04/2018. Though the Department produced the relevant pages of the notice server book maintained by it to show that the notice dated 31/03/2018 was within the limitation period, it only disclosed that the notice dated March 31/03/2018 was returned on 06/04/2018. The order on the writ petition and the notice issued u/s. 148 were set aside.”

Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

44 G. P. Engineering Works Kachhwa vs. UOI
[2022] 446 ITR 563 (All.)
A.Y.: 1990-91
Date of order: 8th February, 2022
Ss. 276C, 277, 278B and 279(2) of ITA, 1961

Offences and prosecution — Wilful attempt to evade tax — Application for compounding of offences — Limitation — Show-cause notice issued for rejection of compounding of offences on ground of bar of limitation relying on circular issued by CBDT — Circular cannot override statutory provision — Authority to consider assessee’s application

A criminal case was filed against the assessee u/s 276C(1) read with sections 277 and 278B of the Income-tax Act, 1961 on the ground of wilful attempt to evade tax relating to the A.Y. 1990-91. The assessee filed an application for compounding of the offences before the Chief Commissioner who issued a show-cause notice for rejecting the application relying upon the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated 14th June, 2019.

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

“i)    In terms of sub-section (2) of section 279 of the Income-tax Act, 1961 any offence under Chapter XXII of the Act may be compounded by the authorised officer either before or after the institution of the criminal proceedings. No limitation for submission or consideration of compounding application has been provided under sub-section (2) of section 279 of the Act. Therefore, the CBDT by a circular can neither provide limitation for the purposes of sub-section (2) nor restrict the operation of the sub-section in purported exercise of its power to issue circulars under the Explanation appended to section 279(2).

ii)    A circular is subordinate to the principal Act or Rules, and cannot override or restrict the application of specific provisions enacted by Legislature. It cannot travel beyond the scope of the powers conferred by the Act or the Rules. Circulars containing instructions or directions cannot curtail a statutory provision by prescribing a period of limitation where none has been provided by either the Act or the Rules. The authority to issue instructions or directions by the Board stems from the Explanation appended to section 279(2). The Explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main section. The object of an Explanation to a statutory provision has been elaborated by the Supreme Court.

iii)    A specific limitation has been provided by para 7(ii) of the compounding guidelines in the Board’s Circular F. No. 285/08/2014-IT (Inv.V)/147 dated June 14, 2019 in purported exercise of power under the Explanation to section 279(2). The Explanation merely enables the Board to issue instructions or directions to other Income-tax authorities for the proper composition of offences under that section. The instructions or directions may prescribe the methodology and manner of composition of offences to clarify any obscurity or vagueness in the main provisions to make it consistent with the dominant object of bringing closure to such cases which may be pending interminably in the court system. Such instructions or directions that are prescribed by the Explanation cannot take away a statutory right of an assessee or set at naught the working of the provision of compounding of offence.

iv)    On the facts and circumstances and the provisions of sub-section (2) of section 279 the compounding application of the assessee could not be rejected by the Income-tax authority concerned on the ground of delay in filing the application. It was not disputed by the respondents in the court or in the show-cause notice that the criminal case in question was still pending. The Income-tax authority was to consider the compounding application of the assessee in accordance with law.”

International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

43 Virtusa Consulting Services Pvt. Ltd. vs. DRP
[2022] 446 ITR 454 (Mad.)
A.Y.: 2006-07
Date of order: 9th June, 2022
Ss. 92CA, 92CA(1) and 153(1) of ITA, 1961

International transactions — Reference to TPO — (A) Limitation — Reference made to TPO beyond period of limitation — All further proceedings in furtherance of reference bad in law (B) Jurisdiction — Reference made to TPO beyond period of limitation — Participation of assessee in proceedings not a bar to challenging jurisdiction (C) Writ — Maintainability — Reference to TPO — Limitation — Question of limitation is legal plea and can be raised at any stage — Existence of alternate remedy not bar — Writ will issue

The assessee was in the business of software development and rendered services to its wholly owned subsidiaries outside India and unrelated third party customers. For the A.Y. 2006-07, the Assessing Officer passed an assessment order dated 14th March, 2008 and refund was granted on 28th March, 2008. Subsequently, pursuant to proceedings of the Commissioner dated 25th August, 2008, the Additional Commissioner issued a notice dated 4th September, 2008 u/s 143(2) of the Income-tax Act, 1961 against the assessee. The assessee furnished its books of account, including forms 3CA and 3CD in terms of section 44AB. It was found that the assessee had entered into international transactions exceeding Rs. 15 crores with its sister concern and on approval dated 18th November, 2008 u/s 92CA of the Act, the Additional Commissioner made a reference to the Transfer Pricing Officer u/s 92CA(1). The Additional Commissioner sent a communication dated 27th February, 2009 informing the assessee about the reference to the Transfer Pricing Officer and requested it to furnish the annual reports for the previous three years and a copy of the computation of total income. The assessee sent a reply dated 12th May, 2009 with the documents sought for and after conducting enquiries, the Additional Commissioner passed a draft assessment order dated 31st December, 2009. Thereafter, the assessee filed its objections before the Dispute Resolution Panel and the Assessing Officer. Before the Dispute Resolution Panel, the assessee also raised an objection with regard to limitation. However, the Dispute Resolution Panel dismissed the objections by an order dated 24th September, 2010.

Challenging both the orders of the Additional Commissioner and the Dispute Resolution Panel, the assessee filed a writ petition. The writ petition was dismissed by the Single Judge Bench of the Madras High Court holding that the Dispute Resolution Panel had rightly overruled the objections raised for the first time by the assessee regarding the limitation to proceed with the assessment. Therefore, the assessee could not challenge the jurisdiction of the Additional Commissioner’s reference to the Transfer Pricing Officer after 31st December, 2008.

The Division Bench allowed the appeal filed by the assessee and held as under:

“i)    Though the provision of section 92B of the Income-tax Act, 1961 does not state as to when a reference is to be made u/s 92CA(1) to the Transfer Pricing Officer after an international transaction is found, section 153 would make it explicit that the reference is to be made during the course of the assessment proceedings before the expiry of the period to pass an assessment order. Thereafter, the Transfer Pricing Officer after considering the documents submitted by the assessee is to pass an order u/s 92CA(3). Section 92CA(3A) stipulates that this order has to be passed before the expiry of 60 days prior to the date on which the period of limitation u/s. 153 expires. According to section 153 no order of assessment can be passed at any time after the expiry of 21 months. Section 92CA(4) stipulates that the Assessing Officer has to pass a draft assessment order in conformity with the order of the Transfer Pricing Officer and the assessee has an option either to file acceptance of the variation of the assessment or file objections to any such variation with the Dispute Resolution Panel and also the Assessing Officer u/s 144C(2). In terms of sub-section (12), the Dispute Resolution Panel has no authority to issue any directions under sub-section (5) from the end of the month in which the draft assessment order is passed and not from the date when the assessee submits the objections. Sub-section (13) of section 144C provides that upon receipt of directions issued under sub-section (5) the Assessing Officer shall in conformity with the directions complete the assessment proceedings within one month from the end of the month in which the directions are received. Under the proviso to section 92CA(3A) if the time limit for the Transfer Pricing Officer to pass an order is less than 60 days, the remaining period shall be extended to 60 days. This implies that not only is the time frame mandatory but also the Transfer Pricing Officer has to pass an order within 60 days. Further, the extension in the proviso also automatically extends the period of assessment to 60 days under the second proviso to section 153. But for the reference u/s 92CA(1) to the Transfer Pricing Officer, the time limit for completing the assessment would only be 21 months from the end of the assessment year. It is only if a reference to the Transfer Pricing Officer has been made during the course of assessment and is pending, that the Department gets another 12 months in terms of the second proviso to section 153(1) and u/s 153(4) after amendment. Therefore, section 153(1) and its first two provisos provide that no order of assessment can be passed after 21 months and the extended period of limitation to pass an assessment order within a further period of 12 months or in other words within 33 months from the end of assessment year, applies only when a reference u/s. 92CA(1) is made during the course of assessment proceedings. The different timelines to be adhered to by the Transfer Pricing Officer, by the Assessing Officer to pass a draft order, by the assessee to file their objections, by the Dispute Resolution Panel to issue directions and by the Assessing Officer to pass the final order, would commence only on a reference to the Transfer Pricing Officer and not otherwise. The period of 33 months is to pass the final order of assessment after the directions from the Dispute Resolution Panel.

ii)    The proviso to section 153(1) inserted by amendment in Finance Act, 2006 altering the original time limit from 24 months to 21 months with effect from June 1, 2006 and the second proviso inserted by the Finance Act, 2007, extending the time for completion of assessment, when a reference has been made to the Transfer Pricing Officer, during the course of assessment proceedings have to be read in tandem and together. Section 153 was repealed and substituted with effect from June 1, 2016, where, under section 153(1) it is clearly mentioned that the period of assessment is 21 months and u/s 153(4) that in case of reference u/s 92CA(1) during the course of assessment proceedings, the period of assessment would be extended by twelve months clarifying the mischief caused on account of the interpretation adopted by the officials.

iii)    The writ petitions were maintainable and alternative remedy would not operate as a bar. The question of limitation was a legal plea which went to the root of authority or jurisdiction. There was no dispute on the facts about the date on which the reference was made or when the order was passed. The interpretation of the provision to be adjudicated is a pure question of law.

iv)    The extension had to be made before the expiry of the time limit prescribed for original assessment was applicable because the second proviso uses the words “and during the course of the proceeding for assessment”. The first two provisos to section 153(1) lay down that the time limit to pass the original assessment order is 21 months and when a reference to the Transfer Pricing Officer is made during the course of such proceedings, the time limit would be 33 months and that if no reference is made within the period provided for assessment, no reference can be made subsequently since the Assessing Officer becomes functus officio. The words used in section 153 are very clear as they lay down that “no order of assessment shall be made”. The order in the writ petition was to be set aside.

v)    Concurrence was obtained from the Commissioner before December 31, 2008 would not be of any assistance to the Department as indisputably the reference to the Transfer Pricing Officer was made only on February 17, 2009. The proceedings would commence only when a reference is made to the Transfer Pricing Officer, which cannot be beyond the period provided u/s 153(1) and the first proviso thereunder. From the undisputed dates and events it was clear that not only was the reference to the Transfer Pricing Officer made after the period of expiry of the period of limitation to pass assessment orders, but also that the Assessing Officer had failed to pass final assessment orders in time. The limitation to pass the original assessment order ended on December 31, 2008 being 21 months from the end of the A.Y. 2006-07, i.e., March 31, 2007. Then the last date for the Assessing Officer to pass the final assessment order would end on December 31, 2009, even considering the extension by 12 months. The order of the Dispute Resolution Panel itself was passed only on September 24, 2010 much beyond the permissible period. The Department though on the one hand contended that the reference could be made within 24 months, on the other contended that the extended period would be 9 months. If such contention was accepted, it would mean that the overall time to pass the assessment order in a case of reference to the Transfer Pricing Officer, would be 36 months and not 33 months, which was not the intention of the Legislature. The amendments brought into the Act would then turn redundant.

vi)    According to the timeline, when the time given to the Dispute Resolution Panel itself was 9 months from the date of the draft assessment order to complete the assessment and then a further time of one month to the Assessing Officer to complete the assessment from the end of the month in which the direction was received, it could not be said that the total additional time was 9 months and the provisos to section 153(1) had no connection. If the time limits provided to the Transfer Pricing Officer to pass an order and for the assessee to submit its objections in terms of section 144C(2) were also considered with the time period for the Dispute Resolution Panel and the Assessing Officer, the extended period was 12 months and not 9 months. When one proviso provides a time limit and when another proviso extends such time under certain circumstances, it cannot be held that the provisos are independent. Therefore, when the extended time provided for the Department was 12 months it could not be contended that it was only 9 months since the reference was not made in time. Since the reference to the Transfer Pricing Officer had been made after the permissible period, the timeline had been missed by the Department at every stage. Therefore, as a sequitur, all further proceedings, in furtherance thereof were also bad.”

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

42 R. Ramakrishnan vs. CBDT
[2022] 446 ITR 308 (Kar.)
A.Y.: 2003-04
Date of order: 7th April, 2022
S. 119(2)(b) of ITA, 1961

CBDT — Condonation of delay — Delay in filing application before Board — Circular dated 9th June, 2015 prescribing limitation period of six years — Cannot have retrospective effect on pending application filed prior to date of issue of circular — Order rejecting application on basis of circular set aside — Matter remanded to Board

The assessee filed a nil return for the A.Y. 2003-04 claiming exemption of capital gains u/s 54EC of the Income-tax Act, 1961 arising on sale of its property on 3rd August, 2002 having invested Rs. 25 lakhs in specific bonds on 5th February, 2003. The Assessing Officer was of the view that the investment should have been made on or before 3rd February, 2003 and denied the benefit of section 54EC. Thereafter, the assessee filed a revision petition u/s 264 before the Commissioner challenging the levy of tax on capital gains with a prayer to condone the delay of two days in investing Rs. 25 lakhs in bonds contending that he was in Australia at that time and accordingly, there was a short delay for advising the remittance towards the bond.

The Commissioner declined to condone the delay of two days in making the investment in specified bonds. The assessee filed an application on 24th May, 2011 before the CBDT to direct the Assessing Officer to consider the application u/s 154 and grant appropriate relief. The Board by an order dated 13th December, 2017 rejected the application. The writ petition challenging this order was dismissed by the Single Judge Bench of the Karnataka High Court mainly referring to clause 8 of the Board’s circular dated 9th June, 2015 which stated that the circular would cover all such applications and claims for condonation of delay u/s 119(2)(b) pending as on the date of issue of the circular.

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

“i)    The CBDT considered the application filed by the assessee u/s. 119(2)(b) on May 24, 2011 before issuance of the circular dated June 9, 2015 it would not have been rejected on the ground of delay, i. e., beyond the period of six years as specified in the Circular. No provisions of the Act and Rules prescribe the period of limitation for filing the application u/s. 119(2)(b) and it was only by virtue of such circular that the period of limitation of six years had been prescribed for the first time. Though the validity of the circular was not challenged directly by the assessee, that applicability of the circular was the main issue before the court and if the matter was perceived from the angle of delay caused in adjudicating the application filed on May 24, 2011 before the Circular dated June 9, 2015 came into force, the resultant effect would be different.

ii)    The assessee should not suffer where no default was committed by him in submitting the application u/s. 119(2)(b) on May 24, 2011, i.e., when there was no period of limitation prescribed. No application could be denied on technical grounds. The application was not disposed of within a reasonable period. The order in the writ petition was set aside and the matter was remanded to the Board for reconsideration of the application and to take an appropriate decision on the merits in accordance with law.”

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

41 Divesh Prakashchand Jain vs. Principal CIT
[2022] 445 ITR 496 (Bom.)
Date of order: 1st December, 2021
S.127(2) of ITA, 1961

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

40 Seema Jagdish Patil vs. National Hi-Speed Rail Corporation Ltd. and Ors
[2022] 445 ITR 382 (Bom.)
Date of order: 9th June, 2022
Ss. 139, 194-IC, 194L, 200(3) proviso, 200A(d) and 237 of ITA, 1961 and ss. 46, 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013

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

39 Muthukoya T. vs CIT
[2022] 445 ITR 450 (Ker.)
A.Ys.: 2007-08 to 2011-12
Date of order: 18th May, 2022
S. 131 of ITA, 1961

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

38 Mohammed Mustafa vs. ITO
[2022] 445 ITR 608 (Kar.)
A.Y.: 2016-17
Date of order: 18th April, 2022
Ss. 148 and 148A of ITA,1961

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

37 Mrs. Noorjahan and Ors. vs. Dy. CIT
[2022] 445 ITR 17 (Mad.)
A.Y.: 2017-18
Date of order: 26th April, 2022
Ss. 276C and 278E of ITA, 1961

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

36 West Palm Developments LLP vs. ACIT
[2022] 445 ITR 511 (Kar.)
A.Y.: 2009-10
Date of order: 19th November, 2021
S. 57(iii) of ITA, 1961

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

35 Principal CIT vs. Shelter Project Ltd.
[2022] 445 ITR 291 (Cal.)
A.Y.: 2009-10
Date of order: 4th February, 2022
S. 2(47) of ITA, 1961 and s. 53A of Transfer of Property Act, 1882

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.”

TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

34 Ingram Micro Inc. vs. ITO(IT)
[2022] 444 ITR 568 (Bom.)
Date of order: 26th February, 2022
S. 195 of ITA, 1961

TDS — Payment to non-resident — Assessee not person responsible for making payment to non-resident — No obligation to deduct tax at source

The assessee was a company incorporated in the USA and was engaged in the business of distribution of technology products. The assessee had worldwide operations. IMAHI, a company incorporated in the USA, and a subsidiary of the assessee, held indirectly a wholly owned subsidiary in India, IMIPL. In 2004, IMAHI acquired the shares of THL, a company incorporated in Bermuda, from its existing shareholders. The assessee’s role in this transaction was that it guaranteed the payment of the sale consideration by IMAHI under the share purchase agreement to the sellers, i.e., the existing shareholders of THL. The guarantee never came to be invoked because IMAHI discharged its obligation under the share purchase agreement to the sellers, and accordingly, the assessee stood discharged of its obligations as a guarantor under the share purchase agreement. The Assessing Officer initiated proceedings u/s 201 of the Income-tax Act, 1961 to treat the assessee as an assessee-in-default for failure to deduct tax on the payment for the purchase of shares of THL.

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

“i) Section 195 of the Income-tax Act, 1961, mandates “any person responsible for paying to a non-resident” any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, to deduct Income-tax thereon at the rates in force.

ii) The share purchase agreement showed that the assessee was the guarantor of the payment to be made by IMAHI and not the purchaser. The purchaser himself could not be the guarantor also and that itself indicated that the assessee was not the purchaser of the shares of THL. The Assessing Officer had also not produced any evidence or referred to any document to even indicate that the assessee had paid any amount or could be even regarded as the person responsible for paying any sum to a non-resident (or a foreign company) chargeable under the provisions of the Act.

iii) As section 195 is applicable only to a person who is responsible for paying to deduct tax at the time of credit to the account of the payee or at the time of payment and the assessee did not make any payment to THL, there was no obligation on the assessee to deduct tax at source. The notice u/s. 201 was not valid.”

Reassessment — Charitable purpose — Registration — Effect — Law applicable — Effect of amendment of s. 12A — Charitable institution entitled to exemption for assessment years prior to registration — Reassessment proceedings cannot be initiated on ground of non-registration

33 CIT(Exemption) vs.
Karnataka State Students Welfare Fund
[2022] 444 ITR 436 (Kar.)
A.Y.: 2012-13
Date of order: 30th November, 2021
S. 12A of ITA, 1961

Reassessment — Charitable purpose — Registration — Effect — Law applicable — Effect of amendment of s. 12A — Charitable institution entitled to exemption for assessment years prior to registration — Reassessment proceedings cannot be initiated on ground of non-registration

The assessee is a trust eligible for exemption u/s 11 of the Income-tax Act, 1961. For the A.Y. 2012-13, reassessment order u/s 143(3) r.w.s 148 of the Act came to be passed, whereby the Assessing Officer held that the assessee had not applied the income for charitable purposes as required u/s 11 and 12 from 2014-15 onwards (i.e., after 23rd September, 2014. A survey revealed that the assessee has accumulated huge income and was claiming exemption under the Act without obtaining registration u/s 12AA.

The Tribunal allowed the appeal and quashed the reassessment order holding that the same is bad in law for violating the second and third proviso to s.12A(2) of the Act.

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

“i) The provisions of section 12A of the Income-tax Act, 1961, before amendment by the Finance (No. 2) Act, 2014, provided that a trust or an institution can claim exemption under sections 11 and 12 only after registration u/s. 12AA of the Act has been granted. In case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organisations. Due to absence of registration, tax liability was fastened even though they may otherwise be eligible for exemption and fulfil other substantive conditions. However, the power of condonation of delay in seeking registration was not available.

ii) In order to provide relief to such trusts and remove hardship in genuine cases, section 12A of the Act was amended to provide that in a case where a trust or institution has been granted registration u/s. 12AA of the Act, the benefit of sections 11 and 12 of the Act shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted. Further, that no action for reopening of an assessment u/s. 147 of the Act shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not been obtained the registration u/s. 12AA for the said assessment year. However, these benefits would not be available in the case of any trust or institution which at any time had applied for registration and it was refused u/s. 12AA of the Act or a registration once granted was cancelled. This was the clarification regarding the amendment issued by the Central Board of Direct Taxes in Circular No. 1 of 2015 ([2015] 371 ITR (St.) 22).

iii) The only reason for reopening of the assessment was the absence of registration u/s. 12A of the Act. Further, the assessee had not filed return of income for the assessment year in question. A finding had been recorded on the facts of the case by the Tribunal on this aspect and the allegation that the assessee was claiming deductions u/s. 11 and 12 of the Act was held to be against the facts available on record. Hence the reassessment was not valid.”

Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

32 Kanubhai Dhirubhai Patel (legal representative of late Dhirubhai Sambhubhai) vs. ITO
[2022] 444 ITR 405 (Guj.)
A.Y.: 2015-16
Date of order: 14th February, 2022
Ss. 147, 148, 292B of ITA, 1961

Reassessment — Death of assessee — Notice of reassessment — Condition precedent for reassessment — Valid notice — Notice of reassessment issued in the name of a person who had died — Objection to notice by legal representative — Mistake in notice not curable by s. 292B — Notice not valid

The writ applicant is an individual assessee and the son of one Dhirubhai Shambhubhai Malviya (“the deceased”). The said Dhirubhai Shambhubhai Malviya expired on 22nd November, 2020. The Assessing Officer issued a notice dated 31st March, 2021 u/s 148 of the Income-tax Act, 1961, calling upon the deceased assessee to file a return of income for the A.Y. 2015-16. The writ applicant, being the son of the deceased assessee, filed a reply dated 10th April, 2021 specifically drawing the attention of the Assessing Officer about the death of the original assessee, and had further requested to drop the proceedings as such notice will have no legal sanctity in the eye of law. The writ applicant again submitted a reply dated 15th December, 2021 reiterating that the notice had been issued in the name of the deceased assessee, and requested that the proceedings be dropped. Despite the aforesaid fact being drawn to the attention of the respondent-authority, the Assessing Officer further issued a notice u/s 142(1) dated 17th December, 2021 again addressed to the deceased assessee.

In such circumstances, the writ applicant challenged the notice and the reassessment proceedings by filing a writ petition. The Gujarat High Court allowed the writ petition and held as under:

“i)    Section 292B of the Income-tax Act, 1961, inter alia, provides that no notice issued in pursuance of any of the provisions of the Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such notice if such notice, summons is in substance and effect in conformity with or according to the intent and purpose of the Act.

ii)    A notice u/s. 148 of the Act is a jurisdictional notice, and existence of a valid notice u/s. 148 is a condition precedent for exercise of jurisdiction by the Assessing Officer to assess or reassess u/s. 147 of the Act. The want of a valid notice affects the jurisdiction of the Assessing Officer to proceed with the assessment and thus, affects the validity of the proceedings for assessment or reassessment. A notice issued u/s. 148 of the Act against a dead person is invalid, unless the legal representative submits to the jurisdiction of the Assessing Officer without raising any objection. Therefore, where the legal representative does not waive his right to a notice u/s. 148 of the Act, it cannot be said that the notice issued against the dead person is in conformity with or according to the intent and purpose of the Act which requires issuance of notice to the assessee, whereupon the Assessing Officer assumes jurisdiction u/s. 147 of the Act and consequently, the provisions of section 292B of the Act would not be attracted. There is a distinction between clause (a) of sub-section (2) of section 159 and clause (b) of sub-section (2) of section 159 of the Act. Clause (b) of sub-section (2) of section 159 permits initiation of proceedings. Clause (b) of sub-section (2) of section 159 of the Act provides that any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative. A proceeding u/s. 147 of the Act for reopening the assessment is initiated by issuance of notice u/s. 148 of the Act, and as a necessary corollary, therefore, for taking a proceeding under that section against the legal representative, necessary notice u/s. 148 of the Act would be required to be issued to him. In view of the provisions of section 159(2)(b) of the Act, it is permissible for the Assessing Officer to issue a fresh notice u/s. 148 of the Act against the legal representative, provided that it is not barred by limitation, he, however, cannot continue the proceedings on the basis of an invalid notice issued u/s. 148 of the Act to the assessee who is dead.

iii)    The petitioner had not surrendered to the jurisdiction of the Assessing Officer by submitting a return in response to the notices nor had the jurisdictional Assessing Officer issued notice upon the petitioner as legal representative representing the estate of the deceased assessee. The notice of reassessment was not valid.”

Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

31 CIT(Exemption) vs. Om Prakash Jindal Gramin Jan Kalyan Sansthan
[2022] 444 ITR 498 (Del)
A.Y.: 2010-11
Date of order: 26th April, 2022
S. 11(1)(d) of ITA, 1961

Charitable purpose — Exemption u/s 11 — Voluntary contributions towards corpus fund used for purchase of land — Allowable as application of income to charitable purpose

After the transfer of the corpus fund of Rs. 19 crores to general reserves, the assessee-trust purchased land worth Rs. 5,27,45,958 and donated Rs. 13.4 crores to another trust. The Assessing Officer made an addition of Rs. 19 crores as additional income.

The Commissioner (Appeals) set aside the addition on the ground that exemption on corpus donation was allowable for the purchase of land, as it was a purchase of a capital asset. The Tribunal affirmed the order of the Commissioner (Appeals) allowing utilisation of corpus fund of Rs. 19 crores as application of income u/s 11(1)(d) of the Income-tax Act, 1961.

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

“i) There was no ground of appeal either before the Tribunal or before the court challenging the concurrent finding of the Commissioner (Appeals) and the Tribunal that the substance of the transaction was that the corpus fund had been utilised for the purchase of a capital asset.

ii) The court was in agreement with the findings of the Commissioner (Appeals) and the Tribunal that the substance of the transaction must prevail over the form and, if required, the Department must examine the nature of the transaction. No question of law arose.”

(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid
(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

30 Dinesh Vazirani vs. Principal CIT
[2022] 445 ITR 110 (Bom.)
A.Y.: 2011-12
Date of order: 8th April, 2022
Ss. 45, 48, 240 and 264 of ITA, 1961

(A) Capital gains — Full value of consideration — Deductions — Consideration on sale of shares including sum held in escrow account offered to tax — Assessee receiving reduced sum from escrow account after completion of assessment — Whole amount credited in book not taxable as capital gains — Only actual amount received taxable — Assessee entitled to refund of excess tax paid

(B) Revision — Powers of Commissioner — Application by assessee for revision of order — Power of Principal Commissioner not restricted to allowing relief only up to returned income — Recomputation of income can be directed irrespective of whether recomputation results in income less than returned income — S. 240 not applicable to assessee

For the A.Y. 2011-12, the assessee computed the capital gains on the sale of shares considering the proportion of the total consideration, which included the escrow amount which had not been received by the time returns were filed but were received by the promoters but were still parked in the escrow account. The income declared by the assessee was accepted in the scrutiny assessment. The assessee stated that subsequent to the sale of the shares, certain statutory and other liabilities arose for the period prior to the sale of the shares, and according to the agreement, a certain amount was withdrawn from the escrow account, and it did not receive the amount. The assessee filed an application u/s 264 before the Principal Commissioner and submitted that the capital gains were to be recomputed accordingly, reducing the proportionate amount from the amount deducted from the escrow account and that an application u/s 264 was filed since the assessment had been completed by the time the amount was deducted from the escrow account. The Principal Commissioner rejected the assessee’s application.

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

“i)    Section 264 of the Income-tax Act, 1961 does not restrict the scope of powers of the Principal Commissioner to restrict relief to an assessee only to the returned income. Where the income can be said not to have resulted at all, there is neither accrual nor receipt of income even though an entry might, in certain circumstances, have been made in the books of account.

ii)    It is the obligation of the Department to tax an assessee on the income chargeable to tax under the Act but if higher income is offered to tax, it is the duty of the Department to compute the correct income and grant the refund of taxes erroneously paid by the assessee. There is no provision in the Act which provides, if the assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to the assessee. If the returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to refund of excess tax paid by it.

iii)    Capital gains was computed u/s. 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. The real income (capital gains) could be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. The amount was neither received nor accrued since it was transferred directly to the escrow account and was withdrawn from the escrow account.

iv)    When the amount had not been received or accrued it could not be taken as full value of consideration in computing the capital gains from the transfer of the shares of the assessee. The purchase price as defined in the agreement was not an absolute amount as it was subject to certain liabilities which might have arisen on account of certain subsequent events. The full value of consideration for computing capital gains would be the amount which was ultimately received after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement. The liability as contemplated in the agreement should be taken into account to determine the full value of consideration. Therefore, if the sale consideration specified in the agreement was along with certain liability, then the full value of consideration for the purpose of computing capital gains under section 48 of the Act was the consideration specified in the agreement as reduced by the liability. The full value of consideration u/s. 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, it ought to be taken into consideration in determining the capital gains chargeable u/s. 45. Such reduced amount should be taken as the full value of consideration for computing the capital gains u/s. 48.

v)    If income did not result at all, there could not be a tax, even though in book keeping, an entry was made about hypothetical income which did not materialize. Therefore, the Principal Commissioner ought to have directed the Assessing Officer to recompute the assessee’s income irrespective of whether the computation would result in income being less than the returned income.

vi)    Reliance by the Principal Commissioner on the provisions of section 240 to hold that he had no power to reduce the returned income was erroneous because the circumstances provided in the proviso to section 240 did not exist. The proviso to section 240 only provides that in case of annulment of assessment, refund of tax paid by the assessee according to the return of income could not be granted to the assessee. The only thing that was sacrosanct was that an assessee was liable to pay only such amount which was legally due under the Act and nothing more. Therefore, the assessee was entitled to refund of excess tax paid on the excess capital gains.”

Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

29 Enviro Control Pvt. Ltd. vs. NEAC
[2022] 445 ITR 119 (Guj)
A.Y.: 2018-19
Date of order: 29th March, 2022
S. 144B of ITA, 1961

Assessment — Draft assessment order — Procedure u/s 144B — Mandatory — Failure to issue draft assessment order — Final assessment order not valid

For the A.Y. 2018-19, the assessee had furnished all necessary details, including the details pertaining to the quantification of the claim to deduction u/s 80-IA of the Income-tax Act, 1961, in response to the notices u/s 142(1). Thereafter, without issuing any further or specific show-cause notice or draft assessment order, the National e-Assessment Centre passed the assessment order u/s 143(3) r.w.s. 144B.

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

“i) Section 144B of the Income-tax Act, 1961 lays down a procedure for assessment under the Faceless Assessment Scheme and needs to be scrupulously followed. If any action is in disregard of the statutory provisions it is open to the court to overrule the objection of alternative remedy available to the assessee.

ii) It was not just a question of giving an opportunity of hearing and for that purpose, the assessee should have the draft assessment order in his hands but, with the introduction of section 144B , a procedure had been laid down which needed to be scrupulously followed. The assessment order was quashed and set aside.

iii) The matter was remitted to the National e-Assessment Centre to undertake proceedings in accordance with the provisions of section 144B, to issue a fresh notice-cum-draft assessment order for the assessee to respond to and afford an opportunity of hearing to the assessee in accordance with the procedure as prescribed u/s. 144B.”

TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

28 Celestial Aviation Trading 64 Ltd vs. ITO(International Taxation) [2022] 443 ITR 441 (Del) A. Y.: 2021-22 Date of order: 12th November, 2021 S. 197 of ITA 1961: R. 28AA of IT Rules, 1962: Arts. 8 and 12 of DTAA between India and Ireland

TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

The assessee was a tax resident of Ireland and was in the business of aircraft leasing. On 21st October, 2016, the assessee entered into an agreement with a company AIL for lease of an aircraft for a period of 12 years. For the F.Ys. 2016-17 to 2020-21, the assessee made applications u/s. 197 of the Income-tax Act, 1961 for “nil” rate of withholding tax in respect of the lease rentals on the ground that under articles 8 and 12 of the DTAA between India and Ireland they were liable to pay tax only in Ireland. The Assessing Officer allowed the assessee to receive considerations from AIL without any tax deducted at source. For the F.Y. 2021-22, the assessee filed an application before the Income-tax Officer (International Taxation) requesting for issuance of “nil” withholding tax certificate or order in respect of the estimated consideration receivable from AIL under the agreement on a similar basis as before. However, the ITO issued an order prescribing 10 per cent as the withholding tax rate.

The assessee filed a writ petition and challenged the order. The Delhi High Court allowed the writ petition and held as under:

“i) The aspects which the Assessing Officer was obliged to take into consideration, while considering an application u/s. 197 had not been adverted to. The reasons proceeded only on the basis of any liability of another company IGL in the group on which survey was carried out and which was alleged to have evaded tax which might or might not be fastened upon the assessee. That by itself could not be a justification for denying the “nil” rate certificates to the assessee. The order was unsustainable and accordingly, quashed and set aside. The matter was remanded back to the Assessing Officer.

ii) In the interim period, the assessee was entitled to avail of the “nil” rate of withholding tax, as had been the position in the past several years consistently. Since the aircraft in question was leased to AIL for a period of 12 years, the interests of the Revenue was sufficiently protected in any eventuality of the assessee being found liable to payment of taxes, interest or penalty.”

Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

27 KLJ Organic Ltd vs. CIT (IT) [2022] 444 ITR 62 (Del) A.Y.: 2018-19 Date of order: 18th February, 2022 Ss. 248 and 264 of ITA 1961 and S. 14 of Limitation Act, 1963

Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

For the A.Y. 2018-19, the Commissioner (International Taxation) rejected the revision petition filed by the assessee under section 264 of the Income-tax Act, 1961 due to the delay in filing the petition.

The assessee filed a writ petition submitting that under a bona fide mistake of law and relying on the earlier orders passed by the Income-tax Officer and the Commissioner (Appeals) in its favour on the similar issue, it had filed and pursued an appeal u/s. 248 under the belief that the order was appealable and hence the delay.

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

“If the time spent by the assessee in prosecuting the appeal u/s. 248 was excluded, the revision petition filed u/s. 264 would be within the limitation period. On the facts section 14 of the Limitation Act, 1963, was attracted and the assessee was entitled to exclusion of time spent in prosecuting the proceeding bona fide in a court without jurisdiction. The matter was remanded to the Commissioner (International Transactions) to decide on the merits.”

Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

26 Sea Sagar Construction Co. vs. ITO [2022] 444 ITR 385 (Bom) A.Ys.: 2001-02 to 2003-04 Date of order: 6th May, 2022 Ss. 147, 148, 149 and 150 of ITA, 1961

Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

The assessee was in the construction business. The contractor from whom the assessee took over two projects followed the completed contract method of accounting. The Assessing Officer was of the view that a part of the income from the project should be assessed to tax based on the percentage completion method and reopened the assessments for the A.Ys. 2001-02, 2002-03 and 2003-04 u/s. 147 of the Income-tax Act, 1961 by issue of notice u/s. 148 dated 19th January, 2012. The objections filed by the assessee were rejected.

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

“i) There was no specific finding that income chargeable to tax had escaped assessment for the A.Ys. 2001-02, 2002-03 and 2003-04 nor was there a direction to the Assessing Officer to initiate reassessment proceedings u/s. 147 by issuing notices u/s. 148. On the contrary, the Tribunal had recorded specific findings that following the project completion method the assessee had offered income in respect of the project in the A.Y. 2003-04 which had been accepted by the Department. Once income was taxed in the A.Y. 2003-04 on the completion of the project, there could not be any question of taxing the same amount in the earlier years by applying a particular percentage on the amount of work-in-progress shown in the balance-sheet. Even assuming that the observations of the Tribunal could be stated to be a finding or a direction u/s. 150, still in view of the proviso to section 147, the reopening was not valid.

ii) From the observations of the Tribunal in its order there was some confusion with respect to whether the project completed in the A.Y. 2003-04 was the same project which was shown as work-in-progress in the A.Y. 2000-01 and thereafter, restoring the matter to the Assessing Officer for the limited purpose of ascertaining whether the two projects referred to in the assessment order of the A.Y. 2000-01 were part of the project completed in the A.Y. 2003-04 and offered for taxation in that year. This could not be stated to be either a finding or a direction as contemplated u/s. 150.

iii) There was nothing in the reasons recorded for reopening of the assessments to indicate that there was any escapement of income due to failure on the part of the assessee to truly and fully disclose material facts. Even otherwise after the order of the Tribunal was passed in the first round of litigation the Assessing Officer had passed a fresh assessment order making certain additions. An appeal was filed against the such order, which had been allowed during the pendency of these petitions. The Commissioner (Appeals) had held that considering the purpose for which the matter had been remanded by the Tribunal to the Assessing Officer, and the assessee’s explanation to the confusion in figures over which the matter was set aside and also the assessee’s proving the fact that there was no other project under work-in-progress in any of these assessment years except assignment of the development of sale to the societies, there was no justification in going beyond the directions of the Tribunal. The Tribunal had held that the Department had failed to bring on record any cogent incriminating material to controvert the contention of the assesse and had confirmed the order of the Commissioner (Appeals).

iv) Therefore, on the facts and circumstances, the notices issued u/s. 148 for the A.Ys. years 2001-02, 2002-03 and 2003-04 and the orders rejecting the objections raised by the assessee were unsustainable and hence quashed.”

Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

25 Daujee Abhushan Bhandar Pvt. Ltd vs. UOI [2022] 444 ITR 41 (All) A. Y.: 2013-14 Date of order: 10th March, 2022 Ss. 148, 149, 282 and 282A of ITA, 1961

Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

The petitioner is a regular assessee. For the A.Y. 2013-14, the assessment was completed. Subsequently, the assessment was sought to be reopened. For this purpose, a notice under section 148 of the Income-tax Act, 1961 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was received by the petitioner on his registered e-mail id on 6th April, 2021. The petitioner filed objections before the assessing authority. One of the objections raised by the petitioner was that the notice is time-barred and thus without jurisdiction as it was issued on 6th April, 2021 whereas the limitation for issuing notice under Section 148 read with Section 149 of the Act, 1961 expired on 31st March, 2021. The objection was rejected by the assessing authority holding that since the notice was digitally signed on 31st March, 2021, therefore, it shall be deemed to have been issued within time, i.e., on 31st March, 2021.

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

“i) Sub-section (1) of section 149 of the Income-tax Act, 1961, starts with a prohibitory words that “no notice u/s. 148 shall be issued for the relevant assessment year after expiry of the period as provided in sub-clauses (a), (b) and (c)”, section 282 of the Act provides for mode of service of notices. Section 282A provides for authentication of notices and other documents by signing it. Sub-section (1) of section 282A uses the word “signed” and “issued in paper form” or “communicated in electronic form by that authority in accordance with such procedure as may be prescribed”. Thus, signing of notice and issuance or communication thereof have been recognised as different acts. The issuance of notice and other documents would take place when the e-mail is issued from the designated e-mail address of the concerned Income-tax authority. Therefore after a notice is digitally signed and when it is entered by the Income-tax authority in the computer resource outside his control, i.e., the control of the originator then that point of time would be the time of issuance of notice.

ii) Thus, considering the provisions of sections 282 and 282A of the Act, 1961 and the provisions of section 13 of the Information Technology Act, 2000 and the meaning of the word “issue” firstly the notice shall be signed by the assessing authority and then it has to be issued either in paper form or be communicated in electronic form by delivering or transmitting the copy thereof to the person therein named by the modes provided in section 282 which includes transmitting in the form of electronic record. Section 13(1) of the 2000 Act provides that unless otherwise agreed, the dispatch of an electronic record occurs when it enters into computer resources outside the control of the originator. Thus, the point of time when a digitally signed notice in the form of electronic record is entered in computer resources outside the control of the originator, i. e., the assessing authority that shall be the date and time of issuance of notice u/s. 148 read with section 149.

iii) The notice u/s. 148 of the Act for the A.Y. 2013-14 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was undisputedly received by the assessee on its registered e-mail id on 6th April, 2021. The limitation for issuing notice u/s. 148 read with section 149 of the Act, 1961 was up to 31st March, 2021 for the A.Y. 2013-14. Since, the notice u/s. 148 of the Act, 1961 was issued to the assessee on April 6, 2021 the notice u/s. 148 of the Act, 1961 was time barred. Consequently, the impugned notice is quashed.”

Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

24 Inland Builders Pvt. Ltd vs. Dy. CIT [2022] 443 ITR 270 (Mad) A.Y.: 2014-15 Date of order: 25th August, 2021 Ss. 276C(2) and 276CC of ITA, 1961

Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

A complaint was filed against the assessee under section 276CC and 276C(2) of the Income-tax Act, 1961 on 5th October, 2017 on the ground that the assessee’s return for the A.Y. 2014-15 was defective for non-payment of self-assessment tax under section 140A before furnishing the return of income. The assessee submitted that the entire dues were paid with interest and furnished the details of payments. The final payment was made on 19th March, 2018.

The assessee filed a criminal writ petition for quashing the criminal proceedings and pointed out the entire tax dues have been paid with interest. The Madras High court allowed the petition and held as under:

“The offences alleged were only technical offences and there was no material to show that there was any deliberate and conscious evasion of tax on the part of the assessee. It had paid the entire amount of tax with interest and this was confirmed by the Deputy Commissioner. Therefore, the criminal proceedings were quashed.”

Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

23 CIT(Exemption) vs. Hamdard National Foundation (India) [2022] 443 ITR 348 (Del) A.Ys.: 2007-08 to 2010-11 Date of order: 16th February, 2022 Ss. 11, 12, 13(2)(b) and 13(3) of ITA, 1961

Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

For the A.Y. 2007-08, the AO felt that the assessee had offered substantial concession in rent to the wakf and had let out two properties at a much lower rate as compared to the market rate in lieu of voluntary and corpus donations and therefore, invoked Section 13(2)(b) and Section 13(3) of the Income-tax Act, 1961 and denied exemption under section 11 and 12.

The Commissioner (Appeals) allowed the appeals of the assessee for the A.Ys. 2008-09 and 2010-11 but rejected the appeal for the assessment year 2009-10. For all the assessment years the Tribunal held that there was no justification for invoking the provisions of Section 13(2)(b) read with Section 13(3) by the Assessing Officer and allowed the assessee’s appeals.

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

“i) Though strictly speaking res judicata does not apply to Income-tax proceedings as each assessment year is a separate unit, in the absence of any material change justifying the Department to take a different view of the matter, the position of fact accepted by the Department over a period of time should not be allowed to be reopened unless the Department is able to establish compelling reasons for a departure from the settled position.

ii) U/s. 13(2)(b) of the Income-tax Act, 1961 the burden of showing that the consideration or rent charged by the assessee was not “adequate” is on the Department. Unless the price or rent was such as to shock the conscience of the court and to hold that it cannot be the reasonable consideration at all, it would not be possible to hold that the transaction is otherwise bereft of adequate consideration. It is necessary for the Assessing Officer to show that the property has been made available for the use of any person referred to in sub-section (3) of section 13 otherwise than for adequate consideration. In order to determine the consideration or rent, the context of the facts of the particular case need to be appreciated. For determining adequate consideration or rent, however, market rent or rate is not the sole yardstick but other circumstances also need to be considered.

iii) There was no perversity in the findings of the Tribunal that the Department had failed to bring on record any cogent evidence to show that the rent received by the assessee, in the facts of the case, was inadequate, that the material collected from the internet and the estate agents could not be termed as a corroborative piece of evidence and that the rent received by the assessee had exceeded the valuation adopted by the Municipal Corporation for the purpose of levying house tax.

iv) The contention of the Department that the Tribunal had failed to disclose the basis on which it arrived at the quantum of the standard rent could not be accepted in the absence of any determination to the contrary being even pleaded by the Department. Security deposit may be one of the factors to be taken into consideration by the Assessing Officer for coming to a conclusion if the rent was “adequate”, but it cannot be a sole determinative factor. The Assessing Officer except for relying upon the opinion as to rent from property broker firms and websites had not made any independent inquiry on the adequacy of the rent being charged by the assessee from the wakf and on the age and condition of the building of the assessee. It was not denied by the Department that the other property was not even ready during the A.Y. 2008-09 and was lying vacant. In the absence of any such inquiry by the Assessing Officer, the invocation of section 13(2)(b) was rightly rejected by the Tribunal. No question of law arose.

v) The Tribunal while considering appeals for various assessment years had concurred with the view taken by the Commissioner (Appeals) for the A.Y. 2008-09 and had placed reliance on that order taking reasoning therefrom. Therefore, the Tribunal had not erred in adopting the approach while considering the appeal for the A.Y. 2007-08.”

Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

22 Creative Museum Designers vs. ITO(Exemption) [2022] 443 ITR 173 (Cal) A.Ys.: 2013-14 to 2015-16  Date of order: 10th February, 2022 Ss. 2(15) and 11 of ITA, 1961

Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

The assessee was a company registered under section 25 of the Companies Act, 1956 and was formed by the National Council of Science Museum, Ministry of Culture, GOI. The Council was formed by the Government of India for the dissemination of science and development of scientific temperament to the public and to ensure development of society and the country as well. The council established the assessee-company under section 25 of the Companies Act, 1956 whose very nature was charitable and its purpose is dissemination of knowledge to the Indian society. The assessee was engaged in the design and development of knowledge centres like science museums, planetariums, and other knowledge dissemination centres. The Reserve Bank of India proposed to establish a museum and financial literary centre in Kolkata to explain the development of the monetary system and to exhibit its collection of “artefacts’. There was a similar project conceived by the Surat Municipal Corporation. The RBI museums and financial literacy centre, were completed by the assessee with state-of-the-art facilities interactive galleries, trained professionals and handed over to the Reserve Bank of India on 17th September, 2018. On similar lines, Surat Municipal Corporation had awarded the task of establishing five galleries on textiles, astronomy, space, polar science and children learning activities, to educate the general public about the history of the development of textiles, study of astronomy through the ages, understanding space travel, understanding Earth’s poles and children’s interactive gallery. The assessee completed the project and handed it over to the Surat Municipal Corporation which threw it open to the public.

For the A.Ys. 2013-14, 2014-15, and 2015-16 the assessee claimed exemption under section 11 of the Income-tax Act, 1961 on the surplus which had been generated from these activities. The exemption was denied by the Assessing Officer, Commissioner (Appeals) and the Tribunal.

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

“i) The term “education” occurring of section 2(15) of the Income-tax Act, 1961, cannot be restricted to formal school or college education. The dissemination of knowledge through a museum or science park would undoubtedly fall within the meaning of “education”. Museums function as places for conservation research, education and entertainment for the general public. Thus, indisputably a museum is a place of informal and free choice education and learning. Museums offer educational experience in diverse fields, to be cherished and enjoyed. To reduce a “Master” curator to a contractor, is to belittle their role in preserving heritage. A museum is not constructed but conceived and developed. The object behind establishing a science centre is undoubtedly in public interest to educate the general public in an easy and attractive manner. To develop in young minds a love towards science, history, astronomy and various subjects also to educate the general public who might not have had formal education owing to circumstances beyond their control. To conceptualise a museum is a serious matter.

ii) The assessee had disseminated knowledge in the process of establishing the facilities for the RBI and the Surat Municipal Corporation. The assessee was a not-for-profit organisation but public utility company and the activities of the company for which it had been established would undoubtedly show that the company by establishing knowledge parks, engaged in imparting education and also undertook advancement of other aspects of general public utility to fall within the definition of charitable purpose as defined u/s. 2(15). The assessee was entitled to exemption u/s. 11.”

Revision — Powers of Commissioner u/s 264 — Commissioner can give relief to an assessee who has committed mistake

21 Hapag Lloyd India Pvt. Ltd vs. Principal CIT [2022] 443 ITR 168 (Bom.) A. Y.: 2016-17  Date of order: 9th February, 2022 S. 264 of ITA, 1961

Revision — Powers of Commissioner u/s 264 — Commissioner can give relief to an assessee who has committed mistake

The petitioner is a private limited company. The assessee was entitled to the benefit of article 10 of the India – Kuwait Double Taxation Avoidance Agreement. However, for the A.Y. 2016-17, the assessee, by mistake, did not claim the said benefit both in the original return and the revised return. After passing of the assessment order u/s 143(3), the assessee realized the mistake and found that the assessee had paid an excess tax of Rs.84,61,650. The assessee, therefore, made an application to the Principal Commissioner of Income Tax u/s 264 requesting to revise the assessment order, correct the mistake and direct the Assessing Officer to grant a refund of the said amount of Rs.84,61,650.

The Principal Commissioner of Income Tax rejected the application, holding it to be untenable primarily on the ground that the assessee had not claimed at the time of filing the original return of income and the revised return of income. The Principal Commissioner held that there was no apparent error on the record in the said assessment order, which warranted exercise of jurisdiction u/s 264.

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

“i) Section 264 of the Income-tax Act, 1961, does not limit the power of the Commissioner to correct errors committed by the sub-ordinate authorities and can even be exercised where errors are committed by the assessee. There is nothing in section 264 which places any restriction on the Commissioner’s revisional power to give relief to the assessee in a case where the assessee detects mistakes after the assessment is completed.

ii) The very foundation of the application u/s. 264 was that the assessee had inadvertently failed to claim the benefit of article 10 of the Double Taxation Avoidance Agreement between India and Kuwait, under which the dividend distribution was taxed at a lower rate. The Commissioner had the power to consider the claim u/s. 264. The rejection of the application for revision was not valid.

iii) The impugned order dated 31st March, 2021 stands quashed and set aside. The revision application stands restored to the file of respondent No. 1 and remitted back for de novo consideration.”

Revision — Powers of Commissioner u/s 263 — Declaration under Income Declaration Scheme, 2016 — Declaration accepted and consequent assessment — Such assessment cannot be set aside in proceedings u/s 263

20 Principal CIT vs. Manju Osatwal [2022] 443 ITR 107 (Cal.) A. Y.: 2014-15  Date of order: 11th February, 2022 S. 263 of ITA, 1961 and Income Declaration Scheme, 2016

Revision — Powers of Commissioner u/s 263 — Declaration under Income Declaration Scheme, 2016 — Declaration accepted and consequent assessment — Such assessment cannot be set aside in proceedings u/s 263

The assessee is an individual. For the A.Y. 2014-15, the assessment was completed u/s 143(3) of the Income-tax Act, 1961 by an order dated 6th May, 2016. After the assessment was completed, the assessee availed of the benefit of the Income Declaration Scheme, 2016 (IDS). The Principal Commissioner accepted the declaration.

Thereafter, the Principal Commissioner invoked the provisions of section 263 and passed an order revising the assessment order. The Tribunal quashed the revision order holding it to be without jurisdiction.

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

“i) The Income Declaration Scheme, 2016 was introduced by Chapter IX of the Finance Act, 2016 ([2016] 384 ITR (St.) 1). Chapter IX of the Finance Act, 2016 is a complete code by itself. It provides an opportunity to an assessee to offer income, which was not disclosed earlier, to tax. Chapter IX provides for a special procedure for disclosure and charging income to tax. It lays down the procedure for disclosure of such income ; the rate of Income-tax and the penalty to be levied thereupon and the manner of making such payment. Under the Scheme the competent authority has been vested with the power to accept the declaration made by the assessee and such power to be exercised only upon being satisfied with such disclosure. It is also open to such authority not to accept such declaration. But once accepted, it attains finality. The scheme does not empower or authorise the competent authority to reopen or revise a decision taken on such declaration. It is well settled that a statutory authority has to function within the limits of the jurisdiction vested with him under the statute. Thus, once the declaration is accepted by the Principal Commissioner such authority is estopped from taking any steps which would in effect amount to reopening or revising the decision already taken on such declaration.

ii) The Principal Commissioner had invoked his power u/s. 263 in respect of an item of income which was declared in terms of the Scheme. All particulars were available before the Principal Commissioner in respect of such income and the Principal Commissioner upon being satisfied, had accepted such declaration. All materials were available before the Principal Commissioner when the declaration made u/s. 183 of the Finance Act, 2016 were considered and accepted. Therefore, the assumption of jurisdiction by the Principal Commissioner u/s. 263 of the Act was wholly without jurisdiction.”

Recovery of tax:— (i) Provisional attachment of property — Effect of s. 281B — Power of provisional attachment must not be exercised in an arbitrary manner — Revenue must prove that an order of provisional attachment was justified — Recovery proceedings against assignee of partner’s share in firm — Provisional attachment of property of firm — Not valid; (ii) Firm — Assignment of share of partner to third person — Difference between assignment of share and formation of sub-partnership — Recovery proceedings against assignee — Provisional attachment of property of firm — Not valid

19 Raghunandan Enterprise vs. ACIT [2022] 442 ITR 460 (Guj.) A.Ys.: 2014-15 to 2019-20  Date of order: 7th February, 2022 S. 281B of ITA, 1961

Recovery of tax:— (i) Provisional attachment of property — Effect of s. 281B — Power of provisional attachment must not be exercised in an arbitrary manner — Revenue must prove that an order of provisional attachment was justified — Recovery proceedings against assignee of partner’s share in firm — Provisional attachment of property of firm — Not valid; (ii) Firm — Assignment of share of partner to third person — Difference between assignment of share and formation of sub-partnership — Recovery proceedings against assignee — Provisional attachment of property of firm — Not valid

In proceedings against an individual AS, to whom one of the partners of the assessee-firm had assigned part of her interest in the firm, property standing in the name of the assessee-firm was provisionally attached on the ground that AS had paid cash consideration to the partner and thereby, derived 2.5 per cent share in the profit from the partner.

On a writ petition to quash the order of provisional attachment, the Gujarat High Court held as under:

“i) A plain reading of section 281B of the Income-tax Act, 1961 would make it clear that it provides for provisional attachment of property belonging to the assessee for a period of six months from the date of such attachment unless extended, but excluding the period of stay of assessment proceedings, if any. These are drastic powers permitting the Assessing Officer to attach any property of an assessee even before the completion of assessment or reassessment. These powers are thus in the nature of attachment before judgment. They have provisional applicability and in terms of sub-section (2) of section 281B of the Act, a limited life. Such powers must, therefore, be exercised in appropriate cases for proper reasons. Such powers cannot be exercised merely by repeating the phraseology used in the section and recording the opinion of the officer passing such order that he was satisfied for the purpose of protecting the interests of the Revenue, it was necessary so to do.

ii) The plain language of the provisions of section 281B is plain and simple. It provides for the attachment of the property of the assessee only and of no one else.

iii) A fine distinction was drawn by the Supreme Court in the case of Sunil J. Kinariwala [2003] 259 ITR 10 (SC) between a case where a partner of a firm assigns his or her share in favour of a third person and a case where a partner constitutes a sub-partnership with his or her share in the main partnership. Whereas in the former case, in view of section 29(1) of the Partnership Act, the assignee gets no right or interest in the main partnership except to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm, in the latter case, the sub-partnership acquires a special interest in the main partnership.

iv) The case on hand indisputably was not one of a sub-partnership though in view of section 29(1) of the Partnership Act, AS as an assignee may become entitled to receive the assigned share in the profits from the firm, not as a sub-partner because no sub-partnership came into existence, but as an assignee to the share of profit of the assignor-partner. The subject land not being the property of AS, was not open to provisional attachment. Even if the Department’s case that there was some interest of AS involved in the land in question, that would not make the subject land of the ownership of AS. The provisional attachment of the subject land u/s. 281B of the Act at the instance of the Revenue was not sustainable in law.

v) For all the forgoing reasons, this writ-application succeeds and is hereby allowed. The impugned order of provisional attachment dated 29th May, 2021 to the extent it includes the subject land, is hereby quashed and set aside. If on the basis of the provisional attachment order, any entries have been mutated in the revenue records, the same shall now also stand corrected.”

Reassessment — Notice u/s 148:— (i) Duty of AO — Consideration of assessee’s objections to reopening of assessment is not mechanical ritual but quasi-judicial function — Order disposing of objections should deal with each objection and give proper reasons for conclusions — AO is bound to provide documents requested by assessee — Matter remanded to AO; (i) Recording of reasons — Reasons recorded furnished to assessee containing omission and was not actual reasons submitted to competent authority for approval — Matter remanded to AO with directions

18 Tata Capital Financial Services Ltd vs. ACIT [2022] 443 ITR 127 (Bom.) A.Y.: 2013-14  Date of order: 15th February, 2022 Ss. 147, 148 and 151(1) of ITA, 1961

Reassessment — Notice u/s 148:— (i) Duty of AO — Consideration of assessee’s objections to reopening of assessment is not mechanical ritual but quasi-judicial function — Order disposing of objections should deal with each objection and give proper reasons for conclusions — AO is bound to provide documents requested by assessee — Matter remanded to AO; (i) Recording of reasons — Reasons recorded furnished to assessee containing omission and was not actual reasons submitted to competent authority for approval — Matter remanded to AO with directions

The assessee was a non-banking financial company. In compliance with clause 3(2) of the Reserve Bank of India Act, 1934, the assessee recognised the income from non-performing assets only when it was realized and did not offer it to tax on an accrual basis but on actual receipt basis. For the A.Y. 2013-14, the assessee received a notice u/s 148 of the Income-tax Act, 1961 stating that there were reasons to believe that income chargeable to tax for the assessment year had escaped assessment within the meaning of section 147. The assessee filed its objections. Thereafter, the assessee was furnished the reasons recorded for reopening the assessment. In its objections to the reopening, the assessee also requested the Assessing Officer to provide photocopies of documents evidencing the request sent by the Assessing Officer to the competent authority for obtaining approval u/s 151(1) and documents evidencing the approval. The Assessing Officer rejected the objections raised by the assessee without referring to any of the objections raised or judgments cited by the assessee.

The assessee filed a writ petition and challenged the notice and the reopening. The Bombay High Court allowed the writ petition and held as under:

“i) The exercise of considering the assessee’s objections to the reopening of an assessment u/s. 147 of the Income-tax Act, 1961 is not a mechanical ritual but a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. The Assessing Officer is duty bound to provide all the documents requested by the assessee and his reluctance to provide those documents only would make the court draw adverse inference against the department.

ii) The Assessing Officer was duty bound to deal with all the submissions made by the assessee in its objections raised for reopening of the assessment u/s. 147 and not just brush aside uncomfortable objections. The Assessing Officer instead of providing the requested documents had dismissed the assessee’s request stating that it was an administrative matter and all correspondence had been made through the system. There was omission in reasons recorded furnished to the assessee and these were not the actual reasons submitted to the competent authority for approval u/s. 151 to issue notice u/s. 148.

iii) The order rejecting the assessee’s objections for reopening the assessment was quashed and set aside. The matter was remanded for de novo consideration. The Assessing Officer was directed to grant a personal hearing to the assessee and provide the assessee with a list of judgments and orders of the court or Tribunal relied on by him to enable the assessee to deal with or distinguish those judgments or orders in the personal hearing. The court also directed that the Assessing Officer should also consider all the earlier submissions of the assessee while considering the assessee’s objections and give proper reasons for his conclusion.”

Period of limitation — Legislative powers — Delegated legislation — CBDT — Reassessment — Notice u/s 148 — Limitation — Extension of period of limitation to period beyond 31-3-2021 — Explanations by notifications traversing beyond parent Act — Extension of period of limitation through notifications not valid — Notices issued barred by limitation

17 Tata Communications Transformation Services Ltd. vs. ACIT [2022] 443 ITR 49 (Bom.) Date of order: 29th March, 2022 Ss. 147 and 151 of ITA, 1961

Period of limitation — Legislative powers — Delegated legislation — CBDT — Reassessment — Notice u/s 148 — Limitation — Extension of period of limitation to period beyond 31-3-2021 — Explanations by notifications traversing beyond parent Act — Extension of period of limitation through notifications not valid — Notices issued barred by limitation

A bunch of writ petitions filed by various assessees to challenge the initiation of reassessment proceedings u/s 147 of the Income-tax Act, 1961 by issuing notices u/s 148 for different assessment years were taken up by the Bombay High Court for hearing together as the issues were common. All notices in these petitions were issued after 1st April, 2021; however, under the Act’s provisions, as it existed before 1st April, 2021. The High Court held as under:

“i) U/s. 147 as amended by the Finance Act, 2021 the new period of limitation provided is three years unless the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount Rs. 50 lakhs or more in which case, the limitation period for issuing notice u/s. 148 would be ten years from the end of the relevant assessment year.

ii) The Notes on Clauses to the Finance Bill, 2021 clearly at every stage provide that the Bill proposes to substitute the existing provisions of 148 of the Income-tax Act, 1961. The original provisions upon their substitution stood repealed for all purposes and had no existence after introduction of the substituting provisions. Section 6 of the General Clauses Act, 1897 provides, inter alia, that where the State Act or Central Act or regulation repeals any enactment then unless a different intention appears, repeal shall not revive anything not in force or existing at the time at which the repeal takes effect or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder. Under the circumstances after substitution unless there is any intention discernible in the scheme of the statute either pre-existing or newly introduced, the substituted provisions would not survive.

iii) The concept of income chargeable to tax escaping assessment on account of failure on the part of the assessee to disclose truly or fully all material facts is no longer relevant. Elaborate provisions are made u/s. 148A introduced by the Finance Act, 2021 enabling the Assessing Officer to make enquiry with respect to material suggesting that income has escaped assessment, issuance of notice to the assessee calling upon why notice u/s. 148 should not be issued and passing an order considering the material available on record including the response of the assessee if made while deciding whether the case is fit for issuing notice u/s. 148. There is absolutely no indication in all these provisions which would suggest that the Legislature intended that the new scheme of reopening of assessments would be applicable only to the period post 1st April, 2021. In the absence of any such indication all notices which are issued after 1st April, 2021 have to be in accordance with such provisions. There is no indication whatsoever in the scheme of statutory provisions suggesting that the past provisions would continue to apply even after the substitution for the assessment periods prior to substitution and there are only strong indications to the contrary. The time limits for issuing notice u/s. 148 have been modified under substituted section 149. Clause (a) of sub-section (1) of section 149 reduces such period to three years instead of the originally prevailing four years under normal circumstances. Clause (b) extends the upper limit of six years previously prevailing to ten years in cases where income chargeable to tax which has escaped assessment amounts to or is likely to amount to R50 lakhs or more.

iv) Sub-section (1) of section 149 contracts as well as expands the time limit for issuing notice u/s. 148 depending on the question whether the case falls under clause (a) or clause (b). In this context the first proviso to section 149(1) provides that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st April, 2021 if such notice could not have been issued at that time on account of being beyond the period of limitation specified under the provisions of clause (b) of sub-section (1) of section 149 as they stood immediately before the commencement of the Finance Act, 2021. According to this proviso therefore, no notice u/s. 148 would be issued for the past assessment years by resorting to the larger period of limitation prescribed in the newly substituted clause (b) of section 149(1). This would indicate that the notice that would be issued after 1st April, 2021 would be in terms of the substituted section 149(1) but without breaching the upper time limit provided in the original section 149(1) which stood substituted. This aspect has also been highlighted in the Memorandum Explaining the proposed Provisions in the Finance Bill. The inescapable conclusion is that for any action of issuance of notice u/s. 148 after 1st April, 2021 the newly introduced provisions under the Finance Act, 2021 would apply. Mere extension of time limits for issuing notice u/s. 148 would not change this position that obtains in law. Under no circumstances can the extended period available in clause (b) of sub-section (1) of section 149 which is now ten years instead of six years earlier available with the Revenue, be pressed in service for reopening assessments for the past period.

v) Under sub-section (1) of section 3 of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 while extending the time limits for taking action and making compliances under the specified Acts up to 31st December, 2020 the only power vested with the Central Government was to extend the time further by issuing a notification. As a piece of delegated legislation the notifications issued in exercise of such powers, have to be within the confines of such powers. Issuing any Explanation touching the provisions of the 1961 Act is not part of this delegation. The CBDT while issuing Notification No. 20, dated 31st March, 2021 ([2021] 432 ITR (St.) 141) and Notification No. 38, dated 27th April, 2021 ([2021] 434 ITR (St.) 11) introduced an Explanation by way of clarification that for the purposes of issuance of notice u/s. 148 under the time limits specified in section 149 or 151, the provisions as they stood as on 31st March, 2021 before commencement of the Finance Act, 2021 shall apply. This plainly exceeded its jurisdiction as a subordinate legislation. The subordinate legislation could not have travelled beyond the powers vested in the Government of India by the parent Act. Even otherwise the Explanation in the guise of clarification cannot change the very basis of the statutory provisions. If the plain meaning of the statutory provision and its interpretation are clear, by adopting a position different in an Explanation and describing it to be clarificatory, the subordinate legislation cannot be permitted to amend the provisions of the parent Act. Accordingly, such Explanations are unconstitutional and are to be declared as invalid.

vi) The provisions of sections 147 to 151 of the 1961 Act were substituted with effect from 1st April, 2021 by the 2021 Act and a new section 148A was inserted with effect from April 2021. Accordingly, the unamended provisions of sections 148 to 151 of the 1961 Act cease to have legal effect after 31st March, 2021 and the substituted provisions of sections 148 to 151 of the 1961 Act have binding force from 1st April, 2021. In the absence of a savings clause there is no legal device by which a repealed set of provisions can be applied and a set of provisions on the statute book (in force) can be ignored. The validity of a notice issued u/s. 148 of the 1961 Act must be judged on the basis of the law existing on the date on which such notice is issued. The provisions of sections 147 to 151 of the 1961 Act are procedural laws and accordingly, the provisions as existing on the date of the notice issued u/s. 148 of the 1961 Act would be applicable.

vii) The word “notwithstanding” creating the non obstante clause, does not govern the entire scope of section 3(1) of the 2020 Act. It is confined to and may be employed only with reference to the second part of section 3(1) of the 2020 Act, i.e., to protect the proceedings already under way. There is nothing in the language of that provision to admit a wider or sweeping application to be given to that clause to serve a purpose not contemplated under that provision and the enactment, wherein it appears. The 2020 Act only protected certain proceedings that might have become time barred on 20th March, 2020, up to 30th June, 2021. Correspondingly, by delegated legislation incorporated by the Central Government, it may extend that time limit. That time limit alone stood extended up to 30th June, 2021. In the absence of any specific delegation, to allow the delegate of Parliament, to indefinitely extend such limitation, would be to allow the validity of the enacted law of the 2021 Act to be defeated by the delegate of Parliament. Section 3(1) of the 2020 Act does not itself speak of reassessment proceeding or of section 147 or section 148 of the 1961 Act as it existed prior to 1st April, 2021. It only provides a general relaxation of limitation granted on account of general hardship existing upon the spread of pandemic. After enforcement of the 2021 Act, it applies to the substituted provisions and not the pre-existing provisions. Reference to reassessment proceedings with respect to pre-existing and now substituted provisions of sections 147 and 148 of the 1961 Act has been introduced only by the later notifications issued under the Act.

viii) A notice issued u/s. 148 of the 1961 Act which had become time barred prior to 1st April, 2021 under the then prevailing provisions would not be revived by virtue of the application of section 149(1)(b) effective from 1st April, 2021. All the notices issued to the assessees were issued after 1st April, 2021 without following the procedure contained in section 148A of the Act and were therefore invalid. No jurisdiction had been assumed by the assessing authority against any of the assessees under the unamended law. Hence, no time extension could be made u/s. 3(1) of the 2020 Act, read with the notifications issued thereunder. The submission of the Department that the provisions of section 3(1) of the 2020 Act gave overriding effect to that Act and therefore saved the provisions as they existed under the unamended law could not be accepted and that saving could arise only if jurisdiction had been validly assumed before 1st April, 2021.

ix) Section 3(1) of the 2020 Act does not speak of saving any provision of law but only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by Parliament in future. Unless specifically enabled under any law and unless that burden had been discharged by the Department, the further submission of the Department that practicality dictates that the reassessment proceedings be protected was unacceptable. Once the matter reaches court, it is the legislation and its language, and the interpretation offered to that language as may primarily be decisive that governs the outcome of the proceeding. To read practicality into an enacted law is dangerous and it would involve legislation by the court, an exercise which the court would tread away from. In the absence of any proceeding of reassessment having been initiated prior to 1st April, 2021, it was the amended law alone that would apply. The delegate, i.e., Central Government or the Central Board of Direct Taxes could not have issued Notification No. 20, dated 31st March, 2021 and Notification No. 38, dated 27th, April, 2021 to overreach the principal legislation and therefore, were invalid.”

Income Declaration Scheme, 2016 — Adjustment of advance tax towards tax, surcharge and penalty on income declared — No reason to distinguish between tax deducted at source and advance tax for purpose of credit — Assessee entitled to credit of advance tax paid pertaining to assessment years for which declaration filed — Principal Commissioner to issue certificate as required by rule 4(5) of Income Declaration Scheme Rules, 2016

16 Tata Capital Financial Services Ltd vs. ACIT [2022] 443 ITR 148 (Bom.) A.Ys.: 2011-12 to 2014-15  Date of order: 2nd February, 2022 Ss. 139, 199, 210 and 219 of ITA, 1961

Income Declaration Scheme, 2016 — Adjustment of advance tax towards tax, surcharge and penalty on income declared — No reason to distinguish between tax deducted at source and advance tax for purpose of credit — Assessee entitled to credit of advance tax paid pertaining to assessment years for which declaration filed — Principal Commissioner to issue certificate as required by rule 4(5) of Income Declaration Scheme Rules, 2016

The assessee did not file returns of income for the A.Ys. 2011-12 to 2014-15. The assessee filed a declaration under the Income Declaration Scheme, 2016 u/s 183 of the Finance Act, 2016 and declared undisclosed income for those four assessment years. There were certain mistakes in such forms. On receipt of a notice u/s 148 of the Income-tax Act, 1961, the assessee filed a revised declaration. The Principal Commissioner did not issue the certificate as required by rule 4(5) of the Income Declaration Scheme Rules, 2016 in respect of the income declared by the assessee under the scheme after accepting the declaration. The Principal Commissioner held that the assessee was not entitled to an adjustment of the advance tax towards tax, surcharge and penalty payable in respect of the undisclosed income declared on the grounds that only 60.21 per cent of the total amount due under the scheme had been received and that under the scheme, there was no provision for such adjustment.

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

“i) Section 199 of the Income-tax Act, 1961 provides for credit for tax deducted. Sub-section (1) of section 199 declares that any deduction made in accordance with the provisions of Chapter XVIII of the Act and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. Section 219 provides that an assessee who pays advance tax shall be entitled to credit therefor in the regular assessment. From a conjoint reading of sections 199 and 219, it becomes clear that in the matter of credit, the tax deducted at source and advance tax stand on the same footing. As there is no ground to make a distinction between the tax deducted at source and advance tax for the purpose of credit, there is no reason not to equate an advance tax with tax deducted at source for the purpose of the Income Declaration Scheme, 2016. If the tax deducted at source is entitled to credit, a fortiori advance tax must get the same dispensation.

ii) The provisions of sections 184 and 185 of the Finance Act, 2016 incorporating the Scheme, begin with a non obstante clause. However, the overriding effect of sections 184 and 185 is confined to the rate at which the tax is to be imposed on the undisclosed income, surcharge to be paid thereon and the penalty. The advance payment made by the declarant retains the character of tax.

iii) The assessee was entitled to adjustment of advance tax paid towards tax, surcharge and penalty in respect of the undisclosed income declared under the Scheme. It was not the case of the Principal Commissioner that the advance tax paid by the assessee was not relatable to the income for the relevant assessment years for which the assessee had disclosed income. If the advance tax payment was not apportionable towards any other liability, there was no justifiable reason to deprive the assessee of credit for such amount against the liability under the Scheme. The Principal Commissioner was to issue the certificate as required by rule 4(5) of the 2016 Rules upon the assessee’s complying with all the requirements under the Scheme.”

Business expenditure — Meaning of expression “wholly and exclusively” in s. 37 — No compelling reason for incurring particular expenditure — Expenditure benefitting third person — Finding by Tribunal that expenditure had been incurred for purposes of business — Expenditure deductible

15 Principal CIT vs. South Canara District Central Co-Operative Bank Ltd. [2022] 442 ITR 338 (Kar.) A.Y.: 2012-13  Date of order: 14th December, 2021 S. 37 of ITA, 1961

Business expenditure — Meaning of expression “wholly and exclusively” in s. 37 — No compelling reason for incurring particular expenditure — Expenditure benefitting third person — Finding by Tribunal that expenditure had been incurred for purposes of business — Expenditure deductible

For the A.Y. 2012-13, the assessee incurred an expenditure made towards Navodaya Grama Vikasa Charitable Trust with a description “animator salary” under the directions of their controlling authority, i.e., NABARD. The Assessing Officer disallowed the expenditure.

On extensive analysis of the factual aspects, the Tribunal concluded that though the assessee was promoting the formation of self-help groups in the districts of Dakshina Kannada and Udupi, loans were given to such self-help groups for home industries like candle-making, soap-making and similar other activities, and the income generated by such self-help groups came back to the assessee as deposits. The commercial exigency being established u/s 37(1), the expenditure was allowed as deduction.

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

“i) In Sasoon J. David And Co. P. Ltd. vs. CIT [1979] 118 ITR 261 (SC) it had been observed that the expression “wholly and exclusively” used in section 10(2)(xv) of the Indian Income-tax Act, 1922 does not mean “necessarily”. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity but if it is incurred for promoting the business and to earn profits, the assessee can claim deduction. The fact that somebody other than the assessee is also benefitted by the expenditure does not come in the way of its being allowed by way of deduction.

ii) The Commissioner (Appeals) as well as the Tribunal had analysed the factual aspects in the background of the legal principles, which could not by any stretch of imagination be held to be perverse or arbitrary. More over, these factual aspects recorded by the fact finding authorities could not be interfered with. Accordingly the expenditure was deductible for the A.Y. 2012-13.”

Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

14 CIT vs. Indian Overseas Bank [2022] 441 ITR 689 (Mad) A.Y.: 2004-05  Date of order: 10th August, 2021 Ss.143, 147 and 263 of ITA, 1961

Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

For the A.Y. 2004-05, the assessment was completed u/s 143(3) of the Income-tax Act 1961 by order dated 28th December, 2006. Thereafter, the assessment was reopened concerning certain investments and prior period expenses of Rs. 93,04,142. The assessee submitted their reply. Thereafter, the assessment was completed by an order dated 30th December, 2011 u/s 143(3) r.w.s.147 of the Act. After taking into consideration the reply given by the assessee, the Assessing Officer held that no disallowance was required to be made in respect of the prior period expenses. In other words, the explanation offered by the assessee was found to be satisfactory by the Assessing Officer.

Thereafter, the Commissioner of Income-tax initiated proceedings u/s 263(1) of the Act proposing to revise the reassessment order dated 30th December, 2011 and claiming that the claim for deduction of business loss of R72.75 crores have been wrongly allowed in the assessment order. The assessee objected to the exercise of power u/s 263(1) on the ground of limitation as well as on the merits. However, by an order dated 26th March, 2014, the objections raised by the assessee were rejected by the Commissioner of Income-tax, the reassessment order dated 30th December 2011 was set aside, and the matter was sent back to the Assessing Officer for de novo consideration regarding the claim of business loss of
R72.75 crores.

The Tribunal allowed the assesse’s appeal and set aside the revision order passed by the Commissioner.

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

“i) Where an assessment has been reopened u/s. 147 of the Income-tax Act, 1961 in relation to a particular ground or in relation to certain specified grounds and subsequent to the passing of the order of reassessment, the jurisdiction u/s. 263 of the Act is sought to be exercised with reference to issues which do not form the subject of the reopening of the assessment or the order of reassessment, the period of limitation provided for in sub-section (2) of section 263 of the Act would commence from the date of the order of original assessment and not from the date on which the order of reassessment has been passed. The order of assessment cannot be regarded as being subsumed within the order of reassessment in respect of those items which do not form part of the order of reassessment.

ii) The original assessment was completed u/s. 143(3) of the Act by order dated 28/12/2006. The reassessment was completed by order dated 30/12/2011. The reasons for reopening u/s. 147 of the Act were only two and the issue, on which, the Commissioner issued notice u/s. 263 pertained to a claim of business loss which was not one of the issues in the reassessment proceedings, but was an issue, which was raised by the Assessing Officer in the original assessment u/s. 143(3) of the Act, in which, a show-cause notice was issued, the assessee submitted its explanation and thereafter, the assessment was completed. The proceedings u/s. 263 of the Act ought to have commenced before March 31, 2009. Therefore, the proceedings were barred by limitation.

iii) For the above reasons, the tax case appeal is dismissed and the substantial questions of law framed are answered against the Revenue.”

Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

13 Sudesh Taneja vs. ITO [2022] 442 ITR 289 (Raj) A. Y.: 2013-14
Date of order: 27th January, 2022 Ss. 147, 148, 148A and 151 of ITA 1961 and Notification Nos. 20 (S. O. No. 1432(E)) dated 31/03/2021 [1] and 38 (S. O. No. 1703(E)) dated 27-4-2021 [2]

Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

For the A.Y. 2013-14, notices u/s 148 of the Income-tax Act, 1961 were issued after 1st April, 2021 without following the mandatory procedure prescribed u/s 148A by the Finance Act, 2021. The validity of the notices was challenged by filing writ petitions in the Rajasthan High Court. It was also contended that the notices were barred by limitation.

The Rajasthan High Court quashed the notices and held as under:

“i) The substituted sections 147, 148, 149 and 151 of the Income-tax Act, 1961 pertaining to reopening of assessment u/s. 147 came into force on 1st April, 2021. The time limits for issuing notice for reassessment have been changed. The concept of income chargeable to tax escaping assessment on account of failure on the part of the assessee to disclose truly or fully all material facts is no longer relevant. Elaborate provisions are made u/s. 148A of the Act enabling the Assessing Officer to make enquiry with respect to material suggesting that income has escaped assessment, issue notice to the assessee calling upon him to show cause why notice u/s. 148 should not be issued and pass an order considering the material available on record including the response of the assessee if made while deciding whether the case is fit for issuing notice u/s. 148. There is no indication in all these provisions which would suggest that the Legislature intended that the new scheme of reopening of assessments would be applicable only to periods post 1st April, 2021. In the absence of any such indication all notices which are issued after 1st April, 2021 have to be in accordance with such provisions. There is no indication whatsoever in the scheme of statutory provisions suggesting that the past provisions would continue to apply even after the substitution, for the assessment periods prior to substitution, but there are strong indications to the contrary.

ii) Time limits for issuing notice have been modified under substituted section 149. The first proviso to section 149(1) provides that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st April, 2021 if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of section 149 as they stood immediately before the commencement of the Finance Act, 2021. Therefore, under this proviso no notice under section 148 would be issued for the past assessment years by resorting to the larger period of limitation prescribed in newly substituted clause (b) of section 149(1). This would indicate that the notice that would be issued after 1st April, 2021 would be in terms of the substituted section 149(1) but without breaching the upper time limit provided in the original section 149(1) which stood substituted. For any action of issuance of notice u/s. 148 after 1st April, 2021 the newly introduced provisions under the Finance Act, 2021 would apply. Mere extension of time limits for issuing notice u/s. 148 would not change this position that obtains in law. Under no circumstances can the extended period available in clause (b) of sub-section (1) of section 149 which now stands at 10 years instead of 6 years earlier available with the Revenue, be pressed in service for reopening assessments for past periods. A notice which has become time barred prior to 1st April, 2021 according to the then prevailing provisions, would not be revived by virtue of the application of section 149(1)(b) effective from 1st April, 2021.

iii) Under the new scheme of section 148A, the Assessing Officer has to first provide an opportunity to the assessee to show cause why notice u/s. 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment. Though clause (b) of section 148A does not so specify, since the notice calls upon the assessee to show cause why assessment should not be reopened on the basis of information which suggests that income chargeable to tax has escaped assessment, the requirement of furnishing such information to the assessee is in-built in the provision. Therefore, the assessee has an opportunity to oppose even the issuance of notice u/s. 148 and he could legitimately expect that the Assessing Officer provides him the information which according to him suggests that income chargeable to tax has escaped assessment. The Assessing Officer has a duty to decide whether it is a fit case for issuing notice u/s. 148 of the Act. Such decision has to be taken on the basis of material available on record and the reply of the assessee, if any filed. The decision has to be taken within the time prescribed.

iv) The limitation period had expired prior to 1st April, 2021 and therefore, all the notices issued after 1st April, 2021 for reopening the assessments having been issued without following the procedure contained in section 148A were invalid. The reassessment notices issued under the erstwhile section 148 were to be quashed.

v) If the plain meaning of the statutory provision and its interpretation are clear, by adopting a position different in an Explanation and describing it to be clarificatory, the subordinate legislation cannot be permitted to amend the provisions of the parent Act. Accordingly, the Explanations contained in the circulars dated 31st March, 2021 and 27th April, 2021 issued by the CBDT are unconstitutional and declared invalid.”

Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

12 Vellore Institute of Technology vs. CBDT [2022] 442 ITR 233 (Mad) Date of order: 4th February, 2022 Ss.147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

The validity of notices issued after 1st April, 2021 u/s 148 of the Income-tax Act, 1961 for reopening the assessment under the unamended provisions was challenged before the Madras High Court. The High Court held as under:

“i) A reassessment proceeding emanating from a simple show-cause notice must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time as jurisdiction is validly assumed by the assessing authority, evidenced by issuance of the jurisdictional notice u/s. 148 of the Act, no reassessment proceeding may ever be said to be pending before the assessing authority.

ii) It is settled law that the law prevailing on the date of issuance of the notice u/s. 148 has to be applied. On 1st April, by virtue of the plain effect of section 1(2)(a) of the Finance Act, 2021, the provisions of sections 147, 148, 149, 151 (as those provisions existed up to March 31, 2021), stood substituted, along with a new provision enacted by way of section 148A of that Act. In the absence of any saving clause, to save the pre-existing (and now substituted) provisions, the Revenue authorities could only initiate reassessment proceedings on or after 1st April, 2021, in accordance with the substituted law and not the pre-existing laws. Had the intention of the Legislature been to keep the erstwhile provisions alive, it would have introduced the new provisions with effect from 1st July, 2021, which has not been done. Accordingly, the notices relating to any assessment year issued u/s. 148 on or after 1st April, 2021 have to comply with the provisions of sections 147, 148, 148A, 149 and 151 of the Act, as specifically substituted by the Finance Act, 2021 with effect from 1st April, 2021.

iii) Consequently, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and notifications issued thereunder can only change the time-lines applicable to the issuance of a section 148 notice, but they cannot change the statutory provisions applicable thereto which are required to be strictly complied with. Further, just as the Executive cannot legislate, it cannot impede the implementation of law made by the Legislature. Explanations A(a)(ii)/A(b) to the Notifications dated 31st March, 2021 and 27th April, 2021 are ultra vires the 2020 Act, and are therefore, bad in law and null and void.

iv) The reassessment notices u/s. 148 of the Act issued on or after 1st April, 2021 had to be set aside having been issued in reference to the unamended provisions and the Explanations would be applicable to reassessment proceedings if initiated on or prior to 31st March, 2021, but it would be with liberty to the assessing authorities to initiate reassessment proceedings in accordance with the provisions of the 1961 Act, as amended by the Finance Act, 2021, after making all the compliances as required by law, if limitation for it survived.”

Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

11 S. P. Velayutham vs. ACIT [2022] 442 ITR 74 (Mad) A. Y.: 2013-14  Date of order: 28th January, 2022 Ss. 140A and 276C(2) of ITA, 1961

Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

An order of attachment of the immovable property u/s 226 of the Income-tax Act, 1961 was passed by the Department towards the remaining tax dues of the assessee since the assessee did not pay the entire tax demand. Prosecution was launched against the assessee u/s 276C(2) on the ground that the assessee did not pay the entire tax demand. It was stated in the complaint that the reason given in the reply for non-payment of tax was general in nature, and loss in business could not be an excuse for evading tax.

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

“i) To prosecute an assessee u/s. 276C of the Income-tax Act, 1961 there must be a wilful attempt on the part of the assessee to evade payment of any tax, penalty or interest. The Explanation to section 276C makes it clear that the evasion shall include a case where a person makes any false entry or statement in the books of account or other document or omission to make any entry in the books of account or other documents or any other circumstances which will have the effect of enabling the assessee to evade tax or penalty or interest chargeable or imposable under the Act or the payment thereof.

ii) “Wilful attempt” cannot be inferred merely on failure to pay the tax in time without any intention or deliberate attempt to avoid tax in totality or without any mens rea to avoid the payment.

iii) Sub-section (3) of section 140A makes it very clear that in the event of failure to pay tax the assessee shall be deemed to be in default. The word “wilful attempt to evade tax” is absent in section 140A(3) . If mere default in payment of tax in time is to be construed as a wilful attempt to evade tax the Legislature would have included the words “wilful attempt to evade tax” in sub-section (3) of section 140A which are absent. Therefore, mere default in payment of tax in time cannot be imported to prosecute for wilful attempt to evade tax. The penal provision has to be strictly construed. Only if the circumstances and the conduct of the accused show the wilful attempt in any manner whatsoever to evade tax or to evade payment of any tax, penalty or interest, can prosecution be launched.

iv) On the facts and the nature of the complaint there was no intention or wilful attempt made by the assessee to evade the payment of tax. Though the Explanation to section 276C is an inclusive one it was not the case of the Department that the assessee had made any false entry in the statements or documents or omitted to make any such entry in the books of account or other document or acted in any other manner to avoid payment of tax. The assessee had expressed his inability and mere failure to pay a portion of the tax could not be construed to mean that he had wilfully attempted to evade the payment of tax. When the return had been properly accepted and the assessment was also confirmed, mere default in payment of taxes unless such default arose out of any of the circumstances, which had an effect of the assessee to defeat the payment, the words “wilful attempt” employed in the provision could not be imported to mere failure to pay the tax.

v) From the inception there was no suppression and even in the reply to the notice the assessee had clearly stated the circumstances which had forced him to such default. If the intention of the assessee to evade the payment of tax was present from the very inception, he would not have made further payments. The statements filed by the Department also indicated that he had continuously paid the taxes in instalments. The assessee’s conduct itself showed that there was no wilful attempt to evade the payment of tax. The payment of tax in instalments probabilised his reply given to the notice but had not been considered by the Department. The criminal proceedings were quashed.”

Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

10 Principal ClT vs. T. M. International Logistic Ltd. [2022] 442 ITR 87 (Cal) A.Ys: 2004-05 and 2005-06  Date of order: 20th January, 2022 S.80-IA of ITA, 1961

Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

The assessee was in the business of terminal port operation and maintenance. For the A.Ys. 2004-05 and 2005-06, the assessee filed the return of income and claimed deduction u/s 80-IA of the Income-tax Act, 1961. The Assessing Officer rejected the claim on the ground that the assessee was operating and maintaining a multi purpose-berth and did not operate a port. The assessee submitted a letter issued by the port authorities stating that the berth at the dock complex had been allotted to the assessee on a leave and licence basis for thirty years, and it had the exclusive licence to equip, construct, finance, operate, manage, maintain and replace the project facilities and services. The Assessing Officer held that the letter had no significance regarding the deduction claimed u/s 80-IA and that no details were furnished in respect of the arrangement for the construction of the berth either on build-operate-transfer (BOT) or build-operate-lease-transfer (BOLT) basis and transfer of the berth to the port authorities.

The Commissioner (Appeals) held that the assessee was entitled to deduction u/s 80-IA. The Tribunal affirmed the orders.

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

“i) The Commissioner (Appeals) for the A.Y. 2003-04 which was the first year in the period of ten years had on examination of the facts allowed the deduction u/s. 80-IA and his order was confirmed by the Tribunal. The Assessing Officer had also given effect to such order. There was nothing on record to show that there was any change in the situation.

ii) The letter from the port authorities and the agreement which were produced by the assessee were to be treated as a certificate issued by the port authorities and would satisfy the requirement in Circular No. 10 of 2005, dated December 16, 2005 ([2006] 280 ITR (St.) 1) issued by the Central Board of Direct Taxes. The Tribunal had rightly rejected the Department’s appeal and confirmed the order passed by the Commissioner (Appeals) allowing deduction u/s. 80-IA to the assessee.”

Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

9 Shriram Chits and Investments (P.) Ltd. vs. ACIT [2022] 442 ITR 54 (Mad) A.Ys.: 1987-88 to 1995-96 and 1999-2000  Date of order: 30th August, 2012 Ss. 37 and 145 of ITA, 1961

Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

The assessee was in chit business. Till 31st December, 1985, in respect of the method of accounting u/s 145 of the Income-tax Act, 1961, the assessee followed the mercantile accounting system regarding the commission earned by it in its capacity as foreman, conducting the chit activity. However, thereafter, the assessee changed the method to the completed contract method of accounting, and the commission earned was accounted for on the completion of each series of chits. The Department did not accept the change of the accounting method on the ground that on the date the auction was conducted, the right of the assessee to receive the commission in the capacity as foreman accrued, and consequently, the assessee was not entitled to wait for the completion of each chit period, as there was no accrual of income at the end of each term.

The Commissioner (Appeals) upheld the order of the assessing authority. The Tribunal held that the remuneration or commission of the foreman accrued at the end of chit draw and that, therefore, the assessee’s commission had to be related to and determined based on every auction and not to be postponed to the completion period and dismissed the assessee’s appeal.

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

“i) A reading of the rights of the subscribers and responsibilities of the chit fund as foreman in the provisions of the Chit Funds Act, 1982 shows that the duty is cast on the foreman to conduct the chit to a duration assured and in the event of any default of payment of any one of the instalments, the foreman has the responsibility to make good that loss. At the end of the chit period, the subscriber is assured of the amount for which he participated in the scheme. In the background of the provisions of sections 21 to 28 of the 1982 Act read in the context of the definition of “discount” and “dividend”, on every auction, the discount that is arrived at is taken for the purpose of meeting the expenses of running the chit. The expenses normally include all expenses apart from the commission payable to the foreman, and the dividends that are payable to the subscribers, are normally carried to the end of the chit period. Every chit is an independent transaction containing a series of activities to be undertaken during the course of the transaction. Even though the discount and commission are recognised with the conduct of auction every month, yet, with all the load mounted on the discount, the uncertainties in the payment of subscriptions and the commitments that the assessee has to discharge under the 1982 Act, the revenue recognition, as a business proposition becomes determinable only at the end of the particular chit transaction.

ii) While in the proportionate completion method, revenue is recognised proportionately by referring to the performance of each act, the possibility of revenue recognition in the proportionate completion method being a fairly determinable one, in the completed services contract method, the difficulty in determining the revenue arises by reason of the significant nature of the services yet to be performed in relation to the transaction that normally, the revenue recognition is taken to the end of the performance. Therefore, even while adopting the proportionate completion method, where there is every possibility of identifying the revenue vis-a-vis the extent of services completed, there is a line of caution stated that when there is a better method available to assess the better performance, it may be adopted to the straight line basis for ascertaining the income. However, when the services yet to be performed are so significant in relation to the transaction, difficulty arises in recognising the revenue in the performed services. Therefore, in contrast to the proportionate completion method, necessarily, revenue recognition is postponed till the completion of the services of the contract. Under clause 9, “Basis for revenue recognition”, it is stated that so long as there is uncertainty on the ultimate collection, revenue is not normally recognised along with rendering of services. Even though payment may be made in instalments, when the consideration is not determinable within reasonable limits, recognition of revenue is postponed. Accounting Standards 9 and 7 both speak in one voice at least as regards the proportionate completion method, the completion contract method and both these methods aim at the methodology for arriving at the revenue recognition with a certain degree of certainty, taking into consideration, the significance of the services performed and to be performed in relation to the particular transaction.

iii) Section 21(1)(b) of the 1982 Act provides for entitlement to receive commission, remuneration or for meeting the expenditure of running the chit at a rate not more than 5 per cent. Therefore, at a given point of time, a foreman cannot, with any certainty, assert that his commission be paid irrespective of the expenses that he may have to incur for the conduct of the transaction. In the computation of income on the completed contract basis, the exercise would be seen as revenue neutral. Under the 1982 Act, the discount is the sum of money which is set apart under the chit agreement to meet the expenses of running the chit. This also has to take note of the default among the different classes of subscribers.

iv) While there may be a certainty as to the dividend received every month for purpose of assessment on accrual basis, as far as a company running the chit business is concerned, the dividend and the discount can properly be ascertained only at the completion of the transaction and not in the midway. Given the significant nature of the services yet to be performed in relation to the chit series, till the series come to an end, it is difficult to assess with any certainty, the amount that would be properly called as income for the purpose of assessment. “Discount” as defined under section 2(g) of the 1982 Act means the money set apart under the chit agreement to meet the expenses of running the chit or for distribution among the subscribers or for both. Dividend is the share of the subscriber in the amount of discount available for reasonable distribution among the subscribers at each instalment of the chit.

v) Given the rights of the subscriber, when section 21 of the 1982 Act provides for 5 per cent of the chit amount to be given to the assessee as foreman which was stated therein as commission, remuneration or for meeting the expenses of running the chits, and when the dividend to the assessee as foreman had to come only from out of the discount, the Department was not justified in contending that the assessee could not adopt the completed contract method for income recognition. The assessee was justified in adopting the completed contract method to arrive at the real income.

vi) The assessee’s expenditure was related both to the administrative costs and to the advertisement costs. The expenses could not be viewed as relatable to the particular series alone, but as relating to the running of the business and were revenue expenditure of the relevant assessment year in which it was incurred. The fact that the advertisement referred to the beginning of a new series, per se, would not mean that it was relatable to the conduct of the business of the assessee in general. The advertisement was more in the nature of information as to the business of the assessee and for its promotion.

vii) The plea of the Department that the change in the method of accounting was not bona fide was taken without any material. Except for the issue on mutuality relating to the A. Ys. 1988-89 to 1995-96 and 1999-2000 the findings of the Tribunal to the extent regarding the method of accounting were set aside.”

Settlement of cases — Interest u/s 220(2) — Order of Commissioner (Appeals) directing AO to withdraw investment allowance granted u/s 32A set aside by Tribunal — Order passed by Settlement Commission reducing interest u/s 220(2) — Need not be interfered with

8 UOI vs. Dodsal Ltd.
[2022] 441 ITR 47 (Bom)
A.Y.: 1989-90; Date of order: 9th December, 2021
Ss. 32A, 156, 220(2), 245D(4) of ITA, 1961

Settlement of cases — Interest u/s 220(2) — Order of Commissioner (Appeals) directing AO to withdraw investment allowance granted u/s 32A set aside by Tribunal — Order passed by Settlement Commission reducing interest u/s 220(2) — Need not be interfered with

For the A. Y. 1989-90, the Assessing Officer passed an order u/s 143(3) of the Income-tax Act, 1961. The assessment order was rectified u/s 154 on 27th July, 1992 revising the total income after allowance of set-off of unabsorbed investment allowance brought forward from the A.Ys. 1986-87, 1987-88 and 1988-89. The assessee made an application u/s 245C before the Settlement Commission, which passed an order u/s 245D(4). The Assessing Officer gave effect to the order u/s 245D(4) and also calculated the interest payable u/s 220(2). The quantum of interest was rectified, and a revised order was passed. The assessee sought rectification of the order passed by the Settlement Commission on the ground that since the order u/s 245D(4) was silent on the point of charging interest u/s 220(2), it should be considered to have been waived. The Settlement Commission held that it did not consider it to be a good case for waiver of interest chargeable u/s 220(2). However, regarding the method of charging of interest, the Settlement Commission directed the Assessing Officer to take the income as determined by him in his order dated 27th July, 1992, adjust it in accordance with its order u/s 245D(4), but without withdrawing the benefit of set-off of brought forward investment allowance u/s 32A. The Department filed an application contending that the Settlement Commission could not have granted the assessee the benefit of set-off of brought forward investment allowance. The Settlement Commission rejected the application filed by the Department.

The Bombay High Court dismissed the writ petition filed by the Department and held as under:

“i) The language used in sub-section (2) of section 220 of the Income-tax Act, 1961 is that the interest on demand is payable by the assessee for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid. Accordingly, the first proviso to sub-section (2) of section 220 provides that where as a result of an appellate order, the amount on which interest was payable under this section is reduced, the interest shall be reduced accordingly. Therefore, the effect of the first proviso to sub-section (2) of section 220 will be that the amount on which the interest is payable under sub-section (2) of section 220 will get modified according to the appellate order. There can be variation in charging interest if ultimately due to the result of the appellate order, the liability to pay the original amount on which interest is levied u/s. 220 ceases, and accordingly, the assessee needs to be given the benefit of reduction in interest resulting in reduced payment of interest.

ii) According to the proviso to sub-section (2) of section 220, once the amount on which interest was charged got extinguished the liability of the assessee to pay interest on such amount would also be extinguished. The order of the Commissioner (Appeals) directing the Assessing Officer to withdraw the investment allowance granted u/s. 32A was set aside by the Tribunal. Therefore, interference with the orders passed by the Settlement Commission reducing the liability of the assessee to pay interest u/s. 220(2) would result in directing the assessee to pay interest on an amount which had been extinguished and consequently would result in miscarriage of justice.

iii) The power under article 226 of the Constitution of India needs to be exercised to prevent miscarriage of justice. It will be exercised only in furtherance of interest of justice and not merely on the making out of a legal point.

iv) Therefore, we refuse to interfere in the exercise of power under article 226 of the Constitution of India in its extraordinary discretionary jurisdiction. The petition stands dismissed.”

Return of income — Revised return — Delay in filing revised return since sanction from National Company Law Board for demerger was received after expiry of time limit for filing revised return — Rejection of revised return not valid

7 Deep Industries Ltd. vs. Dy. CIT
[2022] 441 ITR 307 (Guj)
A.Y.: 2018-19;
Date of order: 29th September, 2021
S. 139(5) of ITA, 1961

Return of income — Revised return — Delay in filing revised return since sanction from National Company Law Board for demerger was received after expiry of time limit for filing revised return — Rejection of revised return not valid

The company DIL had its business of oil and gas exploration and production and oil and gas services. It decided to demerge its oil and gas services business, and a scheme of arrangement was formulated and a company application was moved before the National Company Law Tribunal. The scheme of arrangement was sanctioned on 17th March, 2020, and the appointed date was 1st April, 2017. The certified copy of the scheme was received on 20th May, 2020, and it was filed with the Registrar of Companies on 20th June, 2020.

DIL had filed the original return of income for the A.Y. 2018-19 on 30th March, 2019. On the sanction of the scheme being effective from 1st April, 2017 the erstwhile DIL’s assets, liabilities, incomes, etc., were deemed to be that of the resulting company, the assessee. However, the time for filing the revised return for the A.Y. 2018-19 had lapsed, and there was no mechanism to file it online. The assessee raised a grievance on the income tax portal on 26th June, 2020 through the e-Nivaran facility. Thereafter, it physically filed the revised return along with the letter dated 28th July, 2020, explaining the cause of revision. The Deputy Commissioner rejected the revised return of income filed by the assessee and passed an assessment order on a protective basis making an addition.

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

“i) Once there was no response to the grievance raised on the Income-tax portal, the assessee had physically filed the revised return on 28th July, 2020. The Department therefore ought to have considered the physical filing of the revised return.

ii) Resultantly, the assessment which has been finalized shall need to be quashed permitting the respondent to process considering the revised return which has been filed by the petitioner. If it is not filed in an electronic manner as has been reflected in the affidavit-in-reply, he should be permitted to do that by a specific order and granting him reasonable time of minimum one week to so do it. Otherwise, his physical copy which he has dispatched shall be taken into consideration.

iii) As a parting note the court needs to make a mention that the matter has travelled to this court only because the revised return was not permitted beyond the prescribed time limit as set under section 139(5) of the Act. Thus, the apex court in the case of Dalmia Power Ltd. vs. Asst. CIT [2020] 420 ITR 339 (SC) has categorically held and observed that section 119 of the Income-tax Act in such matters also would not be applicable and therefore, when the respondents are desirous of operating in the regimes of electronic mode and faceless assessment, it shall need to improvise the software and allow the revised return more particularly, when the law has been made quite clear by virtue of the direction of the apex court. Let care be taken in improvising the software wherever necessary since its limitations have tendency to swell the court litigation. The petitioner could have been saved from this ordeal, had such a care taken to permit the revised return in an electronic mode once the direction of the National Company Law Tribunal (NCLT) was communicated along with the decision of the apex court.”

Reassessment — Notice u/s 148 after four years — Condition precedent — Failure by assessee to disclose material facts necessary for assessment — Notice not stating which fact had not been disclosed — Mere statement that there had been failure to disclose material facts is not sufficient — All documents and details submitted by assessee during original assessment and examined by TPO and original order passed by AO thereafter — No failure on part of assessee to disclose material facts fully and truly — Notice and reassessment on change of opinion — Impermissible

6 Skoda Auto Volkswagen India Pvt. Ltd. vs. ACIT
[2022] 441 ITR 74 (Bom)
A.Y.: 2004-05; Date of order: 4th December, 2021
Ss. 92CA(3), 143(3), 147, 148 of ITA, 1961

Reassessment — Notice u/s 148 after four years — Condition precedent — Failure by assessee to disclose material facts necessary for assessment — Notice not stating which fact had not been disclosed — Mere statement that there had been failure to disclose material facts is not sufficient — All documents and details submitted by assessee during original assessment and examined by TPO and original order passed by AO thereafter — No failure on part of assessee to disclose material facts fully and truly — Notice and reassessment on change of opinion — Impermissible

For the A.Y. 2004-05, the Assessing Officer issued a notice u/s 148 of the Income-tax Act, 1961 after four years for reopening the assessment u/s 147. The reasons recorded stated that on verification of the records it was found that the assessee had capitalized an amount paid towards lump sum payment of technical know-how fees and claimed depreciation but had calculated the operating loss considering the actual payment of technical know-how fees instead of only the depreciation as claimed by the assessee, that therefore, the working profit calculated by the assessee was not correct and that the arm’s length price calculated was short by Rs. 116.20 crores and hence such amount had escaped assessment within the meaning of section 147. The assessee filed objections to the reopening. Before the objections were disposed of, various further notices were issued.

The assessee filed a writ petition and challenged the reopening. An ad interim stay was granted till the next date of hearing. However, when the stay did not get extended, reassessment was completed, and an order was passed pursuant to the order passed by the Transfer Pricing Officer on a reference made u/s 92CA(1). The Bombay High Court allowed the writ petition and held as under:

“i) The reasons recorded for reopening were based on a change of opinion which was not permissible. The proviso to section 147 applied and the Assessing Officer had to make out a case that income chargeable to tax had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. The reasons recorded did not indicate which were those material facts that the assessee had failed to truly and fully disclose.

ii) The assessee had in its annual report mentioned the technical know-how fee, royalty and technical assistance fee that it had paid and had also filed form 3CEB in which it had disclosed the details and description of the international transactions in respect of technical know-how and patents and regarding the royalty paid and lump-sum fees paid for the technical services. Before the original order was passed u/s. 92CA(3), the Transfer Pricing Officer also had raised all these queries and had considered the royalty, technical know-how fees paid. The assessee had not only filed its account books and other evidence but those had been considered by the Transfer Pricing Officer whose order also had been considered by the Assessing Officer while passing the original order u/s. 143(3). Therefore, there could be nothing which had not been truly and fully disclosed.

iii) The contention of the Department that Explanation 1 to section 147 provided that production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence should have been discovered by the Assessing Officer was no defence, was not tenable. The notice issued u/s. 148 and the reassessment order were quashed and set aside.”

Non-resident — Income deemed to accrue or arise in India — Royalty — Meaning of “royalty” — Transfer authorising transferee to use licensed software — No transfer of copyright — Amount received cannot be termed royalty

5 EY Global Services Ltd. vs. ACIT
[2022] 441 ITR 54 (Del)
Date of order: 9th December, 2021
S. 9 of ITA, 1961

Non-resident — Income deemed to accrue or arise in India — Royalty — Meaning of “royalty” — Transfer authorising transferee to use licensed software — No transfer of copyright — Amount received cannot be termed royalty

EYGBS was an Indian company that provided back-office support and data processing services. It entered into an agreement with the EYGSL (UK) whereby it received ‘right to benefit from the deliverables and/or services’ from the UK company. The Authority for Advance Rulings held that the amount received was assessable as royalty in India.

The assessee company filed a writ petition and challenged the ruling. The Delhi High Court allowed the writ petition and held as under:

“a) In Engg. Analysis Centre of Excellence P. Ltd. vs. CIT [2021] 432 ITR 471 (SC), the Supreme Court observed that the definition of royalty that is contained in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961 would make it clear that there has to be a transfer of “all or any rights” which includes the grant of a licence in respect of any copyright in a literary work. The expression “including the granting of a licence” in clause (v) of Explanation 2 to section 9(1)(vi) of the Act, would necessarily mean a licence in which transfer is made of an interest in rights “in respect of” copyright, namely, that there is a parting with of an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act, 1957.

(i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts.

(ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner.

(iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act.

(iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise.

(v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.

(vi) The right to reproduce and the right to use computer software are distinct and separate rights.

b) For the payment received by the UK company from EYGBS to be taxed as “royalty”, it is essential to show a transfer of copyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licensee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to and make use of the licenced software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as “royalty”.

c) EYGBS, in terms of the service agreement and the memorandum of understanding, merely received the right to use the software procured by the UK company from third-party vendors. The consideration paid for the use thereof therefore, could not be termed “royalty”. The rights acquired by the UK company from the third-party software vendors were not relevant. What was relevant was the agreement between the UK company and EYGBS. As the agreement did not create any right to transfer the copyright in the software, the payment would not fall within the ambit of the term “royalty”.

Income — Income or capital — Investment of funds before commencement of operation in fixed deposits and mutual funds as per directive of Government — Income generated to be utilised for purposes of business of company — Income not revenue receipt

4 ClT vs. Bangalore Metro Rail Corporation Ltd.
[2022] 441 ITR 113 (Kar)
A.Ys: 2007-08 and 2008-09;
Date of order: 23rd November, 2021
S. 4 of ITA, 1961

Income — Income or capital — Investment of funds before commencement of operation in fixed deposits and mutual funds as per directive of Government — Income generated to be utilised for purposes of business of company — Income not revenue receipt

The assessee was a company incorporated under the Companies Act, 1956 and was a wholly-owned undertaking of the Government of Karnataka. It was established with the approval of Government of India to implement a rail-based mass rapid transit system in five years in five stages. The project’s cost was to be financed by both the Union and the State Governments. The assessee had received funds during the A.Y. 2007-08 which were not immediately required for execution of the project and these were invested in fixed deposits and mutual funds. As a result, interest and dividends were received. The assessee contended that the dividend income on mutual funds received from State Bank of India and Unit Trust of India was exempt u/s 10(35) of the Income-tax Act, 1961. Apart from this, the assessee also claimed a short-term loss of Rs. 5,02,05,005 arising out of redemption of units with a mutual fund. The Assessing Officer rejecting the contention of the assessee and brought the income of Rs. 10,30,48,755 that was earned by the company through deposits to tax.

The Tribunal held that the amount was not taxable.

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

“It was apparent that the unutilized funds of the project, before the commencement of the functional operation of the project, was invested by the assessee in fixed deposits and mutual funds as per the directions of the Government. A perusal of the Government order dated 25th March, 2008, it was clear that the income generated out of earlier release of State Government for its project would have to be converted into State’s equity towards the project and could not be counted as income of the assessee. Thus, there was no profit motive as the entire funds entrusted and the interest accrued therefrom had to be utilized only for the purpose of the scheme. Thus, it had to be capitalized and could not be considered as revenue receipts.”

Charitable purpose — Exemption u/s 11:- (i) Charitable institution engaged in imparting education — Effect of proviso to s. 2(15) and CBDT circular No. 11 of 2008 [1] — Surplus income generated by educational activities — Would not affect entitlement to exemption u/s 11; (ii) Effect of s. 13 — Disqualification for exemption — Charitable institution running educational institution — Alleged excess of remuneration to employees — Revenue has no power to interfere — Exemption could not be denied

3 CIT(Exemption) vs. Krupanidhi Education Trust
[2022] 441 ITR 154 (Kar)
A.Ys.: 2009-10 and 2010-11;
Date of order: 20th September, 2021
Ss. 2(15), 11 & 13 of ITA, 1961

Charitable purpose — Exemption u/s 11:- (i) Charitable institution engaged in imparting education — Effect of proviso to s. 2(15) and CBDT circular No. 11 of 2008 [1] — Surplus income generated by educational activities — Would not affect entitlement to exemption u/s 11; (ii) Effect of s. 13 — Disqualification for exemption — Charitable institution running educational institution — Alleged excess of remuneration to employees — Revenue has no power to interfere — Exemption could not be denied

The assessee-trust ran various institutions in Bangalore offering degrees and training in various academic courses and was granted registration u/s 12A of the Income-tax Act, 1961. The Assessing Officer held that the assessee had violated the provisions of section 13(1)(c) of the Act and therefore, the assessee was not entitled to claim exemption u/s 11, 12 and 13 of the Act. The two trustees were being paid remuneration or salary not proportionate to the pay scales of a professor and administrative officer, respectively. The Assessing Officer completed the assessment for the A.Ys. 2009-10 and 2010-11 u/s 143(3) of the Act by order dated 30th December, 2011 denying the exemption u/s 11 of the Act and making certain additions.

The Commissioner (Appeals) and the Tribunal held that the assessee was entitled to exemption.

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

“i) Under Circular No. 11 of 2008 dated 19th December, 2008 ([2009] 308 ITR (St.) 5) issued by the CBDT having regard to the proviso inserted to section 2(15) amended by the Finance Act, 2008 wherein, it has been clarified that the newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i. e., relief of the poor, education and medical relief. Consequently, where the object of trust or institution is relief to the poor, education or medical relief, it will constitute “charitable purpose” even if it incidentally involves in carrying of commercial activities.

ii) The Revenue cannot sit in the armchair of an assessee and decide the pattern of working, methodology to be adopted for administration of an educational trust including the payment structure of salary or remuneration to be paid to the professors or administrative staff. In other words, the Department cannot manage or control the managerial affairs of the educational trust. These aspects would not come within the purview of the authorities to decide the Income-tax liability merely on suspicion that the assessee is claiming huge expenditure to get the corresponding benefits of allowable deductions.

iii) The Assessing Officer merely on surmises and conjectures had come to the conclusion that the salary and remuneration paid to the two trustees was highly excessive and not proportionate to the services rendered by them. The Department cannot regulate the management of the assessee-trust. Indeed, the salary or remuneration paid to the trustees were duly accounted and reflected in their returns as income. Merely on imagination, exemption u/s. 11 of the Act could not be denied.

iv) Hence, the substantial question of law deserves to be answered against the Revenue and in favour of the assessee.”

Business expenditure — Disallowance — Expenses prohibited in law — CBDT Circular No. 5 dated 1st August, 2012 disallowing expenses in providing free gifts or facilities to medical practitioners by pharmaceutical and allied health sector industry — Circular not applicable retrospectively — Expenses deductible for earlier years

2 Principal CIT vs. Goldline Pharmaceuticals Pvt. Ltd.
[2022] 441 ITR 543 (Bom)
A.Y.: 2010-11; Date of order: 14th January, 2022
S. 37(1) of ITA, 1961

Business expenditure — Disallowance — Expenses prohibited in law — CBDT Circular No. 5 dated 1st August, 2012 disallowing expenses in providing free gifts or facilities to medical practitioners by pharmaceutical and allied health sector industry — Circular not applicable retrospectively — Expenses deductible for earlier years

The assessee manufactured and traded in medicines. For the A.Y. 2010-11, the assessee claimed deduction u/s 37 of the Income-tax Act of expenditure incurred towards tour and travel expenses of medical practitioners to enable them to attend conferences held in different parts of the world. The Assessing Officer applied CBDT Circular No. 5 of 2012 and disallowed proportionate expenditure.

The Tribunal allowed the assessee’s claim and held that the disallowance of expenditure on the basis of Board’s Circular No. 5 of 2012, dated 1st August, 2012 was without merit.

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

“i) Under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 as amended on 10th December, 2009 the Medical Council of India imposed a prohibition on medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industries. According to Circular No. 5 of 2012, dated 1st August, 2012 ([2012] 346 ITR (St.) 95) issued by the CBDT claim of any expense incurred in providing the aforesaid or similar freebees in violation of the provisions of the said regulations were held inadmissible u/s. 37(1) of the Income-tax Act, 1961 being an expense prohibited in law. It was further stated that such disallowance would be made in the hands of such pharmaceutical or allied health sector industries or other assessee which had provided such freebees.

ii) The Board’s Circular No. 5 of 2012, dated 1st August, 2012 could not have been applied retrospectively to the A.Y. 2010-11. The circular imposed a new kind of imparity and therefore, the Tribunal had consistently held that the Board’s Circular No. 5 of 2012 would not have any retrospective effect but would operate prospectively from 1st August, 2012. These decisions of the Tribunal were not assailed before the High Court. The Tribunal was justified in deleting the disallowance and its order need not be interfered with.”

Business expenditure — Capital or revenue expenditure — Capital work-in-progress written off — Salary and professional fees expenditure incurred in respect of projects abandoned to conserve cash flow — Revenue expenditure

1 Principal CIT vs. Rediff.Com India Ltd.

[2022] 441 ITR 195 (Bom)
Date of order: 29th September, 2021
S. 37 of ITA, 1961

Business expenditure — Capital or revenue expenditure — Capital work-in-progress written off — Salary and professional fees expenditure incurred in respect of projects abandoned to conserve cash flow — Revenue expenditure

The assessee abandoned some of its incomplete website projects, which were not expected to pay back. The assessee wrote off expenses on account of capital work-in-progress pertaining to such abandoned projects and claimed deduction thereof as revenue expenditure u/s 37 of the Income-tax Act, 1961. The Assessing Officer held that the expenditure was incurred for creating new projects and represented capital assets of its business that were to yield enduring benefit and that by claiming such expenditure under the head ‘capital work-in-progress’, the assessee itself had admitted that those expenses were capital in nature and disallowed the assessee’s claim of writing off ‘capital work-in-progress’.

The Tribunal held that the expenses incurred were in connection with the existing business and were of routine nature, such as salary and professional fees, and that the expenses were revenue in nature and allowed the assessee’s claim.

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

“The Tribunal’s view that if an expenditure was incurred for doing the business in a more convenient and profitable manner and had not resulted in bringing any new asset into existence, such expenditure was allowable business expenditure u/s. 37 was correct. The expenditure incurred was on salary and professional fees which was revenue in nature and did not bring into existence any new asset. There was no perversity or application of incorrect principles in its order. No question of law arose.”

Revision — (i) Powers of Commissioner — Reassessment — Order of AO dropping reassessment proceedings after issuance of notice and considering assessee’s objections — Order of AO not administrative order — No jurisdiction in Commissioner to examine correctness of decision taken by AO; (ii) Export — Exemption — Disqualification where shareholding of assessee changes — Documents showing shareholding pattern in assessee continued to be same and share transfers were without beneficial interest — AO dropping reopening proceedings — Finding that shares transferred only to comply with legal requirements and beneficial ownership never transferred — Revision not sustainable

47 CIT vs. Barry-Wehmiller International Resources (P.) Ltd. [2021] 440 ITR 403 (Mad) A.Y.: 2001-02; Date of order: 3rd August, 2021 Ss.10A(9), 147, 148 & 263 of ITA, 1961

Revision — (i) Powers of Commissioner — Reassessment — Order of AO dropping reassessment proceedings after issuance of notice and considering assessee’s objections — Order of AO not administrative order — No jurisdiction in Commissioner to examine correctness of decision taken by AO; (ii) Export — Exemption — Disqualification where shareholding of assessee changes — Documents showing shareholding pattern in assessee continued to be same and share transfers were without beneficial interest — AO dropping reopening proceedings — Finding that shares transferred only to comply with legal requirements and beneficial ownership never transferred — Revision not sustainable

For the A.Y. 2001-02 the assessment of the assessee was reopened. After receiving the response from the assessee, the Assessing Officer dropped the proceedings holding that there was no change in the beneficial shareholding of the company in terms of section 10A(9) of the of the Income-tax Act, 1961 . The Commissioner after examining the records issued notice u/s 263 proposing to revise the order dropping the reassessment proceedings because the Assessing Officer failed to appreciate that the beneficial shareholding of the company had changed with the acquisition of shares in M Inc., U.S.A. company, which owned 100 per cent shares of a Mauritius company, which was the holding company of the assessee.

The Tribunal allowed the assessee’s appeal.

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

“i) The Commissioner had no jurisdiction to invoke his power u/s. 263 of the Act to examine the correctness of the decision taken by the Assessing Officer dropping the reopening proceedings after issuance of notice u/s. 148 of the Act and after considering the objections filed by the assessee.

ii) The U.S.A. company had addressed the Registrar of Companies in Chennai conveying its no objection to the change of name. The assessee had explained its organisational structure stating that 100 per cent. of the equity capital of MWS was held by MAPL, a company incorporated in Mauritius, that the shareholding pattern in the assessee continued to be the same, that all the shares in the assessee were held by MAPL, Mauritius and that during 2000-01, no share transfers occurred, that only 2 shares were transferred to BW Inc., USA in March 2002 and that too without beneficial interest in the shares and that MAPL continued to hold the beneficial interest in the shares. This was duly supported by necessary records. These facts were taken note of and the Assessing Officer had dropped the reopening proceedings. Thus, it was on an opinion formed by the Assessing Officer and after being satisfied that there was no case made out for reopening and after recording that the ownership or beneficial interest of the assessee had not changed and continued to be with the Mauritius company and therefore, section 10A(9) of the Act was not attracted and accordingly, proceedings under section 147 of the Act were dropped.

iii) The Tribunal was right in coming to the conclusion that the shares were transferred only to comply with the legal requirements and the beneficial ownership was never transferred. Hence, the order passed by the Tribunal did not call for any interference.”

Recovery of tax — Provisional attachment u/s 281B — Condition precedent for attachment — Authority must form opinion on basis of tangible material that it is necessary to do so for protecting interest of government revenue and that assessee not likely to fulfil demand if raised — Order merely stating likelihood of huge liability being raised and necessary to provisionally attach fixed deposit of assessee — Cryptic, unreasoned, non-speaking and laconic — Specific assertion by assessee that it owned immovable property of substantial value — Apprehension that assessee might not make payment unfounded and without any basis — Orders liable to be quashed

46 Indian Minerals and Granite Co. vs. Dy. CIT [2021] 440 ITR 292 (Karn) Date of order: 12th August,2021 S. 281B of ITA, 1961

Recovery of tax — Provisional attachment u/s 281B — Condition precedent for attachment — Authority must form opinion on basis of tangible material that it is necessary to do so for protecting interest of government revenue and that assessee not likely to fulfil demand if raised — Order merely stating likelihood of huge liability being raised and necessary to provisionally attach fixed deposit of assessee — Cryptic, unreasoned, non-speaking and laconic — Specific assertion by assessee that it owned immovable property of substantial value — Apprehension that assessee might not make payment unfounded and without any basis — Orders liable to be quashed

Pursuant to the search said to have been conducted by the respondents in respect of the petitioner-assessees u/s 132 of the said Act of 1961, assessment proceedings were initiated u/s 153A by the Assessing Officer. During the course of the said proceedings, Assessing Officer passed orders u/s 281B, thereby provisionally attaching the fixed deposits of the petitioners.

The assessee filed writ petition and challenged the orders. The Karnataka High Court allowed the writ petition and held as under:

“i) Mere apprehension on the part of the Department that huge tax demands are likely to be raised on completion of the assessment is not sufficient for the purpose of passing a provisional order of attachment. Having regard to the fact that the provisional attachment order of a property of a taxable person including the bank account of such person is draconian in nature and the conditions which are prescribed by the statute for the valid exercise of power must be strictly fulfilled, the exercise of power for order of provisional attachment must necessarily be preceded by formation of an opinion by the authorities that it is necessary to do so for the purpose of protecting the interest of Government revenue. Before an order of provisional attachment is passed, the Commissioner must form an opinion on the basis of tangible material available for attachment that the assessee is not likely to fulfil the demand for payment of tax and it is therefore necessary to do so for the purpose of protecting the interest of the Government revenue. In addition, before passing the provisional attachment order, it is also incumbent upon the authorities to come to a conclusion based on tangible material that without attaching the provisional attachment, it is not possible in the facts of the given case to protect the revenue and that the provisional attachment order is completely warranted for the purpose of protecting the Government revenue.

ii) Except for merely stating that since there was a likelihood of huge tax payments to be raised on completion of assessment and that for the purpose of protecting the revenue, it was necessary to provisionally attach the fixed deposit of the assessee, the other mandatory requirements and preconditions had neither been complied with nor fulfilled or followed prior to passing the order. In view of the fact that the orders were cryptic, unreasoned, non-speaking and laconic, they deserved to be quashed.

iii) In the light of the undisputed fact that the proceedings u/s. 153A of the Act had already been initiated coupled with the fact that section 281 of the Act contemplates that any alienation of any property belonging to the assessee would be null and void, in addition to the specific assertion made by the assessee that it owned and possessed immovable property to the tune of more than Rs. 300 crores, the apprehension of the Department that in the event huge tax payments were to be raised as against the assessee, the assessee might not make payment thereof thus causing loss to the Revenue, was clearly unfounded and without any basis.

iv) The impugned orders dated 26th March, 2021 passed by respondent No. 1 are hereby quashed.”

Reassessment — Notice — Sanction of prescribed authority — To be obtained prior to issue of notice — Approval granted after issue of notice — No valid explanation by cogent material that physical approval was granted before issuance of notice — Approval saying merely “yes, I am satisfied” — Non-application of mind on part of specified authority — Notice not valid

45 Svitzer Hazira Pvt. Ltd. vs. ACIT [2021] 441 ITR 19 (Bom) A.Y.: 2014-15; Date of order: 21st December, 2021 Ss. 147, 148 & 151 of ITA, 1961

Reassessment — Notice — Sanction of prescribed authority — To be obtained prior to issue of notice — Approval granted after issue of notice — No valid explanation by cogent material that physical approval was granted before issuance of notice — Approval saying merely “yes, I am satisfied” — Non-application of mind on part of specified authority — Notice not valid

For the A.Y. 2014-15, the Assessing Officer digitally issued a notice u/s 148 of the Income-tax Act, 1961 against the assessee and furnished the reasons for reopening. The notice was uploaded at 2.40 p.m. on 31st March, 2019 on the portal under the digital signature of the Assessing Officer and the copy of the approval u/s 151 was signed at 2.55 p.m. on 31st March, 2019 by the specified authority.

The assessee filed a writ petition and challenged the validity of notice on the ground that the notice u/s 148 was issued without prior sanction u/s 151 and that sanction had been granted without application of mind by the specified authority. The Bombay High Court allowed the writ petition and held as under:

“i) Prior approval of the superior officer as contemplated by section 151 of the Income-tax Act, 1961 operates as a shield against arbitrary exercise by the Assessing Officer of the power conferred on him u/ss. 147 and 148. The power to grant prior approval has been conferred on the superior officer so that the superior officer shall examine the reasons, material or grounds and adjudicate whether they are sufficient and adequate to the formation of necessary belief on the part of the Assessing Officer. Therefore, it is necessary for the superior officer to apply his mind and record his reasons howsoever brief so that the Assessing Officer’s belief is well reasoned and bona fide.

ii) The remark on the part of the superior authority must indicate application of mind by giving reasons for prior approval. The expression “no notice shall be issued” cannot be construed to mean post facto approval. The expression “no notice shall be issued” reflects the intention of the Legislature to indicate that prior approval is the sine qua non before issuance of notice u/s. 148. The sanction to be granted by the authority u/s. 151 has to be prior in point of time of issuance of notice u/s. 148.

iii) There was no prior sanction granted u/s. 151 by the Joint Commissioner before issuance of notice u/s. 148. Therefore, the jurisdictional condition of complying with section 151 was not satisfied. The explanation furnished in the order disposing of the objections of the assessee by the Assessing Officer that initially physical approval was granted and thereafter online approval was granted was not supported by any material on record. In the absence of valid explanation by cogent material the explanation in the order disposing of the objections of the assessee by the Assessing Officer that physical approval was granted before issuance of notice under section 148 could not be accepted.

iv) In his order of sanction, the Joint Commissioner had merely recorded his approval as “Yes, I am satisfied”. There was non-application of mind on the part of the Joint Commissioner while granting sanction u/s. 151.”

Reassessment — (i) Notice u/s 148 — Conditions precedent — New tangible material to show that income has escaped assessment and reason to believe — Notice on ground that assessee did not offer to tax interest and bonus received on surrender of life insurance policy before maturity — Original assessment without scrutiny not relevant — Reopening of assessment unsustainable; (ii) Exemption — Receipt of interest and bonus on surrender of life insurance policy before maturity — Conditions stipulated u/s 10(10D) — Department to prima facie establish which condition was not fulfilled by assessee — Assessee not receiving from insurer under contract of annuity plan — Provision of s. 80CCC(2) not applicable

44 Ami Ashish Shah vs. ITO [2021] 440 ITR 417 (Guj) A.Y.: 2012-13; Date of order: 22nd March, 2021 Ss.143(1), 147, 148, 10(10D) & 80CCC(2) of ITA, 1961

Reassessment — (i) Notice u/s 148 — Conditions precedent — New tangible material to show that income has escaped assessment and reason to believe — Notice on ground that assessee did not offer to tax interest and bonus received on surrender of life insurance policy before maturity — Original assessment without scrutiny not relevant — Reopening of assessment unsustainable; (ii) Exemption — Receipt of interest and bonus on surrender of life insurance policy before maturity — Conditions stipulated u/s 10(10D) — Department to prima facie establish which condition was not fulfilled by assessee — Assessee not receiving from insurer under contract of annuity plan — Provision of s. 80CCC(2) not applicable

The assessee, a non-resident individual, for the A.Y. 2012-13, declared income from house property. After a period of four years, the Assessing Officer issued a notice u/s148 of the Income-tax Act, 1961 to reopen u/s 147, the assessment made u/s 143(1) and recorded reasons that information was received from the Deputy Director (Investigation) to the effect that the assessee had obtained a life insurance policy on 28th June, 2006 on payment of an annual premium up to the F.Y. 2010-11, that the total amount paid by the assessee was Rs. 50 lakhs and the sum assured was Rs. 50 lakhs and the date of the last premium was 28th June, 2020, that the assessee surrendered the policy prematurely on 15th April, 2011 and received the surrender value which included an amount of accretion on account of interest and bonus on the credit of the assessee in the policy fund and that the assessee did not offer the accretion value to tax which resulted in income escaping assessment. The assessee raised objections on the grounds that any sum received under life insurance, including the sum allocated by way of bonus on life insurance policies did not form part of total income u/s 10(10D) if it did not fall under Exception sub-clauses (a) to (d) provided under such section and that the provisions of section 80CCC(2) was not applicable as he did not claim deduction u/s 80CCC(1) in his return. The objections were rejected.

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

“i) Even where the proceedings u/s. 147 of the Income-tax Act, 1961 are sought to be initiated with reference to an intimation u/s. 143(1), the ingredients of section 147 are required to be fulfilled. Therefore, such an assessment cannot be reopened unless some new or fresh tangible material comes into the possession of the Assessing Officer, subsequent to the intimation u/s. 143(1) and there should exist “reason to believe” that income chargeable to tax has escaped assessment. According to the Explanatory Notes on the provisions of the Direct Tax Laws (Amendment) Act, 1987, contained in Circular No. 549, dated 31st October, 1989, issued by the CBDT no distinction u/s. 147 is contemplated between a scrutiny assessment u/s. 143(3) and the assessment u/s. 143(1) and tangible material is necessary to reopen even an assessment made without scrutiny.

ii) Reference to section 80CCC(2) by the Department was misconceived for two reasons: first, section 80CCC dealt with annuity plans whereas the assessee’s case was concerned with life insurance policy; secondly, section 80CCC(2) made any sum received by the assessee from the insurer towards contract for any annuity plan, taxable, provided premium paid for such plan was claimed as allowable deduction u/s. 80CCC(1) . There was no such averment or findings that the amount of premium paid by the assessee had been claimed and allowed as deduction u/s. 80CCC(1). According to section 10(10D) as on 1st April, 2021 as applicable for the A.Y. 2012-13, all that was required for an insurance policy to meet the requirements of section 10(10D) were that: (i) it should be a life insurance policy; (ii) it should be taken by the assessee on his/her life, and (iii) for insurance policies issued after 1st April, 2003, premium payable for any of the years during the term of the policy should not exceed 20 per cent. of the actual capital sum assured. Once these criteria were fulfilled, any sum received under such life insurance policy including bonus (accretions over and above the premiums paid) was exempt income. This amount was nothing, but, bonus, which was otherwise covered u/s. 10(10D). However, for this amount to be taxable, the Department had to prima facie indicate as to which of the conditions of section 10(10D) were not fulfilled or how the amount in question was not exempted under this section. Hence, in the absence of any new tangible material in the possession of the Assessing Officer, subsequent to the intimation u/s. 143(1), the reopening u/s. 147 was unsustainable.”

Penalty — Concealment of income — Search proceedings and income-tax survey — Subsequent addition to income returned — Returns accepted — No concealment of income — Penalty could not be levied

43 Principal ClT vs. Shreedhar Associates [2021] 440 ITR 547 (Guj) A.Y.: 2013-14; Date of order: 14th September, 2021 S. 271 of ITA, 1961

Penalty — Concealment of income — Search proceedings and income-tax survey — Subsequent addition to income returned — Returns accepted — No concealment of income — Penalty could not be levied

The assessee, a partnership firm was involved in the business of real estate development and construction, where it had come out with a scheme “Shreedhar Residency” in the first year 2012-13. The survey u/s 133A of the Income-tax Act, 1961 was conducted on 9th January, 2013 as a part of search operations in Rashmikant Bhatt Group along with other assessees belonging to the very group. The total disclosure was made of Rs. 20 crores, of which Rs. 3.80 crores was of the assessee firm. This was offered as an additional income of a year under survey and the return which was filed by the assessee for the A.Y. 2013-14 on 29th September, 2013. The total income disclosed and declared was Rs. 4,26,92,360 which was inclusive of the said sum of Rs. 3.80 crores. The assessment order was passed u/s 143(3) on 28th December, 2015 without any addition, whereby the return filed by the assessee was accepted. However, the Assessing Officer had initiated the penalty proceedings u/s 271(1)(c) on the ground of concealment. The stand of the assessee is that the amount of Rs. 3.80 crores cannot be treated as concealed income since the same had been declared in the return filed by the assessee. This was not accepted by the Assessing Officer and a penalty was imposed u/s 271(1)(c) at the rate of 100 per cent tax on the income to the tune of Rs. 3.80 crores.

The Commissioner (Appeals) cancelled the penalty. The Tribunal concurred with the Commissioner (Appeals).

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

“Whether in the facts and circumstances of the case, the learned Income-tax Appellate Tribunal has erred in law and on fact in deleting the penalty levied u/s. 271(1)(c) of the Income-tax Act, 1961, amounting to Rs. 1,18,00,000 despite the fact that penalty was levied on admitted net undisclosed income of Rs. 3.80 crores received as ‘on money’, which was unearthed based on diary found and impounded by Investigation Wing during survey proceedings and also admitted by one of the partners in the statement recorded u/s. 131(1A) of the Act and the said ‘on money’ income was not accounted for in the regular books of account of the assessee on the date of survey?”

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

“i) The Income-tax survey had taken place on 9th January, 2013 as a part of search operation of the entire group and out of additional Rs. 20 crores disclosed, Rs. 3.80 crores was attributed to the assessee-firm. The return was filed u/s. 139 of the Income-tax Act, 1961 by the assessee for the A.Y. 2013-14 on 29th September, 2013, which was about eight months after the survey which was conducted. The books of account were not closed and it was not a case of any revised return being filed by the assessee. In such circumstances, the Assessing Officer also had not added any other income as the amount of Rs. 3.80 crores had already been declared in the return itself.

ii) There was no concealment of income and hence penalty could not be imposed.”

Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

42 CIT vs. Varun Developers [2021] 440 ITR 354 (Karn) A.Ys.: 2006-07 and 2007-08; Date of order: 8th February, 2021 Ss.80-IB(10), 145 of ITA, 1961

Method of accounting — Assessee a builder and developer and not construction contractor — AS 7 applicable only in case of contractors — Assessee adopting completed contract method for A.Y. 2006-07 — No income offered in subsequent A.Y. 2007-08 — Result revenue neutral

The assessee was a builder and developer and not a construction contractor simpliciter. Assessee adopted completed contract method for the A.Y. 2006-07 onwards. Following the said method the assessee did not offer any income for the A.Y. 2007-08. The Assessing Officer rejected the assessee’s claim and made addition applying the percentage completion method.

The Tribunal allowed the assessee’s claim.

In appeal by the Revenue, the following question was raised before the High Court.   

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the assessee from project ‘Mantri Sarovar’ has to be computed for the A.Y. 2006-07 on the basis of ‘Project completion method’ without appreciating that as per AS-7 and AS-9, the assessee has to follow percentage completion method as the assessee is a builder and developer?”

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

“i) U/s. 145(1) of the Act, the income chargeable under the head “Profits and gains of business” shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The general provision was subject to accounting standards that the Central Government may notify.

ii) The assessee was a builder and developer and not a construction contractor simpliciter. Accounting Standard 7, titled construction contracts, was applicable only in case of contractors and did not apply to the case of developers and builders as evident from the opinion rendered by the expert advisory committee of the Institute of Chartered Accountants of India. No income from the project was offered for the A.Y. 2007-08 on the basis of the project completion method and either method of accounting finally would lead to the same results in terms of profits and therefore, was revenue neutral.

iii) The substantial question of law is answered against the Revenue and in favour of the assessee.”

Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

41 Jetha Properties Pvt. Ltd. vs. CIT [2021] 440 ITR 524 (Bom) A.Y.: 1991-92; Date of order: 9th December, 2021 S. 37 of ITA, 1961

Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

The assessee was a warehouse keeper. Due to flooding during the rains, when the customer’s goods which were clothing material manufactured for export got damaged the customer cautioned the assessee that if no remedial measure was taken it would have to change its business arrangement with the assessee. Therefore, the assessee raised the floor height to preserve the goods of its customers. Thereafter, the customer raised the warehousing charges from Rs. 1.20 per sq. ft. per week to Rs. 1.50 per sq. ft. per week.

On the question whether the expenditure incurred by the assessee for raising the floor height was revenue expenditure as claimed by the assessee or capital expenditure as claimed by the Department, the Bombay High Court held as under:

“i) The test to be applied whether an expenditure is revenue expenditure or not depends on whether the expenditure is related to the carrying on or conduct of the business and is an integral part of the profit-earning process. If the expenditure is so connected with the carrying on of the business that it may be regarded as an integral part of the profit-earning process, the expenditure cannot be treated as a capital expenditure but is revenue expenditure.

ii) The expenditure was incurred by the assessee wholly and solely to ensure that the existing business with the customer, which offered attractive returns to it was continued uninterrupted. The expenditure incurred by the assessee had direct relation to the business with the customer because the assessee had also received corresponding increased compensation from the customer. The expenditure did not bring into existence any new asset. There was a benefit by way of continuing business with the customer or increase in compensation from the customer. The assessee had achieved both these objectives by incurring the expenditure. The assessee had satisfactorily explained that the expenditure was for the purpose of conducting its business and increase in profit. The expenditure so incurred was related to the carrying on or conducting of warehouse business of the assessee and hence, it was as an integral part of the profit-earning process. The expenditure, therefore, could not be treated as capital expenditure but should be treated as revenue expenditure.”

Assessment — Faceless assessment — Grant of personal hearing where there is variation of income and requested by assessee — Failure to grant personal hearing requested by assessee on passing of draft assessment order — Assessment order and consequential demand and penalty notices set aside — Matter remanded to AO to grant personal hearing through video conferencing

40 Civitech Developers Pvt. Ltd. vs. ACIT [2021] 440 ITR 398 (Del) A.Y.: 2018-19; Date of order: 22nd July, 2021 Ss. 143(3), 144B(7) of ITA, 1961

Assessment — Faceless assessment — Grant of personal hearing where there is variation of income and requested by assessee — Failure to grant personal hearing requested by assessee on passing of draft assessment order — Assessment order and consequential demand and penalty notices set aside — Matter remanded to AO to grant personal hearing through video conferencing

The assessee was in real estate business. For the A.Y. 2018-19, a notice was issued against the assessee proposing to make addition to its income. The assessee filed a response and sought personal hearing through video conferencing. Another notice was served with the draft assessment order reducing the addition in response to which the assessee filed a detailed reply with documents and again sought a personal hearing through video conferencing to explain the issues which were complex in nature to the Assessing Officer in correct perspective with the layout plan, the disputed land and the towers which were incomplete. However, no personal hearing was allowed and assessment order was passed u/s 143(3) read with section 144B of the Income-tax Act, 1961 enhancing the income and consequential demand and penalty notices were issued.

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

“Section 144B(7) of the Income-tax Act, 1961 provides an opportunity for a personal hearing, if requested by the assessee. As the option to opt for personal hearing was not enabled, the assessee due to technical glitches could not request for personal hearing on the e-portal. Consequently, it could not be said that the assessee did not opt for personal hearing. Therefore, the assessment order passed u/s. 143(3) read with section 144B and the consequential demand and penalty notices were set aside.”

The matter was remanded back to the Assessing Officer to grant an opportunity of personal hearing to the assessee through video conferencing.

TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

39 Kartik Vijaysinh Sonavane vs. Dy. CIT [2021] 440 ITR 11 (Guj) A.Ys.: 2009-10 and 2011-12; Date of order 15th November, 2021 S. 205 of ITA, 1961

TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

The assessee was a pilot by profession and an airline company employee. The company deducted tax at source of Rs. 7,20,100 and Rs. 8,70,757 for the A. Ys. 2009-10 and 2011-12 respectively in his case but did not deposit it in the Central Government account. The assessee was denied credit for the tax deducted at source and recovery notices for tax with interest were raised against the assessee.

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

“The Department was precluded from denying the assessee the benefit of the tax deducted at source by the employer during the relevant financial years. Credit shall be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee shall be entitled to the refund thereof with the statutory interest, within eight weeks.”

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

38 ClT(TDS) vs. INTAS Pharmaceuticals Ltd. [2021] 439 ITR 692 (Guj) A.Ys.: 2011-12 to 2013-14; Date of order: 11th August, 2021 S. 194H of ITA, 1961

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

The assessee was a pharmaceutical company. Pursuant to a survey u/s 133A of the Income-tax Act, 1961 carried out at the premises of the assessee, e-mails and other correspondences that ensued between the sales executive and the general manager, seized during the survey operations, suggested that the doctors had acted as the agents of the assessee, by prescribing the medicines of the assessee over a period of time, and therefore, the expenses incurred by the assessee on the doctors towards taxi fares, air fares, etc., for attending regional conferences or scientific conferences were required to be treated as commission received or receivable as contemplated u/s 194H. The Assessing Officer treated the assessee as an assessee-in-default u/s 201(1) for non-deduction of tax at source u/s 194H of the Act on such payments.

The Commissioner (Appeals) restricted the addition to expenditure incurred on the doctors under various heads and held that the expenses incurred on other stakeholders did not fall within the definition of the term commission. Both the Department and the assessee filed appeals before the Tribunal. The Tribunal partly allowed the assessee’s appeals and dismissed the appeals filed by the Department.

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

“i) According to the provisions contained in section 194H of the Income-tax Act, 1961 and the Explanation to the section, any payment received or receivable by a person for rendering medical services is excluded from the purview of section 194H. The Explanation to section 194H cannot be interpreted so widely as to include any payment receivable, directly or indirectly for services in the course of buying or selling goods.

ii) In the absence of an element of agency between the assessee and the doctors, the provisions of section 194H could not be invoked. The doctors were not bound to prescribe the medicines as suggested by the assessee. There was no legal compulsion on the part of the doctors to prescribe a particular medicine suggested by the assessee, and therefore, the doctors had not acted as the agents of the assessee.

iii) There was no illegality or infirmity in the order of the Tribunal in holding that the expenditure incurred on the doctors could not be classified as commission. No question of law arose.”

TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

37 CIT  vs. SBI Life Insurance Company Ltd. [2021] 439 ITR 566 (Bom) Date of order: 22nd October, 2021 S. 194D of ITA, 1961

TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

The assessee respondent is engaged in the business of underwriting life insurance policies. The assessee’s business comprises of individual life and group business. The Assessing Officer noticed that the assessee had incurred foreign travel expenses for its agents who were working for soliciting or procuring insurance business for the assessee and opined that foreign travel expenses incurred by the assessee on its agents were covered under the words “income by way of remuneration or reward whether by way of commission or otherwise” used in section 194D of the Income-tax Act, 1961. Since the assessee had not deducted tax at source, the Assessing Officer treated the assessee as an assessee in default.

The order was set aside by the Commissioner (Appeals) and this was affirmed by the Tribunal.

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

“i) U/s 194D the obligation to deduct is on the person who is paying and the deduction to be made at the time of making such payment.

ii) Factually and admittedly no amount had been paid to the agents by the assessee as a reimbursement of expenses incurred by the agent on foreign travel. The assessee had made arrangement for foreign travel for all the agents and paid expenses directly to those service providers. Therefore, as no amount was paid to the agents by the respondent, the obligation to deduct Income-tax thereon at source also would not arise.”

Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

36 Loku Ram Malik vs. CIT [2021] 440 ITR 159 (Raj) A.Y.: 1999-00; Date of order: 3rd May, 2017 Ss. ss. 143, 143(2), 143(3) & 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

The assessee showed the investment in a plot of land at a certain value in his return of income filed on 6th December, 1999. The Assessing Officer processed the return u/s 143(1)(a) of the Income-tax Act, 1961 on 11th August, 2000. Thereafter, the assessee revised the balance sheet and profit and loss account on 16th August, 2000 enhancing the investment in such property. The Assessing Officer issued a notice u/s 148 on 14th September, 2000, based on the revised balance sheet filed by the assessee and then issued a notice u/s 143(2) on 3rd October, 2000.

In appeal, the assessee challenged the validity of the notice u/s. 148. The Tribunal upheld the issuance of notice u/s 148 though the Assessing Officer could have issued a notice u/s 143(2) to make the regular assessment u/s 143(3).

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

“i) The order u/s 143(1)(a) was confirmed on 11th August, 2000 when the return was filed and the notice u/s 148 came to be issued before the assessment could have been done.

ii) The Tribunal had committed an error in upholding the notice issued u/s 148.”

Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

35 Coca-Cola India P. Ltd. vs. Dy. CIT [2021] 440 ITR 20 (Bom) A.Y.: 1998-99; Date of order: 21st September, 2021 Ss. 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

For the A.Y. 1998-99, the assessee filed a second revised return declaring a loss as a result of demerger of its bottling division. The Deputy Commissioner issued notices u/s 143(2) and 142(1) of the Income-tax Act, 1961 along with a questionnaire. The assessee furnished the reasons for filing the revised returns of income and provided clarifications in response to the various queries raised and the balance sheet and the profit and loss account. Thereafter, the Deputy Commissioner passed an order dated 30th March, 2001 u/s 143(3), computing the assessee’s total income at nil after setting off earlier years’ losses. Aggrieved by certain disallowances made by the Deputy Commissioner, the assessee filed an appeal before the Commissioner (Appeals). The Commissioner, by an order u/s 263 directed the Deputy Commissioner to pass a fresh assessment order after considering the issues identified in his order. Thereafter, an order u/s 143(3) read with section 263 was passed. After the expiry of four years, the Deputy Commissioner issued a notice u/s 148 to reopen the assessment u/s 147.

The assessee filed a writ petition and challenged the notice. The Bombay High Court allowed the writ petition and held as under:

“i) According to the proviso to section 148 of the Income-tax Act, if the notice is issued to reopen the assessment u/s 147 after the expiry of four years from the relevant assessment year, it will be time barred unless the assessee had failed to disclose material facts that were necessary for the assessment of that A.Y. and if there is no failure to disclose, it would render the notice issued as being without jurisdiction.

ii) The reasons recorded for reopening of the assessment did not state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of the assessment year 1998-99. The notice issued u/s 148 after a period of four years for reopening the assessment u/s 147 and the consequential order passed were quashed and set aside.”

Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

34 Peninsula Land Ltd. vs. ACIT [2021] 439 ITR 582 (Bom) A.Y.: 2012-13; Date of order: 25th October, 2021 Ss. 132, 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

For the A.Y. 2012-13, an order u/s 143(3) read with section 153A of the Income-tax Act, 1961 was passed on 30th December, 2016 against the assessee. After a period of four years, the Assessing Officer issued a notice u/s 148 dated 30th March, 2019 for reopening the assessment u/s 147 of the Act. He recorded reasons that information was received from the Deputy Director that a search and seizure operation was conducted u/s 132 in the case of an entity EE and based on the statement recorded of the partner of EE and documentary evidence found in the search, an undisclosed activity of money lending and borrowing in unaccounted cash was found being operated at the premises of EE, that the assessee had indulged in lending of cash loan and the amount of Rs. 30 lakhs had escaped assessment within the meaning of section 147. Consequent reassessment order was passed on 5th September, 2019.

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

“i) Under the substituted section 147 of the Income-tax Act, 1961 if the Assessing Officer has reason to believe that income has escaped assessment that is enough to confer jurisdiction to reopen the assessment. But the Assessing Officer has no power to review an assessment which has been concluded. After a period of four years even if the Assessing Officer has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

ii) The reasons for the reopening of assessment have to be tested or examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons to believe cannot be improved upon or supplemented much less substituted by affidavit or oral submissions. The reasons for reopening an assessment should be those of the Assessing Officer alone who is issuing the notice and he cannot act on the dictates of any another person in issuing the notice. The tangible material upon the basis of which the Assessing Officer entertains reason to believe that income chargeable to tax has escaped assessment can come to him from any source, but the reasons for the reopening have to be only of the Assessing Officer issuing the notice.

iii) In the reasons for the reopening, the Assessing Officer had not stated anywhere that one BS was an employee of the assessee. Further, he did not even disclose when the search and seizure u/s 132 was carried out in the case of the entity EE, whether it was before the assessment order dated 30th December, 2016 against the assessee was passed or afterwards. The reasons for reopening were absolutely silent on how the search and seizure on EE or the statement referred to or relied upon in the reasons recorded had any connection with the assessee.

iv) The notice dated 30th March, 2019 issued u/s 148 and the subsequent order dated 5th September, 2019 passed were without jurisdiction and hence, quashed and set aside. Any consequent notice or demand, if issued, was also quashed and set aside.”

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

33 Park Health Systems Pvt. Ltd. vs. Principal CIT [2021] 439 ITR 643 (Telangana) Date of order: 28th September, 2021 S. 17(2)(viii) Proviso (II)(B) of ITA, 1961

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

The assessee was a hospital, and it was granted approval by the Principal Chief Commissioner under proviso (ii)(b) to section 17(2)(viii) of the Income-tax Act, 1961 initially in the year 2011-12, with each renewal being valid for three years and the last of the renewal granted being valid till 21st March, 2020. The assessee made an application on 13th January, 2020 seeking renewal of approval granted two months prior to the expiry of the validity period of the existing approval granted. While the application was pending for renewal of approval, the Covid-19 pandemic struck and the assessee was granted approval by the State Government Department of Public Health and Family Welfare for providing treatment for Covid-19 patients. Thereafter, based on complaints, the State Government Medical and Health Officer, on 3rd August, 2020 revoked the permission granted to the assessee. The assessee submitted its explanation and sought for recalling the revocation order. While the explanation offered by the assessee was under consideration by the State authorities, the second respondent issued a notice dated 12th October, 2020 calling upon the assessee to show cause why the cancellation order of the State Government should not be considered for deciding the application for recognition under proviso (ii)(b) to section 17(2)(viii). The assessee submitted in its letter to the Principal Chief Commissioner that when it made the application for renewal of approval, there was no Covid-19 pandemic outbreak, that the State Government Department of Public Health and Family Welfare revoked the permission for Covid-19 treatment only and not for other medical treatments, that the State authority’s action was based on misinformation and baseless propaganda made by the media without taking into consideration the actual facts, that the assessee was under the process of getting permission again for Covid-19 treatment from the State Government Department of Public Health and Family Welfare and requested to grant the renewal of application under proviso (ii)(b) to section 17(2)(viii). The Principal Chief Commissioner rejected the application for renewal of approval by an order dated 19th October, 2020.

On a writ petition challenging the order, the Telangana High Court allowed the writ petition and held as under:

“i) The order rejecting the renewal of approval under proviso (ii)(b) to section 17(2)(viii) had been passed by the Principal Chief Commissioner by traversing beyond the notice and was in violation of principles of natural justice causing prejudice to the assessee. The order read with the notice showed that it was passed as a chain reaction to the order of the State Government, which dealt with determination of corona virus disease as a respiratory disease and it was a prescribed disease under clause (a) of sub-rule (2) of rule 3A of the Income-tax Rules, 1962.

ii) The order indicated that it had taken into consideration various issues which had not been mentioned in the notice issued to the assessee. The only ground mentioned in the notice was with regard to the State Government revoking the mandate given for covid treatment, whereas the order, apart from dealing with the revocation of mandate for covid treatment by the State Government, also dealt with other aspects as to the nature of the corona virus disease being a respiratory disease and the assessee having resorted to excessive, exorbitant and unconscionable pricing being a misconduct or an offence, without putting the assessee on notice of the allegations and to offer its explanation. The claim of the Principal Chief Commissioner that Covid-19 treatment was a respiratory disease was not backed by any material or scientific data. Since the notice issued relied only on the revocation of permission for providing medical treatment for Covid-19 by the State Government, and the revocation having been lifted by the State authority by proceedings dated 13th September, 2020 and the assessee was permitted to provide treatment for Covid-19 patients, the very basis of the notice dated 12th October, 2020 issued was removed.

iii) The order rejecting the renewal of approval granted under proviso (ii)(b) to section 17(2)(viii) was unsustainable.”

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

32 Principal CIT. vs. Narmada Chematur Petrochemicals Ltd. [2021] 439 ITR 761 (Guj) A.Y.: 2004-05; Date of order: 14th July, 2021 S. 115JB of ITA, 1961

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

The assessee claimed deduction u/s 80HHC of the Income-tax Act, 1961 and after setting off unabsorbed loss and depreciation of the preceding years, the assessee filed a nil return for the A.Y. 2004-05 and declared the book profits under the provisions of section 115JB. The Assessing Officer made various disallowances in his order u/s 143(3).

The Commissioner (Appeals) deleted the addition made on account of bad and doubtful debts holding that the provision for bad and doubtful debt was not a provision for a liability but for diminution in value of assets and therefore, clause (c) of the Explanation to section 115JB would not be applicable. The assessee and the Department filed appeals before the Tribunal. The Tribunal held that since the assessee had simultaneously obliterated the provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year shown the loans and advances on the assets side of the balance sheet as net of the provision for bad debts, it would amount to a write-off and such actual write-off would not be hit by clause (i) of the Explanation to section 115JB.

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

“The Tribunal was right in deleting the addition on account of the provision for bad and doubtful debts in the computation of the book profits for computation of minimum alternate tax liability in the light of clause (i) of the Explanation to section 115JB. No question of law arose.”

Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

31 Stride Multitrade Pvt. Ltd. vs. ACIT [2021] 439 ITR 141 (Bom) A.Y.: 2017-18;
Date of order: 21st September, 2021 S. 246A of ITA, 1961; Ss. 2(1)(a)(i), 2(1)(a)(n) of Direct Tax Vivad se Vishwas Act, 2020

Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

For the A.Y. 2017-18, the assessee declared loss in its return of income. An assessment order was passed u/s. 144. The assessee filed an appeal u/s 246A before the Commissioner (Appeals) with an application for condonation of delay of 19 days in filing the appeal. Thereafter, the assessee received a communication from the Commissioner (Appeals) of the National Faceless Appeal Centre inquiring whether the assessee wished to opt for the Vivad se Vishwas Scheme or would contest the appeal. The assessee admittedly made its declaration in form 1 on 21st January, 2021, within the specified date of 31st January, 2020 u/s 2(1)(a)(n) of the 2020 Act. The Principal Commissioner rejected the declaration of the assessee under the 2020 Act on the ground that there was no order condoning the delay in filing the appeal before the Commissioner (Appeals).

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

‘i) Section 2(1)(a)(i) of the Direct Tax Vivad se Vishwas Act, 2020 provides that a person in whose case an appeal or a writ petition or special leave petition has been filed either by himself or by Income-tax authority or by both, before an appellate forum and such appeal or petition is pending as on the specified date is entitled to make a declaration under the Act. The specified date u/s 2(1)(a)(n) of the 2020 Act is 31st January, 2020. Where the time limit for filing of appeal has expired
before 31st January, 2020 but an appeal with an application for condonation of delay is filed before the date of the Circular, i.e., 4th December 2020 [2020] 429 ITR (St.) 1, issued by the Central Board of Direct Taxes such appeal will be deemed to be pending as on 31st January, 2020.

ii) The communication dated 20th January, 2021 from the Commissioner (Appeals) asking the assessee to furnish ground-wise written submissions on the grounds of appeal itself would mean that the delay had been condoned by the Commissioner (Appeals). Therefore, it was incorrect for the Principal Commissioner to state that there was no order condoning the delay and hence, reject the declaration of the assessee under the 2020 Act.

iii) The time limit to file appeal had expired on 18th January, 2020 and the condonation of delay application was filed on 6th February, 2020, before 4th December, 2020, the date of the Board’s Circular. The appeal would be pending as required under the 2020 Act. The order of rejection of the assessee’s declaration under the 2020 Act was bad in law and accordingly set aside. The Principal Commissioner was directed to process the forms filed by the assessee under the provisions of the 2020 Act.’

Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

30 Principal CIT vs. S.R. Trust [2021] 438 ITR 506 (Mad) A.Ys.: 2009-10 to 2015-16; Date of order: 24th November, 2020 Ss. 132 and 153C of ITA, 1961

Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

The assessee was a charitable trust. A search was conducted u/s 132 of one SG who was a doctor and managing trustee of the assessee which established and administered a hospital. Simultaneously, a search action was conducted in the case of one TJ who
supplied medical and surgical equipment and other accessories to the hospital run by the assessee. Pursuant to the search, the Department was of the prima facie view that funds were siphoned off through TJ allegedly resorting to huge inflation of expenses through salaries paid to staff members by transfer of funds to the bank accounts of the employees as if salaries were paid to them. Based on the seized documents, a notice u/s 153C was issued for the A.Ys. 2009-10 to 2015-16 against the assessee. An order u/s 143(3) read with section 153C was passed.

The Commissioner (Appeals) and the Tribunal found that TJ did not admit that money was paid back to the managing trustee of the assessee-trust, that the materials seized did not indicate any inflation of purchase by the assessee and that the deposits in the bank account of the managing trustee of the assessee stood explained. The Commissioner (Appeals) and the Tribunal held that there was no material brought on record to prove the nexus between withdrawal of the amount from the bank account of TJ and the deposits made in the bank accounts of the managing trustee of the assessee.

The appeal filed by the Department was dismissed by the Madras High Court. The High Court held as under:

‘i) The Tribunal was right in holding that the A.O. ought not to have assumed jurisdiction u/s 153C. In proceedings u/s 153C, in the absence of any incriminating documents or evidence discovered during the course of search u/s 132 in the case of searched person against the assessee, the jurisdiction under the provisions of section 153C could not be assumed. The Commissioner (Appeals) had allowed the appeals filed by the assessee as confirmed by the Tribunal.’

ii) The order of the Tribunal was confirmed. No question of law arose.

Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

29 Principal CIT vs. EPC Industries Ltd. [2021] 439 ITR 210 (Bom) A.Y.: 2007-08; Date of order: 26th October, 2021 Ss. 147, 148 of ITA, 1961

Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

For the A.Y. 2007-08, the A.O. issued a notice u/s 148 to reopen the assessment u/s 147 on the ground that the assessee had claimed deduction for depreciation on the assets acquired with the bank loan, which the bank had written off under a one-time settlement as bad debts and the write-back by the assessee was to be treated as income. The assessee’s objections were rejected. In the reassessment order the A.O. brought to tax the waiver of principal amount of bank loan as income of the assessee u/s 41(1) / 28(iv).

The Tribunal held that the assessment was reopened based on information which was already on record and no new tangible material was brought on record to suggest escapement of income in respect of waiver of loan on one time settlement by the bank which was claimed by the assessee as deduction. The Tribunal allowed the assessee’s appeal.

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

‘i) The reason to believe that any income chargeable to tax had escaped assessment u/s 147 has to arise not on account of a mere change of opinion but on the basis of some tangible material. Once there was a query raised with regard to a particular issue during the regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as reflected in the assessment order.

ii) A query was raised by the A.O. in the original assessment in respect of the waiver of loan on account of the one-time settlement with the bank and the assessee had filed a detailed submission as to why the principal amount waived by the bank on account of the one-time settlement was not taxable. Reassessment on a change of opinion was impermissible. No question of law arose.’

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

17. CIT vs. Oberon Edifices & Estates (P) Ltd.; [2019] 110 taxmann.com 305 (Ker.) Date of order: 5th September, 2019 A.Y.: 2009-10

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

The assessee was a company engaged in the business of construction and sale of residential and commercial building complexes. During the A.Y. 2009-10 the assessee sold a portion of the mall building being constructed by it. The construction of the building was not complete at that time. The assessee incurred expenditure during the financial years 2009-10 and 2010-11 for completing the construction and claimed it as deduction. The AO disallowed the same.

The Commissioner (Appeals) held that in a situation where at the time of assessment the building remains incomplete, estimated future expenditure to be incurred was also considered along with the expenditure already incurred and was taken as cost relatable to the total saleable area, i.e., saleable area already built and the saleable area to be built in future, for arriving at the estimated cost of construction per square foot (sq. ft.). Therefore, the contentions of the assessee were accepted and it was held that the AO was not justified in not taking the value of building work-in-progress during the financial years 2009-10 and 2010-11 for working out the cost per sq. ft.

It was directed that the cost per sq. ft. would be taken as total expenditure incurred in construction, divided by the total saleable area, for the purpose of working out the profit from the sale of commercial area. The Tribunal upheld the decision of the Commissioner (Appeals).

The Revenue filed an appeal before the High Court and contended that the claim for deduction of future expenses made by the assessee could not be allowed. It contended that there was a distinction between the amount spent to pay off an actual liability and a liability that would be incurred in future which was only contingent. It was contended that the former was deductible but not the latter.

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

‘(i) The dispute raised by the Revenue is only with regard to the deduction claimed by the assessee in respect of the expenses incurred in future, that is, after the sale of the building, during the subsequent financial years, and not in respect of the expenses incurred by it during the relevant financial year. Section 37 is a residuary section for allowability of business expenditure.

(ii)    The expression “profits and gains” has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom –whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. It is the meaning of the word “profits” in relation to any trade or business. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise.

(iii)    “Expenditure” is not necessarily confined to the money which has been actually paid out and it covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro.

(iv)    In order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself and it is sufficient that the liability for payment had incurred or accrued during the relevant accounting year and the actual payment of amount or discharge of liability may occur in future and what is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But a contingent liability that may arise in future cannot be treated as expenditure. Thus, the substantial question of law is answered in favour of the assessee and against the Revenue.’

Income from undisclosed sources – Bogus purchases – A.O. disallowing entire purchases – Estimation by Commissioner (Appeals) of profit element embedded in purchases at 17.5% affirmed by Tribunal based on facts – Justified

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

39. Principal CIT vs. Pratham Developers [2020] 429 ITR 114 (Guj.) Date of order: 2nd March, 2020 A.Y.: 2010-11

 

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

 

The assessee developed housing projects. It claimed deduction u/s 80-IB(10) in respect of five projects. The A.O. found that one of the projects was undertaken
on land introduced by the partners. He held that the assessee was not the sole owner of the land on which the housing project was constructed and disallowed the deduction. In respect of another project PV, the A.O. held that out of the layout plan for 158 residential units, 55 residential units were of built-up areas of 2,199 sq. ft. which exceeded the prescribed built-up area of 1,500 sq. ft. as envisaged u/s 80-IB(10)(c). Accordingly, the A.O. disallowed the deduction claimed by the assessee u/s 80-IB(10).

 

The Commissioner (Appeals) found that all the residential units developed by the assessee under the scheme PV were below the prescribed built-up area of 1,500 sq. ft., that as regards the 55 residential units the development agreement entered into between the land owners and its associate concern showed that the scheme was developed by its associate concern and that they did not form part of the housing project developed by the assessee. The Commissioner (Appeals) held, on the facts that the assessee was a separate concern which fulfilled the conditions prescribed u/s 80-IB(10), that the project which consisted of the 55 residential units was a separate project developed by another assessee, and that the assessee was entitled to deduction u/s 80-IB(10) in respect of the 103 residential units in the project which fulfilled the criteria prescribed as to the size of the plot, and the built-up area of each residential unit being of less than 1,500 sq. ft. The Tribunal affirmed the order passed by the Commissioner (Appeals).

 

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

 

‘i)    The condition laid down u/s 80-IB(10)(c) was fulfilled when the assessee claimed the deduction with respect to the residential units, which had built-up area less than 1,500 sq. ft. Under section 80-IB(10) there was no provision requiring the assessee to obtain a commencement certificate from the local authority for development and construction of the residential units having more than 1,500 sq. ft. area. Therefore, whether such development permission included the area for the residential units which were more than 1,500 sq. ft. would not be relevant for deciding the eligibility for deduction u/s 80-IB(10).

 

ii)    In view of the concurrent findings of fact arrived at by the Commissioner (Appeals) and the Tribunal, there was no legal infirmity in their orders allowing the deduction u/s 80-IB(10).’

 

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

38. CIT vs. NTT Data Global Advisory Services Pvt. Ltd. [2020] 429 ITR 546 (Karn.) Date of order: 12th November, 2020 A.Y.: 2007-08

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

 

The assessee is a private limited company and is in the business of software development and professional services. For the A.Y. 2007-08 the assessee claimed deduction u/s 10A. The A.O. recomputed the deduction u/s 10A by reducing the recruitment fee from the export turnover.

 

The Commissioner held that income from human resource services is not eligible for deduction u/s 10A and accepted the alternative plea to tax only net income from the business of manpower supply. The Tribunal held that transmitting the data of qualified information technology personnel is human resource services and information technology-enabled services. Accordingly, the appeal preferred by the assessee was allowed.

 

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

 

‘i)    The expression “computer software” has been defined in Explanation 2 to section 10A and means even any customised electronic data or any product or service of a similar nature as may be notified by the Board. Thus, the Legislature has empowered the Board to notify the products or services of similar nature which would be covered under clause (b) and treated as “customised electronic data” and also, “any product or service of similar nature”. The Board has issued a notification dated 26th September, 2000 which admittedly contains human resources as well as information technology-enabled products or services.

 

ii)    The role of the assessee company was to create an electronic database of qualified personnel and transmit data through electronic means to the client. The Commissioner (Appeals) had found that the assessee was in the business of supply of manpower from India to its foreign clients after their recruitment in India. Thus, irrespective of whether or not the assessee provided training to its employees or to the employees who were recruited by its clients, since the assessee was engaged in providing human resource services, its case was squarely covered by notification dated 26th September, 2000. Therefore, the assessee was entitled to the benefit of deduction u/s 10A.’

 

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

37. CIT (LTU) vs. V. IBM Global Services India Pvt. Ltd. [2020] 429 ITR 386 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2000-01

 

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

 

The assessee was in the business of export of software solutions and maintenance services. For the A.Y. 2000-01, the assessee claimed exemption u/s 10A. The A.O., inter alia, held that the assessee had a software technology park unit as well as other units and all overhead expenses had been charged in relation to the other unit and no expenditure was claimed in respect of the software technology park unit for which exemption u/s 10A had been claimed. He also held that the assessee had not fulfilled the stipulations laid down in the Software Technology Parks of India Scheme or the conditions laid down by the Reserve Bank of India regarding maintenance of separate accounts and other conditions and, therefore, the assessee was not entitled to exemption u/s 10A. He further held that the audit report did not exclude payment made to sub-contractors or other expenses incurred abroad. He held that the turnover brought into the country was 56.056% which was below 75% as stipulated u/s 10A. Accordingly, he disallowed the exemption u/s 10A.

 

The Commissioner (Appeals) allowed the appeal partly. The Tribunal dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee in part.

 

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

 

‘i)    Section 10A is a special provision in respect of newly-established undertakings in free trade zones. The exemption is dependent on fulfilment of the conditions mentioned in sub-section (2). Sub-section (2) does not contain any requirement with regard to maintenance of separate accounts. Wherever the Legislature intended to incorporate the requirement of maintenance of either separate accounts or separate books of accounts, it has expressly said so. The requirement of maintenance of separate accounts has been provided in the STPI registration scheme and no consequences for non-compliance therewith have been prescribed. Therefore, the requirement is directory.

 

ii)    From a perusal of section 10A(2)(ia) it is evident that it applies to an undertaking which begins to manufacture or produce any article or thing on or after 1st April, 1995 and whose exports of such articles or things are not less than 75% of the total sales thereof during the previous year. Thus, the total export has to be not less than 75% of the total sales.

 

iii)   The A.O. in his remand report to the Commissioner (Appeals) had stated that the assessee had been able to bifurcate the software technology park receipts, section 80HHE receipts and domestic receipts. The direct expenses relating to domestic receipts and export receipts had also been segregated and direct expenses of export turnover were apportioned on the basis of the percentage of turnover of the software technology park unit and section 80HHE receipts.

 

iv)   The Commissioner (Appeals) had concluded that since the assessee had identified the turnover relating to the software technology park units and there was a reasonable basis for quantifying direct and indirect expenses pertaining to the software technology park units, the income pertaining to the software technology park units and therefore, exemption u/s 10A could be worked out. The Tribunal had held that the assessee had units spread over various parts of the country and even abroad, and hence the only plausible method of reasonably allocating the overhead expenses was by relating them to the turnover. The Tribunal had upheld the order to the extent of Rs. 68,72,88,748 holding this to be a reasonable figure. These concurrent findings of fact were based on meticulous appreciation of evidence on record. The Tribunal had rightly held that the allocation of the overhead expenses had to be made on the basis of the turnover.

 

v)   The Commissioner (Appeals) had held that the sub-contractors had given software support activity to the assessee and not to the customers of the assessee. The employees of the sub-contractors operated from the software technology park unit itself and the sub-contractors had claimed exemption u/s 10A on the basis of the foreign inward remittance certificate, which had no bearing with regard to the assessee’s claim to exemption u/s 10A. The question of double deduction did not arise.

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

36. CIT vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) [2020] 429 ITR 358 (Bom.) Date of order: 6th November, 2020


 

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

 

The assessee was a miner and exporter of mineral ores. For the A.Y. 2009-10 the A.O. computed disallowance u/s 14A read with rule 8D at 0.5% on the average investment. He rejected the assessee’s claim that it did not incur any expenditure to earn the dividend income, that it invested the surplus funds through bankers and other financial institutions and all the forms were filled up by them, and that it only issued cheques. He was of the view that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds.

 

The Commissioner (Appeals) partly allowed the appeal. The Tribunal allowed the assessee’s appeal and deleted the disallowances.

 

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

 

‘i)    Section 14A inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 aims to disallow expenditure incurred in relation to income which did not form part of the total income and has to be read with Rule 8D of the Income-tax Rules, 1962 which provides the method of calculation of the disallowance. Section 14A statutorily recognises the principle that tax is leviable only on the net income. The profits and gains of business or profession are taxed after deducting expenditure from income. In that regard, there is no need for the assessee to establish a one-to-one correlation between income and expenditure. Rule 8D provides the methods for determining the amount of expenditure in relation to income not includible in the total income and comes into play once an expenditure falls within the mischief of section 14A.

 

ii)    The onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. The application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Though the expenditure u/s 14A includes both direct and indirect expenditure, that expenditure must have a proximate relationship with the exempted income. Before rejecting the disallowance computed by the assessee, the A.O. must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected.

 

iii)   The Tribunal was right in deleting the additions made by the A.O. u/s 14A read with rule 8D. The Tribunal had found that the A.O. had only discussed the provisions of section 14A(1) but had not justified how the expenditure incurred by the assessee during the relevant year related to the income not forming part of its total income and had straightaway applied Rule 8D. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected. There was no valid reason to interfere with the Tribunal’s well-reasoned order.’

 

Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

35. Chittharanjan A. Dasannacharya vs. CIT [2020] 429 ITR 570 (Karn.) Date of order: 23rd October, 2020 A.Y.: 2006-07


 

Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

 

The assessee was a software engineer who was employed with a company registered in India from 1995 to 1998. He was deputed to a U.S. company in 1995 as an independent consultant. The assessee served in the US from 1995 to 1998 as an independent consultant and later as an employee of the US company from 2001 to 2004. The assessee thereafter returned to India and was employed in the Indian subsidiary. While on deputation to the US, the assessee was granted stock option by the US company whereunder he was given the right to purchase 30,000 shares at an exercise price of US $0.08 per share. The assessee also had an option of cashless exercise of stock options which was an irrevocable direction to the broker to sell the underlying shares and deliver the proceeds of the sale of the shares after deducting the exercise / option price which was to be delivered to the US company. In the cashless exercise, the underlying shares were not allotted to the assessee and he was only entitled to receive the sale proceeds less the exercise price.

 

The assessee in the A.Y. 2006-07 exercised his right under the stock option plan by way of cashless exercise and received a net consideration of US $283,606 and offered this as long-term capital gains as the stock options were held for nearly ten years. The A.O. by an order u/s 143(3) split the transaction into two and brought to tax the difference between the market value of the shares on the date of exercise and the exercise price as ‘income from salary’ and the difference between the sale price of shares and market value of shares on the date of exercise of ‘income from short-term capital gains’.

 

The Tribunal held that the assessee was to be regarded as an employee for the purposes of the plan and the benefits arising therefrom were to be treated as income in the nature of salary in the hands of the assessee.

 

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

 

‘i)    The Supreme Court in Dhun Dadabhoy Kapadia and Hari Brothers (P) Ltd. held that the right to subscribe to shares of a company was treated to be a capital asset u/s 2(14). The stock option being a right to purchase the shares underlying the options is a capital asset in the hands of the assessee u/s 2(14) which is also evident from Explanation 1(e) to section 2(42A) which uses the expression “in case of a capital asset being a right to subscribe any financial asset”. The cashless exercise of option therefore is a transfer of capital asset by way of a relinquishment or extinguishment of the right in the capital asset in terms of section 2(47).

 

ii)    From a perusal of the communication dated 3rd August, 2006 sent by the US company to the assessee, it was evident that the assessee was an independent consultant and not an employee of the US company at the relevant time. Thus, there was no relationship of employer and employee between it and the assessee. The assessee never received the shares in the stock options. At the time of grant of options to the assessee in the year 1996, section 17(2)(iia) was not there in the statute. The difference between the option / exercise price of the stock option and the fair market value of the shares on the date of exercise of the stock option was assessable as capital gains.

 

iii)   The Revenue in case of several other assessees had accepted the fact that on cashless exercise of option there arises income in the nature of capital gains. However, in the case of the assessee the aforesaid stand was not taken. The Revenue could not be permitted to take a different view.’

 

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

19 CIT vs. Director of Technical Education [2021] 432 ITR 110 (Karn) A.Y.: 2011-12 Date of order: 10th February, 2021

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

The assessee was a Department of the Government of Karnataka and was in charge of the academic and administrative functions of controlling technical education in the State of Karnataka. As part of its activities, the assessee entrusted the construction of engineering and polytechnic college buildings under construction agreements to KHB and RITES. The Deputy Commissioner treated the assessee as an assessee-in-default and passed an order u/s 201(1) on the ground that the assessee had failed to deduct the tax as required u/s 194C on the payments made under the contracts with KHB and RITES. Accordingly, a demand notice was also issued.

The Commissioner (Appeals), inter alia, held that the Government of Karnataka directed the assessee to appoint a particular agency like KHB or RITES for every new building on remuneration by providing a specific percentage of the project cost for each building in the form of service charges and that the provisions of section 194C were not applicable. The Tribunal upheld the order of the Commissioner (Appeals).

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

‘The Tribunal was right in holding that the assessee was not liable to deduct tax u/s 194C on payments made to KHB and RITES for rendering of services in connection with the construction of engineering and polytechnic college buildings in the State of Karnataka. The Commissioner (Appeals) had gone into the details of the memorandum of understanding entered into with KHB and RITES and had held that the provisions of section 194C were not applicable to the assessee. The concurrent findings of fact by the appellate authorities need not be interfered with in the absence of any perversity being shown.’

TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

18 CIT vs. Corporation Bank [2021] 431 ITR 554 (Karn) A.Y.: 2011-12 Date of order: 23rd November, 2020
    
TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

The assessee is a nationalised bank. For the A.Y. 2011-12, the A.O. made disallowance u/s 40(a)(ia) of service charges paid to National Financial Switch (NFS) on the ground that tax was not deducted at source u/s 194H.

The Commissioner of Income-tax (Appeals) and the Tribunal allowed the assessee’s claim.

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

‘Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that on the payment made towards the service charges rendered by M/s NFS is neither commission nor brokerage which does not attract tax deduction at source u/s 194H of the Income-tax Act?’

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

‘i) In case the credit card issued by the assessee was used on the swiping machine of another bank, the customer whose credit card was used to get access to the internet gateway of acquiring bank resulting in realisation of the payment. Subsequently, the acquiring banks realise and recover the payment from the bank which had issued the credit card. The relationship between the assessee and any other bank is not of an agency but that of two independents on principal-to-principal basis. Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, even then it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the High Court of Delhi in CIT vs. JDS Apparels (P) Ltd. [2015] 370 ITR 454 (Delhi) and hold that the provisions of section 194H of the Act are not attracted to the fact situation of the case.

ii) In the result, the substantial question of law is answered against the Revenue and in favour of the assessee.’