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

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

17 Tahiliani Design Pvt. Ltd. vs. JCIT [2021] 432 ITR 134 (Del) A.Y.: 2018-19 Date of order: 19th January, 2021

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

A search and seizure operation u/s 132 as well as a survey u/s 133A were carried out on 29th May, 2018 in the case of the assessee. Thereafter, the Investigation Wing referred the case to the A.O. The Range Head of the A.O. of the assessee, after going through the seized material, presumed that the assessee had violated the provisions of section 269ST and issued a notice to it for the A.Ys. 2018-19 and 2019-20 to show cause why penalty u/s 271DA for violating the provisions of section 269ST should not be imposed on it. Meanwhile, in pursuance of the search and seizure operation, notices u/s 153A were issued to the assessee for the A.Ys. 2013-14 to 2018-19. The assessee applied for settlement of the case on 1st November, 2019 for the A.Ys. 2012-13 and 2013-14 to 2019-20 and in accordance with the provisions of the Act on 1st November, 2019 itself also informed the A.O. about the filing of the application before the Settlement Commission. The A.O., however, proceeded to pass a penalty order dated 4th November, 2019.

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

‘i) Though section 245A(b) while defining “case” refers to a proceeding for assessment pending before an A.O. only and therefrom it can follow that penalties and prosecutions referred to in sections 245F and 245H are with respect to assessment of undisclosed income only, (i) section 245F vests exclusive jurisdiction in the Settlement Commission to exercise the powers and perform the functions “of an Income-tax authority under this Act in relation to the case”; and (ii) section 245H vests the Settlement Commission with the power to grant immunity from “imposition of any penalty under this Act with respect to the case covered by the settlement”. The words, “of an Income-tax authority under this Act in relation to the case” and “immunity from imposition of any penalty under this Act with respect to the case covered by the settlement”, are without any limitation of imposition of penalty and immunity with respect thereto only in the matter of undisclosed income. They would also cover penalties under other provisions of the Act, detection whereof has the same origin as the origin of undisclosed income. Not only this, the words “in relation to the case” and “with respect to the case” used in these provisions are words of wide amplitude and in the nature of a deeming provision and are intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions.

ii) Both the notices u/s 153A as well as u/s 271DA for violation of section 269ST had their origin in the search, seizure and survey conducted qua the assessee as evident from a bare reading of the notice u/s 271DA. Both were part of the same case. The proceedings for violation of section 269ST according to the notice dated 30th September, 2019 were a result of what was found in the search and survey qua the assessee and were capable of being treated as part and parcel of the case taken by the assessee by way of application to the Settlement Commission.

iii) The Settlement Commission had exclusive jurisdiction to deal with the matter relating to violation of section 269ST also and the A.O., on 4th November, 2019, did not have the jurisdiction to impose penalty for violation of section 269ST on the assessee. His order was without jurisdiction and liable to be set aside and quashed.’

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

16 CIT vs. S.R.A. Systems Ltd. [2021] 431 ITR 294 (Mad) A.Ys.: 2000-01 to 2002-03 Date of order: 19th January, 2021

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

While completing the assessment u/s 143(3) read with section 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. While completing the assessment u/s 143(3) read with section 263(3) for the A.Y. 2002-03, the A.O. disallowed the claim u/s 10A on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence among others.

The Commissioner of Income-tax (Appeals) allowed the appeals for the A.Ys. 2000-01 and 2001-02 by following the order of the Tribunal. The Department filed appeals before the Income-tax Appellate Tribunal and the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal held that this was not a case of setting up of a new business but only of transfer of existing business to a new place located in a software technology park area and, thereafter, getting the approval from the authorities.

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

‘On the facts and in the circumstances of the case, the assessee was entitled to deduction u/s 10A/10B.’

Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

15 Bangalore Electricity Supply Company Ltd. vs. Dy. CIT [2021] 431 ITR 606 (Karn) A.Y.: 2005-06 Date of order: 27th January, 2021

Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

The assessee was a public limited company which was wholly owned by the Government of Karnataka and was engaged in the activity of distribution of electricity. For the A.Y. 2005-06, it claimed deduction of Rs. 141,84,44,170 u/s 80-IA(4)(iv)(c), but the A.O. disallowed the claim. This was upheld both by the Commissioner (Appeals) and the Tribunal.

In its appeal to the High Court, the assessee submitted that its case fell within the third category of undertakings and, therefore, the amount undertaken towards renovation and modernisation had to be considered. Alternatively, it submitted that capital work-in-progress was to be included and should not be restricted only to those amounts which were capitalised in the books and substantial renovation and modernisation could be at any time during the period beginning on 1st April, 2004 and ending 31st March, 2006. It contended that it had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c).

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

‘i) From a perusal of section 80-IA(4) it is evident that there are three types of undertakings which are considered by the Legislature eligible for deduction u/s 80-IA, viz., an undertaking which is (i) set up for generation or generation and distribution of power, (ii) starts transmission or distribution by laying network of new transmission or distribution lines, (iii) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines. Thus, for each type of undertaking the Legislature has used different expressions, viz., “set up”, “starts” and “undertakes”. These words have different meanings. The expression “undertake” has not been defined under the Act. Therefore, its common parlance meaning has to be taken into account. The meaning of the word “undertake” used in section 80-IA(4)(iv)(c) cannot be equated with the word “completion”.

ii) The Circular dated 15th July, 2005 [(2005) 276 ITR (St.) 151] issued by the CBDT clearly states that the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernisation of an existing network of transmission or distribution lines during the period beginning from 1st April, 2004 and ending on 31st March, 2006. The provisions of section 80-IA(4)(iv)(c) use the expression “any time” during the period beginning from 1st April, 2004 and ending on 31st March, 2006 and do not use the word “previous year”. Wherever the Legislature has intended to use the expression “previous year”, it has consciously done so, viz., in section 35AB, section 35ABB, section 35AC and section 35AD as well as in 77 other sections of the Act.

iii) There is no requirement of capitalisation of the amount in the books of accounts mentioned in section 80-IA(4)(iv)(c) which does not mandate that there has to be an increase in the value of plant and machinery in the books of accounts. Therefore, such a requirement which is not prescribed in the language of the provision cannot be read into it.

iv) The assessee had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of the assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c). Thus, it could safely be inferred that the assessee had undertaken the work towards renovation and modernisation of existing transmission or distribution lines. The assessee was entitled to deduction u/s 80-IA(4).’

Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

14 Karnataka Financial Services Ltd. vs. ACIT [2021] 432 ITR 187 (Karn) A.Ys.: 1986-87 to 1996-97 Date of order: 8th February, 2021

Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

The assessee carried on the business of equipment leasing. Pursuant to a search, a notice was issued to it u/s 158BC for the block period 1986-87 to 1996-97 and the assessee filed its return of income. The A.O. held that the assessee had purchased the assets from one PLF at a higher value with a view to claim depreciation on the enhanced value as against the actual written down value in the books of accounts of PLF and restricted the depreciation to assets of value Rs. 1 crore. The Tribunal deleted the disallowance of depreciation and held in favour of the assessee.

The Department filed an appeal before the High Court against the order of the Tribunal. During the pendency of the appeal, the Court by an order directed the assessee to be wound up and appointed the official liquidator to take charge of its assets. The Court set aside the order of the Tribunal and remitted the matter to the Tribunal for fresh adjudication considering the amended provisions of section 158BB. The Tribunal thereupon passed an order with respect to the question of depreciation but did not adjudicate the ground raised by the assessee with regard to limitation on the ground that it was not the subject matter of the order of remand of the Court.

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

‘i) The order passed by the Tribunal had been set aside in its entirety by this Court. Therefore, it was open to the assessee to raise the plea of limitation.

ii) Since the Tribunal had not adjudicated the issue with regard to limitation, the order passed by the Tribunal insofar as it pertained to the finding with regard to the issue of limitation was quashed and the Tribunal was directed to decide the issue of limitation with regard to the order of assessment passed by the A.O. for the block period 1986-87 to 1996-97. It would be open to the parties to raise all contentions before the Tribunal on this issue.’

Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

13 Principal CIT vs. Samsung R&D Institute Bangalore Pvt. Ltd. [2021] 431 ITR 615 (Karn) A.Y.: 2009-10 Date of order: 30th November, 2020

Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

The assessee was a wholly-owned subsidiary of SECL and rendered software development services to its associate enterprises. In the A.Y. 2009-10 the assessee realised a net profit margin of 15.45% in respect of the international transactions with its associate enterprises. The Transfer Pricing Officer made a transfer pricing adjustment in respect of software development services and passed an order u/s 92CA which was incorporated by the A.O. in his order.

Before the Commissioner (Appeals) the assessee challenged the selection of the entity IL as comparable. The Commissioner (Appeals) excluded IL on account of its enormous size and bulk and partly allowed the appeal. The Tribunal directed the Transfer Pricing Officer to exclude certain companies from the list of comparables on the basis of functional dissimilarity. The Tribunal also held that the assessee was entitled to depreciation on goodwill.

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

‘i) The Tribunal is the final fact-finding authority and a decision of the Tribunal on the facts can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal is perverse.

ii) The issue whether the entity IL was comparable to the assessee and was functionally dissimilar was a finding of fact. The Commissioner (Appeals) had dealt with the findings recorded by the Transfer Pricing Officer and had been approved by the Tribunal by assigning cogent reasons. The findings were findings of fact.

iii) Even in the substantial questions of law, no element of perversity had either been pleaded or demonstrated. The Tribunal was justified in removing certain companies from the list of comparables on the basis of functional dissimilarity and in holding that the assessee was entitled to depreciation on goodwill.’

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

12 Rabindra Kumar Mohanty vs. Registrar ITAT [2021] 432 ITR 158 (Ori) A.Y.: 2009-10 Date of order: 18th March, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

The Income-tax Appellate Tribunal issued notice for hearing of the appeal filed by the assessee on 6th July, 2017. On that date, the authorised representative of the assessee filed an adjournment application and the case was placed for hearing on 30th August, 2017. However, on that date neither the assessee nor his authorised representative or his counsel was present. The Tribunal, therefore, dismissed the appeal for want of prosecution.

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

‘i) The Income-tax Act, 1961 enjoins upon the Appellate Tribunal to pass an order in an appeal as it thinks fit after giving both the parties an opportunity of being heard. It does not give any power to the Appellate Tribunal to dismiss the appeal for default or for want of prosecution in case the appellant is not present when the appeal is taken up for hearing.

ii) Article 265 of the Constitution of India mandates that no tax can be collected except by authority of law. Appellate proceedings are also laws in the strict sense of the term, which are required to be followed before tax can legally be collected. Similarly, the provisions of law are required to be followed even if the taxpayer does not participate in the proceedings. No assessing authority can refuse to assess the tax fairly and legally merely because the taxpayer is not participating in the proceedings. Hence, dismissal of appeals by the Income-tax Appellate Tribunal for non-prosecution is illegal and unjustified.

iii) Merely because a person is not availing of his right of natural justice it cannot be a ground for the Tribunal to refuse to perform its statutory duty of deciding the appeal. An appellate authority is required to afford an opportunity to be heard to the appellant.

iv) The Tribunal could not have dismissed the appeal filed by the assessee for want of prosecution and it ought to have decided the appeal on merits even if the assessee or its counsel was not present when the appeal was taken up for hearing. The Tribunal was to restore the appeal and decide it on the merits after giving both the parties an opportunity of being heard.’

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

11 Daryapur Shetkari Sahakari Ginning and Pressing Factory vs. ACIT [2021] 432 ITR 130 (Bom) A.Ys.: 2002-03 to 2004-05 Date of order: 24th November, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

For the A.Ys. 2002-03, 2003-04 and 2004-05, against the orders of the Commissioner (Appeals), the assessee had filed appeals before the Tribunal. The Tribunal dismissed all three appeals by a common order on the ground that none appeared on behalf of the assessee which meant that the assessee was not interested in prosecuting those appeals.

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

‘i) Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 mandates that when an appeal is called for hearing and the appellant does not appear, the Tribunal is required to dispose of the appeal on merits after hearing the respondent.

ii) The order passed by the Tribunal dismissing the appeals in limine for non-appearance of the appellant-assessee holding that the assessee was not interested in prosecuting the appeals was unsustainable. The Tribunal was duty-bound to decide the appeals on the merits after hearing the respondent and the Department according to the mandate under Rule 24 of the 1963 Rules and in terms of the ratio laid down by the Supreme Court.

iii) The order of the Tribunal being contrary to Rule 24 of the 1963 Rules was quashed and set aside. The respective appeals were restored for adjudication on the merits before the Tribunal.’

Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

10 Pradeep Kumar Jindal vs. Principal CIT [2021] 432 ITR 48 (Del) A.Y.: 2008-09 Date of order: 19th February, 2021

Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

The assessee filed an application in March, 2017 before the Tribunal for recall of the order dated 10th December, 2015 dismissing its appeal for non-prosecution. The application was dismissed by the Tribunal in limine by an order dated 7th February, 2018. The Tribunal dismissed the assessee’s contention that between 8th and 10th December, 2015 he was ill and hence could not appear when the appeal was heard on 10th December, 2015, and held that u/s 254(2) as amended with effect from 1st June, 2016, any miscellaneous application had to be filed within six months from the date of the order and that, therefore, the application for restoration of the appeal dismissed on 10th December, 2015 was barred by limitation. Thereafter, the assessee filed another application on 26th February, 2018 for recall of the order dated 7th February, 2018 which was also dismissed by an order dated 23rd December, 2020 on the ground that a second application was not maintainable.

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

‘i) There was no adjudication by the Tribunal of the appeal on merits. Its order dated 10th December, 2015 dismissing the assessee’s appeal was for non-prosecution and not on merits, as it was required to do notwithstanding the non-appearance of the assessee when the appeal was called for hearing, was violative of Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 and thus was void. The action of the Tribunal, of dismissing the appeal for non-prosecution instead of on merits and of refusal to restore the appeal notwithstanding the applications of the assessee, was not merely an irregularity. The Tribunal had erred in dismissing the first application of the assessee filed in March, 2017 for restoration of the appeal invoking the amendment to section 254(2) requiring application thereunder to be filed within six months and in not going into the sufficiency of the reasons given by the assessee for non-appearance.

ii) The application filed by the assessee in March, 2017 invoking Rule 24 of the 1963 Rules was within time and could not have been dismissed applying the provisions of limitation applicable to section 254(2).

iii) In view of the aforesaid, the petition is allowed. I.T.A. No. 3844/Del/2013 preferred by the petitioner before the Income-tax Appellate Tribunal is ordered to be restored to its original position, as immediately before 10th December, 2015, and the Tribunal is requested to take up the same for hearing on 15th March, 2021 or on any other date which may be convenient to the Income-tax Appellate Tribunal.’

Penalty – Mistake in notice not to affect validity – Scope of section 292B – Mistake in specifying assessment year for which penalty was levied – Mistake could not be corrected u/s 292B

28 SSS Projects Ltd. vs. Dy. CIT [2021] 432 ITR 201 (Karn) A.Y.: 2008-09; Date of order: 01/02/2021 Ss. 221 and 292B of ITA, 1961

Penalty – Mistake in notice not to affect validity – Scope of section 292B – Mistake in specifying assessment year for which penalty was levied – Mistake could not be corrected u/s 292B

The assessee is a company and for the A.Y. 2008-09 it had paid the tax on the assessed income. However, the A.O. passed an order dated 9th February, 2009 and levied a penalty of Rs. 50,00,000 u/s 221 for the A.Y. 2008-09. The assessee pleaded that it appeared that the A.O. had considered the facts of the case for the A.Y. 2007-08 for levying the penalty for the A.Y. 2008-09 and had passed an order u/s 221 to raise the demand of Rs. 50,00,000.

Both the Commissioner (Appeals) and the Tribunal dismissed the appeals filed by the assessee.

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

‘i) From a close scrutiny of section 292B it is evident that no return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act. In other words, any clerical or typographical error or omission in the return of income, assessment, notice, summons or other proceeding shall not invalidate the proceedings. When there is no confusion or prejudice caused due to non-observance of technical formalities, the proceedings cannot be invalidated and therefore, a defective notice to an assessee u/s 292B of the Act is not invalid.

ii) The order of penalty referred to the A.Y. 2008-09. The order by which the penalty was levied by the A.O. had been affirmed by the Commissioner (Appeals) and similarly, the Tribunal had held that the penalty had been levied in respect of the A.Y. 2008-09. From a perusal of the memorandum of appeal it was evident that the assessee had paid tax in respect of the A.Y. 2008-09. The assessee had committed a default in respect of the A.Y. 2007-08 and did not pay the tax on account of financial hardship. However, the authorities under the Act had taken into account the facts in respect of the A.Y. 2007-08 and had held the assessee to be in default in respect of the A.Y. 2008-09 and had levied the penalty u/s 221 in respect of the A.Y. 2008-09.

iii) The mistake could not be condoned u/s 292B under which only clerical error or accidental omissions can be protected. The order of penalty was not valid.’

Limitation – Assessment u/s 144C – Section 144C does not exclude operation of section 153 – Notice by DRP four years after direction by Tribunal – Barred by limitation

26 ROCA Bathroom Products Pvt. Ltd. vs. DRP [2021] 432 ITR 192 (Mad) A.Ys.: 2009-10 and 2010-11; Date of order: 23/12/2020 Ss. 144C and 153 of ITA, 1961

Limitation – Assessment u/s 144C – Section 144C does not exclude operation of section 153 – Notice by DRP four years after direction by Tribunal – Barred by limitation

For the A.Y. 2009-10, by an order dated 18th December, 2015, the Tribunal had set aside the order passed u/s 144C and remanded the matter to the Dispute Resolution Panel (DRP) for fresh examination. For the A.Y. 2010-11, by an order dated 23rd September, 2016, the Tribunal had set aside the order passed u/s 144C and remanded the matter to the A.O. for passing a fresh order. No further proceedings were initiated by the DRP and the A.O. pursuant to the order of the Tribunal. Therefore, on 21st August, 2019, the assessee wrote to the A.O. seeking refund of the tax paid for both the years. The aforesaid letter triggered notices dated 6th January, 2020 from DRP calling upon the assessee to appear for a hearing. The assessee filed writ petitions and challenged the notices on the ground of limitation.

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

‘i) Section 144C is a self-contained code of assessment and time limits are in-built at each stage of the procedure contemplated. Section 144C envisions a special assessment, one which includes the determination of arm’s length price of international transactions engaged in by the assessee. The Dispute Resolution Panel (DRP) was constituted bearing in mind the necessity for an expert body to look into intricate matters concerning valuation and transfer pricing and it is for this reason that specific timelines have been drawn within the framework of section 144C to ensure prompt and expeditious finalisation of this special assessment. The purpose is to fast-track a specific type of assessment.

ii) This does not, however, lead to the conclusion that overall time limits have been eschewed in the process. In fact, the argument that proceedings before the DRP are unfettered by limitation would run counter to the avowed object of setting up of the DRP, a high-powered and specialised body set up for dealing with matters of transfer pricing. Having set time limits at every step of the way, it does not stand to reason that proceedings on remand to the DRP may be done at leisure sans the imposition of any time limit at all. Sub-section (13) to section 144C imposes a restriction on the A.O. and denies him the benefit of the more expansive time limit available u/s 153 to pass a final order of assessment as he has to do so within one month from the end of the month in which the directions of the DRP are received by him, even without hearing the assessee concerned. The specific exclusion of section 153 from section 144C(13) can be read only in the context of that specific sub-section and, once again, reiterates the urgency that sets the tone for the interpretation of section 144C itself.

iii) The notices issued by the Dispute Resolution Panel after a period of four years from the date of order of the Tribunal would be barred by limitation by application of the provisions of section 153(2A). The writ petitions are allowed.’

Income – Income or capital – Receipt from sale of carbon credits – Capital receipt – Amount not assessable merely because of erroneous claim for deduction u/s 80-IA

25 S.P. Spinning Mills Pvt. Ltd. vs. ACIT [2021] 433 ITR 61 (Mad) A.Y.: 2011-12; Date of order: 19/01/2021 S. 4 of ITA, 1961

Income – Income or capital – Receipt from sale of carbon credits – Capital receipt – Amount not assessable merely because of erroneous claim for deduction u/s 80-IA

The assessee, a private limited company, had claimed deduction of Rs. 3,17,77,767 u/s 80-IA for the A.Y. 2011-12 in respect of the revenue generated for adhering to the clean development mechanism. This included receipts on sale of carbon credits. The A.O. found that the assessee is engaged in the generation of electrical power which is used for its own textile business and the remaining is wheeled to the Tamil Nadu Electricity Board. He held that the income from generation of electricity and the carbon credit earned by the assessee are totally separate and the source of the income is also separate. Therefore, the income derived from the generation of electrical power alone can be construed as income from the eligible business for the purpose of deduction u/s 80-IA. Therefore, the assessee is not entitled to deduction u/s 80-IA in respect of the carbon credit.

Before the Commissioner (Appeals), the assessee contended that without prejudice to its claim for deduction u/s 80-IA, the carbon credit revenue is to be held as a capital receipt and ought to have been excluded from the taxable income. The Commissioner (Appeals) noted the decision of the Chennai Tribunal relied on by the assessee in the case of Ambika Cotton Mills Ltd. vs. Dy. CIT [2013] 27 ITR (Trib) 44 (Chennai) ITA No. 1836/Mds/2012, dated 16th April, 2013, wherein it was held that carbon credit receipts cannot be considered as business income and these are a capital receipt. Hence, the assessee’s claim u/s 80-IA is untenable as deduction u/s 80-IA is allowable only on profits and gains derived by an undertaking. The Tribunal took note of the submission made by the assessee and the decisions relied on and confirmed the finding of the Commissioner (Appeals) largely on the ground that the assessee itself regarded it as a business income and claimed deduction u/s 80-IA.

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

‘i) The task of an appellate authority under the taxing statute, especially a non-departmental authority like the Tribunal, is to address its mind to the factual and legal basis of an assessment for the purpose of properly adjusting the taxpayer’s liability to make it accord with the legal provisions governing his assessment. Since the aim of the statutory provisions, especially those relating to the administration and management of Income-tax is to ascertain the taxpayer’s liability correctly to the last pie, if it were possible, the various provisions relating to appeal, second appeal, reference and the like can hardly be equated to a lis or dispute as arises between two parties in a civil litigation.

ii) The assessee while preferring the appeal before the Commissioner (Appeals), had specifically raised a contention that the receipts from sale of carbon credits was a capital receipt and could not be included in the taxable income. Though this ground had been recorded in the order, the Commissioner (Appeals) did not take a decision thereon. A similar ground was raised by the assessee before the Tribunal, which was not considered by the Tribunal, though the Tribunal referred to all the decisions relied on by the assessee, and rejected the assessee’s claim made u/s 80-IA.

iii) This finding of the Tribunal was wholly erroneous and perverse. The Tribunal was expected to apply the law and take a decision in the matter and if the Commissioner (Appeals) or the A.O. had failed to apply the law, then the Tribunal was bound to apply the law. The receipt by way of sale of carbon credits had been held to be a capital receipt. Therefore, it was of little consequence to the claim made by the assessee u/s 80-IA or in other words, the question of taking a decision as to whether the deduction was admissible u/s 80-IA was a non-issue. Receipt from sale of carbon credits is a capital receipt.’

Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

24 Principal CIT vs. Cinestaan Entertainment Pvt. Ltd. [2021] 433 ITR 82 (Del) A.Y.: 2015-16; Date of order: 01/03/2021 S. 56(2)(viib) of ITA, 1961

Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

For the A.Y. 2015/16, the assessee had filed its return of income declaring Nil income. The case of the assessee was selected for ‘limited scrutiny’ inter alia for the reason ‘large share premium received during the year [verify applicability of section 56(2)(viib)(b)]’. By an order dated 31st December, 2017, the assessment was framed u/s 143(3) determining the total income of the assessee at Rs. 90,95,46,200, making an addition u/s 56(2)(viib).

The Tribunal deleted the addition and held that neither the identity nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established before the A.O. and had not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. It held that if the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods had been adopted by the assessee, then the A.O. had to accept it.

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

‘i) Section 56(2)(viib) lays down that amounts received by a company on issue of shares in excess of their fair market value will be deemed to be income from other sources. Valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares.

ii) The shares had not been subscribed to by any sister concern or closely related person, but by outsider investors. The methodology adopted was a recognised method of valuation and the Department was unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which went to the root of the valuation process. The deletion of addition was justified.’

Deemed business income u/s 41(1)(a) – Remission or cessation of liability – Scope of section 41(1)(a) – Amount obtained mentioned in provision refers to actual amount obtained – Royalty payment claimed as expenditure in A.Y. 1990-91 – Tax deducted at source on such payment and interest paid to treasury – Royalty amount written back in accounts in A.Y. 1995-96 – Tax deducted at source and interest not refunded – Such amounts not includible u/s 41(1)(a)

23 Carbon and Chemicals (India) Ltd. vs. CIT [2021] 433 ITR 14 (Ker) A.Y.: 1995-96; Date of order: 01/03/2021 S. 41(1)(a) of ITA, 1961

Deemed business income u/s 41(1)(a) – Remission or cessation of liability – Scope of section 41(1)(a) – Amount obtained mentioned in provision refers to actual amount obtained – Royalty payment claimed as expenditure in A.Y. 1990-91 – Tax deducted at source on such payment and interest paid to treasury – Royalty amount written back in accounts in A.Y. 1995-96 – Tax deducted at source and interest not refunded – Such amounts not includible u/s 41(1)(a)

The assessee claimed a deduction of Rs. 53,71,650 for the A.Y. 1990-91 as expenditure, being royalty payable to a foreign collaborator. Though the deduction was allowed, the amount was not actually remitted outside India. In the meantime, an amount of Rs. 13,65,060 was paid towards tax deducted at source on the royalty amount and a further amount of Rs. 9,38,438 towards interest, under orders passed u/s 201(1A). Thus, a total amount of Rs. 23,03,498 was paid by the assessee towards tax and interest due to the Department against the deduction claimed towards royalty payable to the foreign collaborator. In the A.Y. 1995-96, the amount claimed as deduction for the A.Y. 1990-91, excluding the tax deducted at source and interest paid, was written back by the assessee into its accounts on account of the cessation of liability. Thus, in the return filed for the A.Y. 1995-96, the assessee had written back only Rs. 30,68,152 u/s 41(1). The A.O. held that the entire amount of Rs. 53,71,650 ought to be treated as a deemed profit u/s 41(1)(a) due to cessation of liability with the foreign collaborator.

The Tribunal upheld the addition.

On a reference by the assessee, the Kerala High Court allowed its claim and held as under:

‘i) A reading of section 41(1)(a) indicates that a legal fiction is created to treat the amount which was once deducted as an expenditure, if received back in another assessment year, as income from profits and gains of business. For the purpose of attracting section 41(1) it is necessary that the following conditions are satisfied: (i) the assessee had made an allowance or any deduction in respect of any loss, expenditure, or trading liability incurred by him; (ii) any amount is obtained in respect of such loss or expenditure or any benefit is obtained in respect of such trading facility by way of remission or cessation thereof; and (iii) such amount or benefit is obtained by the assessee in a subsequent year. Once these conditions are satisfied, the deeming provision enacted in the closing part of section 41(1)(a) gets attracted and the amount obtained becomes chargeable to Income-tax as profits and gains of business or profession.

ii) The purpose behind creating a fiction u/s 41(1)(a) is to tax the amount, earlier deducted but subsequently received back, to the extent recouped. It is a measure of taxing the amount recouped. Though a legal fiction must be given full effect, it should not be extended beyond the purpose for which it is created. It is true that Income-tax is a portion of the profits payable to the State and the tax payable is not a permissible deduction. Section 198 provides that all sums deducted for the purpose of computing income of an assessee, including the tax deducted at source, shall be treated as income received. However, this principle cannot be applied while determining the amount to be deemed as profits and gains u/s 41(1)(a). Such an interpretation, if adopted, will in fact be expanding the fiction created and even transform the chargeability.

iii) The words employed in section 41(1)(a) are “amount obtained by such person or the value of benefits accruing to him”. The “amount obtained” can only mean the actual amount obtained. The fiction created under the provision cannot be expanded to include amounts that may be obtained in the future. The legal fiction is intended to deem the actual amount obtained as profits and gains from business and to tax the actual amount. Section 41(1) employs, on the one hand, words such as “allowance” or “deduction”, and on the other hand “loss”, “expenditure”, or “trading liability”. These words are of general import and are understandably employed to take care of several fluid dynamics. These expressions are relatable to words used in section 41(1)(a), i. e., “the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits, gains, etc.” Therefore, an entry made in one previous year as an allowance or deduction towards “loss”, “expenditure” or “trading liability” when written back in a subsequent previous year, on account of the cessation of such liability, becomes taxable as profit or gains of business. But the tax liability should be commensurate with the actual amount received or the value of benefit accrued to the assessee in that financial year and not on the unrecovered amount or unacknowledged benefit by the assessee. The unrecovered amount becomes taxable only in the previous year when it is recovered or actually obtained.

iv) The amount of tax deducted at source and interest could be deemed to be profits and gains and chargeable to tax only on refund. The amounts paid as tax had not been obtained in 1995-96 as they had not been refunded. Until the amount of tax deducted at source was refunded, that amount could not be treated as an amount obtained by the assessee. The addition made by the A.O. was not justified.’

Charitable purpose – Registration of trust – Loss of all records in respect of registration due to floods in 1978 – Exemption granted in assessments up to A.Y. 2012-13 – Absence of documents cannot be ground to presume registration never granted and to deny exemption – Other contemporaneous records to be scrutinised to ascertain issuance of registration certificate

22 Morbi Plot Jain Tapgachh Sangh vs. CIT [2021] 433 ITR 1 (Guj) A.Ys. 2013-14 to 2016-17; Date of order: 25/03/2021 Ss. 11, 12A, 12AA of ITA, 1961

Charitable purpose – Registration of trust – Loss of all records in respect of registration due to floods in 1978 – Exemption granted in assessments up to A.Y. 2012-13 – Absence of documents cannot be ground to presume registration never granted and to deny exemption – Other contemporaneous records to be scrutinised to ascertain issuance of registration certificate

The assessee was a charitable trust established in 1967 and registered with the Charity Commissioner. Thereafter, it was registered u/s 12A. In orders passed u/s 143(3) for the A.Ys. 1977-78 to 1982-83, the Department had accepted the assessee’s claim for exemption u/s 11 and for the A.Ys. 1986-87 to 2012-13, the exemption u/s 11 was allowed accepting the return of income u/s 143(1) under the provisions applicable to a registered trust drawing the benefits of registration u/s 12A.

The entire records of the assessee, including the books of accounts, registration certificate as trust and other documents related thereto were destroyed in the devastating flood in the year 1978. From A.Y. 2013-14, the assessee was required to E-file its return of income in which the details as regards the registration of trust u/s 12A/12AA were to be furnished. If the registration number was not mentioned an error would be indicated and the assessee would not be able to upload the return of income. In the absence of the registration certificate and the registration number, the Department did not grant the exemption u/s 11 for the period between 2013-14 and 2016-17. The assessee was granted a fresh certificate from A.Y. 2017-18 onwards.

The assessee filed a writ petition seeking a direction to grant the benefit of exemption for the A.Ys. 2013-14 to 2016-17. The Gujarat High Court allowed the writ petition and held as under:

‘i) Though in the absence of the registration number to be mentioned in the course of E-filing of the return, the benefit of exemption u/s 11 could not be granted, the assessee trust should not be denied the benefit of exemption u/s 11 only on account of its inability to produce the necessary records which got destroyed during the floods of 1978. There was nothing doubtful as regards the assessee. The stance of the Department that as the record was not available with the assessee or with the Department, it should be presumed that at no point of time the certificate of registration u/s 12A was granted, could not be accepted.

ii) There was contemporaneous record available with the assessee which could be produced by it and should be considered minutely by the Department so as to satisfy itself that the assessee had been issued a registration certificate u/s 12A and had been availing of the benefit of exemption over a period of time u/s 11.

iii) The Department is expected to undertake some homework in this regard seriously. The trust should not be denied the benefit of exemption u/s 11 only on account of its inability to produce the necessary records which got destroyed during the floods of 1978. We do not find anything doubtful or fishy as regards the trust.

iv) In such circumstances, we are of the view that whatever record is available with the trust, as on date, should be produced before the Department and the Department should look into the records minutely and also give an opportunity of hearing to the trust or its legal representative and take an appropriate decision in accordance with law.

v) We dispose of this writ application with a direction that the writ applicant-trust shall produce the entire record available with it as on date before the Department and the Department shall look into the entire record closely and threadbare and ascertain whether the trust being a registered charitable trust had been issued the registration certificate u/s 12A. A practical way needs to be found out in such types of litigation. Let this entire exercise be undertaken at the earliest and be completed within a period of four weeks from the date of receipt of the order by the Department.

vi) We hope and trust that the controversy is resolved by the parties amicably and the trust may not have to come back to this Court.’

Capital gains – Computation – Deeming provision in section 50C – Applicable only when there is actual transfer of land – Assessee acquiring right in land under agreement to purchase land – Sale of land to third party with consent of assessee – Section 50C not applicable

21 V.S. Chandrashekar vs. ACIT [2021] 432 ITR 330 (Karn) A.Y.: 2010-11; Date of order: 02/02/2021 Ss. 45 and 50C of ITA, 1961

Capital gains – Computation – Deeming provision in section 50C – Applicable only when there is actual transfer of land – Assessee acquiring right in land under agreement to purchase land – Sale of land to third party with consent of assessee – Section 50C not applicable

The assessee was a dealer in land. On 23rd December, 2005, it had entered into an unregistered agreement with ‘N’ for purchase of land measuring 3,639.60 square metres for a consideration of Rs. 4.25 crores. Under the agreement, the assessee was neither handed over possession of the land nor was the power of attorney executed in his favour. ‘N’ sold the land in question by three sale deeds. In the first two transactions the assessee was not a party to the deed, whereas in the third transaction the assessee was a consenting witness. The assessee claimed the loss arising from the transaction as a business loss. The A.O. applied section 50C and made an addition to his income. This was upheld by the Tribunal.

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

‘i) It is a well settled rule of statutory interpretation with regard to taxing statutes that an assessee cannot be taxed without clear words for that purpose and every Act of Parliament has to be read as per its natural construction of words.

ii) From a perusal of sections 2(47) and 50C it is axiomatic that Explanation 1 to section 2(47) uses the term “immovable property”, whereas section 50C uses the expression “land” instead of immovable property. Wherever the Legislature intended to expand the meaning of land to include rights or interests in land, it has said so specifically, viz., in section 35(1)(a), section 54G(1), section 54GA(1) and section 269UA(d) and Explanation to section 155(5A). Thus, section 50C applies only in case of transfer of land.

iii) Section 50C was applicable only in case of a transferor of land which in the instant case was ‘N’ and not a transferor or co-owner of the property. The provisions of section 50C were not applicable to the case of the assessee.

iv) The question whether the loss sustained by the assessee fell under the head “Business” or “Capital gains” required adjudication of facts.’

Limitation – Order of TPO – Mode of computing limitation

27 Pfizer Healthcare India Pvt. Ltd. vs. JCIT [2021] 433 ITR 28 (Mad) Date of order: 07/09/2020 Ss. 92CA, 144C and 153 of ITA, 1961

Limitation – Order of TPO – Mode of computing limitation

The petitioners filed returns of income, including income from transactions with associated entities abroad, thus necessitating a reference of issues arising under Chapter X to the Transfer Pricing Officer. The TPO has, after issuance of notices, passed orders dated 1st November, 2019. The petitioners filed writ petitions and challenged the validity of the orders of the TPO on the ground of limitation that there was a delay of one day.

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

‘i) The provisions of section 144C prescribe mandatory time limits both pre- and post- the stage of passing of a transfer pricing order. In this scheme of things, the submission that the period of 60 days stipulated for passing of an order of transfer pricing is only directory or a rough and ready guideline cannot be accepted. Section 153 states that no order of assessment shall be made at any time after the expiry of 21 months from the end of the assessment year in which the income was first assessable.

ii) In computing the limitation for passing the order in the instant case, the period of 21 months expired on 31st December, 2019. That must stand excluded since section 92CA(3A) stated “before 60 days prior to the date on which the period of limitation referred to in section 153 expires”. Excluding 31st December, 2019, the period of 60 days would expire on 1st November, 2019 and the transfer pricing orders thus ought to have been passed on 31st October, 2019 or any date prior thereto. The Board in the Central Action Plan also indicated the date by which the Transfer Pricing orders were to be passed as 31st October, 2019.

iii) The orders of the Transfer Pricing Officer passed on 1st November, 2019 were barred by limitation.’

Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

20 CIT vs. NGC Networks (India) Pvt. Ltd. [2021] 432 ITR 326 (Bom) A.Y.: 2009-10; Date of order: 29/01/2018 Ss. 9(1)(vi), 40(a)(ia), 194C, 194J of ITA, 1961

Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

During the previous year relevant to the A.Y. 2009-10, the assessee paid channel placement fees of Rs. 7.18 crores to cable operators deducting tax at source u/s 194C at the rate of 2%. The A.O. was of the view that the tax had to be deducted at source on payment at the rate of 10% u/s 194J as the payment was in the nature of royalty, as defined in Explanation 6 to section 9(1)(vi) and disallowed the entire expenditure of Rs. 7.18 crores u/s 40(a)(ia) for failure to deduct tax u/s 194J. The Dispute Resolution Panel upheld the assessee’s objections holding that deduction of tax at source was properly made u/s 194C. The A.O. passed a final assessment order accordingly.

On appeal by the Department, the Tribunal held that the assessee was not liable to deduct the tax at source at higher rates only on account of the subsequent amendment made in the Act, with retrospective effect from 1976.

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

‘i) The view taken by the Tribunal that a party could not be called upon to perform an impossible act, i. e., comply with a provision not in force at the relevant time but introduced later by retrospective amendment, was in accordance with the legal maxim lex non cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform). The amendment by introduction of Explanation 6 to section 9(1)(vi) took place in the year 2012 with retrospective effect from 1976. It could not have been contemplated by the assessee when it made the payment during the assessment year that the payment would require deduction u/s 194J due to some future amendment with retrospective effect.

ii) Under section 40(a)(ia), royalty is defined as in Explanation 2 to section 9(1)(vi) and not in Explanation 6 to section 9(1)(vi). Undisputedly, the payment made for channel placement as a fee was not royalty in terms of Explanation 2 to section 9(1)(vi). Therefore, no disallowance of expenditure u/s 40(a)(i) could be made.’

Reassessment – Notice u/s 148 – Validity – Effect of insertion of s. 148A by F.A. 2021 – Taxation and other laws (relaxation of certain provisions) Act, 2020 enabling certain actions of Department in view of pandemic – Notification of Finance Ministry under enabling Act – Notification could not save reassessment proceedings under unamended s. 148 instituted after 1st April, 2021 – Notices issued in pursuance of such reassessment proceedings – Not valid

28 Ashok Kumar Agarwal vs. UOI [2021] 439 ITR 1 (All) A.Ys.: 2013-14 to 2017-18; Date of order: 8th October, 2021 Ss. 147, 148 and 148A of ITA, 1961

Reassessment – Notice u/s 148 – Validity – Effect of insertion of s. 148A by F.A. 2021 – Taxation and other laws (relaxation of certain provisions) Act, 2020 enabling certain actions of Department in view of pandemic – Notification of Finance Ministry under enabling Act – Notification could not save reassessment proceedings under unamended s. 148 instituted after 1st April, 2021 – Notices issued in pursuance of such reassessment proceedings – Not valid

Writ petitions were filed by individual petitioners to challenge the initiation of reassessment proceedings after 1st April, 2021 by issuing notice u/s 148 for different assessment years.

The Allahabad High Court held as under:

‘i) An Act of legislative substitution is a composite Act. Thereby, the Legislature chooses to put in place another or replace an existing provision of law. It involves simultaneous omission and re-enactment. By its very nature, once a new provision has been put in place of a pre-existing provision, the earlier provision cannot survive, except for things done or already undertaken to be done, or things expressly saved to be done. By virtue of section 1(2)(a) of the Finance Act, 2021, the provisions of sections147, 148, 149, 151 (as those provisions existed up to 31st March, 2021) stood substituted and a new provision was enacted by way of section 148A which mandated that the A.O. before issuing any notice u/s 148 shall conduct an inquiry, if required with the prior approval of the specified authority and provide to an opportunity to the assessee of being heard.

ii) The Taxation and Other Laws (Relaxation of certain Provisions) Act, 2020 had been passed to deal with situations arising due to the pandemic. This enabling Act that was pre-existing had been enforced prior to enforcement of the Finance Act, 2021 on 1st April, 2021. In the 2020 Act and the Finance Act, 2021, there is absence both of any express provision in itself or to delegate the function to save applicability of the provisions of sections 147, 148, 149 or 151 of the Act as they existed up to 31st March, 2021. Plainly, the 2020 Act is an enactment to extend timelines only. Consequently, it flows from the above that from 1st April, 2021 onwards, all references to issuance of notice contained in the 2020 Act must be read as a reference to the substituted provisions only. Equally, there is no difficulty in applying the pre-existing provisions to pending proceedings. Looked at in that manner, the laws are harmonised. A reassessment proceeding is not just another proceeding emanating from a simple show cause notice. Both under the pre-existing law as also under the law enforced from 1st April, 2021, that proceeding must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time jurisdiction is validly assumed by the assessing authority evidenced by issuance of the jurisdictional notice u/s 148, no reassessment proceedings may ever be said to be pending.

iii) The submission that the provision of section 3(1) of the 2020 Act gave an overriding effect to that Act and therefore saved the provisions as they existed under the unamended law, cannot be accepted. That saving could arise only if jurisdiction had been validly assumed before the date 1st April, 2021. In the first place section 3(1) of the 2020 Act does not speak of saving any provision of law. It 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. Even otherwise 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 proceedings already underway. 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. Hence, the 2020 Act only protected certain proceedings that may have become time-barred on 20th March, 2020 up to the date 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.

By Notification No. 3814 dated 17th September, 2021 ([2021] 437 ITR (St.) 16)], issued u/s 3(1) of the 2020 Act, further extension of time has been granted till 31st March, 2022. 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 an enacted law, i.e., the Finance Act, 2021 to be defeated by a purely colourable exercise of power, 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 Act as it existed prior to 1st April, 2021. It only provides a general relaxation of the limitation granted on account of general hardship existing upon the spread of the Covid-19 pandemic. After enforcement of the Finance Act, 2021 it applies to the substituted provisions and not the pre-existing provisions.

iv) The mischief rule has limited application in the present case. Only in case of any doubt existing as to which of the two interpretations may apply or as to the true interpretation of a provision, the court may look at the mischief rule to find the correct law. However, where plain legislative action exists, as in the present case (whereunder Parliament has substituted the old provisions regarding reassessment with new provisions with effect from 1st April, 2021), the mischief rule has no application. There is no conflict in the application and enforcement of the 2020 Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the Revenue authorities would have been within their rights to claim extension of time under the 2020 Act. However, upon that sweeping amendment made in Parliament, by necessary implication or implied force, it limited the applicability of the 2020 Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31st March, 2021. Consequently, the notifications had no applicability to reassessment proceedings initiated from 1st April, 2021 onwards. Upon the Finance Act, 2021 being enforced with effect from 1st April, 2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It is for the assessing authority to act according to the law as it existed on and after 1st April, 2021. If the rule of limitation is permitted, it could initiate reassessment proceedings in accordance with the new law, after making adequate compliance therewith.

v) A delegated legislation can never overreach any Act of the principal Legislature. Secondly, it would be over-simplistic to ignore the provisions of either the 2020 Act or the Finance Act, 2021 and to read and interpret the provisions of the Finance Act, 2021 as inoperative in view of the fact and circumstances arising from the spread of the Covid-19 pandemic. Practicality of life de hors statutory provisions may never be a good guiding principle to interpret any taxation law. In the absence of any specific clause in the Finance Act, 2021 either to save the provisions of the 2020 Act or the notifications issued thereunder, by no interpretative process can those notifications be given an extended run of life beyond 31st March, 2020. They may also not infuse any life into a provision that stood obliterated from the statute with effect from 31st March, 2021. Inasmuch as the Finance Act, 2021 does not enable the Central Government to issue any notification to reactivate the pre-existing law (which that principal Legislature had substituted), the exercise by the delegate / Central Government would be de hors any statutory basis. In the absence of any express saving of the pre-existing laws, the presumption drawn in favour of that saving is plainly impermissible. Also, no presumption exists that by the notification issued under the 2020 Act the operation of the pre-existing provision of the Act had been extended and thereby the provisions of section 148A (introduced by the Finance Act, 2021) and other provisions had been deferred. Such notifications did not insulate or save the pre-existing provisions pertaining to reassessment under the Act.

vi) Accordingly, the Revenue authorities had admitted that all the reassessment notices involved in this batch of writ petitions had been issued after the enforcement date of 1st April, 2021. As a matter of fact, 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. All the notices were invalid.’

Educational institution – Exemption u/s 10(23C) – Scope of s. 10(23C) – Benefit granted with reference to educational activity – Society deriving income from running educational institution having other income – Separate accounting for such other income – Income of society could not be aggregated for purposes of s. 10(23C)

27 Manas Sewa Samiti vs. Addl. CIT [2021] 439 ITR 79 (All) A.Y.: 2007-08; Date of order: 5th October, 2021 S. 10(23C) of ITA, 1961

Educational institution – Exemption u/s 10(23C) – Scope of s. 10(23C) – Benefit granted with reference to educational activity – Society deriving income from running educational institution having other income – Separate accounting for such other income – Income of society could not be aggregated for purposes of s. 10(23C)

The appellant-assessee is a society registered under the Societies Registration Act, 1860. Under its registered objects, it established an educational institution in the name of Institute of Information Management and Technology at Aligarh. For the previous year relevant to the A.Y. 2007-08, the Institution received fees of Rs. 85,95,790 and interest on fixed deposit receipt of Rs. 86,121. Thus, the total receipts of the institution were Rs. 86,81,911. After deducting expenditure of the institution, the excess of income over expenditure, Rs. 38,54,310 was carried to the income and expenditure account of the society. Also, the society received donations or subscriptions amounting to Rs. 47,62,000 and interest on fixed deposit receipt of Rs. 18,155. The A.O. denied exemption claimed u/s 10(23C)(iiiad).

The Tribunal upheld the denial of exemption.

In the appeal before the High Court the following question of law was raised by the assessee:

‘Whether, in view of the law laid down in CIT vs. Children’s Education Society [2013] 358 ITR 373 (Karn) and the order passed by this Court in CIT (Exemption) vs. Chironji Lal Virendra Pal Saraswati Shiksha Parishad [2016] 380 ITR 265 (All), the order of the Tribunal denying the exemption u/s 10(23C)(iiiad) and clubbing the voluntary contributions received by the appellant with the receipts of the educational institution is justified in law?’

The Allahabad High Court held as under:

‘i) Under the provisions of section 10(23C), any income received by any person on behalf of any university or other educational institution existing solely for educational purposes and not for purposes of profit, if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed… in the A.Y. 2007-08 the upper limit prescribed for such receipts was Rs. 1 crore under Rule 2BC of the Income-tax Rules, 1962.

ii) The benefit of section 10(23C)(iiiad) being activity-centric, the limit of Rs. 1 crore prescribed thereunder has to be seen only with reference to the fee and other receipts of the eligible activity / institution. Admittedly, those were below Rs. 1 crore. The eligibility condition prescribed by law was wholly met by the assessee. The fact that the institution did not exist on its own and was run by the society could never be a valid consideration to disallow that benefit. Merely because the assessee-society was the person running the institution, it did not cause any legal effect of depriving the benefit of section 10(23C)(iiiad) which was activity specific and had nothing to do with the other income of the same assessee; the Tribunal had also erred in looking at the provisions of section 12AA and the fact that the donations received by the society may not have been received with any specific instructions.

iii) It was not relevant in the facts of the present case because here the assessee had only claimed the benefit of section 10(23C)(iiiad) with respect to the receipts of the institution, and it had not claimed any benefit with respect to the donations received by the society. There could be no clubbing of the receipts of the institution with the other income of the society for the purpose of considering the benefit of section 10(23C)(iiiad).

iv) The question of law is answered in the negative, i.e., in favour of the assessee and against the Revenue.’

Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

26 CIT vs. Premier Tyres Ltd. [2021] 439 ITR 346 (Ker) A.Ys.: 1996-97 to 2003-04; Date of order: 19th July, 2021 Ss. 14 and 28 of ITA, 1961

Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

The assessee was a company engaged in the manufacture and sale of tyres. Since the assessee had a business loss in excess of the paid-up capital, it moved an application u/s 15 of the Sick Industries (Special Provisions) Act, 1985 before the Board for Industrial and Financial Reconstruction (BIFR) for framing a scheme under the 1985 Act. The BIFR, through its order dated 17th April, 1995, approved a scheme for the rehabilitation and revival of the assessee. While sanctioning the rehabilitation scheme for the assessee, the BIFR approved the arrangement between the assessee and ATL, viz., that ATL under an irrevocable lease of eight years would operate the plant and pay a total lease rental of Rs. 45.5 crores over the period of rehabilitation to the sick industrial company, i.e., the assessee, and that ATL would take over the production made at the assessee plant. The assessee made over the plant operation to ATL for manufacturing tyres. Thus, the plant and machinery were given on lease by the assessee to ATL for eight years stipulated in the scheme. For the A.Y. 1996-97, the assessment was completed treating the lease rent received from ATL amounting to Rs. 6,61,75,914 as income from business of the assessee. Thereafter, the A.O. issued notice and reopened the assessment u/s 148 and through the reassessment order treated the receipt from ATL as income from other sources.

The Tribunal held that the lease rental received by the assessee from ATL under the rehabilitation scheme came within the meaning of business income especially in the circumstances of the case.

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

‘i) The word “business” in section 14 is not a word of art but a word of commercial implication. Therefore, in any given year or situation, the activity claimed by the assessee is neither accepted through interpretative nor expressive narrative of the activity claimed by the assessee, nor is the claim for business income refused through the prism of the Revenue. The bottom line is the availability of assets, activities carried out for exploiting the assets, that the assessee is not a mere onlooker at the activities in the company or a passive recipient of rent for utilisation of facilities other than business assets. The net income of business presupposes computation of income after allowing permissible expenses and deductions in accordance with the Act. Therefore, denying eligible deductions or expenses treating business activity as any other activity, and on the other hand allowing deductions or expenses without just eligibility is equally illegal. The circumstances therefore are weighed in an even scale by the authority or court while deciding whether the activity stated by the assessee merits inclusion as income from business or other sources. These controversies are determined not only on case-to-case basis but also on year-to-year basis as well.

ii) The assessee was obligated to work under a statutorily approved scheme; the lease of eight years was to ATL, which was in the same business, and the lease was for utilising the plant, machinery, etc., for manufacturing tyres; the actuals were reimbursed to the assessee by ATL; the work force of the assessee had been deployed for manufacturing tyres; the total production from the assessee unit was taken over by ATL; the overall affairs of the assessee company were made viable by entering into the settlement; coupled with all other primary circumstances, the assessee employed commercial assets to earn income. The scheme was for providing a solution to the business problem of the assessee. The claim of lease rental receipt as income of business was justifiable for the assessment years.’

Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

25 Kalyan Buildmart Pvt. Ltd. vs. Initiating Officer, Dy. CIT (Benami Prohibition) [2021] 439 ITR 62 (Raj) Date of order: 6th October, 2021 Prohibition of Benami Property Transactions Act, 1988

Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

In this writ petition, the petitioners assail the provisional attachment orders dated 12th January, 2018 passed by the Initiating Officer u/s 24(4) of the Prohibition of Benami Property Transactions Act, 1988 and the confirmation orders dated 30th January, 2019 passed by the adjudicating authority u/s 26(3) of the Prohibition of Benami Property Transactions Act, 1988 (hereinafter referred to as ‘the Benami Act, 1988’).

The Rajasthan High Court held as under:

‘i) The Prohibition of Benami Property Transactions Act, 1988 would not extend to properties purchased by a company.

ii)  The very purpose of coming into force of the Prohibition of Benami Property Transactions Act, 1988 was to implement the recommendations of the 57th Report of the Law Commission on benami transactions and was to curtail benami purchases, i.e., purchase in the name of another person who does not pay the consideration but merely lends his name while the real title vests in another person who actually purchased the property. Upon reading the provisions of the Act and the definitions, it is apparent that a benami transaction would require one transaction made by one person in the name of another person where the funds are owned and paid by the first person to the seller while the seller gets the registered sale deed executed in favour of the second person, i.e., from the account of A, the amount is paid to C who sells the property to B and a registered sale deed is executed in favour of B. While in the case of an individual this position may continue, a transaction for purchase of property by a company in favour of any person or in its own name would not come within the purview of a benami transaction because the funds of the company are its own assets.

If the promoters of the company, namely, the shareholders, their relatives or individuals invest in the company by way of giving land or by way of gift or in any other manner, then such amounts or monies received would be part of the net worth of the company and the company would be entitled to invest in any sector for which it has been formed. The persons who have put monies in the company may be considered as shareholders but such shareholders do not have the right to own properties of the company nor can it be said that the shareholders have by virtue of their share in the company invested their amount as benamidars. The transactions of the company are independent transactions which are only for the purpose of benefit of the company. It is a different aspect altogether that on account of benefit accruing to the company the shareholders would also receive benefit and they may be beneficiaries to a certain extent. This would, however, not make the shareholders beneficial owners in terms of the definition as provided u/s 2(12) of the 1988 Act. A “company” as defined under the Companies Act, 1956 and incorporated thereunder, therefore, cannot be treated as a benamidar as defined under the 1988 Act. The company cannot be said to be a benamidar and its shareholders cannot be said to be beneficial owners within the meaning of the 1988 Act.

iii) Transactions done legally under the Companies Act of transferring shares of one shareholder to another, the benefit, if any, of which may accrue on account of legally allowed transactions, cannot be a ground to draw a presumption of benami transaction under the 1988 Act. Strict proof is required to be produced and there is no room for surmises or conjectures nor presumption to be made as the 1988 Act has penal consequences.

iv) The prayer of the respondents for lifting the veil to examine the original sale deed dated 24th August, 2006 in relation to the 1988 Act was correct. However, the original transaction of 2006 was between the company and the sellers and the sale deed was executed in favour of the company. Therefore, a subsequent registered sale deed executed by the Development Authority did not warrant interference and it was not a case of proceeds from the property acquired through benami transaction. Once land had been surrendered and order had been passed by the Development Authority u/s 90B of the Rajasthan Land Revenue Act, 1956 and the land had been converted from agricultural to commercial use and registered lease deed had been executed by the Development Authority in favour of the company, the transaction was not a benami transaction.

v) Ordinarily, any proceeding relating to benami transactions ought to be taken up immediately or at least within a reasonable period of limitation of three years as generally provided under the Limitation Act, 1963. Moreover the proceedings initiated after ten years of the purchase were highly belated.

vi) The action of the respondents in attaching the commercial complex which had been leased out to the company by the Development Authority was illegal and unjustified and without jurisdiction.’

Search and seizure – Assessment of third person – Income-tax survey – Assessment based on documents seized during survey at assessee’s premises – No incriminating material found against assessee during search of third parties – Absence of satisfactory note by A.O. that any seized document belonged to assessee – Search warrant not issued against assessee – Assessment and consequent demand notice were unsustainable

24 Sri Sai Cashews vs. CCIT [2021] 438 ITR 407 (Ori) A.Y.: 2016-17; Date of order: 23rd August, 2021 Ss. 132, 133A, 153C and 156 of ITA, 1961

Search and seizure – Assessment of third person – Income-tax survey – Assessment based on documents seized during survey at assessee’s premises – No incriminating material found against assessee during search of third parties – Absence of satisfactory note by A.O. that any seized document belonged to assessee – Search warrant not issued against assessee – Assessment and consequent demand notice were unsustainable

The assessee processed cashewnuts into cashew kernel. A survey operation was conducted u/s 133A against it. The A.O. invoked the jurisdiction u/s 153C for making a block assessment for the A.Ys. 2010-11 to 2016-17 as a result of searches which were conducted in the premises of two persons JR and JS u/s 132. He passed an order u/s 143(3) read with section 153C for the A.Y. 2016-17 and issued a notice of demand u/s 156.

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

‘i) In the absence of incriminating materials against the assessee having been found in the course of the search of the searched persons JR and JS, the order passed u/s 143(3) read with section 153C and the consequential demand notice issued u/s 156 were unsustainable and, therefore, set aside.

ii) The documents relied upon by the A.O. were found in the course of survey of the assessee u/s 133A and not during the search of the parties against whom the search authorisation was issued u/s 132 and search was conducted. The Department had not been able to dispute any of the factual averments. No incriminating materials concerning the assessee were found in the premises of the two persons against whom search was conducted and the absence of satisfaction note of the A.O. of the persons against whom search was conducted about any such incriminating material against the assessee, were not denied. The order only related to disallowance of expenditure u/s 140A(3) that was payable to the cultivators, expenses towards hamali, i.e., labour charges, unexplained money u/s 69A, negative cash and unaccounted stock which was not on account of the discovery of any incriminating materials found in the course of the search concerning the assessee and there was no search warrant u/s 132 against the assessee.’

Search and seizure – Assessment in search cases – Validity – Assessment completed on date of search – No incriminating material found during search – Invocation of section 153A not valid – Assessment order and consequent demand notice set aside

23 Smt. Jami Nirmala vs. Principal CIT [2021] 437 ITR 573 (Ori) A.Y.: 2015-16; Date of order:10th August, 2021 Ss. 132, 153A and 156 of ITA, 1961

Search and seizure – Assessment in search cases – Validity – Assessment completed on date of search – No incriminating material found during search – Invocation of section 153A not valid – Assessment order and consequent demand notice set aside

A search and seizure operation was conducted u/s 132 at the assessee’s residential premises and on a locker jointly held with another person. According to the panchanama prepared for the search and seizure, nothing was found or seized. A notice was issued to the assessee u/s 153A. The assessee requested the A.O. to treat the original return of income as the return filed in response to such notice. Thereafter, notices u/s 143(2) and 142(1) were issued. Although nothing was found during the course of the search, the order passed u/s 143(3) read with section 153A referred to the cash book found during the survey conducted two weeks prior to the date of search, and stated that during the course of the search operation it was found that the assessee company had made expenditure during the year which was paid in the mode of cash of beyond the prescribed limit of Rs. 20,000 or above in a single day to a single party. The A.O. also disallowed the payments made to the cultivators and hamalis and accordingly raised a demand u/s 156 along with interest.

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

‘i) The assessment u/s 153A pursuant to a search u/s 132 has to be on the basis of incriminating material gathered or unearthed during the course of the search.

ii) The order passed u/s 143(3) read with section 153A was without jurisdiction. The order did not refer to any document unearthed during the course of the search conducted u/s 132. Therefore, the assumption of jurisdiction u/s 153A for assessment of the A.Y. 2015-16 was without legal basis. The panchanama of the search proceedings unambiguously showed that nothing incriminating was recovered in the course of the search. The assessment order and the consequential demand notice u/s 156 are set aside.’

Interest on excess refund – Law applicable – Effect of amendment of section 234D by F.A. 2012 – Section 234D applies to regular assessment – Meaning of regular assessment – Regular assessment refers to first order of assessment u/s 143, u/s 147 or u/s 153A – Order of assessment u/s 143(3) on 31st March, 2006 and order of reassessment passed on 26th December, 2008 – Section 234D not applicable – Interest could not be levied u/s 234D

22 CIT vs. United India Insurance Co. Ltd. [2021] 438 ITR 301 (Mad) A.Y.: 2001-02; Date of order: 24th August, 2021 S. 234D of ITA, 1961

Interest on excess refund – Law applicable – Effect of amendment of section 234D by F.A. 2012 – Section 234D applies to regular assessment – Meaning of regular assessment – Regular assessment refers to first order of assessment u/s 143, u/s 147 or u/s 153A – Order of assessment u/s 143(3) on 31st March, 2006 and order of reassessment passed on 26th December, 2008 – Section 234D not applicable – Interest could not be levied u/s 234D

The appellant Revenue had raised the following three substantial questions of law for consideration:

‘1. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in deleting the interest levied u/s 234D?

2. Whether on the facts and in the circumstances of the case, no interest can be charged even for the period subsequent to the introduction of section 234D merely on the ground that the said section was introduced by the Finance Act, 2003 with effect from 1st June, 2003?

3. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that interest levied u/s 234D cannot be charged for the A.Y. 2001-02, especially when the assessment order was made after introduction of the said section?’

The Madras High Court held as under:

‘i) Section 234D deals with “interest on excess refund”. Explanation 1 to section 234D states that where, in relation to an assessment year, an assessment is made for the first time u/s 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of section 234D of the Act. Explanation (2) was inserted for the removal of doubts and declared that the provisions of section 234D shall also apply to an assessment year commencing before 1st June, 2003 if the proceedings in respect of such assessment year are completed after that date. Explanations (1) and (2) were inserted by the Finance Act, 2012 with retrospective effect from 1st June, 2003.

ii) “Regular assessment” has been defined u/s 2(40) to mean the assessment made under sub-section (3) of section 143 or section 144. Explanation (1) would stand attracted if an assessment is made for the first time u/s 147 or section 153A and the assessment, if it is done for the first time, shall be regarded as a “regular assessment” u/s 2(40).

iii) Admittedly, the assessment order dated 26th December, 2008 u/s 143(3) read with section 147 was not the first assessment, as an assessment was made u/s 143(3) dated 31st March, 2004 which fact was not disputed. Since the assessment framed u/s 143(3) read with section 147 dated 26th December, 2008, was not the assessment made for the first time, it could not be regarded as a “regular assessment” for the purposes of section 234D and, therefore, no interest could be levied on the assessee.’

Income Declaration Scheme – Failure to pay full amount of tax according to declaration – Declaration would be rendered void and non est – Part of tax already paid under scheme cannot be forfeited by Revenue authorities – Such amount must be returned to assessee

21 Pinnacle Vastunirman Pvt. Ltd. vs. UOI [2021] 438 ITR 27 (Bom) A.Y.: 2016-17; Date of order: 11th August, 2021 Income Declaration Scheme, 2016 – Effect of S. 181 of Finance Act, 2016

Income Declaration Scheme – Failure to pay full amount of tax according to declaration – Declaration would be rendered void and non est – Part of tax already paid under scheme cannot be forfeited by Revenue authorities – Such amount must be returned to assessee

The assessee had made a declaration under the Income Declaration Scheme, 2016 concerning the A.Y. 2016-17. However, it could not make full payment of tax according to the declaration. Therefore, the declaration had become void and non est. The petitioner therefore applied for refund of the taxes so paid under the declaration or to give adjustment or credit of the amount so paid. The application was rejected.

The petitioner filed a writ petition and challenged the order of rejection. The Bombay High Court allowed the writ petition and held as under:

‘i) Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. This would mean there must be a law, the law must authorise the tax and the tax must be levied and collected according to the law. Sub-section (3) of section 187 of the Finance Act, 2016 which deals with the Income Declaration Scheme, 2016 categorically provides that if the declarant fails to pay the tax, surcharge and penalty in respect of the declaration made u/s 183 on or before the dates specified in sub-section (1), the declaration filed by him shall be deemed never to have been made under the Scheme. This would mean that the declaration will be non est. When the scheme itself contemplates that a declaration without payment of tax is void and non est and the declaration filed by the assessee would not be acted upon [because section 187(3) says the declaration filed shall be deemed never to have been made under the Scheme], the question of retention of the tax paid under such declaration will not arise. The provisions of section 191 cannot have any application to a situation where the tax is paid but the entire amount of tax is not paid. The Scheme does not provide for the Revenue to retain the tax paid in respect of a declaration which is void and non est.

ii) The assessee was entitled to an adjustment by giving credit for the amount of Rs. 82,33,874 paid under the Income Declaration Scheme.’

Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

20 CIT vs. Exim Rajathi India Pvt. Ltd. [2021] 438 ITR 19 (Mad) A.Y.: 2007-08; Date of order: 7th September, 2021 S. 2(42A) proviso of ITA, 1961

Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

For the A.Y. 2007-08, the Commissioner invoking his power u/s 263 held that the order passed by the A.O. u/s 143(3) was erroneous and prejudicial to the interests of the Revenue on the ground that the shares held by the assessee in a company, which was not a listed company when sold, should be treated as ‘short-term capital asset’ as defined u/s 2(42A) and not as ‘long-term capital asset’. Accordingly, the A.O. computed the short-term capital gains.

The Commissioner (Appeals) directed the A.O. to treat the shares as long-term capital asset, allow indexation and tax the resultant capital gains at the special rate of 20%. The Tribunal concluded that there was no distinction between unlisted and listed shares for classifying them as short-term capital asset under the Act and affirmed the decision of the Commissioner (Appeals).

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

‘i) In terms of the definition u/s 2(42A), short-term capital asset would mean a capital asset held by an assessee for not more than 36 months immediately preceding the transfer. The provision does not make a distinction between shares in a public company, a private company, a listed company or an unlisted company. The use of the word “or” in between each of the categories is very important and such distinction needs to be borne in mind. Although “securities” as defined u/s 2(h) of the Securities Contracts (Regulation) Act, 1956 includes shares, scrips, stocks, bonds, etc., that by itself cannot have an impact to give a different interpretation to the distinction of “short-term capital asset” as defined in section 2(42A).

ii) According to the Explanatory Notes to the provisions of the Finance (No. 2) Act, 2014, in Circular No. 1 of 2015 dated 21st January, 2015 [(2015) 371 ITR (St.) 22] issued by the Central Board of Direct Taxes, all shares whether listed or unlisted enjoy the benefit of shorter period of holding, and investment in shares of private limited companies enjoy long-term capital gains on transfer after 12 months.

iii) The Tribunal was right in holding that the shares and debentures not listed could be treated as a long-term capital asset u/s 2(42A) of the Act read with its proviso.’

Assessment – Duty of A.O. to consider normal and special provisions relating to assessee – Company – Computation of book profits – A.O. must take into account provisions of section 115JB

19 CIT vs. Kerala Chemicals and Proteins Ltd. [2021] 438 ITR 333 (Ker) A.Y.: 2002-03; Date of order: 19th July, 2021 S. 115JB of ITA, 1961

Assessment – Duty of A.O. to consider normal and special provisions relating to assessee – Company – Computation of book profits – A.O. must take into account provisions of section 115JB

The assessee is engaged in the business of manufacturing and trading of ossein, compound glue, gelatine, etc. On 31st October, 2002, it filed the Income-tax return for the A.Y. 2002-03 declaring a total loss of Rs. 3,59,10,946. The A.O., through an assessment order dated 3rd March, 2005 made u/s 143(3), computed the total income of the assessee at Rs. 2,99,81,060.

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

In the appeal by the Revenue, the following questions were raised:

‘1. Whether on the facts and in the circumstances of the case and also in the light of section 80AB, the Tribunal is right in holding that while computing the book profit u/s 115JB the deduction u/s 80HHC is to be computed as per minimum alternate tax provisions and not as per the normal provisions of the Income-tax Act, 1961?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law and fact,
(i) in presuming that the A.O. has considered clause (c) of Explanation to section 115JA in the A.Ys. 1997-98 and 1998-99;
(ii) in holding that merely because proper working is not available on record, it cannot be said that the A.O., has not considered the same; and are not the approach and the conclusion based on presumptions and suppositions perverse, arbitrary and illegal?

3. (a) Whether on the facts and in the circumstances of the case, the Tribunal is justified in directing the A.O. to reduce the net profit by the sum of Rs. 3,29,27,056 in place of Rs. 1,42,02,335 as has been done by the A.O.?
(b) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the A.O. to allow an amount of Rs. 1,87,24,721 being the provision for excise duty written back on the “presumption” that even though the provisions of minimum alternate tax were not considered as the assessments were completed applying the normal provisions of the Act; and the A.O. has considered clause (c) of Explanation to section 115JA in the A.Ys. 1997-98 and 1998-99?’

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

“i) Once the return is filed by the assessee, it is the responsibility of the A.O. to compute the income of the assessee under normal provisions and special provisions. The income tax is collected on the income whichever is higher in these two methods, i. e., either normal provision or special provision.

ii) In the A.Ys. 1997-98, 1998-99 and 1999-2000, provision for disputed excise duty was made by the assessee. The assessment orders for the first two years were made referring to the normal provisions of the Act and the necessity to refer to the special provisions was not noticed by the A.O. The Tribunal, taking note of the fact that the assessee was subject to the slab rate of 30% for the A.Ys. 1997-98 and 1998-99, computed the tax under normal provisions.

iii) The Tribunal had rightly found that the fact that the proper working was not reflected in the respective assessment orders or the record could not lead to the conclusion that the A.O. had not considered the applicability of the special provision as well and that the omission on the part of the A.O. in referring to the special provisions ought not to deny the writing-back provision available under the second proviso to sub-section (2) of section 115JB. The denial of the benefit of writing back the provision to the assessee in these assessment years was illegal and the finding recorded by the Tribunal was valid and correct in the circumstances of this case.’

Assessment – International transactions – Section 144C mandatory – Assessment order passed without following procedure laid down in section 144C – Not a procedural irregularity – Section 292B not applicable – Order not valid

18 SHL (India) Pvt. Ltd. vs. Dy. CIT [2021] 438 ITR 317 (Bom) A.Y.: 2017-18; Date of order: 28th July, 2021 Ss. 144C and 292B of ITA, 1961

Assessment – International transactions – Section 144C mandatory – Assessment order passed without following procedure laid down in section 144C – Not a procedural irregularity – Section 292B not applicable – Order not valid

The petitioner is an Indian company incorporated under the Companies Act, 1956. It is a part of the SHL Group, United Kingdom, and primarily a trading entity that provides SHL products (psychometric test), assessment, consultancy and training services (‘SHL Solutions’) to clients in India in various industries. The petitioner had filed the return of income on 30th March, 2018 declaring a total income of Rs. 1,01,31,750. Its case is that during the A.Y. 2017-18 it had entered into an international transaction with its associated enterprise (the ‘AE’) whereby it was granted a licence to market, distribute and deliver the SHL Solutions to clients in India from its associated enterprise, for which the petitioner made payments towards support services charges incurred by the associated enterprise. It submitted that along with the return of income filed for the said year, in view of the various international transactions with the associated enterprise, Form 3CEB was filed along with the return of income.

The petitioner’s case was selected under the computer-aided scrutiny selection (CASS) pursuant to which, on 5th September, 2018 a notice was issued u/s 143(2). Thereafter, on 6th August, 2019, a reference was made to the Transfer Pricing Officer (TPO) by the first respondent. A notice was issued on 16th August, 2019 by the TPO and an order dated 29th January, 2021 was passed by the TPO proposing transfer pricing adjustments of Rs. 10,74,54,337 considered as Nil by the petitioner. On 10th March, 2021, the second respondent, viz., National e-Assessment Centre, Delhi requested the petitioner to provide rebuttal to the proposed adjustments to the arm’s length price made by the TPO. On 15th March, 2021, the petitioner filed a reply and on 6th April, 2021, a final assessment order was passed u/s 143(3) read with sections 143(3A) and 143(3B), determining the total income at Rs. 11,75,86,087. A notice of demand for Rs. 1,17,60,810 was also issued. A notice initiating penalty proceedings also came to be issued u/s 274 read with section 270A.

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

‘i) Section 144C(1) is a non obstante provision, which requires its compliance irrespective of the other provisions that may be contained in the Act. The requirement u/s 144C(1) to first pass a draft assessment order and to provide a copy thereof to the assessee is a mandatory requirement which gives a substantive right to the assessee to object to any variation that is prejudicial to it. The procedure prescribed u/s 144C is a mandatory procedure and not directory. Failure to follow the procedure would be a jurisdictional error and not merely a procedural error or irregularity but a breach of a mandatory provision. Therefore, section 292B cannot save an order passed in breach of the provisions of section 144C(1), the same being an incurable illegality.

ii) The assessee was an eligible assessee and there was no dispute as to the applicability of section 144C. It was also not in dispute that the final assessment order had been passed without the draft assessment order as contemplated u/s 144C(1). The order was not valid.’

Assessment – Draft assessment order – Objections – Powers of DRP – DRP must consider merits of objections – Objections cannot be rejected for mere non-appearance of party at time of hearing

17 Sesa Sterlite Ltd. vs. DRP [2021] 438 ITR 42 (Mad) A.Y.: 2011-12; Date of order: 29th July, 2021 S. 144C of ITA, 1961

Assessment – Draft assessment order – Objections – Powers of DRP – DRP must consider merits of objections – Objections cannot be rejected for mere non-appearance of party at time of hearing

The issue raised in this writ petition is whether the Dispute Resolution Panel (DRP) is competent to reject the objections on account of non-appearance of the assessee on the hearing date. The Madras High Court allowed the writ petition and held as under:

‘i) Under section 144C, on receipt of the draft order the assessee gets a right to file his objections, if any, to such variations with the DRP and the A.O. The DRP consists of three Commissioners of the Income-tax Department. They undoubtedly have certain expertise in the tax regime. Thus, adjudication before the DRP is a valuable opportunity provided both to the assessee as well as to the A.O. Either of the parties may get guidance for the purpose of completion of the assessment proceedings. Thus, the importance attached to the DRP under the Act can in no circumstances be undermined.

ii) When the Act contemplates a right to the assessee, such right must be allowed to be exercised in the manner prescribed under it. The manner in which objections are to be considered by the DRP are well defined both under the Act as well as under the Income-tax (Dispute Resolution Panel) Rules, 2009. Sub-section (6) of section 144C unambiguously states that the DRP is bound to consider the materials denoted as the case may be and issue suitable directions as it thinks fit. Therefore, the DRP has no option but to deal with objections, if any, filed by an eligible assessee on merits and, in the event of non-consideration, it is to be construed that the right conferred to an assessee has not been complied with.

iii) The language employed is “shall” both under sub-sections (5) and (6) of section 144C. Therefore, the DRP has no option but to strictly follow sub-sections (5) and (6) of section 144C which are mandatory provisions as far as the DRP is concerned; sub-sections (7) and (8) of section 144C are discretionary powers. Sub-section (11) is to be linked with sub-section (2)(b)(i) and (ii) of section 144C because an opportunity is bound to be given to the assessee as well as to the A.O. Sub-section (11) is also significant with reference to the opportunities to be granted to the parties before the DRP. The DRP is a quasi-judicial authority. This being the case, the DRP is bound to pass orders as it thinks fit only on the merits and such quasi-judicial authorities are not empowered to reject the objections merely by stating that the assessee had not appeared before the DRP. The DRP is legally bound to adjudicate the objections and pass orders on the merits, even in case of the assessee or the A.O. failing to appear for personal hearing.

iv) An order passed rejecting the objections submitted by the assessee, merely on the ground that the assessee has not appeared on the hearing date, is infirm and liable to be quashed.’

Refund – Withholding of refund – Condition precedent – A.O. must apply his mind before withholding refund – Reasons for withholding must be recorded in writing and approval of Commissioner or Principal Commissioner obtained – Discretion to withhold refund must be exercised in judicious manner – Withholding of refund without recording reasons – Not sustainable

16 Mcnally Bharat Engineering Company Ltd. vs. CIT [2021] 437 ITR 265 (Cal) A.Y.: 2017-18; Date of order: 6th August, 2021 Ss. 143(1), 241A and 244A of ITA, 1961

Refund – Withholding of refund – Condition precedent – A.O. must apply his mind before withholding refund – Reasons for withholding must be recorded in writing and approval of Commissioner or Principal Commissioner obtained – Discretion to withhold refund must be exercised in judicious manner – Withholding of refund without recording reasons – Not sustainable

For the A.Y. 2017-18, the assessee declared loss in its return of income and claimed refund of the entire tax deducted at source. The assessee received a notice u/s 143(2) and an intimation u/s 143(1) regarding the refund payable thereunder with interest for the A.Y. 2017-18 u/s 244A. Subsequently, the refund was withheld u/s 241A by the A.O. without assigning any reasons.

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

‘i) The very essence of passing of the order u/s 241A was application of mind by the A.O. to the issues which were germane for withholding the refund on the basis of statutory prescription contained in section 241A. The power of the A.O. under the provisions of section 241A could be exercised only after he had formed an opinion that the refund was likely to adversely affect the Revenue and with the prior approval of the Chief Commissioner or Commissioner as an order for refund after the assessment u/s 143(3) pursuant to a notice u/s 143(2) was subject to appeal or further proceedings.

ii) Having not done so, the officer had acted arbitrarily. At the point of time when the refund was notified, there was no other demand pending against the assesse either for a prior or a subsequent period. The procedure followed by the A.O. did not also show proper application of two independent provisions as in section 241A and section 143 wherein once a refund was declared after scrutiny proceedings and such refund was withheld, a reasoned order had to follow because the assessment in such a case was done after production of materials and evidence required by the A.O. No reasons were assigned by him by referring to any materials that the refund declared would adversely affect the Revenue.

iii) That apart, the assessee was a public limited company whose accounts were stringently scrutinised at the internal level. It was, therefore, more important to apply the provisions more cautiously while withholding the refund after it had been declared on completion of assessment on scrutiny. The assessee became entitled to the refund immediately on the completion of the assessment and the refund having been notified. The A.O. could not have withheld the refund to link such refund with any demand against the assessee for a subsequent period when such demand was not in existence on the date when the refund was notified.

iv) The competent officer being authorised under the statute to withhold the refund if he had reasons to believe that it would adversely affect the Revenue, could or could have withheld the refund after the refund had been declared only after assigning reasons and not otherwise. The A.O. had withheld the refund without assigning any reason though the statute mandated the recording of reasons. Having not done so, the A.O. had acted arbitrarily. The withholding of the refund for the A.Y. 2017-18 was not sustainable and therefore was set aside and quashed. The assessee was entitled to refund with interest till the actual date of refund.’

Penalty – Penalty u/s 271AAB in search cases – Income-tax survey – Survey of assessee firm pursuant to search and seizure of another group – No assessment u/s 153A – Where search u/s 132 has not been conducted penalty cannot be levied u/s 271AAB

15 Principal CIT vs. Silemankhan and Mahaboobkhan [2021] 437 ITR 260 (AP) A.Y.: 2016-17; Date of order: 12th July, 2021 Ss. 132, 133A, 153C, 271AAB and 260A of ITA, 1961

Penalty – Penalty u/s 271AAB in search cases – Income-tax survey – Survey of assessee firm pursuant to search and seizure of another group – No assessment u/s 153A – Where search u/s 132 has not been conducted penalty cannot be levied u/s 271AAB

In the course of a search conducted u/s 132A against an entity, the statements of its partners were recorded u/s 132(4). Pursuant thereto, a survey u/s 133A was conducted in the assessee firm and a notice was issued u/s 153C, whereupon the assessee filed a return admitting additional income. The Tribunal, referring to the proposition of law that no penalty u/s 271AAB could be imposed when search u/s 132 was not conducted against the assessee and the consistent view taken by the Tribunal, held that the imposition of penalty u/s 271AAB was illegal.

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

‘i) When the return of income is filed in response to a notice u/s 153C by an assessee in whose case search has not been conducted u/s 132, penalty u/s 271AAB cannot be imposed. Penalty under the provision can be imposed only when a search has been initiated against the assessee.

ii) No penalty u/s 271AAB could be imposed when admittedly a search u/s 132 had not been conducted in the assessee’s premises. The notice issued u/s 153C was incidental to the search proceedings of the searched party and could not be a foundation to impose penalty against the assessee u/s 271AAB. The legal position was based on the clear and unequivocal meaning transpiring from the words used in the section and cannot yield to any other interpretation. The view had been consistently followed by the Tribunal and was binding on the Department in such cases. No contrary view either of any High Court or the Supreme Court had been placed.

iii) In the light of the settled proposition of law, the provisions of section 271AAB could not be invoked to impose penalty on the assessee on whom search was not conducted. There was no perversity or illegality in the finding of the Tribunal. No question of law arose.’

Housing project – Special deduction u/s 80-IB(10) – Open terrace of building not to be included for computation of built-up area – Time limit for completion of project – Date of approval of building plan and not date of lay-out – Completion certificate issued by local panchayat would satisfy requirement of section – Assessee entitled to deduction

14 CIT vs. Shanmugham Muthu Palaniappan [2021] 437 ITR 276 (Mad) A.Y.: 2010-11; Date of order: 15th June, 2021 S. 80-IB(10) of ITA, 1961

Housing project – Special deduction u/s 80-IB(10) – Open terrace of building not to be included for computation of built-up area – Time limit for completion of project – Date of approval of building plan and not date of lay-out – Completion certificate issued by local panchayat would satisfy requirement of section – Assessee entitled to deduction

The assessee developed housing projects and claimed deduction u/s 80-IB(10) for the A.Y. 2010-11. The Tribunal held that (a) the open terrace area of the building should not be included while computing the built-up area for the purpose of claiming deduction u/s 80-IB(10), (b) the time limit for completion of the eligible project should not be computed from the date on which the lay-out was approved for the first time but only from the date on which the building plan approval was obtained for the last time, and (c) the completion certificate issued by the local panchayat would satisfy the requirements of the section instead of the completion certificate issued by Chennai Metropolitan Development Authority which had originally approved the plan.

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

‘The Tribunal was right in holding that, (i) the open terrace area should not be included while computing the built-up area for the purpose of claiming deduction u/s 80-IB(10), (ii) the time limit for completion of the eligible project should not be computed from the date on which the lay-out was approved for the first time, but only from the date on which the building plan approval was obtained for the last time, and (iii) the completion certificate issued by the local panchayat would satisfy the requirements of the section instead of the completion certificate issued by the Chennai Metropolitan Development Authority which had originally approved the plan.’

Exemption u/s 10(10C) – Amount received under early retirement option scheme of bank – Exemption not claimed in return but later in representation to Principal Commissioner on basis of Supreme Court ruling in case of another employee – That exemption not claimed in return of income not material – Assessee entitled to benefit of exemption

13 Gopalbhai Babubhai Parikh vs. Principal CIT [2021] 436 ITR 262 (Guj) A.Y.: 2004-05; Date of order: 20th January, 2021 Ss. 10(10C) and 264 of ITA, 1961

Exemption u/s 10(10C) – Amount received under early retirement option scheme of bank – Exemption not claimed in return but later in representation to Principal Commissioner on basis of Supreme Court ruling in case of another employee – That exemption not claimed in return of income not material – Assessee entitled to benefit of exemption

The assessee was a bank employee and opted for the scheme of early retirement declared by the bank. In his return of income for the A.Y. 2004-05, he did not claim the benefit of exemption u/s 10(10C) on the amount received under the early retirement option scheme. Thereafter, relying on the dictum of the Supreme Court in the case of a similarly situated employee of the same bank, to the effect that the employee was entitled to the exemption u/s 10(10C), the assessee filed applications before the Principal Commissioner and claimed exemption u/s 10(10C) under the scheme. The Principal Commissioner was of the view that the assessee, unlike in the case before the Supreme Court, had not claimed such deduction in his return, and secondly, the assessee was expected to file a revision application u/s 264 and not file a representation in that regard. Therefore, he rejected the claim of the assessee.

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

‘i) On the facts, the assessee was entitled to the exemption u/s 10(10C) for the amount received from his employer bank at the time of his voluntary retirement under the early retirement option scheme. Even if the assessee had not claimed the exemption in his return of income for the A.Y. 2004-05, he could claim it at a later point of time. The orders passed by the Principal Commissioner rejecting the benefit of exemption u/s 10(10C) are set aside.

ii) It is declared that the writ applicant is entitled to claim exemption u/s 10(10C) for the amount of Rs. 5,00,000 received from the ICICI Bank Ltd. at the time of his voluntary retirement under the scheme in accordance with the law. It is clarified that this order has been passed in the peculiar facts of the case and shall not be cited as a precedent.’

Direct Tax Vivad Se Vishwas Act, 2020 – Resolution of disputes – Sum payable by declarant – Difference between appeal by assessee and that by Revenue – Lower rate of deposit of disputed tax where appeal is preferred by Revenue – Appeal to Tribunal by Revenue – Tribunal remanding matter to A.O. – Appeal from order by assessee before High Court – High Court restoring Revenue’s appeal to Tribunal – Appeal was by Revenue – Assessee entitled to lower rate of deposit of disputed tax

12 Cooperative Rabobank U.A. vs. CIT [2021] 436 ITR 459 (Bom) A.Y.: 2002-03; Date of order: 7th July, 2021 Direct Tax Vivad Se Vishwas Act, 2020

Direct Tax Vivad Se Vishwas Act, 2020 – Resolution of disputes – Sum payable by declarant – Difference between appeal by assessee and that by Revenue – Lower rate of deposit of disputed tax where appeal is preferred by Revenue – Appeal to Tribunal by Revenue – Tribunal remanding matter to A.O. – Appeal from order by assessee before High Court – High Court restoring Revenue’s appeal to Tribunal – Appeal was by Revenue – Assessee entitled to lower rate of deposit of disputed tax

The assessee was a bank established in the Netherlands. It filed its return for the A.Y. 2002-03 declaring Nil income. The assessment order was passed assessing the business profits attributable to its permanent establishment at Rs. 31,25,060. The Commissioner (Appeals) deleted the addition. The Revenue filed an appeal before the Tribunal which remanded the issue to the A.O. Against the order, the assessee filed an appeal before the High Court on 23rd September, 2015 u/s 260A. The assessee also filed a Miscellaneous Application before the Tribunal which was rejected by an order dated 21st August, 2018. Thereafter, on 29th August, 2018, the High Court passed an order setting aside both the orders of the Tribunal, viz., the order dated 1st April, 2015 restoring the issue to the file of the A.O., as well as the order dated 21st August, 2018 dismissing the Miscellaneous Application filed by the assessee. The High Court directed the Tribunal to decide the matter afresh.

Meanwhile, the assessee made a declaration in Form 1 along with an undertaking in Form 2 according to the provisions of the Direct Tax Vivad Se Vishwas Act, 2020. The assessee indicated an amount payable under the 2020 Act as Rs. 7,50,014 which was 50% of the disputed tax. On 28th January, 2021, Form 3 was issued by the designated authority indicating the amount payable as Rs. 15,00,029 which was 100% of the disputed tax.

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

‘i) A plain reading of the Table in section 3 of the Direct Tax Vivad Se Vishwas Act, 2020 suggests that in the case of an eligible appellant, if it is a non-search case, the amount that is payable would be 100% of the disputed tax, and if it is a search case it would be 125% of the disputed tax. However, in a case where the appeal is filed by the Income-tax authority, the amount payable shall be one-half of the amount calculated for payment of 50% of disputed tax or 100%.

ii) The Court had sent back the matter to the Tribunal and what was before the Tribunal was a matter by the Revenue. Factually as well as in law, it was the Revenue’s matter which stood revived. It was also not the Revenue’s case that it had not accepted the decision of the Court. The whole process resurrected under the orders of the High Court was not the proceedings in the Tribunal by the assessee but of the Revenue preferred u/s 253 of the 1961 Act where the Revenue was the appellant. Maybe the appeal by the Revenue is revived at the instance of the assessee because of its proceedings in the High Court, but that would by no stretch of imagination make the appeal before the Tribunal an appeal by the assessee u/s 253. Hence, the first proviso to section 3 of the 2020 Act would become applicable and, accordingly, the amount payable by the assessee would be 50% of the amount, viz., 50% of the disputed tax.’

Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

Dayanand Pushpadevi Charitable Trust vs. Addl. CIT 11 [2021] 436 ITR 406 (All) A.Y.: 2010-11; Date of order: 23rd June, 2021 Ss. 2(13), 2(15) and 11 of ITA, 1961

Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

The assessee was registered as a charitable trust. The trust was also recognised and registered u/s 12A as an institution whose objects were charitable in nature. The trust ran a dental college which was a residential institution. In pursuance of the statutory obligation imposed by the Dental Council of India requiring all students to reside in the halls of residence or hostel built by the institute within its campus, the assessee ran a hostel for residence of the students (both boys and girls) admitted in the institute. The hostel fees charged from the students included a mess fee. The A.O. concluded that the hostel activities of the trust were separable from its educational activities and would fall within the meaning of ‘business’ u/s 2(13) and could not be treated as ‘charitable purposes’ u/s 2(15). The benefit of section 11 was denied to the assessee.

The assessment order was affirmed in appeals both by the Commissioner (Appeals) and the Tribunal.

But the Allahabad High Court allowed the appeal filed by the assessee and held as under:

‘i) Under sub-section (4A) of section 11, income of any business of a trust in the nature of profit and gains of such business can be exempted under sub-section (1) of section 11 only if two preconditions mentioned in the sub-section are fulfilled. The first condition is that the business must be incidental to the attainment of the objectives of the trust. The crucial word in sub-section (4A) is “business” which has to be understood according to the meaning provided u/s 2(13). Any interpretation or meaning given to the word “business” in the literal parlance cannot be read into the Act as the word “business” has been defined in the Act itself.

ii) The applicability of sub-section (4A) of section 11 presupposes income from a business, being profits and gains of the business, and hence the test applied is whether the activity which is pursued is integral or subservient to the dominant object or is independent of or ancillary or incidental to the main object or forms a separate activity in itself. The issue whether the institution is hit by sub-section (4A) of section 11 will essentially depend upon the individual facts of the case where considering the nature of the individual activity, it will have to be tested whether it forms an incidental, ancillary or connected activity and whether it was carried out predominantly with the profit motive in the nature of trade or commerce.

iii) Having regard to the object and purpose for which the institution in question had been established by the trust and the mandate of the Dental Council of India in the Gazette Notification of the year 2007, its activity in maintaining the hostel by charging hostel fee (for its maintenance and providing mess facility) was an integral part of the main activity of “education” of the assessee. The hostel and mess facility sub-served the main object and purpose of the trust and were an inseparable part of its academic activity. The hostel fee could not be said to be income derived from the “business” of the trust. The activity being directly linked to the attainment of the main objectives of the trust, the requirement of maintaining separate books of accounts with regard to such activity for seeking benefit of exemption u/s 11(1) was, therefore, not attracted.

iv) There was no material on record with the Revenue to hold that the hostel activity was a separate business. From any angle, it could not be proved by the Revenue that the income from the hostel fee could be treated as profits and gains of the separate business or commercial activity. The assessee was entitled to exemption u/s 11.’

Assessment – Faceless assessment – Variation in income to assessee’s prejudice – Personal hearing not given before passing assessment order and consequential notices though requested – Assessment order and subsequent notices of demand and penalty set aside

10 Satia Industries Limited vs. NFAC [2021] 437 ITR 126 (Del) Date of order: 31st May, 2021 Ss. 144B(7)(vii), 156 and 270A of ITA, 1961

Assessment – Faceless assessment – Variation in income to assessee’s prejudice – Personal hearing not given before passing assessment order and consequential notices though requested – Assessment order and subsequent notices of demand and penalty set aside

The assessee filed a writ petition challenging the assessment order and the consequential notice, issued u/s 156, towards tax demand and u/s 270A for initiation of penalty proceedings on the ground that no personal hearing was granted despite a request being made.

The High Court set aside the assessment order and the consequential notices issued u/s 156 towards tax demand and u/s 270A for initiation of penalty proceedings and gave liberty to the Department to proceed from the stage of issuing a notice-cum-draft assessment order with directions to afford an opportunity of hearing to the assessee.

Assessment – Faceless assessment – Writ – Request by assessee for personal hearing – Orders passed and consequential notices of demand and penalty without affording personal hearing – No information on whether steps enumerated in provision taken – Proceedings under assessment order and subsequent notices stayed while notice on writ petition issued

9 Lemon Tree Hotels Limited vs. NFAC [2021] 437 ITR 111 (Del) A.Y.: 2018-19; Date of order: 21st May, 2021 Ss. 143(3), 144B, 144B(7), 156, 270A and 274 of ITA, 1961

Assessment – Faceless assessment – Writ – Request by assessee for personal hearing – Orders passed and consequential notices of demand and penalty without affording personal hearing – No information on whether steps enumerated in provision taken – Proceedings under assessment order and subsequent notices stayed while notice on writ petition issued

For the A.Y. 2018-19, a notice-cum-draft assessment order was issued to the assessee calling upon it to file its objections. Since the matter was complex both on the facts and on law, the assessee made a request for a personal hearing to the A.O. But orders were passed u/s 143(3) r.w.s. 144B and consequential notices of demand were issued u/s 156 and for initiation of penalty proceedings u/s 274 r.w.s. 270A.

The assessee filed a writ petition contending that the order and notices were passed in breach of the principles of natural justice. The Delhi High Court, while issuing notice on the writ petition, stayed the operation of the order passed u/s 143(3) r.w.s. 144B and the consequential notices of demand issued u/s 156 and for initiation of penalty proceedings u/s 274 r.w.s. 270A, on the grounds that the Department did not inform whether steps under sub-clause (h) of section 144B(7)(xii) had been taken.

The High Court observed that in faceless assessment, prima facie, once an assessee requests for a personal hearing the officer in charge, under the provisions of clause (viii) of section 144B(7) would, ordinarily, have to grant a personal hearing. According to the provisions of section 144B(7)(viii), the discretion of the officer in charge of the Regional Faceless Assessment Centre is tied in with the circumstances covered in sub-clause (h) of section 144B(7)(xii).

Appeal to Appellate Tribunal – Powers of Tribunal – Tribunal cannot transfer case from Bench falling within jurisdiction of a particular High Court to Bench under jurisdiction of different High Court Appeal to High Court – Writ – Competency of appeal – Competency of writ petition – Meaning of ‘every order’ of section 260A – Order must relate to subject matter of appeal – Order transferring case – Appeal not maintainable against order – Writ petition maintainable

8 MSPL Ltd. vs. Principal CIT [2021] 436 ITR 199 (Bom) A.Ys.: 2005-06 to 2008-09; Date of order: 21st May, 2021 Ss. ss. 255 and 260A of ITA, 1961 r.w.r. 4 of ITAT Rules, 1963; and Article 226 of Constitution of India

Appeal to Appellate Tribunal – Powers of Tribunal – Tribunal cannot transfer case from Bench falling within jurisdiction of a particular High Court to Bench under jurisdiction of different High Court

Appeal to High Court – Writ – Competency of appeal – Competency of writ petition – Meaning of ‘every order’ of section 260A – Order must relate to subject matter of appeal – Order transferring case – Appeal not maintainable against order – Writ petition maintainable

The assessee was engaged in the business of mining, running a gas unit and generating power through windmills. The relevant period is the A.Ys. 2005-06 to 2008-09. Following centralisation of the cases at Bangalore, the assessments were carried out at Bangalore and in all the assessment orders the A.O. was the Assistant Commissioner. The first appeals against the assessment orders were preferred before the Commissioner (Appeals) at Bangalore, after which the appeals were filed before the Tribunal at Bangalore. On 20th August, 2020, the President of the Tribunal passed an order u/r 4 of the Income-tax (Appellate Tribunal) Rules, 1963 directing that the appeals be transferred from the Bangalore Bench to be heard and determined by the Mumbai Benches of the Tribunal.

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

‘i) Section 255 of the Income-tax Act, 1961 deals with the procedure of the Appellate Tribunal. Sub-section (1) of section 255 says that the powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal from among the Members thereof. Sub-section (5) says that the Tribunal shall have power to regulate its own procedure and that of its various Benches while exercising its powers or in the discharge of its functions. This includes notifying the places at which Benches shall hold their sittings. This provision cannot be interpreted in such a broad manner as to clothe the President of the Tribunal with jurisdiction to transfer a pending appeal from one Bench to another Bench outside the headquarters in another State.

ii) The Income-tax (Appellate Tribunal) Rules, 1963 have been framed in exercise of the powers conferred by sub-section (5) of section 255 of the Act to regulate the procedure of the Appellate Tribunal and the procedure of the Benches of the Tribunal. Sub-rule (1) of Rule 4 empowers the President to direct hearing of appeals by a Bench by a general or special order, and sub-rule (2) deals with a situation where there are more than two Benches of the Tribunal at any headquarters and provides for a transfer of an appeal or an application from one Bench to another within the same headquarters. Thus, this provision cannot be invoked to transfer a pending appeal from one Bench under one headquarters to another Bench in different headquarters.

iii) Section 127 of the Act deals with transfer of any case from one A.O. to another A.O. In other words, it deals with transfer of assessment jurisdiction from one A.O. to another. While certainly the appropriate authority u/s 127 has the power and jurisdiction to transfer a case from one A.O. to another subject to compliance with the conditions mentioned therein, the principles governing the section cannot be read into transfer of appeals from one Bench to another Bench that, too, in a different State or Zone for the simple reason that it is not a case before any A.O.

iv) A careful reading of section 260A(1) would go to show that an appeal shall lie to the High Court from “every order” passed in appeal by the Tribunal if the High Court is satisfied that the case involves a substantial question of law. The expression “every order” in the context of section 260A would mean an order passed by the Tribunal in the appeal. In other words, the order must arise out of the appeal, it must relate to the subject matter of the appeal. An order related to transfer of the appeal would be beyond the scope and ambit of sub-section (1) of section 260A.

v) Clause (2) of Article 226 makes it clear that the power to issue directions, orders or writs by any High Court within its territorial jurisdiction would extend to a cause of action or even a part thereof which arises within the territorial limits of the High Court, notwithstanding the fact that the seat of the authority is not within the territorial limits of the High Court.

vi) The writ petition was maintainable because the petitioner had no other statutory remedy. Having regard to the mandate of Clause (2) of Article 226 of the Constitution, the Bombay High Court had jurisdiction to entertain the petitions.

vii) The fact that the assessee may have expressed no objection to the transfer of the assessment jurisdiction from the A.O. at Bangalore to the A.O. at Mumbai after assessment for the assessment years covered by the search period, could not be used to non-suit the petitioner in his challenge to the transfer of the appeals from one Bench to another Bench in a different State and in a different Zone. The two were altogether different and had no nexus with each other.

viii) The orders dated 19th March, 2020 and 20th August, 2020 were wholly unsustainable in law.’

Revision – Application for revision – Conditions precedent – No appeal filed against assessment order and expiry of time limit for filing appeal – Application for revision valid

42 Aafreen Fatima Fazal Abbas Sayed vs. ACIT [2021] 434 ITR 504 (Bom) A.Y.: 2018-19; Date of order: 8th April, 2021 S. 264 of ITA, 1961

Revision – Application for revision – Conditions precedent – No appeal filed against assessment order and expiry of time limit for filing appeal – Application for revision valid

The petitioner is an individual and for the A.Y. 2017-18 had offered in the return of income, long-term capital gains of Rs. 3,07,60,800 which had arisen on surrender of tenancy rights for that year. The assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. For A.Y. 2018-19, the petitioner had received income from house property of Rs. 12,69,954 and income from other sources of Rs. 14,35,692, making a total income of Rs. 27,05,646. After claiming deductions and set-off on account of deduction of tax at source and advance tax, the refund was determined at Rs. 34,320.

However, while filing return of income on 20th July, 2018 for the A.Y. 2018-19, the figure of long-term capital gains of Rs. 3,07,60,800 was wrongly copied by the petitioner’s accountant from the return of income filed for the A.Y. 2017-18, and the same was mistakenly included in the return for the A.Y. 2018-19. The return filed by the petitioner for the A.Y. 2018-19 was processed u/s 143(1) vide order dated 2nd May, 2019 and a total income of Rs. 3,34,66,446, including long-term capital gains of Rs. 3,07,60,800 purported to have been inadvertently shown in the return of income was determined, thereby raising a tax demand of Rs. 87,40,612. Upon perusal of the order u/s 143(1) dated 2nd May, 2019, the petitioner realised that the amount of Rs. 3,07,60,800 towards long-term capital gains had been erroneously shown in the return of income for the year under consideration.

Realising the mistake, the petitioner filed an application u/s 154 before the A.O. on 25th July, 2019 seeking to rectify the mistake of misrecording of long-term capital gains in the order u/s 143(1) as being an inadvertent error as the same had already been considered in the return for the A.Y. 2017-18, assessment in respect of which had already been completed u/s 143(3). The petitioner had not received any order of acceptance or rejection of this application. In the meantime, the petitioner also made the grievance on the e-filing portal of the Central Processing Centre on 4th October, 2019 seeking rectification of the mistake where the taxpayer was requested to transfer its rectification rights to AST, after which the petitioner filed letters dated 17th October, 2019, 20th February, 2020 and 24th November, 2020 with the A.O., requesting him to rectify the mistake u/s 154.

In order to alleviate the misery and bring to the notice of the higher authorities the delay in the disposal of the rectification application, the petitioner approached the Principal Commissioner u/s 264 on 27th January, 2021, seeking revision of the order of 2nd May, 2019 passed u/s 143(1), narrating the aforementioned facts and requesting the Principal Commissioner to direct the A.O. to recalculate tax liability for the A.Y. 2018-19 after reducing the amount of long-term capital gains from the total income of the petitioner for the said year.

However, instead of considering the application on merits, the Principal Commissioner of Income-tax-19, vide order dated 12th February, 2021, dismissed the application filed by the petitioner on the ground that the same was not maintainable on account of the alternate effective remedy of appeal and that the assessee had also not waived the right of appeal before the Commissioner of Income-tax (Appeals) as per the provisions of section 264(4).

The petitioner therefore filed this writ petition and challenged the order. The Bombay High Court allowed the writ petition and held as under:

‘i) The assessee had not filed an appeal against the order u/s 143(1) u/s 246A of the Act and the time of 30 days to file the appeal had also admittedly expired. Once such an option had been exercised, a plain reading of the section suggested that it would not then be necessary for the assessee to waive such right. That waiver would have been necessary if the time to file the appeal had not expired. The application for revision was valid.

ii) The order dated 12th February, 2021 passed by the Principal Commissioner, the respondent No. 2, is set aside. We direct respondent No. 2 to decide the application filed by the petitioner u/s 264 afresh on merits and after hearing the petitioner, pass a
reasoned / speaking order in line with the aforesaid discussion for grant of relief prayed for in the said application.

Obiter dicta: Where errors can be rectified by the authorities, the whole idea of relegating or subjecting the assessee to the appeal machinery or even discretionary jurisdiction of the High Court, is uncalled for and would be wholly avoidable. The provisions in the Income-tax Act for rectification, revision u/s 264 are meant for the benefit of the assessee and not to put him to inconvenience.’

Direct Tax Vivad se Vishwas Act, 2020 – Scope of – Act deals with disputed tax – Application for revision u/s 264 relating to tax demand – Applicant eligible to make declaration under Direct Tax Vivad se Vishwas Act

41 Sadruddin Tejani vs. ITO [2021] 434 ITR 474 (Bom) A.Ys.: 1988-89 to 1998-99; Date of order: 9th April, 2021 S. 264 of ITA, 1961 and Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act, 2020 – Scope of – Act deals with disputed tax – Application for revision u/s 264 relating to tax demand – Applicant eligible to make declaration under Direct Tax Vivad se Vishwas Act

The petitioner was engaged in the business of retail footwear. He had filed declarations in Form 1 and undertaking in Form 2 in respect of each of the A.Ys. 1988-89 to 1997-98, u/s 4(1) of the Direct Tax Vivad se Vishwas Act, 2020 on 18th November, 2020. However, the same was rejected on 30th January, 2021.

Being aggrieved, the petitioner filed a writ petition and challenged the order of rejection. The Bombay High Court allowed the writ petition and held as under:

‘i) The Direct Tax Vivad se Vishwas Act, 2020 is aimed not only to benefit the Government by generating timely revenue but also to benefit the taxpayers by providing them with peace of mind, certainty and saving time and resources rather than spending the same otherwise. The Preamble clearly provides that this is an Act to provide for resolution of disputed tax and for matters connected therewith or incidental thereto. The emphasis is on disputed tax and not on disputed income.

ii) For a declarant to file a valid declaration there should be disputed tax in the case of such declarant. The definition of “tax arrears” clearly refers to an aggregate of the amount of disputed tax, interest chargeable or charged on such disputed tax, etc., determined under the provisions of the Income-tax Act, 1961. From a plain reading of the provisions of the 2020 Act and the Rules, it emerges that the designated authority would have to issue Form 3 as referred to in section 5(1) specifying the amount payable in accordance with section 3 of the 2020 Act in the case of a declarant who is an eligible appellant not falling u/s 4(6) nor within the exceptions in section 9 of the 2020 Act.

iii) The assessee had filed an application u/s 264 for adjustment or credit of Rs. 12,43,000 paid in respect of the tax demands of the A.Ys. 1988-89 to 1998-99 as according to him this amount had been adjusted only against the demand for the A.Y. 1987-88. While this application was pending, the Direct Tax Vivad se Vishwas Act, 2020 was enacted, followed by the Direct Tax Vivad se Vishwas Rules, 2020. The assessee filed applications under the 2020 Act and Rules. The assessee having filed a revision application u/s 264 for the A.Ys. 1988-89 to 1998-99 for adjustment of Rs.12,43,000 which application was pending before the Commissioner, admittedly being an eligible appellant, squarely satisfied the definition of “disputed tax” as contained in section 2(1)(j)(F) of the 2020 Act. This was because if the revision application u/s 264 were rejected, the assessee would purportedly be liable to pay a demand of Rs. 88,90,180 including income tax and interest. The assessee as eligible appellant had filed a declaration u/s 4 with the designated authority under the provisions of section 4 of the 2020 Act in respect of tax arrears, which included the disputed tax which would become payable as may be determined. This was not only a case where there was a disputed tax but also tax arrears as referred to in section 3 of the 2020 Act.

iv) The designated authority had not raised any objection under any provision of the 2020 Act or Rules with respect to the declarations or undertakings furnished by the assessee, nor passed any order let alone a reasoned or speaking order rejecting the declarations. The designated authority had summarily rejected the declarations without there being any such provision in the 2020 Act or the Rules. There was also no fetter on the designated authority to determine the disputed tax at an amount other than that declared by the assessee. The designated authority under the 2020 Act was not justified in rejecting the declarations filed by the assessee.

v) Accordingly, we set aside the rejections. We direct respondent No. 2 to consider the applications made by the petitioner by way of declarations dated 18th November, 2020 in Form 1 as per law and proceed with them according to the scheme of the Direct Tax Vivad se Vishwas Act and Rules in the light of the above discussion within a period of two weeks from the date of this order. The petition is allowed in the above terms.’

Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

40 Toyota Kirloskar Motor (P) Ltd. vs. ITO (TDS) LTU [2021] 434 ITR 719 (Karn) A.Y.: 2012-13; Date of order: 24th March, 2021 S. 201(1) of ITA, 1961

Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

The assessee is a joint venture and is a subsidiary of Toyota Motor Corporation, Japan. It is engaged in manufacturing and sale of passenger cars and multi-utility vehicles. The assessee follows the mercantile system of accounting and as per its accounting policies, at the end of the financial year, i. e., 31st March of every year, the assessee makes provision for marketing expenses, overseas expenses and general expenses on an estimated basis in respect of works contracts services which are in the process of completion but the vendor is yet to submit the bills to ascertain the closest amount of profits / loss. The aforesaid provision is made in conformity with Accounting Standard 29. Subsequently, as and when invoices are received from the vendors the invoice amount is debited to the provisions already made with corresponding credit at the respective vendor’s account. The assessee also deducts tax at source as required under the provisions of the Act and remits the same along with interest to the Government.

For the A.Y. 2012-13, the assessee had made a provision towards marketing, overseas and general expenses to the extent of Rs. 1114,718,613. However, at the time of filing of the return of income the provision which remained unutilised as per the books of accounts as on 30th April, 2012 and on 31st October, 2012 in respect of overseas and domestic payments, respectively, for an amount of Rs. 9,27,41,239 was not claimed as deduction u/s 40(a)(i) and (ia) and the same was offered to tax. Subsequent to filing of the return, the assessee received invoices from the vendors for the A.Y. 2012-13 and the amount mentioned in the invoices was debited to the provision already made with a corresponding credit to the respective vendors’ account. The amount indicated in the invoices for a sum of Rs. 5,589,454 was utilised against the provision and the deduction of tax at source along with interest was also discharged at the time of credit of the invoice amount to the account of the vendor. Subsequently, the amount which remained unutilised, i.e., a sum of Rs. 8,71,32,988 in the provision account after completion of negotiation / finalisation of services, was reversed in the books of accounts of the assessee. The assessee received a communication on 30th July, 2013 asking it to furnish details of computation of income, audit report in Form 3CD for the year ending 31st March, 2012 reflecting the details of disallowances made u/s 40(a)(i) and (ia). The assessee thereupon furnished the information vide communication dated 12th August, 2013.

The A.O. initiated the proceedings u/s 201 and also u/s 201(1A) and treated the assessee as assessee-in-default in respect of the amount made in the provision, which was reversed / unutilised for a sum of Rs. 8,71,32,988 and the amount of deduction of tax at source and interest on the aforesaid amount u/s 201(1A) was computed at Rs. 14,18,327 and Rs. 25,195 was levied for late remittance of tax deducted at source. Thus, a total sum of Rs. 17,10,879 was determined as payable by the assessee.

The Commissioner (Appeals) affirmed the order passed by the A.O. The Tribunal dismissed the appeal preferred by the assessee.

In appeal before the High Court, the assessee raised the following question of law:

‘Whether in the facts and circumstances of the present case, the Income-tax Appellate Tribunal was right in law in affirming the order of the Commissioner of Income-tax (Appeals) in treating the appellant as “assessee-in-default” u/s 201(1) for non-deduction of tax at source from the amount of Rs. 8,74,32,988 when such amount had not accrued to the payee or any person at all?’

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

‘i) In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The A.O. erred in law in holding that the assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act ought to have appreciated that in the absence of any income accruing to anyone, the liability to deduct tax at source on the assessee could not have been fastened and, consequently, the proceeding u/s 201 and u/s 201(1A) could not have been initiated.

ii) For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the Revenue.

iii) In the result, the impugned orders dated 31st October, 2017, 20th June, 2014 and 11th March, 2014 passed by the Tribunal, the Commissioner of Income-tax (Appeals) and the A.O., respectively, are hereby quashed. In the result, the appeal is allowed.’

Business expenditure – Year in which expenditure is deductible – Business – Difference between setting up and commencement of business – Incorporation as company, opening of bank account, training of employees and lease agreement in accounting year relevant to A.Y. 2012-13 – Licence for business obtained in February, 2012 – Assessee entitled to deduction of expenditure incurred for business in A.Y. 2012-13

39 Maruti Insurance Broking Pvt. Ltd. vs. Dy. CIT [2021] 435 ITR 34 (Del) A.Y.: 2012-13; Date of order: 12th April, 2021 S. 37 of ITA, 1961

Business expenditure – Year in which expenditure is deductible – Business – Difference between setting up and commencement of business – Incorporation as company, opening of bank account, training of employees and lease agreement in accounting year relevant to A.Y. 2012-13 – Licence for business obtained in February, 2012 – Assessee entitled to deduction of expenditure incurred for business in A.Y. 2012-13

The assessee was incorporated on 24th November, 2010. The first meeting of its board of directors was held on 29th November, 2010 when certain decisions were taken, including, according to the assessee, setting up of its business; appointment of the chief executive officer and the principal officer; approval of the draft application for obtaining a broker’s licence in the prescribed form under Regulation 6 of the IRDA (Insurance Brokers) Regulations, 2002 (in short ‘2002 Regulations’) [this application had to be filed for obtaining the licence]; a decision as to the registered office of the assessee; and a decision concerning the opening of a current account with HDFC Bank at Surya Kiran Building, 19, K.G. Marg, New Delhi 110001.

On 29th November, 2010 itself, an agreement was executed between the assessee and Maruti Suzuki India Limited (MSIL). Via this agreement, the persons who were employees of MSIL were sent on deputation to the assessee and to meet its objective, were made to undergo a minimum of 100 hours of mandatory training as insurance brokers. These steps were a precursor to the application preferred by the assessee with the Insurance Regulatory and Development Authority (IRDA) for issuance of a direct-broker licence. The application was lodged with the IRDA on 1st December, 2010. While this application was being processed, presumably by the IRDA, the assessee took certain other steps in furtherance of its business. Accordingly, on 1st June, 2011, the assessee executed operating lease agreements for conducting insurance business from various locations across the country. Against these leases, the assessee is said to have paid rent as well. The assessee set up 29 offices in 29 different locations across the country for carrying on its insurance business. The assessee was finally issued a direct broker’s licence by the IRDA on 2nd February, 2012.

For the A.Y. 2011-12, the assessee filed return of income on 30th September, 2011 declaring a business loss amounting to Rs. 57,582. For the A.Y. 2012-13, the return of income was filed on 29th September, 2012 declaring a net loss of Rs. 2,78,22,376. In this return, the assessee claimed the impugned deduction, i. e., business expenses amounting to Rs. 2,77,99,046. The A.O. held that since the licence was issued by the IRDA on 2nd February, 2012, the assessee’s business could not have been set up prior to that date, and therefore the entire business expenditure amounting to Rs. 2,78,22,376 was required to be disallowed and capitalised as pre-operative expenses.

The Commissioner (Appeals) upheld the order of the A.O. The Tribunal sustained the view taken by both the Commissioner of Income-tax (Appeals) as well as the A.O.

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

‘i) The Income-tax Act, 1961 does not define the expression “setting up of business”. This expression finds mention though (sic) in section 3 of the Income-tax Act, 1961 which defines “previous year”. The previous year gets tied in with section 4 of the Act, which is the charging section. In brief, section 4, inter alia, provides that income arising in the previous year is chargeable to tax in the relevant assessment year. Firstly, there is a difference between setting up and commencement of business. Secondly, when the expression “setting up of business” is used, it merely means that the assessee is ready to commence business and not that it has actually commenced its business. Therefore, when the commencement of business is spoken of in contradiction to the expression “setting up of business”, it only refers to a point in time when the assessee actually conducts its business, a stage which it necessarily reaches after the business is put into a state of readiness. A business does not, metaphorically speaking, conform to the “cold start” doctrine. There is, in most cases, a hiatus between the time a person or entity is ready to do business and when business is conducted. During this period, expenses are incurred towards keeping the business primed up. These expenses cannot be capitalised.

ii) The assessee did all that was necessary to set up the insurance broking business. The assessee after its incorporation opened a bank account, entered into an agreement for deputing employees (who were to further its insurance business), gave necessary training to the employees, executed operating lease agreements, and resultantly set up offices at 29 different locations across the country. Besides this, the application for obtaining a licence from the IRDA was also filed on 1st December, 2010. The Authority took more than a year in dealing with the assessee’s application for issuance of a licence. The licence was issued only on 2nd February, 2012 although the assessee was all primed up, i. e., ready to commence its business since 1st June, 2011, if not earlier. The assessee was entitled to deduction of the expenses incurred for the business in the A.Y. 2012-13.’

Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

38 CIT (LTU) vs. Areva T&D India Ltd. [2021] 434 ITR 604 (Mad) A.Y.: 2006-07; Date of order: 25th March, 2021 S. 28(iv) of ITA, 1961

Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

The assessee is engaged in the business of manufacturing heavy electrical equipment. Three companies were amalgamated with the assessee company and on amalgamation the assets stood transferred to the assessee company with effect from 1st January, 2006. The net excess value of the assets over the liability of the amalgamating company amounted to Rs. 54,26,56,000 and had been adjusted against the general reserve of the assessee company. In the assessment proceedings for the A.Y. 2006-07, the assessee was called upon to explain why the said excess asset, which was taken over as liability during the current year, should not be taxed u/s 28(iv). The explanation offered by the assessee was not accepted and the A.O. held that the said amount had to be charged to Income-tax under the head ‘Profits and gains of business’ u/s 28(iv).

The Commissioner (Appeals) allowed the assessee’s claim and deleted the addition. The Tribunal dismissed the appeal filed by the Revenue.

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

‘i) For applicability of section 28(iv) the income must arise from business or profession and the benefit which is received has to be in a form other than in the shape of money. The provisions of section 28(iv) make it clear that the amount reflected in the balance sheet of the assessee under the head “Reserves and surplus” cannot be treated as a benefit or perquisite arising from business or exercise of profession.

ii) The difference in amount post amalgamation was the amalgamation reserve and it cannot be said that it was out of normal transaction of the business being capital in nature, which arose on account of amalgamation of four companies, it cannot be treated as falling u/s 28(iv).’

Reassessment – Validity – Sections 147 and 148 – Failure to furnish reasons recorded by A.O. – Furnishing of reasons while matter pending before Tribunal to cure default in first instance – Order of Tribunal remanding matter and subsequent assessment and demand notice set aside

47. New Era Shipping Ltd. vs. CIT [2020] 430 ITR 431 (Bom.) Date of order: 27th October, 2020 A.Y.: 2004-05

Reassessment – Validity – Sections 147 and 148 – Failure to furnish reasons recorded by A.O. – Furnishing of reasons while matter pending before Tribunal to cure default in first instance – Order of Tribunal remanding matter and subsequent assessment and demand notice set aside

Upon receipt of notice u/s 148 for the A.Y. 2004-05, the assessee requested for the reasons for the notice. No reasons were furnished and the A.O. passed a reassessment order u/s 147. The reasons were ultimately furnished to the assessee before the Tribunal which remanded the matter to the A.O.

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

‘i) It was not open to the A.O. to refuse to furnish the reasons for issuing notice u/s 148. By such refusal, the assessee was deprived of the valuable opportunity of filing objections to the reopening of the assessment u/s 147. The approach of the A.O. was contrary to the law laid down by the Supreme Court.

ii) On the facts, the furnishing of reasons for reopening of the assessment at the stage when the matter was pending before the Tribunal could not cure the default in the first instance. The remand ordered by the Tribunal and the consequential assessment order and demand notice issued on the basis thereof were set aside.’

Loss – Set-off – Deduction u/s 10B – Scope of sections 10B and 70 – Assessee having three industrial units two of which export-oriented – Assessee not claiming deduction u/s 10B – Deduction cannot be thrust on it – Assessee entitled to set off losses from export-oriented units against profits of domestic tariff area unit

46. Karle International Pvt. Ltd. vs. ACIT [2020] 430 ITR 74 (Karn.) Date of order: 7th September, 2020 A.Y.: 2008-09

 

Loss – Set-off – Deduction u/s 10B – Scope of sections 10B and 70 – Assessee having three industrial units two of which export-oriented – Assessee not claiming deduction u/s 10B – Deduction cannot be thrust on it – Assessee entitled to set off losses from export-oriented units against profits of domestic tariff area unit

 

The assessee was a private limited company engaged in the business of manufacture and export of readymade garments. For the A.Y. 2008-09 the assessee filed the return of income declaring total income of Rs.12,89,760. The assessee had three units, two of which were export-oriented, and showed profit and loss from all of them. The assessee had set off losses of the units against the profits of the unit making profits and offered the balance to tax under the head ‘Income from business’. The A.O., inter alia, held that losses of the export-oriented units could not be allowed to be set off against the profits of unit No. I.

 

The Commissioner (Appeals) and the Tribunal upheld the decision of the A.O.

 

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

 

‘i) It is a well-settled legal proposition that where the assessee does not want the benefit of deduction from the taxable income, it cannot be thrust upon the assessee. Section 10B is not a provision in the nature of an exemption but provides for a deduction of such profit and gains as are derived by 100% export-oriented undertakings from the export of articles or things or computer software.

 

ii) Section 10B does not contain any prohibition that prevents an assessee from setting off losses from one source against income from another source under the same head of income as prescribed u/s 70. Section 10B(6)(ii) restricts the carrying forward and setting off of loss under sections 72 and 74 but does not provide anything regarding intra-head set-off u/s 70 and inter-head set-off u/s 71. The business income can be computed only after setting off business loss against the business income in the year in accordance with the provisions of section 70.

 

iii) Section 10A is a code by itself and section 10A(6)(ii) does not preclude the operation of sections 70 and 71. Paragraph 5.2 of the Circular issued by the Central Board of Direct Taxes dated 16th July, 2013 [(2013) 356 ITR (St.) 7] clearly provides that income or loss from various sources, i. e., eligible and ineligible units under the same head, are aggregated in accordance with the provisions of section 70.

 

iv) The assessee was entitled to set off the loss from the export-oriented unit against the income earned in the domestic tariff area unit in accordance with section 70.’

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

45. Devashri Nirman LLP vs. ACIT [2020] 429 ITR 597 (Bom.) Date of order: 26th November, 2020 A.Ys.: 2007-08 to 2011-12

Housing project – Special deduction u/s 80-IB(10) – Principle of proportionality – 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’s housing projects DG and VV comprised 105 and 90 residential units, respectively. The assessee was denied the deduction u/s 80-IB by the A.O. on the ground that the area of five residential units in DG and three residential units in VV exceeded 1,500 square feet which was in breach of the conditions prescribed in clause (c) of section 80-IB(10).

The Commissioner (Appeals) directed the A.O. to allow deduction u/s 80-IB(10) on a proportionate basis. The Tribunal dismissed the appeals filed by both the assessee and the Department.

On appeals by the assessee and the Department, the Bombay High Court held as under:

‘i) Clause (c) of section 80-IB(10) does not exclude the principle of proportionality in any manner.

ii) The Tribunal was justified in holding that the assessee was entitled to deduction u/s. 80-IB(10) on proportionate basis. The view taken by the Commissioner (Appeals) and the Tribunal need not be interfered with.’

Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

44. CIT vs. Brigade Enterprises Ltd. (No. 2) [2020] 429 ITR 615 (Karn.) Date of order: 22nd October, 2020 A.Y.: 2009-10

Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

The assessee was engaged in the business of real estate development. For the A.Y. 2009-10 the A.O. made a disallowance u/s 14A.

The Commissioner (Appeals) sustained the disallowance of the interest disallowed u/s 14A read with Rule 8D of the Income-tax Rules, 1962, to the extent of Rs. 1,09,99,962 u/s 14A read with Rule 8D(2)(iii) and deleted the disallowance of interest u/s 14A read with Rule 8D(2)(ii) to the extent of Rs. 15,27,310. The Tribunal, inter alia, held that there was no material on record to substantiate that overdraft account was utilised for making tax-free investments and the investment proceeds were from the public issue of shares. Therefore, it could not be held that funds from the overdraft account from which interest had been paid had been invested in mutual funds which yielded income exempt from tax. Thus, deletion of disallowance u/s 14A read with Rule 8D(2)(ii) to the tune of Rs. 15,27,310 was upheld.

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

‘i) The A.O. had not rendered any finding with regard to the incorrectness of the claim of the assessee either with regard to its accounts or that he was not satisfied with the claim of the assessee in respect of such expenditure in relation to exempt income as is required in accordance with section 14A(2) for making a disallowance under Rule 8D.

ii) Thus, the Tribunal had rightly concluded that the A.O. had not recorded the satisfaction with regard to the claim of the assessee for disallowance u/s 14A read with Rule 8D(2). Section 14A was not applicable.’

Business expenditure – Deduction u/s 37 – Company – Discount on employees stock option plan – Deductible

43. CIT (LTU) vs. Biocon Ltd. [2020] 430 ITR 151 (Karn.) Date of order: 11th November, 2020 A.Y.: 2004-05

Business expenditure – Deduction u/s 37 – Company – Discount on employees stock option plan – Deductible

The following question of law was raised before the Karnataka High Court:

‘Whether on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the discount on issue of Employees Stock Option Plan (ESOP) is allowable deduction in computing the income under the head profits and gains of the business?’

The High Court held as under:

‘i) From a perusal of section 37(1) it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a pay-out. If an expenditure has been incurred, section 37(1) would be attracted. Section 37 does not envisage incurrence of expenditure in cash.

ii) An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction even though the liability may have to be quantified and discharged at a future date.

iii) Section 2(15A) of the Companies Act, 1956 defines “employees stock option” to mean option given to whole-time directors, officers or the employees of the company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date to securities offered by the company at a pre-determined price. In an employees stock option plan, a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between the market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.

iv) The expression “expenditure” also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and, therefore, it cannot be construed as short receipt of capital.

v) The deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of accounts, which had been prepared in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For A.Y. 2009-10 onwards, the A.O. had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the A.Y. 2004-05. The expenses were deductible.’

Appeal to ITAT – Duty of Tribunal to consider issue on merits – Document not filed due to mistake of counsel for assessee – Dismissal of appeal not justified – Appeal should have been decided on merits

42. Swetha Realmart LLP vs. CIT [2020] 430 ITR 159 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2016-17

Appeal to ITAT – Duty of Tribunal to consider issue on merits – Document not filed due to mistake of counsel for assessee – Dismissal of appeal not justified – Appeal should have been decided on merits

 

For the A.Y. 2016-17, the assessee had filed an appeal before the Income-tax Appellate Tribunal against the order of the Commissioner (Appeals). The Tribunal, by an order dated 29th May, 2020, dismissed the appeal inter alia on the ground that in the absence of documentary evidence in support of the assessee’s claim that the property sold in question was not a depreciable asset, no ground is made out to interfere with the order passed by the Commissioner (Appeals).

 

The assessee filed an appeal before the High Court against this order of the Tribunal. The following question was raised:

 

‘Whether, in the facts and circumstances of the case, the Tribunal is right in law in dismissing the appeal instead of disposing the matter on its merits.’

 

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

 

‘i) It is trite law that for the fault committed by counsel, a party should not be penalised.

 

ii) Due to inadvertence, the senior chartered accountant engaged by the assessee could not comply with the directions of the Tribunal to file documents. The Tribunal, in fact, should have adjudicated the matter on the merits instead of summarily dismissing it. The order of dismissal was not valid.

 

iii) The substantial question of law framed by this Court is answered in favour of the assessee and against the Revenue.

 

iv) In the result, the order passed by the Tribunal is quashed. The matter is remitted to the Tribunal. Needless to state that the assessee shall file the audited accounts and computation of income as directed by the Tribunal within a period of four weeks from the date of receipt of the certified copy of the order passed today before the Tribunal. Thereupon, the Tribunal shall proceed to adjudicate the appeal on its merits.’

Appeal to Commissioner (Appeals) – Powers of Commissioner (Appeals) – Sections 246 and 251 of ITA, 1961 – Commissioner (Appeals) has power to consider claim not raised in return or revised return

41. Sesa Goa Ltd. vs. Addl. CIT [2020] 430 ITR 114 (Bom.) Date of order: 12th March, 2020 A.Y.: 2005-06


 
Appeal to Commissioner (Appeals) – Powers of Commissioner (Appeals) – Sections 246 and 251 of ITA, 1961 – Commissioner (Appeals) has power to consider claim not raised in return or revised return

 

The Bombay High Court held as under:

 

‘i) Appellate authorities under the Income-tax Act, 1961 have very wide powers while considering an appeal which may be filed by the assessee. The appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the assessee in accordance with law.

 

ii) The Commissioner (Appeals) has undoubted power to consider a claim for deduction not raised in the return or revised return.’

 

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

Principal CIT vs. Kumagai Skanska HCC ITOCHU Group; [2019] 102 taxmann.com 416 (Bom): Date of order: 29th January, 2019 A.Y.s..: 2003-04 to 2005-06

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

The assessee was engaged in the business of civil construction. It followed the project completion method of accounting to offer its income to tax. During the A.Y.s. 2003-04, 2004-05 and 2005-06, it had received certain payments as a contractor on which the payer had deducted tax at source. In the return of income filed for A.Y. 2005-06, it had declared a certain loss. In the said return, it had claimed the income relatable to the payments made during the said year as well as during the earlier two A.Y.s. 2003-04 and 2004-05.

The assessment order passed by the Assessing Officer gave rise to refund. The assessee contended before the Assessing Officer that on such refund interest in terms of section 244A would be payable from the respective assessment years. The Assessing Officer held that the income in relation to the payments on which tax was deducted at source was returned by the assessee in the A.Y. 2005-06 and, therefore, interest could not be   paid on the refund for any period prior to the said assessment year.

The Tribunal held in favour of the assessee.

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

“i)  Section 244A pertains to interest on refunds. In the instant case, the assessee’s case falls under clause (a) of sub-section (1) of section 244A. Clause (a) of sub-section (1) of section 244A covers situations where the refund is out of any tax collected at source or paid by way of advance tax or treated as paid u/s. 199. This reference to treat tax as paid u/s. 199 would clearly cover the tax deducted at source. In the instant case, the assessee had suffered deduction of tax at source at the time of payments. In that view of the matter, the case of the assessee would clearly be covered under clause  (a) to sub-section (1) of section 244. In such a situation, this clause provides that interest shall be calculated at the rate of 1/2 per cent for every month or part thereof, comprising a period from the 1st day of April of the assessment year to the date on which the refund is granted, provided the return is filed before the due date, specified in sub-section (1) of section 139.

ii)  Here the reference ‘from the 1st day of April of the assessment year’, which is the starting point for computing the interest payable, must be to the assessment year in which the tax was deducted at source. This expression has to be read along with the main body of clause (a) which refers to the refund arising out of,  inter alia, the tax treated to have been paid as per section 199. Any other view would be held untenable, since the Revenue which has received the tax deducted at source from the payments to be made to the assessee and appropriated the same would refund the same but the interest would be accounted much later when the return giving rise to the refund is filed.

iii)  In view of the aforesaid, the Tribunal had not committed any error. The appeal filed by the Revenue deserved to be dismissed.”

Appeal to Appellate Tribunal – Rectification of mistake u/s 254(2) – Powers of Tribunal – Jurisdiction limited to correcting ‘error apparent on face of record’ – Tribunal cannot review its earlier order or rectify error of law or re-appreciate facts – Assessee has remedy of appeal to High Court

37 Vrundavan Ginning and Oil Mill vs. Assistant Registrar / President [2021] 434 ITR 583 (Guj) Date of order: 18th March, 2021 Ss. 253, 254, 254(2), 260A of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistake u/s 254(2) – Powers of Tribunal – Jurisdiction limited to correcting ‘error apparent on face of record’ – Tribunal cannot review its earlier order or rectify error of law or re-appreciate facts – Assessee has remedy of appeal to High Court

In the appeal filed by the assessee against the order passed by the A.O., the Commissioner (Appeals) granted relief to the assessee in respect of the addition on account of understatement of net profit by lowering the value of closing stock and confirmed the addition made by the A.O. The assessee filed a further appeal before the Tribunal on the grounds that the Commissioner (Appeals) erred in (a) confirming the addition made on account of purchases by holding that the purchases of raw cotton from the partners were bogus, (b) confirming the addition made on account of purchases of raw cotton from the relatives of the partners holding them to be unexplained / unsubstantiated, and (c) confirming the addition made on account of alleged suppression in value of closing stock by discarding / disregarding the method of valuation consistently followed and accepted in the past assessments.

The Tribunal held that the Commissioner (Appeals) rightly held that the assessee did not follow either of the methods of valuation of closing stock, i.e., either on the basis of cost price or market price, whichever was lower, rather the assessee followed net realisable value which was an ad hoc method and without any basis, that the net realisation method was neither based on cost price nor calculated on the basis of market price and there was no scientific method of calculation of the net realisable value, and that there was no infirmity in the orders of the authorities below.

Thereafter, the assessee filed a miscellaneous application u/s 254 contending that (a) the copies of returns filed in which agricultural income disclosed by the partners in the hands of the Hindu Undivided Family were furnished, (b) the partners in turn disclosed share in the HUF income in their individual returns and had claimed exemption u/s 10(2) and such exemption claimed was not disturbed by the A.O., (c) the purchases from the partners and relatives were made at market rate and comparable purchase vouchers along with a chart were furnished indicating no excess payment to the partners and relatives, (d) there was complete quantity tally on day-to-day basis, and (e) there was no rejection of book results and that 20% disallowance was sustained by the Tribunal while adjudicating ground Nos. 1 and 2 without taking into account the above stated facts, and therefore the order of the Tribunal needed to be rectified to such extent and consequential required relief was to be granted on ground No. 3 in respect of the addition on account of alleged suppression in value of closing stock.

The Tribunal held that the power of rectification u/s 254 could be exercised only when the mistake which was sought to be rectified was an obvious patent mistake and apparent from the record and not a mistake which was required to be established by arguments and a long-drawn process of reasoning on points on which there could conceivably be two opinions. It was further held that after a detailed discussion the disallowance was restricted to 20% of the purchase made from the partners and relatives of the partners and 80% of the purchases made by the assessee were allowed; and qua ground No. 3 relating to the addition made on account of suppression in the value of closing stock, the issue was discussed and thereafter it was concluded that the assessee adopted an ad hoc method for the valuation of closing stock without any basis and that the scope of sub-section (2) of section 254 was restricted to rectifying any mistake in the order which was apparent from record and did not extend to reviewing of the earlier order. The Tribunal rejected the miscellaneous application filed by the assessee.

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

‘i) Section 254(2) makes it clear that a “mistake apparent from the record” is rectifiable. To attract the jurisdiction u/s 254(2), a mistake should exist and must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. A mistake which can be rectified under this section is one which is patent, obvious and whose discovery is not dependent on argument. The language used in section 254(2) is that rectification is permissible where it is brought to the notice of the Tribunal that there is any mistake apparent from the record. The amendment of an order, therefore, does not mean obliteration of the order originally passed and its substitution by a new order which is not permissible, under the provisions of this section. Further, where an error is far from self-evident, it ceases to be an “apparent” error. Undoubtedly, a “mistake” capable of rectification u/s 254(2) is not confined to clerical or arithmetical mistakes. It does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. An error “apparent on the face of the record” should be one which is not an error that depends for its discovery on an elaborate argument on questions of fact or law.

ii) The power to rectify an order u/s 254(2) is limited. It does not extend to correcting errors of law or re-appreciating factual findings. Those properly fall within the appellate review of an order of a court of first instance. What legitimately falls for consideration are errors (mistakes) apparent from the record.

iii) The language used in Order 47, Rule 1 of the Code of Civil Procedure, 1908 is different from the language used in section 254(2). Power is conferred upon various authorities to rectify any “mistake apparent from the record”. Though the expression “mistake” is of indefinite content and has a large subjective area of operation, yet, to attract the jurisdiction to rectify an order u/s 254(2) it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or disputed question of fact is not a mistake apparent from the record.

iv) The Appellate Tribunal, in its own way, had discussed qua ground No. 3 the issue relating to the addition made on account of suppression in the value of closing stock and had recorded a particular finding. If the assessee was dissatisfied, then it had to prefer an appeal u/s 260A, and if the court was convinced, then it could remit the matter to the Tribunal for fresh consideration of ground No. 3. As regards the findings recorded by the Tribunal, so far as ground No. 3 was concerned, the assessee could seek appellate remedies. The power to rectify an order u/s 254(2) is limited.’

Search and seizure – Condition precedent – Reasonable belief that assets in possession of person would not be disclosed – Application of mind to facts – Cash seized by police and handed over to Income-tax Authorities – Subsequent issue of warrant of authorisation – Seizure and retention of cash – Invalid

36 MECTEC vs. Director of Income-Tax (Investigation) [2021] 433 ITR 203 (Telangana) Date of order: 28th December, 2020 S. 132 of ITA, 1961

Search and seizure – Condition precedent – Reasonable belief that assets in possession of person would not be disclosed – Application of mind to facts – Cash seized by police and handed over to Income-tax Authorities – Subsequent issue of warrant of authorisation – Seizure and retention of cash – Invalid

The petitioner in W.P. No. 23023 of 2019 is a proprietary concern carrying on the business of purchase of agricultural lands and agricultural products throughout the country and claims that it has 46 branches at different places all over the country having an employee strength of about 300. It also deals as a wholesale trader of agricultural products, vegetables, fruits and post-harvest crop activities. The petitioner in W.P. No. 29297 of 2019 is Vipul Kumar Mafatlal Patel, an employee of the petitioner in W.P. No. 23023 of 2019.

The petitioner states that it has business transactions in the State of Telangana also and that it entrusted a sum of Rs. 5 crores to its employee Vipul Kumar Patel for its business purposes. The said individual had come to Hyderabad with friends, and on 23rd August, 2019 their car, a Maruti Ciaz car bearing No. TS09FA 4948, was intercepted by the Task Force Police of the State of Telangana. According to the petitioner, the said employee, his friends, the cash of Rs. 5 crores together with the above vehicle and another car and two-wheeler were detained illegally from 23rd August, 2019 onwards by the Telangana State Police.

The GPA holder of the petitioners filed on 27th August, 2019 a habeas corpus petition for release of the said persons, the cash and vehicles in the High Court of Telangana.

The Task Force Police filed a counter-affidavit in the said writ petition claiming that the discovery of cash with the said persons was made on 26th August, 2019 and that the police had handed over the detenues along with the cash to the Principal Director of Income-tax, Ayakar Bhavan, Hyderabad for taking further action against them.

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

‘i) Admittedly, the Task Force Police addressed a letter under exhibit P5, dated 26th August, 2019 to the Principal Director of Income-tax, Ayakar Bhavan, Hyderabad stating that he is handing over both the cash and the detenues to the latter and the Deputy Director of Income-tax, Unit 1(3), Hyderabad (second respondent in W.P. No. 23023 of 2019) acknowledged receipt of the letter on 27th August, 2019 and put his stamp thereon.

ii) However, a panchanama was prepared by the second respondent on 28th August, 2019 (exhibit R8) as if a search was organised by a search party consisting of eight persons who are employees of the Income-tax Department including the second respondent (without mentioning the place where the alleged search was to be conducted in the panchanama); that there were also two panch witnesses, one from Nalgonda District, Telangana and another from Dabilpura, Hyderabad who witnessed the search at the place of alleged search; that a warrant of authorisation dated 28th August, 2019 was issued to the second respondent u/s 132 to search the place (whose location was not mentioned in the panchanama) by the Principal Director of Income-tax (Inv.), Hyderabad; the search warrant was shown at 9.00 a.m. on 28th August, 2019 to Vipul Kumar Patel who was present at the alleged place (not mentioned specifically); that a search was conducted at the place (not mentioned specifically in the panchanama); and allegedly the cash of Rs. 5 crores was seized at that time from his custody.

iii) Section 132 deals with procedure for search and seizure of cash or gold or jewellery or other valuable things. In DGIT (Investigation) vs. Spacewood Furnishers Pvt. Ltd. [2015] 374 ITR 595 (SC) the Supreme Court dealt with the exercise of power by the competent authority to issue warrant for authorisation for search and seizure as follows: The authority must have information in its possession on the basis of which a reasonable belief can be founded that: (a) the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him, or such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed. Such information must be in the possession of the authorised official before the opinion is formed. There must be application of mind to the material and the formation of opinion must be honest and bona fide. Consideration of any extraneous or irrelevant material will vitiate the belief or satisfaction. Mere possession of cash of large quantity, without anything more, could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which would not have been disclosed by the person in possession for the purpose of the Act.

iv) There were no circumstances existing for the Principal Director (Investigation) to issue any warrant for search or seizure u/s 132 on 28th August, 2019 when the cash had been handed over to the Income-tax Department by the Task Force Police on 27th August, 2019 and therefore the seizure of the cash from Vipul Kumar Patel by the respondents and its retention till date was per se illegal. Intimation by the police to the Income-tax Department on 27th August, 2019 would not confer jurisdiction on the Income-tax Department to retain and withhold cash, that, too, by issuance of an invalid search warrant u/s 132; and there was no basis for the Income-tax Department to invoke the provisions of sections 132, 132A and 132B since there was no “reason to believe” that the assessee had violated any provision of law. In the absence of any rival claim for the cash amount of Rs. 5 crores by any third party, the respondents could not imagine a third-party claimant and on that pretext retain the cash indefinitely from the petitioner, thereby violating article 300A of the Constitution of India.

v) For all the aforesaid reasons, the writ petitions are allowed; the action of the respondents in conducting panchanama dated 28th August, 2019 and seizing cash of Rs. 5 crores from Vipul Kumar Patel, employee of the petitioner in W.P. No. 23023 of 2019, and retaining it till date is illegal and ultra vires the provisions of the Income-tax Act, 1961 and also violative of Articles 14 and 300A of the Constitution of India; the respondents are directed to forbear from conducting any further inquiry pursuant to the said panchanama under the said Act; and they shall refund within four weeks from the date of receipt of a copy of this order the said cash of Rs. 5 crores to the petitioner in W.P. No. 23023 of 2019 with interest at 12% p.a. from 28th August, 2019 till date of payment to the said petitioner. The respondents shall also pay costs of Rs. 20,000 to the petitioner in W.P. No. 23023 of 2019.’

Penalty – Concealment of income – Notice – Essentials of notice – Notice must clearly specify charges against assessee – Notice in printed form without deleting inapplicable portions – Not valid

35 Mohd. Farhan A. Shaikh vs. Dy. CIT [2021] 434 ITR 1 [Bom (FB)] Date of order: 11th March, 2021 Ss. 271 and 274 of ITA, 1961

Penalty – Concealment of income – Notice – Essentials of notice – Notice must clearly specify charges against assessee – Notice in printed form without deleting inapplicable portions – Not valid

In view of the conflict in the decisions of the Division Benches of the Bombay High Court, the following question was referred to the Full Bench.

‘[In] the assessment order or the order made under sections 143(3) and 153C of the Income-tax Act, [when] the Assessing Officer has clearly recorded satisfaction for the imposition of penalty on one or the other, or both grounds mentioned in section 271(1)(c), [would] a mere defect in the notice of not striking out the relevant words
[. . .] vitiate the penalty proceedings?’

The Full Bench held as under:

‘i) According to the well-settled theory of precedents every decision contains three basic ingredients: (i) findings of material facts, direct and inferential. An inferential finding of fact is the inference which the judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the combined effect of (i) and (ii) above. For the purposes of the parties themselves and their privies, ingredient (iii) is the material element in the decision for it determines finally their rights and liabilities in relation to the subject matter of the action. It is the judgment that stops the parties from reopening the dispute. However, for the purpose of the doctrine of precedents, ingredient (ii) is the vital element in the decision. This indeed is the ratio decidendi.

ii) If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds, mentioned in section 271(1)(c) of the Income-tax Act, 1961, does a mere defect in the notice – not striking off the irrelevant matter – vitiate the penalty proceedings? It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice u/s 271(1)(c) read with section 274. True, the 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. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.

iii) The Supreme Court in the case of Dilip N. Shroff vs. Joint CIT [2007] 291 ITR 519 (SC) treats omnibus show cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice.’

[CIT vs. Smt. Kaushalya [1995] 216 ITR 660 (Bom) overruled. CIT vs. Samson Perinchery [2017] 392 ITR 4 (Bom); Pr. CIT vs. Goa Coastal Resorts and Recreation P. Ltd. [2020] 16 ITR-OL 111 (Bom); Pr. CIT vs. New Era Sova Mine [2021] 433 ITR 249 (Bom); and Pr. CIT vs. Goa Dourado Promotions P. Ltd. [2021] 433 ITR 268 (Bom) affirmed.]

Offences and prosecution: – (a) Wilful attempt to evade tax – False verification – Delayed payment of tax does not amount to tax evasion – Misstatement must be deliberate – Burden of proof on Revenue to prove that misstatement was deliberately made to evade tax – Assessee forced to upload return mentioning tax had been paid because of defect in software system set up by Income-tax Department – No offence committed u/s 276C or 277; (b) Company – Liability of directors – All directors cannot be proceeded against automatically – Specific allegation against specific directors necessary; and (c) Cognizance of offences – Accused outside jurisdiction of magistrate – Effect of section 204 of CrPC

34 Confident Projects (India) Pvt. Ltd. and Others. vs. IT Department [2021] 433 ITR 147 (Karn) A.Ys.: 2013-14, 2014-15; Date of order: 28th January, 2021 Ss. 276C, 277 of ITA, 1961 and ss. 202, 204 of CrPC, 1973

Offences and prosecution: – (a) Wilful attempt to evade tax – False verification – Delayed payment of tax does not amount to tax evasion – Misstatement must be deliberate – Burden of proof on Revenue to prove that misstatement was deliberately made to evade tax – Assessee forced to upload return mentioning tax had been paid because of defect in software system set up by Income-tax Department – No offence committed u/s 276C or 277; (b) Company – Liability of directors – All directors cannot be proceeded against automatically – Specific allegation against specific directors necessary; and (c) Cognizance of offences – Accused outside jurisdiction of magistrate – Effect of section 204 of CrPC

Proceedings were initiated by the Income-tax Department against the petitioner company and its directors for offences u/s 276C(2) and 277. Summons were issued.

The Karnataka High Court allowed the writ petition filed by the petitioner company and directors and held as under:

‘i) All the directors of a company cannot be automatically prosecuted for any violation of the Act. There have to be specific allegations made against each of the directors intended to be prosecuted and such allegations should amount to an offence and satisfy the requirement of that particular provision under which the prosecution is sought to be initiated, more so when the prosecution is initiated by the Income-tax Department which has all the requisite material in its possession and a preliminary investigation has been concluded by the Department before filing of the criminal complaint.

ii) The court taking cognizance of an offence is required to apply its mind to the allegations made and the applicable statute and thereafter pass a reasoned order in writing taking cognizance. It should be apparent from a reading of the order of cognizance that the requirement of “sufficient grounds for proceedings” in terms of section 204 of the Code has been complied with. At the time of taking cognizance, there must be a proper application of judicial mind to the materials before the court either oral or documentary, as well as any other information that might have been submitted or made available to the court. The test that is required to be applied by the court while taking cognizance is as to whether on the basis of the allegations made in the complaint, or on a police report, or on information furnished by a person other than a police officer, there is a case made out for initiation of criminal proceedings. For this purpose, there is an assessment of the allegations required to be made applying the law to the facts and thereby arriving at a conclusion by a process of reasoning that cognizance is required to be taken. An order of cognizance cannot be abridged, formatted or formulaic. The order has to make out that there is a judicial application of mind, since without such application the same may result in the initiation of criminal proceedings when it was not required to be so done.

iii) The order of taking cognizance is a safeguard in-built in the criminal justice system so as to avoid malicious prosecution and frivolous complaints. When a complaint or a police report or information by a person other than police officer is placed before the court, the judicial officer must apply judicious mind coupled with discretion which is not to be exercised in an arbitrary, capricious, whimsical, fanciful or casual way.

iv) Cognizance of any offence alleged being one of commission or omission attracting penal statutes can be taken only if the allegations made fulfil the basic requirement of the penal provision. At this point, it is not required for the court taking cognizance to ascertain the truth or veracity of the allegation but only to appreciate if the allegations taken at face value, would amount to the offence complained of or not. If yes, cognizance could be taken, if no, taking cognizance would be refused. The only manner of ascertaining this is by the manner of recordal made by the court in the order taking cognizance. The order passed by the court taking cognizance should therefore reflect such application of mind to the factual situation. Mere reference to the provisions in respect of which offences are alleged to have been committed would not be in compliance with the requirement of the statute when there are multiple accused; the order is required to disclose the application of mind by the court taking cognizance as regards each accused.

v) Section 202 of the Code of Criminal Procedure, 1973 provides for postponement of issue of process. Section 202 of the Code provides for safeguard in relation to persons not residing within the jurisdiction of a magistrate, not to be called or summoned by the court unless the magistrate were to come to a conclusion that their presence is necessary and only thereafter issue process against the accused. The protection u/s 202(2) of the Code is provided so as to not inconvenience an accused to travel from outside the jurisdiction of the court taking cognizance to attend to the matter in that court. Therefore, before issuing summons to an accused residing outside the jurisdiction, there has to be application of mind by the court issuing summons and after conducting an inquiry u/s 202(2) of the Code the court issuing summons has to come to a conclusion that such summons are required to be issued to an accused residing outside its jurisdiction.

vi) In the event of an accused being an individual, if the accused has temporary residence within the jurisdiction of the magistrate, again merely because he does not have a permanent residence, there is no inquiry which is required to be conducted u/s 202 of the Code. It would, however, be required for the magistrate in the event of issuance of summons or process to record why the inquiry u/s 202 of the Code is not being held. When the accused has no presence within the jurisdiction of the magistrate where the offence has been committed, then it would be mandatory for an inquiry u/s 202 of the Code to be held.

vii) Income-tax had been paid and the authorities had received the necessary taxes. If at all, for the delay, there could be an interest component which could have been levied. The delayed payment of Income-tax would not amount to evasion of tax, so long as there was payment of tax, more so for the reason that in the returns filed there was an acknowledgement of tax due to be paid.

viii) The 26 AS returns indicated payment of substantial amount of money due to tax deduction at source. Apart from that, the assessee-company had also made several payments on account of the Income-tax dues. But on account of non-availability of funds, the entire amount could not be paid before the returns were to be uploaded, more particularly since the last date of filing was 30th September, 2013 for A.Y. 2013-14 and 30th September, 2014 for A.Y. 2014-15. The assessee had been forced to upload the returns by mentioning that the entire amount had been paid since without doing so the returns would not have been accepted by the software system set up by the Income-tax Department. Therefore, the statement made had been forced upon the assessee by the Income-tax Department and could not be said to be a misstatement within the meaning and definition thereof u/s 277. There was no wilful misstatement by the assessee in the proceedings.

ix) That the order passed by the magistrate did not indicate any consideration by the magistrate, as required u/s 202. It could be ex facie seen that the order of the magistrate did not satisfy the requirement of arriving at a prima facie conclusion to take cognizance and issue process, let alone to the accused residing outside the jurisdiction of the magistrate. The order taking cognizance dated 29th March, 2016 in both matters was not in compliance with the requirement of section 191(1)(a) of the Code and further did not indicate that the procedure u/s 204 of the Code had been followed. The order dated 29th March, 2016 taking cognizance was not in compliance with applicable law and therefore was not valid.

x) That admittedly accused No. 6 resided beyond the jurisdiction of the trial court. It could be seen from the order dated 29th March, 2016 that there was no postponement by the magistrate, but as soon as the magistrate received a complaint he had issued process to accused No. 6 who was resident outside the jurisdiction of the magistrate. The magistrate could not have issued summons to petitioner No. 6 without following the requirements and without conducting an inquiry u/s 202 of the Code.

xi) The prosecution initiated by the respondent against the petitioners was misconceived and not sustainable.’

Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

33 Principal CIT vs. Puma Sports India P. Ltd. [2021] 434 ITR 69 (Karn) A.Y.: 2013-14; Date of order: 12th March, 2021 S. 5(2)(b) r.w.s. 9(1)(i) and 40(a)(i)(B) of ITA, 1961

Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

The assessee company was a subsidiary of P of Austria. The assessee was engaged in the trading of sports gear, mainly footwear, apparel and accessories. The purchases by the assessee consisted of import from related parties and unrelated third parties as well as domestic purchases from the local manufacturers. The assessee was also engaged as a sourcing agent in India for footwear and apparel. It identified suppliers who could provide the required products to the specifications and standards required by W of Hong Kong, which was the global sourcing agent for the P group and for performing such services it received a commission of 3% of the freight on board price. The A.O. held that the assessee failed to deduct tax at source in view of the specific provision of section 5(2)(b) read with section 9(1)(i) and the expenses made by the assessee without deducting the tax at source were not permissible keeping in view section 40(a)(i)(B).

The Tribunal deleted the disallowance.

The appeal filed by the Revenue was admitted on the following substantial questions of law:

‘Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the disallowance made u/s 40(a)(i) for the sum of Rs. 7,29,13,934 by holding that the income of the non-residents by way of commission cannot be considered as accrued or arisen or deemed to accrue or arise in India as the services of such agents were rendered or utilised outside India and the commission was also paid outside India?’

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

‘i) The Supreme Court in the case of CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC) while dealing with non-resident commission agents has held that if no operations of business are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

ii) The associated enterprises had rendered services outside India in the form of placing orders with the manufacturers who were already outside India. The commission was paid to the associated enterprises outside India. No taxing event had taken place within the territories of India and the Tribunal was justified in allowing the appeal of the assessee.’

Depreciation – Condition precedent – User of machinery – Windmill generating a small amount of electricity – Entitled to depreciation

32 CIT(LTU) vs. Lakshmi General Finance Ltd. [2021] 433 ITR 94 (Mad) A.Y.: 1999-2000; Date of order: 1st March, 2021 S. 32 of ITA, 1961

Depreciation – Condition precedent – User of machinery – Windmill generating a small amount of electricity – Entitled to depreciation

For the A.Y. 1999-2000, the assessment was reopened u/s 147 on the basis of fresh information about excess depreciation laid on windmills. The reassessment was completed withdrawing the excess depreciation of Rs. 1.10 crores.

The Commissioner (Appeals) found that though the windmills were said to be connected with the grid at 2100 hours on 31st March, 1999, the meter reading practically showed 0.01 unit of power and the A.O. disallowed the 50% depreciation claimed by the assessee on the ground that they were not actually commissioned during the year under consideration. He upheld the decision of the A.O. The Tribunal allowed the assessee’s claim for depreciation and held that the assessee is entitled to 50% depreciation on two windmills.

In the appeal by the Revenue, the following question of law was raised:

‘Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in holding that the assessee was entitled to claim depreciation on the windmills even though the windmills had not generated any electricity during the previous year and thus there was no user of the asset for the purpose of the business of generation of power?’

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

‘i) Trial production by machinery kept ready for use can be considered to be used for the purpose of business to qualify for depreciation; it would amount to passive use and would qualify for depreciation.

ii) Though the assessee’s windmills were said to be connected with the grid at 2100 hours on 31st March, 1999, the meter reading practically showed 0.01 unit of power and the A.O. disallowed 50% depreciation claimed by the assessee on the ground that the machines were not actually commissioned during the A.Y. 1999-2000. The Tribunal held that the assessee was entitled to 50% depreciation on two windmills.

iii) On the facts and circumstances of the case, the Tribunal was right in holding that the assessee was entitled to claim depreciation on the windmills.’

Appeal to Appellate Tribunal – Rectification of mistakes: – (a) Power of Tribunal to rectify mistake – Error must be apparent from record – Tribunal allowing rectification application filed by Department on sole ground of contradiction in its earlier orders and assessee had not filed rectification petition in subsequent case – No error apparent on face of record – Tribunal wrongly allowed rectification application filed by Department; (b) Levy of penalty u/s 271(1)(c)(i)(a) – Failure by Tribunal to consider applicability of Explanation to section 271(1) to cases u/s 271(1)(c)(i)(b) – Not ground for rectification

30 P.T. Manuel and Sons vs. CIT [2021] 434 ITR 416 (Ker) A.Y.: 1982-83; Date of order: 1st March, 2021 Ss. 254(2) and 271(1) of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistakes: – (a) Power of Tribunal to rectify mistake – Error must be apparent from record – Tribunal allowing rectification application filed by Department on sole ground of contradiction in its earlier orders and assessee had not filed rectification petition in subsequent case – No error apparent on face of record – Tribunal wrongly allowed rectification application filed by Department; (b) Levy of penalty u/s 271(1)(c)(i)(a) – Failure by Tribunal to consider applicability of Explanation to section 271(1) to cases u/s 271(1)(c)(i)(b) – Not ground for rectification

For the A.Y. 1982-83, there was a delay in filing the return of income by the assessee. The A.O. rejected the explanation offered by the assessee for the delay and imposed a penalty u/s 271(1)(a).

The Commissioner (Appeals) partly allowed the assessee’s appeal on the ground that there was a delay of only five months in filing the return which was properly explained and directed the A.O. to determine the quantum of penalty in the light of the directions given by the Tribunal in Ramlal Chiranjilal vs. ITO [1992] 107 Taxation 1 (Trib). The Tribunal confirmed the order of the Commissioner (Appeals).

The Department filed an application for rectification u/s 254(2) contending that the decision in Ramlal Chiranjilal’s case was not applicable and the direction to follow that decision was incorrect and that the Tribunal in the case relating to a sister concern of the assessee decided not to follow that decision. On this basis, the Tribunal allowed the application for rectification.

On a reference by the assessee, the Kerala High Court held as under:

‘i) A mistake which can be rectified u/s 254(2) is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. An error of judgment is not the same as a mistake apparent from the record and cannot be rectified by the Tribunal u/s 254(2).

ii) Conclusions in a judgment may be inappropriate or erroneous. Such inappropriate or erroneous conclusions per se do not constitute mistakes apparent from the record. However, non-consideration of a binding decision of the jurisdictional High Court or Supreme Court can be said to be a mistake apparent from the record.

iii) The different view taken by the very same Tribunal in another case, on a later date, can be relied on by either of the parties while challenging the earlier decision or the subsequent decision in an appeal or revisional forum, but cannot be a ground for rectification of the order passed by the Tribunal. It can at the most be a change in opinion based upon the facts in the subsequent case. The subsequent wisdom may render the earlier decision incorrect, but not so as to render the subsequent decision a mistake apparent from the record calling for rectification u/s 254.

iv) The Tribunal was wrong in allowing the rectification application filed by the Department on the basis of a decision rendered subsequent to the order that was sought to be rectified. The reasoning of the Tribunal was erroneous. A decision taken subsequently in another case was not part of the record of the case. A subsequent decision, subsequent change of law, or subsequent wisdom that dawned upon the Tribunal were not matters that would come within the scope of ‘mistake apparent from the record’ before the Tribunal. The Tribunal had not found that there was any mistake in the earlier order apparent from the record warranting a rectification. The only reason mentioned was that there was a contradiction in the orders passed and no rectification application had been filed by the assessee in the subsequent case. The satisfaction of the Tribunal about the existence of a mistake apparent on the record was absent.

v) The Department’s further contention was for the proposition that the reason for filing the rectification application was on account of the omission of the Tribunal to consider the Explanation to section 271(1) (as it then stood). Even though the order of rectification issued by the Tribunal did not refer to any such contention having been raised, such contention had no basis. Penalty was levied u/s 271(1)(c)(i)(a) (as it then stood), while the Explanation applied to the cases covered by section 271(1)(c)(i)(b) (as it then stood). In such view also the rectification application filed by the Department could not have been allowed by the Tribunal.’

Appeal to Appellate Tribunal – Rectification of mistake – Application for rectification – Limitation – Starting date for limitation is actual date of receipt of order of Tribunal

29 Anil Kumar Nevatia vs. ITO [2021] 434 ITR 261 (Cal) A.Y.: 2009-10; Date of order: 23rd December, 2020 Ss. 253, 254(2) and 268 of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistake – Application for rectification – Limitation – Starting date for limitation is actual date of receipt of order of Tribunal

The order of the Tribunal passed on 19th September, 2018 was served on the assessee on 5th December, 2018. On 3rd June, 2019, the assessee filed an application u/s 254(2) for rectification of the said order. The Tribunal held that there was a delay of 66 days in filing the application and declined to entertain it, stating that being a creature of the statute it did not have any power to pass an order u/s 254(2) beyond a period of six months from the end of the month in which the order sought to be rectified was passed.

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

‘i) If section 254(2) is read with sections 254(3) and 268 which provide for exclusion of the time period between the date of the order and the date of service of the order upon the assessee, no hardship or unreasonableness can be found in the scheme of the Act.

ii) The Tribunal was wrong in not applying the exclusion period in computing the period of limitation and rejecting the application of the assessee filed u/s 254(2) as barred by limitation. The order was passed on 19th September, 2018, and the copy of the order was admittedly served upon the assessee on 5th December, 2018. Therefore, the Tribunal should have excluded the time period between 19th September and 5th December, 2018 in computing the period of limitation.

iii) The appeal is, accordingly, allowed. The Tribunal below is directed to hear the application u/s 254(2) taken out by the assessee on the merits and dispose of the same within a period of six weeks from the date of communication of this order.’

TDS – Credit for tax deducted at source – Effect of section 199 – Assessee acting as collection agent for television network – Subscription charges collected from cable operators and paid to television network – Amounts routed through assessee’s accounts – Assessee entitled to credit for tax deducted at source on such amounts

7 Principal CIT vs. Kal Comm. Private Ltd. [2021] 436 ITR 66 (Mad) A.Ys.: 2009-10 to 2011-12; Date of order: 26th April, 2021 S. 199 of ITA, 1961

TDS – Credit for tax deducted at source – Effect of section 199 – Assessee acting as collection agent for television network – Subscription charges collected from cable operators and paid to television network – Amounts routed through assessee’s accounts – Assessee entitled to credit for tax deducted at source on such amounts

The assessee acted as the collection agent of a television network and collected the subscription charges and the invoices, raised in the name of the assessee on the subscription income from the pay channels during the relevant year, and remitted them to the network. For the A.Ys. 2009-10, 2010-11 and 2011-12 the assessee was denied credit for the tax deducted at source on such amounts.

The Tribunal allowed the claim for credit of the tax deducted at source.

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

‘i) Under section 199(2), credit for tax deducted at source can be allowed only when the corresponding income is offered for taxation in the year in which such tax deducted at source is claimed and deduction of tax at source was allowed without the corresponding income being declared in the profit and loss account.

ii) On a perusal of the agreement dated 14th October, 2002 entered into between the television network and the assessee, it is clear that the assessee was entitled to a fixed commission on the collection amount from the network. The agreement was entered into much prior to the A.Ys. 2009-10, 2010-11 and 2011-12. All these collection charges had been credited to the account “subscription charges” as and when they were billed and this account was debited at the end of the financial year when the sum was paid back to the network. Therefore, the amounts in question had been routed through the accounts maintained by the assessee, which formed part of the balance sheet and, in turn, formed part of the profit and loss account. Therefore, the amount received by the assessee was the collection of subscription charges on behalf of the principal, viz., the television network and did not partake of the character of income chargeable to tax in its hands.

iii) In the assessee’s case, the income chargeable to tax was only the commission income and interest income. Therefore, the subscription charges collected on behalf of the television network was chargeable as income only in the hands of the network and did not partake of the character of any expenditure, revenue or capital in the hands of the assessee. Merely because the income had been offered and processed in the hands of the network, credit for tax deducted in the name of the assessee could not be denied. The assessee was entitled to credit for the tax deducted at source.’

Recovery of tax – Attachment of property – Transfer void against the Revenue – Death of seller before executing sale of house property under agreement – Supreme Court directing seller’s heirs to execute sale – Attachment of property for recovery of income tax due from firms in which heirs were partners for periods subsequent to sale agreement – TRO cannot declare transfer void – Non-release of registered sale deed by sub-registrar – Not justified

6 J. Manoharakumari vs. TRO [2021] 436 ITR 42 (Mad) Date of order: 21st April, 2021 Ss. 226, 281 of ITA, 1961

Recovery of tax – Attachment of property – Transfer void against the Revenue – Death of seller before executing sale of house property under agreement – Supreme Court directing seller’s heirs to execute sale – Attachment of property for recovery of income tax due from firms in which heirs were partners for periods subsequent to sale agreement – TRO cannot declare transfer void – Non-release of registered sale deed by sub-registrar – Not justified

The petitioner, on payment of advance, entered into a sale agreement in respect of the house property (family property) with one JP, the mother of the third and fourth respondents, A and S, who were minors at the time of execution of the sale agreement. However, JP refused to execute the sale deed. During the pendency of the suit filed by the petitioner in the Additional District and Sessions Court, JP died and A and S, who by then had attained majority, were impleaded in the suit filed to execute the sale receiving the balance consideration. On dismissal of the suit, the petitioner filed an appeal before the High Court which directed A and S to refund the advance received by JP. The Supreme Court allowed the special leave petition filed by the petitioner. Thereafter, the petitioner filed a petition before the Additional District and Sessions Court. When A and S failed to execute the sale deed in terms of the sale agreement dated 30th June, 1994 and the order dated 31st March, 2017 of the Supreme Court in the special leave petition, the Additional District Judge executed the sale deed in favour of the petitioner on 29th June, 2018 and presented it before the Sub-Registrar for registration.

The petitioner was informed through a communication that the property in question was attached for recovery of arrears of tax due to the Income-tax Department from the firms in which S and her husband were partners and, therefore, the petitioner should obtain a certificate to the effect that there were no tax dues in respect of the said property from the Tax Recovery Officer of the Income-tax Department. The Tax Recovery Officer took the stand that the purported sale deed executed by the Court was contrary to section 281, that a copy of the attachment order was served on the office of the Sub-Registrar and an entry of encumbrance in respect of the property was also entered, that the petitioner could not perfect the title over the property, and that the Sub-Registrar could not release the registered sale deed in favour of the petitioner unless the tax arrears were cleared.

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

‘i) Section 281 applies only to a situation where an assessee during the pendency of any proceeding under the Act, or after completion thereof, but before the service of a notice under rule 2 of the Second Schedule, creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of any of his assets in favour of any other person. Only such charge or transfer is void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of such proceedings or otherwise. According to the proviso to section 281 such charge or transfer shall not be void if it is made (i) for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or (ii) with the previous permission of the A.O.

ii) Admittedly, the transfer of the property was on account of the final culmination of the litigation by the order of the Supreme Court. There was only a delay in the execution of the sale deed due to the pendency of the proceedings as the third and fourth respondent’s mother (since deceased) declined to execute the sale deed under the sale agreement dated 30th June, 1994. The third and the fourth respondents, A and S, who were minors at the time of execution of the sale agreement on 30th June, 1994, ought to have executed the sale deed in favour of the petitioner. The subsequent tax liability of the fourth respondent and her husband for the A.Ys. 2012-13 and 2013-14 could not be to the disadvantage of the petitioner, since the petitioner had been diligently litigating since 2004. Therefore, the benefit of the decree in a contested suit could not be denied merely because the seller or one of the persons had incurred subsequent tax liability. The benefit of a decree would date back to the date of the suit. Therefore, the communication dated 6th July, 2018 which required the petitioner to obtain clearance could not be countenanced.

iii) The tax liability of the firms of which S and her husband were partners arose subsequent to the commitment in the sale agreement dated 30th June, 1994. The Sub-Registrar is directed to release the sale deed dated 29th June, 2018 and to cancel all the encumbrances recorded against the property in respect of the tax arrears of the firms of the fourth respondent S and her husband.’

International transactions – Draft assessment order – Procedure to be followed – Mandatory – Tribunal in appeal from final assessment order remanding matter to Assistant Commissioner / TPO – A.O. straightaway passing final order – Not valid – A.O. bound to have passed draft order first – Order quashed and matter remanded

5 Durr India Private Limited vs. ACIT [2021] 436 ITR 111 (Mad) A.Ys.: 2009-10 to 2011-12; Date of order:  27th May, 2020 Ss. 92CA(4), 143(3), 144C of ITA, 1961

International transactions – Draft assessment order – Procedure to be followed – Mandatory – Tribunal in appeal from final assessment order remanding matter to Assistant Commissioner / TPO – A.O. straightaway passing final order – Not valid – A.O. bound to have passed draft order first – Order quashed and matter remanded

For the A.Y. 2009-10, pursuant to the report of the Transfer Pricing Officer, the Assistant Commissioner passed a draft assessment order against which the assessee filed an application before the Dispute Resolution Panel u/s 144C. Pursuant to the order of the Dispute Resolution Panel, the Assistant Commissioner passed an assessment order u/s 144C read with section 143(3). On appeal to the Tribunal, the Tribunal remanded the case back to the Assistant Commissioner / Transfer Pricing Officer. Thereafter, pursuant to the order of the Transfer Pricing Officer on remand by the Tribunal, the Assistant Commissioner passed the final order.

The assessee filed a writ petition contending that such final order being not preceded by a draft assessment order was without jurisdiction. The Madras High Court allowed the writ petition and held as under:

‘i) When the law mandated a particular thing to be done in a particular manner, it had to be done in that manner. The final assessment order u/s 144C read with section 143(3) had been passed without jurisdiction.

ii) Once the case was remitted back to the Assistant Commissioner / Transfer Pricing Officer, it was incumbent on their part to have passed a draft assessment order u/s 143(3) read with section 92CA(4) and section 144C(1). They could not bypass the statutory safeguards prescribed under the Act and deny the assessee the right to file an application before the Dispute Resolution Panel.

iii) The final order is quashed and the case remitted back to the Assistant Commissioner to pass a draft assessment order.’

HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

4 A.P. Oree (Kartha) [Estate of A.R. Pandurangan (HUF)] vs. ITO [2021] 436 ITR 3 (Mad) A.Y.: 2008-09; Date of order: 2nd June, 2021 Ss. 54F, 148, 171 of ITA, 1961

HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

The assessee was one of the four legal heirs of the deceased ARP. Part of the inherited agricultural land was sold without physical division. The share of each heir was orally divided between them under a memorandum of oral recording and the sale proceeds were distributed in proportion with their respective shares in the land and the balance portion of the land continued to remain in their names without physical division. For the A.Y. 2008-09, they filed their returns of income as individuals and claimed exemption from levy of tax on capital gains u/s 54F which was allowed by the A.O. On the ground that there was no physical division of the property, that the memorandum recording oral partition did not amount to partition u/s 171, and that therefore the capital gains was to be assessed in the hands of the estate of the deceased ARP (HUF) and the exemption allowed u/s 54F was contrary to section 171, notice was issued u/s 148 to the estate of ARP (HUF) and a consequential order was passed in the name of the assessee as karta.

The assessee filed a writ petition and challenged the notice u/s 148 and the order. The Madras High Court allowed the writ petition and held as under:

‘i) Section 171 makes it clear that it is applicable only where a Hindu family is already assessed as a Hindu undivided family. Otherwise, there is no meaning to the expression “hitherto” in section 171(1).

ii) During the lifetime of ARP, the deceased father of the assessees, the family was not assessed as a Hindu undivided family. It was only where there was a prior assessment as a Hindu undivided family and during the course of assessment u/s 143 or section 144 it was claimed by or on behalf of a member of such family which was assessed as a Hindu undivided family that there was a partition whether total or partial among the members of such family, that the A.O. should make an Inquiry after giving notice of inquiry to all the members. Where no such claim was made, the question of making inquiry by an A.O. did not arise and only in such circumstances would the definition of “partition” in Explanation to section 171 be attracted. The definition could not be read in isolation. Where a Hindu family was never assessed as a Hindu undivided family, section 171 would not apply even when there was a division or partition of property which did not fall within the definition.

iii) The notice issued u/s 148 to the estate of ARP (HUF) coparceners and the consequential order issued in the name of the assessee as the karta were unsustainable.’

Exemption u/s 10B – Export of computer software – Assessee omitting to claim exemption in return – Rectification of mistake – Revision – Rejection of rectification application and revision petition on ground of delay in filing revised return – Unjustified – Assessee entitled to benefit

3 L-Cube Innovative Solutions P. Ltd. vs. CIT [2021] 435 ITR 566 (Mad) A.Y.: 2006-07; Date of order: 5th February, 2021 Ss. 10B, 139(5), 154, 264 of ITA, 1961

Exemption u/s 10B – Export of computer software – Assessee omitting to claim exemption in return – Rectification of mistake – Revision – Rejection of rectification application and revision petition on ground of delay in filing revised return – Unjustified – Assessee entitled to benefit

The assessee provided software services and was entitled to the benefit u/s 10B. It failed to claim this benefit in its return of income filed u/s 139 for the A.Y. 2006-07. The assessee received the intimation dated 28th March, 2018 u/s 143(1) on 18th May, 2008. Since the time limit for filing a revised return u/s 139(5) had expired on 31st March, 2008, it filed a rectification application before the A.O. u/s 154. The A.O. rejected the application and held that if there was any mistake found in the return the assessee ought to have filed a revised return on or before 31st March, 2008. Against this rejection, the assessee filed a first revision petition u/s 264 which was rejected; a second revision petition filed was also rejected.

The assessee then filed a writ petition challenging the rejection of the claim for deduction. The Madras High Court allowed the writ petition and held as under:

‘i) The rejection of the revision application filed by the assessee u/s 264 was not justified as the Officers acting under the Income-tax Department were duty-bound to extend the substantive benefits that were legitimately available to the assessee.

ii) The rejection of the application for rectification by the A.O. u/s 154 was unjustified, since the assessee was entitled to the substantive benefits u/s 10B and the delay, if any, was attributed on account of the system. Even if the intimation dated 28th March, 2008 was despatched on the same day after it was signed, in all likelihood it could not have been received by the assessee on 31st March, 2008 to file a revised return on time. Therefore, the assessee was entitled to rectification u/s 154.’

Direct Tax Vivad se Vishwas Act, 2020 – Condition precedent for making declaration – Application should be pending on 31st January, 2020 from order dismissed ‘in limine’ – Appeal to Appellate Tribunal – Appeal dismissed based on mistake on 22nd June, 2018 – Tribunal rectifying order and passing fresh order restoring appeal on 11th May, 2020 – Order passed by Tribunal on 22nd June, 2018 was ‘in limine’ – Appeal pending on 31st January, 2020

2 Bharat Bhushan Jindal vs. Principal CIT [2021] 436 ITR 102 (Del) A.Y.: 2011-12; Date of order: 26th April, 2021 Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act, 2020 – Condition precedent for making declaration – Application should be pending on 31st January, 2020 from order dismissed ‘in limine’ – Appeal to Appellate Tribunal – Appeal dismissed based on mistake on 22nd June, 2018 – Tribunal rectifying order and passing fresh order restoring appeal on 11th May, 2020 – Order passed by Tribunal on 22nd June, 2018 was ‘in limine’ – Appeal pending on 31st January, 2020

For the A.Y. 2011-12, the A.O. passed the assessment order on 21st March, 2014 increasing the taxable income considerably. The assessee preferred an appeal before the Commissioner (Appeals), which was allowed on 29th January, 2016. The Revenue filed an appeal on 10th March, 2016 before the Tribunal. The appeal was, however, dismissed by the Tribunal on 22nd June, 2018, based on a mistaken belief that in the earlier assessment years it had taken a view against the Revenue and in the favour of the assessee. This obvious mistake, once brought to the notice of the Tribunal, via a miscellaneous application preferred by the Revenue, was rectified by an order dated 11th May, 2020. The miscellaneous application was filed before the specified date, i.e., 31st January, 2020. As per the information available on the Tribunal’s portal, the miscellaneous application was filed on 13th November, 2018. The Tribunal, realising the mistake that had been made, recalled its order dated 22nd June, 2018 and restored the Revenue’s appeal and directed that the appeal be heard afresh. As a matter of fact, the Tribunal fixed the date of hearing, via the very same order, in the appeal on 6th July, 2020. The assessee filed Forms 1 and 2 with the designated authority under the Direct Tax Vivad se Vishwas Act, 2020 in the first instance on 21st March, 2020. The assessee filed revised Forms 1 and 2, on 27th January, 2021, and thereafter on 20th March, 2021. In the interregnum, both sets of Forms 1 and 2, which were filed on 21st March, 2020 and 27th January, 2021, were rejected.

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

‘i) A careful perusal of the order dated 22nd June, 2018 would show that the Revenue’s appeal was dismissed at the threshold, based on a mistaken impression that the Tribunal had taken a view against the Revenue. Circular No. 21 of 2020 [(2020) 429 ITR (St.) 1] requires fulfilment of two prerequisites for an appeal to be construed as pending on the specified date (i.e., 31st January, 2020) in terms of the provisions of the 2020 Act. First, the miscellaneous application should be pending on the specified date, i.e., 31st January, 2020. Second, the miscellaneous application should relate to an appeal which had been dismissed “in limine” before 31st January, 2020.

ii) There was no dispute that the miscellaneous application was filed and was pending on the specified date, i. e., 31st January, 2020. As regards the second aspect, the order of the Tribunal dated 22nd June, 2-018 could only be construed as an order that dismissed the Revenue’s appeal “in limine”. The Revenue’s appeal was pending on the specified, date, i. e., 31st January, 2020. The order of rejection was not valid.’

Direct Tax Vivad se Vishwas Act – Scope of – Meaning of disputed tax – Difference between disputed tax and disputed income – Appeal against levy of tax pending – Declaration filed under Act cannot be rejected on ground that assessee had offered an amount for taxation

1 Govindrajulu Naidu vs. Principal CIT [2021] 434 ITR 703 (Bom) A.Y.: 2014-15; Date of order: 29th April, 2021 The Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act – Scope of – Meaning of disputed tax – Difference between disputed tax and disputed income – Appeal against levy of tax pending – Declaration filed under Act cannot be rejected on ground that assessee had offered an amount for taxation

The assessee filed a return of income for the A.Y. 2014-15 u/s 139(1) declaring a total income of Rs. 67,55,710. The assessment was completed u/s 143(3) assessing the income at Rs. 67,66,640. Thereafter, in 2019, a survey action was undertaken at the office premises of the assessee. However, no incriminating material was found. Under pressure, the assessee agreed to offer the amount of Rs. 5,76,00,000 allegedly received as his income. Later, he retracted from his statement under an affidavit filed before respondent No. 2. The assessment for the assessment year was reopened by a notice issued u/s 148. The assessee filed a return showing the amount of Rs. 5,76,00,000 as his income and declared a total amount of Rs. 6,43,69,719 and on reassessment the total amount was assessed at Rs. 6,44,09,400. The assessee filed an appeal u/s 246A before the Commissioner (Appeals) and raised the ground that the respondent had erred in taxing the amount of Rs. 5,76,00,000 as income of the assessee for the relevant assessment year. The appeal was pending. During the pendency of the appeal, the Direct Tax Vivad se Vishwas Act, 2020 was enacted. As required under the provisions of this Act, the assessee filed a declaration to the designated authority in the prescribed form. The declaration was rejected on the online portal without giving an opportunity to the assessee observing that there was no disputed tax in the case of the declarant, as the declarant had himself filed a return reflecting the income.

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

‘i) The Direct Tax Vivad se Vishwas Act, 2020 and the rules have been brought out with a specific purpose, object and intention to expedite realisation of locked up revenue, providing certain reliefs to assessees who opt to apply under the Act. Such an option is available only to a few persons. The preamble to the Act provides for resolution of disputed tax and matters connected therewith or incidental thereto. The emphasis is on disputed tax and not on disputed income. The term “disputed tax” has been assigned specific definition in the Act and would have to be appreciated in the context of the Act. The disputed tax means an income tax payable by assessee under the provisions of the Income-tax Act, 1961 on the income assessed by the authority and where any appeal is pending before the appellate forum on the specified date, against any order relating to tax payable under the Income-tax Act. It does not presumably ascribe any qualification to the matter / appeal except that it should concern the Income-tax Act. Further the definition of “dispute” as appearing under Rule 2(b) of the Direct Tax Vivad se Vishwas Rules, 2020 shows that “dispute” means an appeal or writ petition or special leave petition by the declarant before the appellate forum. “Disputed income” has also been defined under clause (g) of section 2(1) to mean the whole or so much of the total income as is relatable to disputed tax.

ii) The scheme of the 2020 Act does not make any distinction and categorise the appeals. The Act does not go into the ground of appeal.

iii) The Department did not dispute that an appeal had been filed by the assessee before the appellate forum. There existed a dispute as referred to under the 2020 Act and the Rules. In such a scenario, the Department’s contention that the assessee had offered the income and as such the tax thereon could not be considered disputed tax, would not align itself with the object and the purpose underlying the bringing in of the 2020 Act. The rejection of the declaration under the 2020 Act was not valid.’

Writ – Notice u/s 148 – Writ petition against notice – Court holding notice invalid – Directions could not be issued once reassessment held to be without jurisdiction

50 T. Stanes and Company Ltd. vs. Dy. CIT [2021] 435 ITR 539 (Mad) A.Ys.: 2010-11, 2011-12; Date of order: 9th October, 2020 Ss. 147, 148 of ITA, 1961; and Art. 226 of Constitution of India

Writ – Notice u/s 148 – Writ petition against notice – Court holding notice invalid – Directions could not be issued once reassessment held to be without jurisdiction

Writ petitions were filed by the assessee contending that the notices issued u/s 148 to reopen the assessment u/s 147 for the A.Ys. 2010-11 and 2011-12 were without jurisdiction being based on change of opinion. The single judge held that the reassessment was without jurisdiction but observed that the A.O. could proceed on other grounds.

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

‘The findings rendered by the single judge and his order to the extent of holding that the reassessment proceedings u/s 147 were without jurisdiction, were to be confirmed but his directions / observations were set aside. Having held that the reassessment proceedings were without jurisdiction, to make any further observation / direction was not sustainable.’

Special deduction u/s 80JJAA – Employment of new employees – Return of income – Delay in filing revised return claiming benefit u/s 80JJAA – Submission of audit report along with return – Substantive benefit cannot be denied on ground of procedural formality – Assessee entitled to benefit u/s 80JJAA

49 Craftsman Automation P. Ltd. vs. CIT [2021] 435 ITR 558 (Mad) A.Y.: 2004-05; Date of order: 6th February, 2020 Ss. 80JJAA, 139(5), 264 of ITA, 1961

Special deduction u/s 80JJAA – Employment of new employees – Return of income – Delay in filing revised return claiming benefit u/s 80JJAA – Submission of audit report along with return – Substantive benefit cannot be denied on ground of procedural formality – Assessee entitled to benefit u/s 80JJAA

The assessee was entitled to deduction u/s 80JJAA. For the A.Y. 2004-05, the assessee had not claimed deduction u/s 80JJAA in the return of income. The assessee filed a revised return making a claim for deduction u/s 80JJAA and claimed refund. The A.O. refused to act on the revised return.

The Commissioner rejected the revision application u/s 264 on the grounds that according to sub-section (2) of section 80JJAA, deduction could not be allowed unless the assessee furnished with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars, and that the revised return was filed beyond the period of limitation prescribed u/s 139(5). The assessee filed this writ petition and challenged the order u/s 264. The Madras High Court allowed the writ petition and held as under:

‘i) If an assessee is entitled to a benefit, a technical failure on the part of the assessee to claim the benefit in time should not come in the way of grant of the substantial benefit that was otherwise available under the Income-tax Act, 1961 but for such technical failure. The legislative intent is not to whittle down or deny benefits which are legitimately available to an assessee. The A.O. is duty-bound to extend substantive benefits which are available and arrive at just tax to be paid.

ii) The failure to file a return within the period u/s 139 for the purpose of claiming benefit of deduction u/s 80JJAA was a procedural formality. The assessee was entitled to benefit u/s 80JJAA.

iii) Denial of substantive benefit could not be justified. It was precisely for dealing with such situations that powers had been vested with superior officers like the Commissioner u/s 264. The Commissioner ought to have allowed the revision application filed by the assessee u/s 264 and the assessee was entitled to partial relief.

Accordingly, the order of the Commissioner was set aside and the Assistant Commissioner directed to pass appropriate orders on the merits ignoring the delay on the part of the assessee in filing the revised return u/s 139(5) and failure to furnish the audit report.’

Recovery of tax – Set-off of refund – Stay of demand – Pending appeal against assessment order for A.Y. 2013-14 – Set-off of demand of A.Y. 2013-14 against refund of A.Ys. 2014-15 to 2016-17 – Effect of circulars, instructions and guidelines issued by CBDT – Excess amount recovered over and above according to such circulars, instructions and guidelines to be refunded with interest – A.O. restrained from recovering balance tax due till disposal of pending appeal

48 Vrinda Sharad Bal vs. ITO [2021] 435 ITR 129 (Bom) A.Ys.: 2012-13 to 2019-20; Date of order: 25th March, 2021 Ss. 220(6), 237, 244A, 245 of ITA, 1961

Recovery of tax – Set-off of refund – Stay of demand – Pending appeal against assessment order for A.Y. 2013-14 – Set-off of demand of A.Y. 2013-14 against refund of A.Ys. 2014-15 to 2016-17 – Effect of circulars, instructions and guidelines issued by CBDT – Excess amount recovered over and above according to such circulars, instructions and guidelines to be refunded with interest – A.O. restrained from recovering balance tax due till disposal of pending appeal

The assessee was a developer. For the A.Y. 2013-14, a demand notice was issued, that during the pendency of his appeal against the assessment order an amount of Rs. 1,38,34,925 was collected by the Department adjusting the refunds pertaining to the A.Ys. 2014-15, 2015-16 and 2016-17. On an application for stay of recovery of demand, the A.O. passed an order of stay for the recovery of balance of tax due for the A.Y. 2013-14, reserving the right to adjust the refund that arose against the demand.

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

‘i) The Centralised Processing of Return of Income Scheme, 2011 was introduced under Notification dated 4th January, 2012 ([2012] 340 ITR (St.) 45] in exercise of the powers u/s 143(1A) with a view to process a return of income expeditiously. Clause 10 of the scheme states that set-off of refund arising from the processing of return against tax remaining payable will be done by using details of the outstanding demand as uploaded on to the system by the A.O. Sub-section 143(1B) provides that for the purpose of giving effect to the scheme made under sub-section (1A), a notification with respect to application or non-application of any provisions relating to processing of the return may be issued. Having regard to the context of sections 143(1A) and 143(1B), it does not appear that clause 10 under the scheme is intended to be read out of the context isolatedly (sic). The scheme pursuant to section 143(1A) will have to be taken into account along with the other provisions of the Act and would take within its fold instructions issued by the CBDT from time to time. It does not appear that the clause is in derogation of operation of the provisions and instructions or would render the provisions and the instructions insignificant and redundant. Clause 10 will have to be read in the context of the provisions in the Act governing refund and orders, circulars, instructions issued from time to time.

ii) Set-off of refund under the clause is to be done by using details of the Income-tax demand against the person uploaded on to the system. The exercise of power to have set-off or adjustment of refund is regulated by legislative provisions and instructions. The details referred to in the clause would have to correspond to the provisions and instructions operating. Function under the clause would be circumscribed by them and it would be incongruous to consider that uploading referred to in clause 10 would mean all refunds arising are liable to be adjusted against the tax demands irrespective of orders thereon by the authorities and / or subsisting instructions and the provisions applicable.

iii) The amount recovered from the assessee over and above the amount as per instructions, memoranda, circulars towards demand of tax for the A.Y. 2013-14 pending in appeal would be returned to the assessee with interest and the refund of amounts over and above the amount as per circulars, instructions and guidelines issued by the CBDT may not be adjusted towards tax demand for the A.Y. 2013-14 till disposal of the appeal. Having regard to the instructions, circulars and memoranda issued from time to time, which were not disputed by the Department, it would be expedient that the A.O. refrained from recovering tax dues demanded for the A.Y. 2013-14 and a restraint was called for.’

Penalty – Concealment of income or furnishing of inaccurate particulars – Method of accounting – Claim of deduction in return filed in response to notice u/s 153A in accordance with change in accounting method and prevailing law – New claim made because of change in accounting policy – Not a case of concealment of income or furnishing of inaccurate particulars – Findings of fact – Tribunal justified in upholding order of Commissioner (Appeals) that penalty was not imposable

47 Principal CIT vs. Taneja Developers and Infrastructure Ltd. [2021] 435 ITR 122 (Del) A.Y.: 2007-08; Date of order: 24th March, 2021 Ss. 132, 145, 153A, 271(1)(c) of ITA, 1961

Penalty – Concealment of income or furnishing of inaccurate particulars – Method of accounting – Claim of deduction in return filed in response to notice u/s 153A in accordance with change in accounting method and prevailing law – New claim made because of change in accounting policy – Not a case of concealment of income or furnishing of inaccurate particulars – Findings of fact – Tribunal justified in upholding order of Commissioner (Appeals) that penalty was not imposable

The search in the TP group led to the proceedings u/s 153A against the assessee for the A.Y. 2007-08. The assessee filed a fresh return in which a cumulative expenditure comprising interest paid on borrowings, brokerage and other expenses was claimed on an accrual basis. The A.O. found that such expenses were not claimed in the original return filed by the assessee u/s 139 and disallowed the claim in his order u/s 153A / 143(3). The Commissioner (Appeals) sustained the addition made by the A.O. Thereafter, the A.O. initiated penalty proceedings and levied penalty u/s 271(1)(c). Before the Tribunal, the assessee gave up its challenge to the disallowance of its claimed expenses by the A.O. and accordingly, the disallowance of the expenses ordered by the A.O. and sustained by the Commissioner (Appeals) remained.

The Commissioner (Appeals) set aside the penalty order passed by the A.O. The Tribunal held that the assessee had made a fresh claim in its return filed u/s 153A of the proportionate expenditure, which was originally claimed, partly in the original return and the balance in the return u/s 153A, that such balance was already shown in the project expenditure for that year at the close of the year which was carried forward in the next year as opening project work-in-progress, that therefore, in the subsequent year it was also claimed as expenditure and that there was no infirmity in the order of the A.O. with respect to that finding. However, the Tribunal rejected the Department’s appeal with respect to the levy of penalty.

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

‘i) Where the basic facts were disclosed or where a new claim was made because of a change in the accounting policy, albeit in a fresh return, and given up because the law, as declared, did not permit such a claim, in such circumstances initiation of penalty proceedings u/s 271(1)(c) against the assessee was not mandated in law. The assessee had brought about a change in the accounting policy vis-a-vis borrowings, brokerage and other expenses in line with Accounting Standard 7 which permitted the assessee to make a new claim for deduction of such expenses, on an accrual basis, in the A.Y. 2007-08. However, the assessee had, in its original return, claimed deduction of a portion of such expenses based on an accounting policy (i. e., a percentage of completion method) which was prevalent at that point in time. Those facts were in the knowledge of the Department and such expenses which were sought to be claimed, on an accrual basis, constituted a fresh claim which was embedded in the fresh return filed u/s 153A.

ii) In the quantum appeal, the assessee had given up its claim of the expenses, for the reason that it was a new claim which was sought to be incorporated in the fresh return, which was made on an accrual basis as the assessment was completed and the fresh return filed by the assessee, pursuant to the proceedings taken out u/s 132 read with section 153A, did not give the assessee the leeway to sustain such claim, since no incriminating material was found during the search. The assessment for the A.Y. 2007-08 stood completed before the search. The assessee had neither concealed the particulars of its income nor furnished inaccurate particulars of income which were the prerequisites for imposition of penalty.

The conclusion reached by the Tribunal that the penalty imposed by the A.O. was correctly cancelled by the Commissioner (Appeals) need not be interfered with. No question of law arose.’

Export – Exemption u/s 10B – Scope – Meaning of ‘computer software’ – Engineering and design included in computer software – Assessee engaged in export of customised electronic data relating to engineering and design – Entitled to exemption u/s 10B

46 Marmon Food and Beverage Technologies India (P) Ltd. vs. ITO [2021] 435 ITR 327 (Karn) A.Y.: 2009-10; Date of order: 9th April, 2021 S. 10B of ITA, 1961

Export – Exemption u/s 10B – Scope – Meaning of ‘computer software’ – Engineering and design included in computer software – Assessee engaged in export of customised electronic data relating to engineering and design – Entitled to exemption u/s 10B

The assesse (appellant) is a 100% export-oriented undertaking engaged in the business of export of customised electronic data according to the requirements of its customers. The requirement is received in electronic format and it is again delivered in electronic format pertaining to various activities in the field of engineering and design. For the A.Y. 2009-10 the assessee filed its return of income declaring ‘Nil’ income after claiming deduction of Rs. 1,80,27,563 u/s 10B. The A.O. denied the claim for deduction u/s10B.

The Commissioner (Appeals) and the Tribunal upheld the decision of the A.O.

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

‘i) Under section 10B, newly-established 100% export-oriented undertakings are entitled to 100% deduction of export profits. Prior to its substitution, section 10B has been operative from 1st April, 1989. With a view to enlarging the scope of the tax holiday to 100% export-oriented undertakings approved by the prescribed authority, an Explanation for the term “produce” had been inserted in section 10B to include production of computer programmes by the Finance Act, 1994.

ii) A tax holiday was given to certain assessees importing and exporting electronic data and as it was a new subject under the Act, the Central Board of Direct Taxes (CBDT) was empowered to notify certain services of customised electronic data or any products or services to mean “computer software” eligible for deduction. The CBDT, in exercise of powers conferred under Explanation 2(i)(b) to section 10B, has notified certain information technology-enabled products or services by Notification dated 26th September, 2000 ([2000] 245 ITR (St.) 102]. The Notification… is a clarificatory Circular and it has been issued in exercise of the powers conferred under Explanation 2(i)(b) to section 10B of the Income-tax Act. The CBDT has notified certain services of customised electronic data or products or services to mean the computer software eligible for deduction. The intention of the Notification was not to constrain or restrict, but to enable the Board to include several services or products within the ambit of the provisions of section 10B and this is precisely what has been done by the Board.

iii) The term “computer software” means: (a) a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result; (b) a sequence of instructions written to perform a specified task for a computer. The same programme in its human-readable source code form, from which executable programmes are derived, enables a programmer to study and develop its algorithms; (c) a set of ordered instructions that enable a computer to carry out a specific task; (d) written programmes or procedures or rules and associated documentation pertaining to the operation of a computer system. Engineering and design finds place in the CBDT Notification dated 26th September, 2000. The Act nowhere provides for a definition of “engineering and design” and the requirement for availing of the benefit of deduction as reflected from section 10B read with the Notification… is fulfilled when the assessee has finally developed a computer programme only. Under section 10B no certificate is required under any regulatory authority.

It is a settled proposition of law that a co-ordinate bench of the Tribunal is required to follow the earlier decisions and in case there is a difference of opinion, the matter may be referred to a larger bench.

From the documents on record, it could be safely gathered that the assessee was engaged in the activity of engineering designs, redesigns, testing, modifying, prototyping and validation of concept. The assessee was also engaged in the activity of providing manufacturing support and computer-aided design support to its group companies. The assessee captured the resultant research of the activity in a customised data both in computer-aided design and other software platforms and for the purposes of carrying (out) these activities, the assessee employed engineers and other technical staff for various research projects undertaken by them. The assessee exported the software data. The activities carried out by the assessee like analysing or duplicating the reported problems, developing and building, testing products, carrying out tests, design and development had to be treated as falling within the scope of section 10B with or without the aid of section 10BB. Thus, the assessee was certainly eligible for deduction u/s 10B.

Another important aspect of the case was that in respect of the eligibility of claim of deduction u/s 10B, in respect of the same assessee it had been accepted by the Department for the A.Ys. 2006-07 to 2008-09. The assessee was entitled to the deduction u/s 10B for the A.Y. 2009-10.’

Business expenditure – Clearing and forwarding business – Payment of speed money to port labourers through gang leaders to expedite completion of work – Acceptance of books of accounts and payments supported by documentary evidence – Payment of speed money accepted as trade practice – Restriction of disallowance on the ground vouchers for cash payments were self-made – Unjustified

45 Ganesh Shipping Agency vs. ACIT [2021] 435 ITR 143 (Karn) A.Ys.: 2007-08 to 2009-10; Date of order: 6th February, 2021 S. 37 of ITA, 1961

Business expenditure – Clearing and forwarding business – Payment of speed money to port labourers through gang leaders to expedite completion of work – Acceptance of books of accounts and payments supported by documentary evidence – Payment of speed money accepted as trade practice – Restriction of disallowance on the ground vouchers for cash payments were self-made – Unjustified

The assessee was a firm which carried on business as a clearing and forwarding and steamer agent. For the A.Ys. 2007-08, 2008-09 and 2009-10, the A.O. disallowed, u/s 37, 20% of the expenses incurred by the assessee as speed money which was paid to the workers for speedy completion of their work on the grounds that (a) the assessee produced self-made cash vouchers for the cash payments to each gang leader, (b) the identity of the gang leader was not verifiable, and (c) the recipients were not the assessee’s employees.

The Commissioner (Appeals) restricted the disallowance to 10% which was confirmed by the Tribunal.

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

‘i) The authorities had accepted the books of accounts produced by the assessee. The A.O., in his order, had admitted that the payment of speed money was a trade practice which was followed by the assessee and similar business concerns functioning for speedy completion of their work. However, the disallowance of 20% of the expenses was made solely on the ground that the assessee had produced self-made cash vouchers and the finding had been affirmed by the Commissioner (Appeals) and the Tribunal.

ii) However, the books of accounts had not been doubted by any of the authorities. The Tribunal was not justified in sustaining the disallowance of expenses at 10% of the expenses paid to port workers as incentive by the assessee in relation to the A.Ys. 2007-08, 2008-09 and 2009-10.

iii) In the result, the impugned order of the Tribunal dated 29th May, 2015 insofar as it contains the findings to the extent of disallowance of 10% of the expenses incurred by the assessee in relation to the A.Ys. 2007-08, 2008-09 and 2009-10 is hereby quashed. Accordingly, the appeal is allowed.’

Assessment – Limitation – Computation of period of limitation – Exclusion of time taken to comply with direction of Court – Meaning of ‘direction’ in section 153(3) – Court remitting matter to A.O. asking him to give assessee opportunity to be heard – Not a direction within meaning of section 153(3) – No exclusion of any time in computing limitation

44 Principal CIT vs. Tally India Pvt. Ltd. [2021] 434 ITR 137 (Karn) A.Y.: 2008-09; Date of order: 6th April, 2021 S. 153 of ITA, 1961

Assessment – Limitation – Computation of period of limitation – Exclusion of time taken to comply with direction of Court – Meaning of ‘direction’ in section 153(3) – Court remitting matter to A.O. asking him to give assessee opportunity to be heard – Not a direction within meaning of section 153(3) – No exclusion of any time in computing limitation

For the A.Y. 2008-09, the case of the assessee was referred to the Transfer Pricing Officer (TPO) for computation of the arm’s length price u/s 92C. The Court by an order restrained the TPO from proceeding to pass a draft assessment order for a period up to 7th March, 2012, i.e., approximately three months. The writ petition was disposed of by the Court by order dated 7th March, 2012 remitting the matter to the A.O. and directing the assessee to appear before the A.O. on 21st March, 2012. The TPO, by an order dated 13th June, 2012 after affording an opportunity to the assessee, passed a draft order of assessment on 5th July, 2012 and forwarded it to the assessee on 11th July, 2012. The assessee filed objections before the Dispute Resolution Panel which passed an order on 22nd April, 2013. The A.O. passed a final order on 31st May, 2013.

The Tribunal held that the draft assessment was completed by the A.O. on 5th July, 2012, beyond the period of limitation.

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

‘i) Section 153 lays down the period of limitation for assessment. Section 153(3) states that in computing the period of limitation, the time taken to comply with a direction of the court is to be excluded. Section 153(3)(ii) applies to cases where any direction is issued either by the appellate authority, revisional authority or any other authority to decide an issue. The Supreme Court in Rajinder Nath vs. CIT and ITO vs. Murlidhar Bhagwan Das has held that a finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for disposal of a particular case. Similarly, a direction must be an expressed direction necessary for disposal of the case before the authority or court and must also be a direction which the authority or court is empowered to give while deciding a case before it. A direction issued to remit the matter and asking the assessee to appear before the A.O. on a particular date does not amount to either issuing a direction or finding within the meaning of section 153(3)(ii).

ii) It was evident that the order dated 7th March, 2012 passed by the Court neither contained any finding nor any direction. The Tribunal was right in holding that the draft assessment was completed by the A.O. on 5th July, 2012, which was beyond the period of limitation.’

Appeal to Appellate Tribunal – Appeal to Commissioner (A) – Powers of Commissioner (A) – Commissioner (A) can call for and examine fresh material – Power of Tribunal to remand matter – Power must be exercised judiciously – A.O. rejecting claim for deduction – Commissioner (A) considering fresh documents and allowing deduction – Tribunal not justified in remanding matter to A.O.

43 International Tractors Ltd. vs. Dy. CIT(LTU) [2021] 435 ITR 85 (Del) A.Y.: 2007-08; Date of order: 7th April, 2021 Ss. 80JJAA, 250(4) of ITA, 1961

Appeal to Appellate Tribunal – Appeal to Commissioner (A) – Powers of Commissioner (A) – Commissioner (A) can call for and examine fresh material – Power of Tribunal to remand matter – Power must be exercised judiciously – A.O. rejecting claim for deduction – Commissioner (A) considering fresh documents and allowing deduction – Tribunal not justified in remanding matter to A.O.

In the return filed for the A.Y. 2007-08, the assessee had failed to claim the deductions both u/s 80JJAA and qua prior period expenses. The deduction u/s 80JJAA was at Rs. 1,07,33,164 and the prior period expenses were quantified at Rs. 51,21,024. These deductions were claimed by the assessee before the A.O. by way of a communication dated 14th December, 2009 filed with him. This statement, admittedly, was accompanied by a Chartered Accountant’s report in the prescribed form (i.e., form 10DA). Furthermore, the details concerning prior period expenses were also provided by the assessee. The A.O., however, declined to entertain the two deductions claimed by the assessee.

The Commissioner (Appeals) allowed the appeal of the assessee. The Tribunal remanded the matter to the A.O.

On appeal by the assessee, the Delhi High Court set aside the order of the Tribunal and held as under:

‘If a claim is otherwise sustainable in law, the appellate authorities are empowered to entertain it. The Commissioner (Appeals) in the exercise of his powers u/s 250(4) is entitled to call for production of documents or material to satisfy himself as to whether or not the deductions claimed were sustainable and viable in law.

Insofar as the deduction claimed u/s 80JJAA was concerned, the Commissioner (Appeals) not only had before him the Chartered Accountant’s report in the prescribed form, i.e., form 10DA, but also examined the details concerning the new regular workmen, numbering 543, produced before him. In this context, the Commissioner (Appeals) examined the details concerning the dates when the workmen had joined the service, the period during which they had worked, relatable to the assessment year at issue, as also the details concerning the bank accounts in which remuneration was remitted. Based on this material, the Commissioner (Appeals) concluded that the deduction u/s 80JJAA was correctly claimed by the assessee. Likewise, insofar as prior period expenses were concerned, out of a total amount of Rs. 51,21,024 claimed by the assessee, a sum of Rs. 24,78,391 was not allowed for the reason that withholding tax had not been deducted by the assessee. The assessee had disclosed the same in its communication dated 14th December, 2009 placed before the A.O.

All that the Tribunal was required to examine was whether the Commissioner (Appeals) had scrupulously verified the material placed before him before allowing the deductions claimed by the assessee. The Tribunal, however, instead of examining this aspect of the matter, observed, incorrectly, that because an opportunity was not given to the A.O. to examine the material, the matter needed to be remanded to the A.O. for a fresh verification. The judgment of the Tribunal deserved to be set aside. The fresh claims made by the assessee, as allowed by the Commissioner (Appeals), were to be sustained.’

Offences and prosecution – Sections 276C, 277 and 278 – Wilful attempt to evade tax – False verification in return – Abetment of false returns – Condition precedent for application of sections 276C and 277 – Incriminating material or evidence of wilful attempt to evade tax must emanate from assessee – Evidence unearthed during search and survey operations of third persons – No evidence of connection between such material and assessee – Mere denial of allegation will not amount to incriminating evidence – Abetment denotes instigation to file false return – Complaint filed by Director of Income-tax – Not justified – Prosecution not valid

8. (1) Karti P. Chidambaram and (2) Srinidhi Karti Chidambaram vs. Dy. DIT (Investigation) [2021] 431 ITR 261 (Mad) Date of order: 11th December, 2020 A.Ys.: 2014-15 and 2015-16

Offences and prosecution – Sections 276C, 277 and 278 – Wilful attempt to evade tax – False verification in return – Abetment of false returns – Condition precedent for application of sections 276C and 277 – Incriminating material or evidence of wilful attempt to evade tax must emanate from assessee – Evidence unearthed during search and survey operations of third persons – No evidence of connection between such material and assessee – Mere denial of allegation will not amount to incriminating evidence – Abetment denotes instigation to file false return – Complaint filed by Director of Income-tax – Not justified – Prosecution not valid

The assessees were husband and wife. For the A.Y. 2014-15, K filed his return on 29th July, 2014 declaring profit from the sale of immovable property as long-term capital gains. His wife filed her return for the A.Y. 2015-16 and disclosed long-term capital gains. Neither K nor his wife disclosed cash payments received as part of the consideration. These facts came to light in a survey u/s 133A carried out in the case of a company A Ltd. and other entities on 1st December, 2015 by the Income-tax Department and the Enforcement Directorate. In the course of the search several hard disks were retrieved by the Department and the ED. Further search and seizure were also conducted in the case of another company AE Ltd. in the year 2018 and certain notebooks were seized from the cashier of the purchaser company and their statements also recorded. A private complaint was filed by the Deputy Director of the Income-tax Department against K for the offences u/s 276C and 277. Similarly, another complaint was filed against his wife under sections 276C(1), 277 and 278.

After the Court had taken cognizance of the complaint, the assessees filed petitions to discharge them from the prosecution mainly on the ground that the documents alleged to have been seized during the search conducted in the two companies were inadmissible and the alleged cloning of the electronic records was not done by any experts and those documents also were not admissible due to non-compliance with section 65B of the Indian Evidence Act, 1872. Similarly, the person who was said to have given a statement as to the cash transaction had not been examined by the Court while taking cognizance. Hence, without any evidence in this regard there were no materials to proceed against the assessees. It was further submitted that the Deputy Director of the Income-tax Department was not a competent person to file a complaint for the false declaration. Only the A.O. before whom the returns were filed was competent to file any complaint for false returns or evidence. The trial court dismissed the petition.

The Madras High Court allowed the revision petitions filed by the assessees and held as under:

‘i) Section 276C deals with wilful attempt to evade tax. In order to attract the provisions of section 276C the following ingredients must be available: the person (a) wilfully attempts to evade any tax; or (b) wilfully attempts to evade any penalty; or (c) wilfully attempts to evade any interest chargeable or imposable under this Act; or (d) under-reports his income. The Explanation further indicates that the expression “wilfully attempts” employed in the provision is an inclusive one. The Explanation makes it very clear that to maintain the prosecution, the false entry or statement containing the books of accounts or other documents ought to have been in the possession or control of such person and such person should have made any false entry or statement in such books of accounts or other documents or wilfully omitted or caused to be omitted any relevant entry or statement in such books of accounts or other documents, or caused any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act.

ii) The essential ingredients of the sections make it clear that any statements or incriminating materials either should come from the accused or very strong material unearthed during search or survey is required to maintain prosecution u/s 276C or 277. The very Explanation provided u/s 276C makes it clear that incriminating materials and documents ought to have been seized from the accused. Unless strong materials are seized from the accused or any incriminating statement recorded from the accused, the prosecution has to wait till the finding recorded by the A.O. Reassessment or assessment order has to be passed only based on the materials seized during the search. On such assessment, when the A.O. comes to the conclusion that there is a wilful suppression to evade tax or under-reporting, etc., the complaint is maintainable. Though the offences u/s 276, 277 and 278 are distinct offences and the Deputy Director can launch the prosecution as per section 279, merely because the power was conferred to the Deputy Director to launch a complaint or sanction merely on the basis of some materials said to have been collected from third parties, the prosecution will not be maintainable.

iii) The intention of the Legislature is to prosecute only where concrete materials are unearthed during the search or survey. It is stated in Circular No. 24 of 2019 [2019] 417 ITR (St.) 5 that the prosecution u/s 276C(1) shall be launched only after the confirmation of the order imposing penalty by the Appellate Tribunal. The object of the statute discernible u/s 276 is that to maintain a complaint by the Deputy Director, the material seized or collected during search should unerringly point towards the accused.

iv) All the proceedings before the Income-tax Officer, particularly assessment proceedings, are deemed to be civil proceedings in terms of section 136. When all the proceedings before the A.O. under the Act are deemed to be judicial proceedings and the officer is deemed to be a civil court, if any false declaration or false return is filed before the A.O. such act of the assessee is certainly punishable u/s 193 of the Indian Penal Code, 1860. In such a case the fact that the statement given by the assessee during the assessment proceedings was false has to be recorded by the officer concerned. Without such a finding recorded, the prosecution cannot be launched merely on the basis of some statements said to have been recorded from third parties.

v) The Income-tax search proceedings have also been held to be judicial proceedings and such authority is deemed to be a judicial authority within the meaning of sections 193 and 196 of the Indian Penal Code, 1860. Even the raiding officer is deemed to be a civil court and the proceedings before him are judicial proceedings and if any offence is committed before such authority, the complaint can be lodged only following the procedure u/s 195 of the Code of Criminal Procedure, 1973.

vi) The entire reading of the complaint made it clear that the assessees never incriminated themselves in the statements recorded by the raiding officers at any point of time. The search was said to have been carried out in AE Ltd., the so-called purchaser of the property. The complaint was silent about whether the assessee, i. e., the accused, were either directors or had control over the firms. Mere denial of the prosecution version could not by any stretch of imagination be construed as incriminating evidence.

vii) Admittedly, returns were filed before the A.O. by the assessees and the verification was also done by them while filing the returns. Whether such verification was false or not had to be decided by the A.O. before whom such verification was filed. Neither the false return nor any false statement or verification was done before the Deputy Director of Income-tax to invoke section 195 of the Code of Criminal Procedure, 1973. Prosecution was launched for the alleged offence under sections 276C and 277. There must be material to show that there was wilful attempt to evade tax, penalty, interest or under-report, etc. Merely because search had been conducted and some third parties’ statements were recorded, and further they had also not been examined, and there was no finding recorded by the A.O. as to a wilful attempt to evade tax or filing of false verification, the complaint filed by the Deputy Director was not maintainable.

viii) Showing of ignorance by one of the assessees by maintaining that only her husband was aware of the return… such conduct could not be construed as abetment to attract the offence u/s 278. The prosecution of K and his wife was not sustainable.’

Non-resident – Taxability in India – Royalty – Consideration received for sale of software products under contract with customers in India – Assessee opting to be governed by provisions of DTAA – Meaning of royalty in agreement not amended to correspond with amended definition in Act – Receipts not royalty – Not liable to tax – Section 9(1)(vi), Explanation 4 – Articles 3(2), 13 of DTAA between India and UK

7. CIT (International Taxation) vs. Micro Focus Ltd. [2021] 431 ITR 136 (Del) Date of order: 24th November, 2020 A.Ys.: 2010-11 and 2013-14

Non-resident – Taxability in India – Royalty – Consideration received for sale of software products under contract with customers in India – Assessee opting to be governed by provisions of DTAA – Meaning of royalty in agreement not amended to correspond with amended definition in Act – Receipts not royalty – Not liable to tax – Section 9(1)(vi), Explanation 4 – Articles 3(2), 13 of DTAA between India and UK

The assessee, a company incorporated in the United Kingdom, developed and distributed software products. It sold software products in India either through its distributors or directly to customers. The assessee entered into contracts with its customers on principal-to-principal basis and sale of software licences was concluded outside India (off-shore supplies). For the A.Ys. 2010-11 and 2013-14 the A.O. passed final orders u/s 144C(3) holding that the receipts of income from the sale of software products in India were taxable under the head ‘royalty’ under the provisions of section 9(1)(vi) read with article 13 of the DTAA between India and the United Kingdom and, accordingly, brought the receipts of the assessee as royalty income at 10%.

The Tribunal held that the consideration received by the assessee from various entities on account of sale of software was not royalty within the meaning of article 13 of the DTAA and that there was no corresponding amendment to the definition of the term ‘royalty’ in article 13(3) of the DTAA as carried out in the definition of royalty u/s 9(1)(vi).

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

‘i) The Tribunal did not err in holding that the receipts of the assessee from the sale of software were not taxable as royalty under the DTAA. The payment made by the reseller for the purchase of software for sale in Indian market could not be considered as royalty.

ii) The Tribunal was right in holding that Explanation 4 to section 9(1)(vi) would not apply to the DTAA between India and United Kingdom.

iii) The Tribunal did not err in holding that the receipt of the assessee was not royalty though u/s 14(b)(ii) of the Indian Copyright Act, 1957 selling or giving on commercial rent any copy of computer programme was copyright.’

Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

6. Principal CIT vs. Dr. Ranjan Pai [2021] 431 ITR 250 (Karn) Date of order: 15th December, 2020 A.Y.: 2012-13


 

Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

 

The assessee was an individual engaged in the medical profession. For the A.Y. 2012-13, the A.O. found that the assessee had received 1,00,00,000 bonus shares issued by M Ltd. The A.O. invoked section 56(2)(vii) and treated the receipt of bonus shares as income from other sources and assessed the fair market value of the bonus shares as income of the year.

 

The Tribunal held that the provisions of section 56(2)(vii) were not attracted to the fact situation of the case and deleted the addition.

 

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

 

‘i) A careful scrutiny of section 56(2)(vii) contemplates two contingencies; firstly, where the property is received without consideration, and secondly, where it is received for consideration less than the fair market value. The issue of bonus shares by capitalisation of reserves is merely a reallocation of the company’s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. The total funds available with the company remain the same and the issue of bonus shares does not result in any change in respect of the capital structure of the company. In substance, when a shareholder gets bonus shares, the value of the original shares held by him goes down and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as per the value of the original share before the issue of bonus shares. Thus, any profit derived by the assessee on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him. Hence, the fair market value of bonus shares is not normally assessable as income from other sources.

 

ii) There was no material on record to infer that bonus shares had been transferred with an intention to evade tax. The provisions of section 56(2)(vii)(c) were not attracted to the fact situation of the case.

 

iii)   In view of the preceding analysis, the substantial question of law framed by a Bench of this Court is answered against the Revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.’

 

Housing project – Special deduction u/s 80-IB(10) – Condition regarding extent of built-up area – Some flats conforming to condition – Proportionate deduction can be granted

5. CIT vs. S.N. Builders and Developers [2021] 431 ITR 241 (Karn) Date of order: 7th January, 2021 A.Y.: 2009-10


 

Housing project – Special deduction u/s 80-IB(10) – Condition regarding extent of built-up area – Some flats conforming to condition – Proportionate deduction can be granted

 

The assessee was a firm engaged in the development of real estate and construction of apartments. For the A.Y. 2009-10 the assessee claimed deduction u/s 80-IB(10) on the profits determined by applying the percentage completion method. A survey u/s 133A was carried out during which it was found that the built-up area of 26 flats exceeded 1,500 square feet. The A.O. completed the assessment rejecting the claim of the assessee for deduction u/s 80-IB(10).

 

The Commissioner (Appeals) held that derivation of profits based on the percentage completion method by the assessee was correct and the assessee was entitled to proportionate deduction u/s 80-IB(10) in respect of those flats which conformed to the limits prescribed under the relevant provisions of the Act. This was upheld by the Tribunal.

 

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

 

‘i) The Tribunal was correct and the assessee was entitled to the benefit of proportionate deduction u/s 80-IB(10) in respect of flats which conformed to the limits under the relevant provisions of the Act.

 

ii) The Institute of Chartered Accountants has issued a clarification that revised Accounting Standard 7 is not applicable to the enterprises undertaking construction activities. The assessee was right in following the project completion method of accounting in terms of Accounting Standard 9.’

Exempt income – Disallowance u/s 14A – Disallowance of expenditure relating to exempt income – Scope of section 14A and rule 8D – Disallowance cannot exceed non-taxable income

4. Principal CIT vs. Envestor Ventures Ltd. [2021] 431 ITR 221 (Mad) Date of order: 18th January, 2021 A.Y.: 2015-16

Exempt income – Disallowance u/s 14A – Disallowance of expenditure relating to exempt income – Scope of section 14A and rule 8D – Disallowance cannot exceed non-taxable income

Dealing with the scope of section 14A, the Madras High Court held as under:

‘i) The disallowance u/s 14A read with rule 8D of the Income-tax Rules, 1962 of the expenditure incurred to earn exempted income has to be computed in accordance with rule 8D which in essence stipulates that the expenditure directly relatable to the earning of such exempted income can alone be disallowed u/s 14A. The assessing authority has to mandatorily record his satisfaction that the proportionate disallowance of expenditure u/s 14A as made by the assessee is not satisfactory and therefore the same is liable to be rejected for such cogent reasons as specified and, thereafter, the computation method under rule 8D can be invoked to compute the quantum of disallowance. It is well settled that the Rules cannot go beyond the main parent provision. Therefore, what has been provided as computation method in rule 8D cannot go beyond the roof limit of section 14A itself under any circumstances.

ii) The Tribunal was right in restricting the disallowance u/s 14A to the extent of exempt income earned during the previous year relevant to the A.Y. 2015-16.’

Business expenditure – Disallowance u/s 40(a)(i) – Depreciation – Scope of section 40(a)(i) – Depreciation is not an expenditure and is not covered by section 40(a)(i)

3. Principal CIT vs. Tally Solutions Pvt. Ltd. [2021] 430 ITR 527 (Karn) Date of order: 16th December, 2020 A.Y.: 2009-10

Business expenditure – Disallowance u/s 40(a)(i) – Depreciation – Scope of section 40(a)(i) – Depreciation is not an expenditure and is not covered by section 40(a)(i)

The assessee was engaged in the business of software development and sale of software product licences, software maintenance and training in software. For the A.Y. 2009-10, the A.O. disallowed a sum of Rs. 6,70,94,074 in respect of depreciation on intellectual property rights u/s 40(a)(i).

The Commissioner (Appeals) held that there being an irrevocable and unconditional sale of intellectual property and the transfer being absolute, it was an outright purchase of a capital asset and, therefore, section 40(a)(i) could not be invoked. This was confirmed by the Tribunal.

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

‘i) From a close scrutiny of section 40(a)(i) it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under the Act on which tax is deductible at source shall not be deducted while computing the income under the head profits and gains of business or profession where such tax has not been deducted. The expression “amount payable” which is otherwise an allowable deduction refers to expenditure incurred for the purpose of business of the assessee and, therefore, the expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under the Act and subject to tax deduction at source under Chapter XVII-B. The deduction u/s 32 is not in respect of an amount paid or payable which is subjected to tax deduction at source, but it is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation.

ii) Section 40(a)(i) and (ia) provides for disallowance only in respect of expenditure, which is revenue in nature, and does not apply to a case of the assessee whose claim is for depreciation which is not in the nature of expenditure but an allowance. Depreciation is not an outgoing expenditure and therefore the provisions of section 40(a)(i) and (ia) are not applicable. Depreciation is a statutory deduction available to the assessee on an asset, which is wholly or partly owned by the assessee and used for business or profession.

iii) The Commissioner (Appeals) had held that the payment had been made by the assessee for an outright purchase of intellectual property rights and not towards royalty. This finding had rightly been affirmed by the Tribunal. The findings recorded by the Commissioner (Appeals) as well as the Tribunal could not be termed perverse. Depreciation was allowable. In any case, the amount could not be disallowed u/s 40(a)(i).’

Business expenditure – Section 37 – Assessee company taking over business of another company – Scheme for voluntary retirement of employees of such company – Amount paid under scheme was for purposes of business – Deductible expenditure

2. CIT vs. G.E. Medical Systems (I) (P) Ltd. [2021] 430 ITR 494 (Karn) Date of order: 18th November, 2020 A.Y.: 2000-01

Business expenditure – Section 37 – Assessee company taking over business of another company – Scheme for voluntary retirement of employees of such company – Amount paid under scheme was for purposes of business – Deductible expenditure

GE was incorporated in Singapore and EI in India. The two companies entered into a joint venture agreement on 9th December, 1993 as a result of which the assessee came into existence with the object of carrying on the business of manufacturing and distribution of X-ray equipment. The agreement also provided that the assessee company would take over certain assets of EI and 184 of its employees. A separate agreement termed ‘equipment sales and employees absorption agreement’ was executed between the assessee and EI. This agreement was part of the share purchase agreement. Under the agreement, the employees were given a choice of continuity of service. The assessee introduced a scheme under which it paid a sum of Rs. 4,33,67,658 as retirement benefit to employees who availed of the benefit of the scheme. The amount paid under the scheme was claimed as a deduction u/s 37. The claim was rejected by the A.O.

The Commissioner (Appeals) and the Tribunal allowed the claim.

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

‘i) The sum was paid as retirement benefit to employees who availed of the benefit of the scheme. Under the scheme, compensation was paid not only for past services but also for the remaining years of service with the company. The employees had also filed a complaint against the assessee under the labour laws and, therefore, the assessee had to offer a scheme to avoid any kind of future problems. The scheme was sanctioned by the Chief Commissioner for the exemption u/s 10(10C) of the Act and it was a contractual obligation and was an ascertained liability.

ii) The genuineness of the scheme was not doubted by any of the authorities, rather it had been approved by the Chief Commissioner. The expenditure incurred by the assessee under the scheme had been incurred solely and exclusively for the purposes of business and was eligible for deduction u/s 37(1).’

Appeal to ITAT – Sections 253, 254 and 254(2) of ITA, 1961 – Ex parte order – Application for recall of order – Limitation – Assessee not served with notice of hearing before Tribunal though change of address intimated by assessee in Form 35 – Rejection of application for recall of order on ground of bar of limitation – Order unsustainable – Ex parte order in appeal and order rejecting application u/s 254(2) quashed and set aside – Matter remanded to Tribunal

1. Pacific Projects Ltd. vs. ACIT [2021] 430 ITR 522 (Del) Date of order: 23rd December, 2020

Appeal to ITAT – Sections 253, 254 and 254(2) of ITA, 1961 – Ex parte order – Application for recall of order – Limitation – Assessee not served with notice of hearing before Tribunal though change of address intimated by assessee in Form 35 – Rejection of application for recall of order on ground of bar of limitation – Order unsustainable – Ex parte order in appeal and order rejecting application u/s 254(2) quashed and set aside – Matter remanded to Tribunal

The assessee filed an application u/s 254(2) of the Income-tax Act, 1961 before the Tribunal for recall of the ex parte order remanding the matter to the Assessing Officer to decide the matter afresh after examining all the documents, including additional evidence as well as books of accounts, bills and vouchers, etc. The Tribunal held that it had no power to condone the delay in filing the application u/s 254(2) as the assessee had filed the application after six months from the end of the month in which the ex parte order had been passed.

The assessee filed a writ petition and challenged the order of the Tribunal contending that it had changed its address and shifted to new premises and this fact was mentioned in the appeal filed by the assessee in Form 35 against the order passed by the Deputy Commissioner and the assessee was never served in the appeal filed by the Department before the Tribunal. The Delhi High Court allowed the writ petition and held as under:

‘i) The course adopted by the Tribunal at the first instance by dismissing the appeal for non-prosecution and then refusing to entertain the application filed by the assessee u/s 254(2) for recall of the order, could not be sustained. The address of the assessee mentioned in the appeal before the Tribunal by the Department was the assessee’s former address and not the new address, which had been mentioned in the appeal filed before the Commissioner (Appeals) in Form 35. The assessee was never served in the appeal filed by the Department before the Tribunal.

ii) The Tribunal had erroneously concluded that the miscellaneous application filed by the assessee was barred by limitation u/s 254(2) inasmuch as the assessee had filed the application within six months of actual receipt of the order. If the assessee had no notice and no knowledge of the order passed by the Tribunal, the limitation period would not start from the date the order was pronounced by the Tribunal. The order dismissing the application filed by the assessee u/s 254(2) was quashed and on the facts the ex parte order whereby the matter was remanded to the Assessing Officer was set aside. The Tribunal is directed to hear and dispose of the appeal on the merits.’

Company – Book profits – Computation – Amount disallowed u/s 14A cannot be included

31 Sobha Developers Ltd. vs. Dy. CIT(LTU) [2021] 434 ITR 266 (Karn) A.Y.: 2008-09; Date of order: 1st April, 2021 Ss. 14A and 115JB of ITA, 1961

Company – Book profits – Computation – Amount disallowed u/s 14A cannot be included

This appeal u/s 260A was preferred by the assessee and was admitted by the Karnataka High Court on the following substantial question of law:

‘Whether the Tribunal is justified in law in holding that the indirect expenditure disallowed u/s 14A read with rule 8D(iii) of Rs. 24,64,632 in computing the total income under normal provisions of the Act is to be added to the net profit in computation of book profit for Minimum Alternate Tax purposes u/s 115JB and thereby importing the provisions of section 14A read with rule 8D into the Minimum Alternate Tax provisions on the facts and circumstances of the case?’

The High Court held as under:

‘Sub-section (1) of section 115JB provides the mode of computation of the total income of an assessee-company and tax payable on the assessee u/s 115JB. Sub-section (5) of section 115JB provides that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee being a company mentioned in this section. The disallowance u/s 14A is a notional disallowance and therefore, by recourse to section 14A, the amount cannot be added back to the book profits under clause (f) of Explanation 1 to section 115JB.’

Writ – Article 226 of Constitution of India and sub-sections 10(10C)(viii), 89(1), 154, 246A – Existence of alternative remedy not a bar to issue of writ where proceedings are without jurisdiction – Amounts received under voluntary retirement scheme – Denial of claim for deduction u/s 10(10C)(viii) and relief u/s 89(1) on basis of letter issued by CBDT – Decision of court quashing letter of Board – Order of denying relief – Proceedings without jurisdiction – Assessee entitled to relief

9. V. Gopalan vs. CCIT [2021] 431 ITR 76 (Ker) Date of order: 5th January, 2021 A.Y.: 2001-02

Writ – Article 226 of Constitution of India and sub-sections 10(10C)(viii), 89(1), 154, 246A – Existence of alternative remedy not a bar to issue of writ where proceedings are without jurisdiction – Amounts received under voluntary retirement scheme – Denial of claim for deduction u/s 10(10C)(viii) and relief u/s 89(1) on basis of letter issued by CBDT – Decision of court quashing letter of Board – Order of denying relief – Proceedings without jurisdiction – Assessee entitled to relief

The assessee claimed deduction u/s 10(10C)(viii) and under the provisions of section 89(1) on the amounts received by him under the voluntary retirement scheme of the State Bank of Travancore. The A.O. held that the assessee was not entitled to claim deduction u/s 10(10C)(viii) and also u/s 89(1).

The assessee filed an application u/s 264 for revision of the order but the Commissioner denied relief. Thereafter, the assessee filed an application to the Commissioner u/s 154 for rectification of his order relying on a decision in State Bank of India vs. CBDT [2006] (1) KLT 258 wherein the Court had held that the amounts received by employees under a voluntary retirement scheme were entitled to benefit u/s 89(1) in addition to the exemption granted u/s 10(10C)(viii) and quashed letter / Circular No. E.174/5/2001-ITA-I dated 23rd April, 2001 issued by the CBDT which held to the contrary. Since recovery proceedings were initiated in the meanwhile, the assessee paid certain amounts to the Department to satisfy the demand that arose out of the denial of relief u/s 89(1).

On a writ petition filed by the assessee, the single judge relegated the assessee to the alternative remedy of appeal u/s 246A. The Division Bench of the Kerala High Court allowed the appeal and held as under:

‘i) On the facts the assessee need not have been relegated to the alternative remedy of filing an appeal u/s 246A.

ii) Admittedly, the assessee had taken voluntary retirement in the year 2001. He had also claimed deduction u/s 10(10C)(viii) and benefit u/s 89(1) in his return of income for the relevant assessment year and the claim was rejected on the basis of the letter issued by the Board on 23rd April, 2001. The letter of the Board had been quashed by the Court in State Bank of India vs. CBDT. In that decision it was also declared that the assessee was entitled to deduction of amounts received under a voluntary retirement scheme u/s 10(10C)(viii) and u/s 89(1) simultaneously. That being the position, the entire proceedings initiated against the assessee were without jurisdiction.

iii) When the proceedings were without jurisdiction the existence of an alternative remedy was not a bar for granting relief under Article 226 of the Constitution. The assessee was entitled to deduction u/s 10(10C)(viii) and benefit u/s 89(1) (as the provision stood at the relevant point of time) in respect of the amounts received by him under the voluntary retirement scheme. If any amounts had been paid by the assessee pursuant to demands which arose on account of denial of deduction u/s 10(10C)(viii) and benefit u/s 89(1), such amounts should be refunded to the assessee.’

TDS – Sections 197 and 264 and Rule 18AA of IT Rules, 1962 – Certificate for Nil deduction or deduction at lower rate – Application by assessee for certificate for Nil withholding rate – Issuance of certificate at higher rate than Nil rate without recording reasons – Copy of order supported by reasons to be furnished to assessee – Matter remanded to Dy. Commissioner (TDS)

48. Tata Teleservices (Maharashtra) Ltd. vs. Dy. CIT [2020] 430 ITR 273 (Bom.) Date of order: 17th December, 2020 A.Y.: 2021-22


 

TDS – Sections 197 and 264 and Rule 18AA of IT Rules, 1962 – Certificate for Nil deduction or deduction at lower rate – Application by assessee for certificate for Nil withholding rate – Issuance of certificate at higher rate than Nil rate without recording reasons – Copy of order supported by reasons to be furnished to assessee – Matter remanded to Dy. Commissioner (TDS)

 

For the A.Y. 2018-19, the assessee was issued Nil withholding rate certificates u/s 197. However, those certificates were cancelled. The assessee filed a writ petition which was allowed, and the cancellation order was quashed. Thereafter, fresh certificates for deduction of tax at Nil rate were issued to the assessee for the A.Y. 2018-19. For the A.Ys. 2019-20 and 2020-21, the assessee submitted applications for tax withholding certificates at Nil rate. However, certificates u/s 197 were issued at rates higher than Nil rate. The assessee stated that it did not contest such certificates because it was focused on providing various wire-line voice, data and managed telecommunications services and therefore had opted for demerger of the consumer mobile business. Under the scheme of demerger, the consumer mobile business of the assessee stood transferred to BAL. The assessee filed an application seeking issuance of Nil rate tax withholding certificates u/s 197 on various grounds for the A.Y. 2021-22 and furnished the details that had been sought. However, the authorities issued certificates at rates higher than Nil. The assessee sought the order sheet / noting on the basis of which such certificates were issued but it did not get a response.

 

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

 

‘i) The procedure for issuance of certificate u/s 197 for deduction at lower rates or no deduction of tax from income other than dividends is laid down in Rule 28AA of the Income-tax Rules, 1962.

 

ii) Since the authorities were required to pass an order u/s 197 either rejecting the application for such certificate or allowing such application resulting in issuance of certificates which may be at rates higher than Nil as sought by the assessee, such an order must be supported by reasons. Not only that, a copy of such an order had to be furnished to the assessee so that it could be challenged u/s 264 if it was aggrieved. Not passing an order to that effect or keeping such an order in the file without communication would vitiate the certificates.

 

iii)   The reasons for not granting Nil rate certificates to the assessee were not known. The contemporaneous order required to be passed u/s 197 was also not available. The order was set aside, and the certificates were quashed. The matter was remanded to the Deputy Commissioner (TDS) for passing fresh order and issuing consequential certificates u/s 197 complying with the requirements of rule 28AA.’

Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

34. CIT vs. Hanon Automotive Systems India Private Ltd. [2020] 429 ITR 244 (Mad.) Date of order: 16th October, 2020 A.Y.: 2010-11

Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

Under an agreement to establish additional infrastructure facility to ensure uninterrupted power supply to it, the assessee made a lump sum payment to a company. The A.O. held that the amount paid by the assessee was to improve its asset and was non-refundable and even if the assessee received ‘services’ from the company in future, it would be separately governed by a ‘separate shared services agreement’ and hence the amount paid was not ‘wholly and exclusively’ for the assessee’s business and that it was spent towards the acquisition of a capital asset. The A.O. disallowed the expenditure claimed u/s 37(1) and also rejected the assessee’s alternate claim to depreciation.

The Commissioner (Appeals) held that the expenditure was capital expenditure, but allowed depreciation. The Tribunal held that the expenditure was revenue in nature and allowed the assessee’s claim for deduction.

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

‘i)    The Tribunal had rightly examined the nature of the transaction and held that the lump sum payment made by the assessee for the development of infrastructure for uninterrupted power supply to it was revenue expenditure u/s 37(1).

ii)    Though the assessee had parted with substantial funds to the company, the capital asset continued to remain the property of the company.’

Appeal to High Court – Territorial jurisdiction – Section 260A of ITA, 1961 and Article 226 of Constitution of India – Company located in Karnataka and assessed in Karnataka – Appeal to Appellate Tribunal in Bombay – Appeal from order of Tribunal – Bombay High Court had no jurisdiction to consider appeal

33. CIT vs. M.D. Waddar and Co. [2020] 429 ITR 451 (Bom.) Date of order: 27th October, 2020 A.Y.: 2008-09


 

Appeal to High Court – Territorial jurisdiction – Section 260A of ITA, 1961 and Article 226 of Constitution of India – Company located in Karnataka and assessed in Karnataka – Appeal to Appellate Tribunal in Bombay – Appeal from order of Tribunal – Bombay High Court had no jurisdiction to consider appeal

 

The assessee company was located in Raichur District, Karnataka. Its registered office, too, was in Karnataka. For Income-tax purposes, the assessee fell within the jurisdiction of the Assistant Commissioner, Belgaum, Karnataka. For the A.Y. 2008-09, the A.O., Belgaum reopened the assessment u/s 147, issued a notice u/s 148 and completed the reassessment in March, 2013.

 

Assailing that assessment order, the assessee appealed to the Commissioner (Appeals), Bangalore. Eventually, both the assessee and the Revenue further appealed to the Appellate Tribunal, Panaji Bench. The Tribunal held in the assessee’s favour.

 

The Revenue then filed an appeal before the Bombay High Court. The question before the High Court was as under:

 

‘An Income-tax Appellate Tribunal exercises its jurisdiction over more than one State, though it is located in one of those States. Its order is sought to be challenged. Which High Court should have the jurisdiction to rule on the Tribunal’s order? Is it the High Court in whose territorial jurisdiction the Tribunal is located? Or is it the High Court in whose territorial jurisdiction the authority that passed the preliminary order operates?’

 

The High Court held as under:

 

‘i)    In the Ambica Industries case the Supreme Court has held that in terms of Article 227 as also clause (2) of Article 226 of the Constitution of India, the High Court will exercise its discretionary jurisdiction and also issue writs of certiorari over orders passed by the subordinate courts within its territorial jurisdiction. Besides, if any cause of action arises within its territorial limits, it will exercise its jurisdiction. According to Ambica Industries, when the appellate court exercises jurisdiction over a Tribunal situated in more than one State, the High Court located in the State where the first court is located should be considered to be the appropriate appellate authority. The mere physical location of an inter-State Tribunal cannot be determinative of the High Court’s jurisdiction for an aggrieved party to challenge that Tribunal’s order.

 

ii)    The assessee was located in Karnataka and so were the Income-tax authorities. The primary order, too, emanated from Karnataka; so did the first appellate order. All challenges, including the appeal before the Tribunal were in continuation of that primary adjudication or consideration before the Assessing Officer at Belgaum, Karnataka. The Bombay High Court had no jurisdiction to entertain the appeal.’

Scientific research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of research – Prescribed authority under Act alone has power to examine nature of scientific research and determine whether assessee is entitled to special deduction u/s 80-IB(8A) – A.O. has no power to determine questions

32. CIT vs. Quintiles Research (India) Private Ltd. [2020]
429 ITR 4 (Kar.) Date
of order: 14th October, 2020 A.Y.:
2008-09

 

Scientific
research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of
research – Prescribed authority under Act alone has power to examine nature of
scientific research and determine whether assessee is entitled to special
deduction u/s 80-IB(8A) – A.O. has no power to determine questions

 

aged in
pharmaceutical research and development as well as clinical research for
pharmacy products. For the A.Y. 2008-09 the assessee claimed deduction of Rs.
31,32,49,090 u/s 80-IB(8A). The A.O. held that the assessee is not undertaking
any scientific research and development on its own as specified under rule
18DA(1)(c) of the Rules. It was further held that the assessee has not been
able to sell any output / prototype till date and undertakes the activities as
specified in the agreement and transfers the data / information to the customer
who in turn may use the same to develop a technology product / patent and the
assessee itself is not engaged in scientific research and development
activities leading to development / improvement / transfer of technology. Thus,
it was held that the assessee does not meet the prescribed conditions u/s
80-IB(8A). Accordingly, the claim of the assessee for deduction under the
aforesaid provision was disallowed.

 

The
Dispute Resolution Panel rejected the objections of the assessee. The Tribunal
allowed the appeal preferred by the assessee and set aside the order of the
A.O. In the appeal filed by the Revenue, the following question of law was
raised before the Karnataka High Court:

 

‘Whether,
on the facts and in the circumstances of the case, the Tribunal is right in law
in holding that the conditions of rule 18DA can be looked into only by the
prescribed authority and not by the A.O., whereas the said rule prescribes the
conditions necessary for allowing deduction u/s 80-IB(8A) and the A.O. is well
within his jurisdiction to accept or reject the same based on the conformity
adhered to by the assessee?’

 

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

 

‘i)    Section 80-IB provides for
deduction in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings. Under sub-section (8A) in
the case of an assessee engaged in scientific research and development, there
would be 100% deduction of the profits and gains of such business for a period
of ten consecutive assessment years subject to the condition that the company
satisfied the conditions enumerated in sub-section (8A) of section 80-IB. From
a conjoint reading of rules 18D and 18DA of the Income-tax Rules, 1962 it is
axiomatic that it is for the prescribed authority to examine the nature of
research and scientific development proposed to be or being carried out by the
company who seeks approval or extension of approval. Once under sub-rule (2)
approval is granted which enures for a period of three years, it can be
extended only on satisfactory performance of the company, which has to be
assessed on periodic review by the prescribed authority. The prescribed
authority is also empowered to call for such information or documents which may
be found necessary for consideration of the application for grant of approval.
Even during the currency of the approval granted by the prescribed authority,
the company has to satisfy several conditions in terms of rule 18DA(2) of the
Rules. The prescribed authority is also empowered to withdraw the approval.
Thus, the statutory scheme of the Rules mandates the prescribed authority to be
a body which can minutely examine the highly technical and scientific
requirements in the case of a company.

 

ii)    Therefore, once the
prescribed authority grants approval and such approval holds the field, it
would not be open to the A.O. or any other Revenue authority to sit in appeal
over such approval certificate and re-examine the issue of fulfilment of
conditions mentioned in sub-rule (1) of rule 18DA of the Rules. The prescribed
authority is a specialised body having expertise in the field of scientific
research and development and the requirements being extremely complex,
scientific requirements have, therefore, been rightly placed in the hands of
the expert body.

 

iii)   There is no plausible reason
why the A.O. should be allowed to sit in appeal over the decision of a body
which is prescribed under the Rules. An issue with regard to violation of
conditions mentioned in rule 18DA can be looked into only by the prescribed
authority and not by the A.O.’

Non-resident – Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement for export of garments – Non-resident company inspecting garments, ensuring quality and export within stipulated time – No technical services performed by non-resident – Income received by non-resident not taxable in India

31. DIT (International
Taxation) vs. Jeans Knit Pvt. Ltd. [2020]
428 ITR 285 (Kar.) Date
of order: 10th September, 2020 A.Y.: 2007-08

 

Non-resident
– Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for
technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement
for export of garments – Non-resident company inspecting garments, ensuring
quality and export within stipulated time – No technical services performed by
non-resident – Income received by non-resident not taxable in India

 

The assessee was
engaged in the business of manufacturing and export of garments and was a 100%
export-oriented undertaking. The assessee company imported accessories from
other countries, mostly from Europe. For this purpose it had engaged a Hong
Kong company to render various services at the time of import such as
inspection of fabrics and timely dispatch of material. The assessee paid 12.5%
of the import value as charges to the non-resident company. The assessee made
payments to the non-resident company in the A.Y. 2007-08 without deduction of
tax at source. The A.O., by an order, inter alia held that the non-resident company was a service provider and was
not an agent of the assessee and the services rendered by the non-resident
company had to be treated as technical services and were squarely covered under
the scope and ambit of section 9(1)(vii). The assessee failed to deduct tax at
source at the rate of 10% and therefore the assessee was treated as an assessee
in default.

 

The Commissioner
(Appeals) upheld the order of the A.O. But the Tribunal set aside the order.

 

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

 

‘i)    From the agreement executed by the assessee
with the non-resident company it was evident that the non-resident company was
required to inspect the quality of fabrics and other accessories in accordance
with the sample approved by the assessee and coordinate with the suppliers to
ship the goods within the stipulated date. The assessee in consultation with
the exporters identified the manufacturers as well as the quality and price of
the material to be imported.

ii)    The non-resident company was nowhere involved
either in identification of the exporter or in selecting the material and
negotiating the price. The quality of material was also determined by the
assessee and the non-resident company was only required to make physical
inspection to see if it resembled the quality specified by the assessee. For
rendering this service, no technical knowledge was required.

 

iii)   The Tribunal on the basis of meticulous
appreciation of the evidence on record had recorded a finding that the
non-resident company was not rendering any consultancy service to the assessee.
Therefore, it would not fall within the services contemplated u/s 9(1)(vii).

 

iv) The substantial
questions of law framed by a Bench of this Court are answered against the
Revenue and in favour of the assessee.’

 

Export – Exemption u/s 10A – Effect of section 10A and Notification No. S.O. 890(e) of CBDT – Assessee carrying on back-office work and preparation of applications for patent in USA – Assessee entitled to exemption u/s 10A

30. CIT vs. Narendra R. Thappetta [2020]
428 ITR 485 (Kar.) Date
of order: 10th September, 2020 A.Ys.: 2009-10 and 2010-11

 

Export –
Exemption u/s 10A – Effect of section 10A and Notification No. S.O. 890(e) of
CBDT – Assessee carrying on back-office work and preparation of applications
for patent in USA – Assessee entitled to exemption u/s 10A

 

The
assessee received back-office work from the legal department of software
companies in the USA. For the A.Ys. 2009-10 and 2010-11 he claimed deduction
u/s 10A of Rs. 3,24,74,124 and Rs. 3,34,41,151, respectively. The A.O. held
that section 10A applies only in respect of profits and gains derived from
export of articles, or things or computer software and, therefore, the assessee
is not entitled to deduction u/s 10A as his activities do not constitute
development of a computer programme as defined u/s 10A. It was further held
that the activities of the assessee do not fall in any of the categories as
mentioned in Notification No. 890 dated 26th September, 2000 ([2000] 245 ITR (St.) 102) issued by
the CBDT and rejected the claims of deduction of the assessee u/s 10A.

 

The
Commissioner of Income-tax (Appeals) allowed the appeals filed by the assessee
and held that the assessee is entitled to deduction u/s 10A in the light of the
Notification issued by the CBDT which is applicable to the case of the assessee
as the services rendered by him can broadly be classified as office operations,
data processing, legal databases and the same can be termed as information
technology-enabled services. The Tribunal held that the activities of the
assessee can be categorised as back-office operations, data processing, legal
databases or even under remote maintenance and the same can be termed as
information technology-enabled products or services. The Tribunal therefore
held that the assessee is entitled to claim deduction u/s 10A.

 

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

 

‘i)    Section 10A provides for
exemption of profits derived from export of computer software. The CBDT issued
a Notification No. S.O. 890(E), dated 26th September, 2000 ([2000] 245 ITR (St.) 102) to specify the information technology-enabled products /
services as provided u/s 10A. The Notification is clarificatory in nature and
has been issued to clarify the expression “computer software” used in
Explanation 2(i)(b) of section 10A. The Notification specifies that information
technology-enabled products or services mentioned in the Notification shall be
treated as information technology-enabled products or services for the purposes
of Explanation 2(i)(b) of section 10A, which includes back-office operations
and data processing
as well.

 

ii)    The assessee received back-office work from
the legal department of software companies in the US. These companies assigned
back-office work of registering their technology in the US patent office. The
applications were prepared and finalised and signatures were obtained in the
declaration. For development of work product as patent application, the US
patent application contained drawings and specifications. The drawings were
generated using computer-aided design software and specifications were written
using word processing software. The back-office standard required a level of
control over formulation of the editing of the content of the application which
was possible only with the use of information technology.

 

iii)  The activities of the assessee could be
classified as data processing, legal databases and remote maintenance in terms
of the Notification issued by the CBDT. The assessee was transmitting the
patent application and related data which was stored in electronic form and
therefore, such data was customised data and the assessee was eligible for
deduction u/s 10A. The Appellate Tribunal was justified in holding that the
assessee was entitled to the benefit of deduction u/s 10A.’

Dividend – Deemed dividend – Section 2(22)(e) – Sum shown as unsecured loan obtained by assessee firm from company in which one partner shareholder – Nature of transaction – Deferred liability – Assessee not shareholder of lender company – Loan not assessable as deemed dividend in hands of assessee

29. CIT vs. T. Abdul Wahid and Co. [2020]
428 ITR 456 (Mad.) Date
of order: 21st September, 2020 A.Ys.: 2005-06 and 2006-07

 

Dividend
– Deemed dividend – Section 2(22)(e) – Sum shown as unsecured loan obtained by
assessee firm from company in which one partner shareholder – Nature of
transaction – Deferred liability – Assessee not shareholder of lender company –
Loan not assessable as deemed dividend in hands of assessee

 

One of the
partners of the assessee firm with a 35% stake in the assessee was also a
shareholder in a company with 26.25% shareholding in it. A sum of Rs. 2 crores
was shown as unsecured loan obtained from the company by the assessee. For the
A.Ys. 2012-13 and 2014-15, the A.O. considered this sum as deemed dividend
attracting the provisions of section 2(22)(e).

 

The
Tribunal held that the deemed dividend u/s 2(22)(e) was to be assessed in the
hands of the shareholder and not in the hands of the assessee firm and allowed
the appeals filed by the assessee.

 

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

 

‘i)    Section 2(22)(e) would stand attracted when
a payment is made by a company in which public are not substantially interested
by way of advance or loan to a shareholder being a person who is the beneficial
owner of the shares.

 

ii)    On the facts it is clear that the payment
has been made to the assessee, a partnership firm. The partnership firm is not
a shareholder in the company. If such is the factual position, the decision in
the case of National Travel Services
relied on by the Revenue cannot be applied, nor can the case of Gopal and Sons, as they are factually
distinguishable. The records placed before the A.O. clearly show the nature of
the transaction between the firm and the company and it is neither a loan nor
an advance, but a deferred liability. These facts have been noted by the A.O.
In such circumstances, this Court is of the view that the Tribunal rightly
reversed the order passed by the Commissioner of Income-tax (Appeals) affirming
the order of the A.O.

 

iii)   For the above reasons, we find no grounds to
interfere with the order passed by the Tribunal and, accordingly, dismiss the
present appeals and answer the substantial question of law against the
Revenue.’

 

Depreciation – Section 32 – Rate of depreciation – Assessee running a hotel – Additional floor space index granted – Not an intangible right – Consideration for additional floor space index payable in instalments – One instalment paid and entire amount debited in accounts – Assessee entitled to depreciation on entire amount at rate applicable to buildings

28. Principal CIT vs. V. Hotels Ltd. [2020]
429 ITR 54 (Bom.) Date
of order: 21st September, 2020 A.Y.: 2006-07

 

Depreciation
– Section 32 – Rate of depreciation – Assessee running a hotel – Additional
floor space index granted – Not an intangible right – Consideration for additional
floor space index payable in instalments – One instalment paid and entire
amount debited in accounts – Assessee entitled to depreciation on entire amount
at rate applicable to buildings

 

The
assessee was running a hotel. For the A.Y. 2006-07 the assessee claimed
depreciation of Rs. 63,90,248 on floor space index; on an opening written down
value of Rs. 2,55,60,990 depreciation at 25% was claimed. The A.O. rejected the
claim of the assessee and added back the sum to the total income of the
assessee. He took the view that grant of floor space index was not in the
nature of any asset but only a payment made to the Government for increasing
the size of the building.

 

The
Commissioner (Appeals) held that the amount spent was for the purpose of
business and being of enduring nature, it would add value to the existing
building as additional floor space index would enable the company to add more
floors over and above the existing structure. Since it related to the building
block of assets, the overall cost of the building block would increase by this
amount. Accordingly, the A.O. was directed to add the amount spent during the
year, i. e., Rs. 68,16,264, to the building block of assets and allow
depreciation as per law. The Tribunal held that on payment of the first
instalment, rights in the form of additional floor space index were capitalised
in the books of accounts. The Tribunal held that the assessee would be entitled
to depreciation at 10% on the whole of the consideration towards floor space
index and not at 25%.

 

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

 

‘Floor
space index relates to the right to construct additional floor to the assessee
which enhances the value or cost of the existing building. It strictly pertains
to addition to the building and therefore depreciation allowable would be at
the rate applicable to buildings and not to intangible rights u/s 32(1)(ii).’

Deduction of tax at source – Section 190 – Liability to deduct tax at source only if there is income – Reimbursement of expenses – No income arises – Tax not deductible at source

27. Zephyr Biomedicals vs. JCIT [2020]
428 ITR 398 (Bom.) Date of order: 7th October, 2020

 

Deduction
of tax at source – Section 190 – Liability to deduct tax at source only if
there is income – Reimbursement of expenses – No income arises – Tax not
deductible at source

 

In the
appeal by the assessee before the Bombay High Court against the order of the
Tribunal the following question of law was raised:

 

‘Whether
on the facts and in the circumstances of the case, the Hon’ble Tribunal was
right in law in holding that the appellant is liable to deduct tax at source
u/s 194C on the payments made to clearing and forwarding agents which is
outright reimbursement of freight charges having no element of profit?’

 

The Bombay
High Court held as under:

 

‘i)    Income-tax is a tax payable in respect of
the “total income” of the previous year of every person. Further, such
Income-tax shall have to be deducted at source or paid in advance, where it is
so deductible or payable under any of the provisions of the Income-tax Act,
1961.

 

ii)    From this it follows that unless the paid
amount has any “income element” in it, there will arise no liability to pay any
Income-tax upon such amount. Further, in such a situation there will also arise
no liability of any deduction of tax at source upon such amount.

 

iii)   Again, the liability to deduct or collect
Income-tax at source is upon “such income” as referred to in section 190(1).
The expression “such income” would ordinarily relate to any amount which has an
“income element” in it and not otherwise.’

 

 

Capital gains – Sections 45 and 50C – Computation – Law applicable – Amendment of section 50C w.e.f. 1st April, 2017 – Amendment retrospective

26. CIT vs. Vummudi Amarendran [2020]
429 ITR 97 (Mad.) Date
of order: 28th September, 2020 A.Y.:
2014-15

 

Capital
gains – Sections 45 and 50C – Computation – Law applicable – Amendment of
section 50C w.e.f. 1st April, 2017 – Amendment retrospective

 

The
assessee owned 44,462 sq. ft. of land and entered into an agreement for sale on
4th August, 2012 to sell the land for a total sale consideration of
Rs. 19 crores. He received a sum of Rs. 6 crores as advance consideration by
cheque payment from the purchaser. The sale deed was registered on 2nd
May, 2013. The A.O. found that on the date of execution and registration of the
sale deed, i.e., on 2nd May, 2013, the guideline value of the
property as fixed by the State Government was Rs. 27 crores. Applying the
provisions of section 50C, the A.O. adopted the full value of consideration at
Rs. 27 crores and recomputed the capital gains and raised a tax demand.

 

The case
of the assessee was that the guideline value on the date of the agreement i.e.,
4th August, 2012 should be taken as per proviso
to section 50C(1). The Commissioner (Appeals) and the Tribunal accepted the
assessee’s claim.

 

In appeal
by the Revenue, the following questions of law were raised:

 

‘(1)
Whether on the facts and in the circumstances of the case, the Tribunal was
right in holding that the amendment to section 50C which was introduced with
effect from A.Y. 2017-18 prospectively was applicable retrospectively from the
A.Y. 2014-15 when the language used in the proviso
does not indicate that it was inserted as a clarification?

 

(2) Is not
the reasoning and finding of the Tribunal bad by holding that the prospective
amendment to provisions of section 50C for the A.Y. 2017-18 are applicable
retrospectively to A.Y. 2014-15 without appreciating the fact that unless
explicitly stated a piece of legislation is presumed not to be intended to have
retrospective operation based on the principle lex
prospicit non respicit, meaning that the law looks
forward and not backwards?’

 

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

 

‘i) Once a
statutory amendment is made to remove an undue hardship to the assessee or to
remove an apparent incongruity, such an amendment has to be treated as
effective from the date on which the law, containing such an undue hardship or
incongruity, was introduced.

 

ii) The proviso to section 50C(1) deals with
cases where the date of the agreement, fixing the amount of consideration, and
the date of registration for the transfer of the capital assets are not the
same and states that the value adopted or assessed or assessable by the stamp
valuation authority on the date of agreement may be taken for the purposes of
computing full value of consideration for such transfer. The amendment by
insertion of the proviso seeks to
relieve the assessee from undue hardship.

 

iii) The Commissioner
(Appeals) and the Tribunal were justified in setting aside the order of the
A.O.’

 

Capital gains – Computation of capital gains – Cost of acquisition – Section 115AC – Conversion of foreign currency convertible bonds into equity shares – Subsequent sale of such shares – Cost of acquisition of shares to be calculated in terms of Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993

25. DIT (International Taxation) vs. Intel Capital (Cayman) Corporation [2020]
429 ITR 45 (Kar.) Date
of order: 6th October, 2020 A.Y.: 2008-09

 

Capital
gains – Computation of capital gains – Cost of acquisition – Section 115AC –
Conversion of foreign currency convertible bonds into equity shares –
Subsequent sale of such shares – Cost of acquisition of shares to be calculated
in terms of Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(through Depository Receipt Mechanism) Scheme, 1993

 

The
assessee was a non-resident company. It filed its return of income for the A.Y.
2008-09. The A.O. held that the assessee had acquired foreign currency
convertible bonds and after conversion thereof into shares, sold the shares
during the previous year relevant to the A.Y. 2009-10 and disclosed short-term
capital gains from the transaction and paid tax thereon at the prescribed rate.
He further held that the cost of acquisition of equity shares on conversion of
foreign currency convertible bonds was shown to be at Rs. 873.83 and Rs. 858.08
per share whereas in fact the assessee converted the bonds into shares at Rs.
200 per share. The A.O. therefore concluded that the cost of acquisition of
shares had to be assessed at Rs. 200 per share and not at Rs.873.83 and Rs.
858.08 per share as claimed by the assessee and completed the assessment.

 

This was
upheld by the Commissioner (Appeals). The Tribunal held that u/s 115AC the
Central Government had formed the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993
permitting some companies to issue foreign currency convertible bonds which
could at any point of time be converted into equity shares. It further held
that the subscription agreement was approved by the Reserve Bank of India, the
regulatory body, and under the terms and conditions for the issuance of foreign
currency convertible bonds between the NIIT and the assessee, the bonds were to
be initially converted into shares at Rs. 200 per share subject to adjustments
under clause 6(c) of the agreement. Therefore, the assessee was rightly
allotted 21,28,000 shares at the rate of Rs. 200 in accordance with the bond
agreement at the prevalent convertible foreign currency rate. Accordingly, the
orders passed by the Commissioner (Appeals) and the A.O. were set aside and 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 Central Government made the Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through Depository
Receipt Mechanism) Scheme, 1993 applicable for the assessment year 2002-03
onwards by Notification dated 10th September, 2002 ([1994] 208 ITR [St.] 82). Clause
2(f) of the Scheme provides that the words and expressions not defined in the
Scheme but defined in the Income-tax Act, 1961 or the Companies Act, 1956 or
the Securities and Exchange Board of India Act, 1992 or the Rules and
Regulations framed under these Acts, shall have the meanings respectively
assigned to them, as the case may be, in those Acts. Clause 7 of the Scheme
deals with transfer and detention. Thus, the cost of acquisition has to be
determined in accordance with the provisions of clause 7(4) of the Scheme for
computation of capital gains. Clause (xa) of section 47 of the Income-tax Act,
1961, which refers to transfer by way of conversion of bonds, was inserted with
effect from 1st April, 2008 and is applicable to the A.Y. 2009-10
onwards. There is no conflict between the provisions of the Scheme and the
Income-tax Act or the Income-tax Rules.

 

ii)   The bonds were issued under the 1993 Scheme
and the conversion price was determined on the basis of the price of shares at
the Bombay Stock Exchange or the National Stock Exchange on the date of
conversion of the foreign currency convertible bonds into shares. The
computation of capital gains by the assessee was right.’

Business expenditure – Service charges paid to employees in terms of agreement entered into under Industrial Disputes Act – Evidence of payment furnished – Amount deductible

24. New Woodlands Hotel Pvt. Ltd. vs. ACIT [2020]
428 ITR 492 (Mad.) Date
of order: 4th September, 2020  A.Ys.:
2013-14 and 2014-15

 

Business
expenditure – Service charges paid to employees in terms of agreement entered
into under Industrial Disputes Act – Evidence of payment furnished – Amount
deductible

 

The
assessee is in the hotel business. For the A.Ys. 2013-14 and 2014-15 it claimed
deduction of amounts paid as service charges to its employees. The explanation
was that tips were being given to the room boys and they alone were benefited
and the other employees and workers raised objections; the matter was discussed
in several meetings and ultimately a settlement was arrived at between the
employees’ union and the assessee’s management. The A.O. rejected this claim.

 

The
Commissioner (Appeals) allowed it partially. The Tribunal dismissed the appeals
filed by the assessee and allowed the appeals filed by the Revenue.

 

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

 

‘i)    The A.O. while rejecting the assessee’s
contention had not disbelieved any of the documents submitted by the assessee.
The payments effected in cash were sought to be substantiated by the assessee
by producing vouchers. Due credence should be given to the memorandum of
settlement dated 2nd August, 2012 recorded in the presence of the
Labour Officer. The settlement could not have been brushed aside. The register
of wages of persons employed was a statutory form under the Payment of Wages
Act and there was a presumption to its validity. The bulk of the materials
produced by the assessee before the A.O. could not have been rejected.

ii)    The A.O., going merely by the statements of
a few employees, could not have disbelieved statutory registers and forms as
there was a presumption to their validity and the onus was on the person who
disputed their validity or genuineness to prove that the documents were bogus.

 

iii)   The Tribunal ought not to have interfered
with the relief granted by the Commissioner (Appeals) and the Commissioner
(Appeals) ought to have interfered with the orders passed by the A.O. in their
entirety and not restricted the same to a partial relief.’

Settlement of cases – Section 245D – Powers of Settlement Commission – Difference between sub-sections (2C) and (4) of section 245D – Procedure under sub-section (2C) summary – Issues raised in application for settlement, requiring adjudication – Application cannot be rejected under sub-section (2C) of section 245D

23. Dy.
CIT (International Taxation) vs. Hitachi Power Europe GMBH [2020] 428 ITR 208 (Mad.) Date of order: 4th September,
2020 A.Ys.: 2015-16 to 2018-19

 

Settlement of cases – Section 245D – Powers
of Settlement Commission – Difference between sub-sections (2C) and (4) of
section 245D – Procedure under sub-section (2C) summary – Issues raised in
application for settlement, requiring adjudication – Application cannot be
rejected under sub-section (2C) of section 245D

 

An application for
settlement of the case was rejected u/s 245D(2C). On a writ petition
challenging the order, a Single Judge Bench of the Madras High Court set aside
the rejection order. On appeal by the Revenue, the Division Bench upheld the
decision of the Single Judge Bench and held as under:

 

‘i)    It is important to take note of the
legislative intent and scope of power vested with the Settlement Commission
under sub-section (2C) and sub-section (4) of section 245D. The power to be
exercised by the Commission under sub-section (2C) of section 245D is within a
period of fifteen days from the date of receipt of the report of the
Commissioner. The marked distinction with regard to the exercise of power of
the Settlement Commission at the sub-section (2C) stage and sub-section (4)
stage is amply clear from the wording in the statute. The Commission can
declare an application to be invalid at the sub-section (2C) stage. Such
invalidation cannot be by a long-drawn reasoning akin to a decision to be taken
at the stage of section 245D(4). This is so because sub-section (4) of section
245D gives ample power to the Commission to examine the records, the report of
the Commissioner received under sub-section (2B) or sub-section (3) or the
provisions of sub-section (1), as they stood immediately before their
amendments by the Finance Act, 2007. However, if on the material the Settlement
Commission arrived at a conclusion prima facie that there was no true
and full disclosure, it had the right to declare the application invalid.

 

ii)    There were four issues which the assessee
wanted settled by the Commission; the first among the issues was with regard to
the income earned from offshore supply of goods. The Commission was largely
guided by the report of the Commissioner, who reported that the composite
contracts for offshore and onshore services were artificially bifurcated. The
Settlement Commission held that the contention of the assessee that it was
separate and that this was done by the NTPC was held to be not fully true. In
other words, the Settlement Commission had accepted the fact that the contracts
were bifurcated by the NTPC, the entity which invited the tender, but the
Commission stated that the bifurcation done by the NTPC was only for financial
reasons.

 

iii)   The question was whether such a finding could
lead to an application being declared as invalid u/s 245D(2C) on the ground
that the assessee had failed to make full and true disclosure of income. This
issue could not have been decided without adjudication. In order to decide
whether a contract was a composite contract or separate contracts, a deeper
probe into the factual scenario as well as the legal position was required. If
such was the fact situation in the case on hand, the application of the
assessee could not have been declared invalid on account of failure to fully
and truly disclose its income. Thus, what was required to be done by the
Commission was to allow the application to be proceeded with u/s 245D(2C) and
take up the matter for consideration u/s 245D(4) and take a decision after
adjudicating the claim.

 

iv)   The issues which were
requested to be settled by the assessee before the Commission, qua the
report of the Commissioner, could not obviously be an issue for a prima
facie decision at the sub-section (2C) stage. The rejection of the
application for settlement of case was not justified.

 

v)   Decision of the Single Judge Bench affirmed.

 

Revision – Condition precedent – Sections 54F, 263 – Assessment order should be erroneous and prejudicial to Revenue – Capital gains – Exemption u/s 54F – Assessee purchasing three units in same building out of consideration received on account of joint development – A.O. allowing exemption taking one of plausible views based on inquiry of claim and law prevalent – Revision to withdraw exemption – Tribunal holding Commissioner failed to record finding that order of assessment erroneous and prejudicial to Revenue – Tribunal order not erroneous

22. Principal CIT vs. Minal Nayan Shah [2020] 428 ITR 23 (Guj.) Date of order: 1st September,
2020 A.Y.: 2014-15

 

Revision – Condition precedent – Sections
54F, 263 – Assessment order should be erroneous and prejudicial to Revenue –
Capital gains – Exemption u/s 54F – Assessee purchasing three units in same
building out of consideration received on account of joint development – A.O.
allowing exemption taking one of plausible views based on inquiry of claim and
law prevalent – Revision to withdraw exemption – Tribunal holding Commissioner
failed to record finding that order of assessment erroneous and prejudicial to
Revenue – Tribunal order not erroneous

 

The assessee, with
the co-owner of a piece of land, entered into a development agreement and
received consideration for the land. The assessee disclosed long-term capital
gains and claimed exemption under sections 54F and 54EC. The return filed by
the assessee was accepted and an order u/s 143(3) was passed. Thereafter, the
Principal Commissioner in proceedings u/s 263 found that the assessee had
purchased the entire block of the residential project which comprised three
independent units on different floors with different entrances and kitchens,
and directed the A.O. to pass a fresh order in respect of the claim of the
assessee u/s 54F.

 

The Tribunal found
that the three units were located on different floors of the same structure and
were purchased by the assessee by a common deed of conveyance. The Tribunal
held that the two prerequisites that the order was erroneous and prejudicial to
the interests of the Revenue, that an erroneous order did not necessarily mean
an order with which the Principal Commissioner was unable to agree when there
were two plausible views on the issue and one legally plausible view was
adopted by the A.O. The Tribunal quashed the revision order passed by the
Principal Commissioner u/s 263.

 

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

 

‘i)    It is an essential condition for the
exercise of power u/s 263 that the Commissioner must find an error in the
assessment order of the A.O. prejudicial to the interests of the Revenue and
the conclusion of the Commissioner that the order is erroneous and prejudicial
to the Revenue must be based on materials and contentions raised by the
assessee on an opportunity of hearing being afforded to the assessee.

 

ii)    On the facts the order of the Tribunal
quashing the revisional order passed by the Principal Commissioner u/s 263 was
not erroneous. The findings of facts recorded by the Tribunal was that one of
the requisite conditions for the exercise of power u/s 263 the Commissioner
should consider the assessment order to be erroneous and prejudicial to the interests
of the Revenue was not satisfied and in arriving at such conclusion the
Tribunal had assigned cogent reasons. No question of law arose.’

Reassessment – Death of assessee – Validity of notice of reassessment – Sections 147, 148, 159, 292BB – Notice issued to deceased person is not valid – Not a defect curable by section 292BB – Representative assessee – Legal representative – Scope of section 159 – No legal requirement that legal representatives should report death of assessee to income-tax department

21. Savita Kapila vs. ACIT [2020] 426 ITR 502 (Del.) Date of order: 16th July, 2020 A.Y.: 2012-13

 

Reassessment – Death of assessee – Validity
of notice of reassessment – Sections 147, 148, 159, 292BB – Notice issued to
deceased person is not valid – Not a defect curable by section 292BB –
Representative assessee – Legal representative – Scope of section 159 – No
legal requirement that legal representatives should report death of assessee to
income-tax department

 

The assessee,
‘MPK’, expired on 21st December, 2018. A notice dated 31st
March, 2019 u/s 148 was issued in his name. The notice could not be served on
‘MPK’. Nor was it served on his legal representatives. An assessment order was
passed in the name of one of his legal representatives on 27th
December, 2019.

 

The Delhi High
Court allowed the writ petition filed by the legal representative to challenge
the notice and the order and held as under:

 

‘i)    The issuance of a notice u/s 148 is the
foundation for reopening of an assessment. Consequently, the sine qua
non for acquiring jurisdiction to reopen an assessment is that such notice
should be issued in the name of the correct person. This requirement of issuing
notice to the correct person and not to a dead person is not merely a
procedural requirement but a condition precedent to the notice being valid in
law.

 

ii)    Section 159 applies to a situation where
proceedings are initiated or are pending against the assessee when he is alive,
and after his death the legal representative steps into the shoes of the
deceased-assessee. There is no statutory requirement imposing an obligation
upon the legal heirs to intimate the death of the assessee.

 

iii)   Issuance of notice upon a dead person and
non-service of notice does not come under the ambit of mistake, defect or
omission. Consequently, section 292B does not apply. Section 292BB is
applicable to an assessee and not to the legal representatives.

 

iv)   The notice dated 31st March, 2019
u/s 148 was issued to the deceased-assessee after the date of his death, 21st
December, 2018, and thus inevitably the notice could never have been served
upon him. Consequently, the jurisdictional requirement u/s 148 of service of
notice was not fulfilled.

 

v)   No notice u/s 148 was ever issued to the
petitioner during the period of limitation and proceedings were transferred to
the permanent account number of the petitioner, who happened to be one of the
four legal heirs of the deceased-assessee by letter dated 27th
December, 2019. Therefore, the assumption of jurisdiction qua the
petitioner for the relevant assessment year was beyond the period prescribed
and, consequently, the proceedings against the petitioner were barred by
limitation in accordance with section 149(1)(b)’.

 

Offences and prosecution – Wilful attempt to evade tax – Section 276C(2) – Delay in payment of tax – Admission of liability in return and subsequent payment of tax – Criminal proceedings quashed

20. Bejan
Singh Eye Hospital Pvt. Ltd. vs. I.T. Department [2020] 428 ITR 206 (Mad.) Date of order: 12th March, 2020 A.Ys.: 2012-13 to 2015-16

 

Offences and prosecution – Wilful attempt
to evade tax – Section 276C(2) – Delay in payment of tax – Admission of
liability in return and subsequent payment of tax – Criminal proceedings
quashed

 

The assessees filed
their returns of income in time for the A.Ys. 2012-13 to 2015-16 and admitted
their liability. There was delay in remittance of the tax for which they were
prosecuted u/s 276C(2) on the ground of wilful evasion of tax.

 

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

 

‘The assessees had
since cleared the dues and as on date no tax dues were payable in respect of
the years in question. Inasmuch as the liability had been admitted in the
counter-affidavit and inasmuch as the tax had been subsequently paid,
continuance of the criminal prosecution would only amount to an abuse of legal
process. The criminal proceedings were to be quashed.’