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

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.’

Offences and prosecution – Wilful attempt to evade tax – Sections 132, 153A, 276C(2), 276CC – Ingredients of offence – Failure to furnish returns and pay self-assessment tax as required in notice – Delayed payment of tax pursuant to coercive steps cannot be construed as an attempt to evade tax – Only act closely connected with intended crime can be construed as an act in attempt of intended offence – Presumption would not establish ingredients of offence – Prosecution quashed

19. Vyalikaval House Building Co-operative
Society Ltd. vs. IT Department [2020] 428 ITR 89 (Kar.) Date of order: 14th June, 2019 A.Ys.: 2010-11 & 2011-12

 

Offences and prosecution – Wilful attempt
to evade tax – Sections 132, 153A, 276C(2), 276CC – Ingredients of offence –
Failure to furnish returns and pay self-assessment tax as required in notice –
Delayed payment of tax pursuant to coercive steps cannot be construed as an
attempt to evade tax – Only act closely connected with intended crime can be
construed as an act in attempt of intended offence – Presumption would not
establish ingredients of offence – Prosecution quashed

 

The assessee, a co-operative society, did not comply with the notice issued
u/s 153A by the A.O. to file returns of income for the A.Ys. 2006-07 to
2011-12. Thereafter, the A.O. issued a notice for prosecution u/s 276CC. The
assessee filed returns of income for the A.Ys. 2010-11 and 2011-12 but failed
to pay the self-assessment tax along with the returns u/s 140A. In the
meanwhile, the property owned by the assessee was attached u/s 281B but the
attachment was lifted on condition that the sale proceeds of the attached
property would be directly remitted to the Department. The assessee issued a
cheque towards self-assessment tax due for the A.Ys. 2010-11 and 2011-12 with
instructions at the back of the cheque that the ‘cheque to be presented at the
time of registration of the property’ but the cheque was not encashed. The Department
initiated criminal prosecution u/s 276C(2) against the assessee, its secretary
and ex-vice-president on the ground of wilful and deliberate attempt to evade
tax.

 

The assessee filed
petitions u/s 482 of the Code of Criminal Procedure, 1973 challenging the
criminal action. The Karnataka High Court allowed the petition and held as
under:

 

‘i)    The gist of the offence u/s 276C(2) is the
wilful attempt to evade any tax, penalty or interest chargeable or imposable
under the Act. What is made punishable under this section is an “attempt to
evade tax, penalty or interest” and not the actual evasion of tax. “Attempt” is
nowhere defined in the Act or in the Indian Penal Code, 1860. In legal echelons
“attempt” is understood as a “movement towards the commission of the intended
crime”. It is doing “something in the direction of commission of offence”.
Therefore, in order to render the accused guilty of “attempt to evade tax” it
must be shown that he has done some positive act with an intention to evade
tax.

 

ii)    The conduct of the assessee in making the
payments in terms of the returns filed, though delayed and after coercive steps
were taken by the Department, did not lead to the inference that the payments
were made in an attempt to evade tax. The delayed payments, under the
provisions of the Act, might call for imposition of penalty or interest, but
could not be construed as an attempt to evade tax so as to entail prosecution
u/s 276C(2).

 

iii)   Even if the only circumstance relied on by
the Department in support of the charge levelled against the assessee, its
secretary and ex-vice-president, that though the assessee had filed its
returns, it had failed to pay the self-assessment tax along with the returns
was accepted as true, it did not constitute an offence u/s 276C(2). Therefore,
the prosecution initiated against the assessee, its secretary and
ex-vice-president was illegal and amounted to abuse of process of court and was
to be quashed.

 

iv)   The act of filing the returns was not
connected with evasion of tax and by itself could not be construed as an
attempt to evade tax. Rather, the filing of returns suggested that the assessee
had voluntarily declared its intention to pay the tax. It was only an act which
was closely connected with the intended crime that could be construed as an act
in attempt of the intended offence.’

 

Company – Book profits – Capital gains – Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of section 115JB – Indexed cost of acquisition to be taken into account in calculating capital gains

18. Best Trading and Agencies Ltd. vs. Dy.
CIT [2020] 428 ITR 52 (Kar.) Date of order: 26th August, 2020 A.Ys.: 2005-06 & 2006-07

 

Company – Book profits – Capital gains –
Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of
section 115JB – Indexed cost of acquisition to be taken into account in
calculating capital gains

 

The assessee
company was utilised as a special purpose vehicle (SPV) for restructuring of
‘K’. Under an arrangement approved by the court, the surplus on
non-manufacturing and liquid assets including real estate had been transferred
to the SPV for disbursement of the liabilities. In the relevant years the A.O.
invoked the provisions of section 115JB and assessed the assessee on book
profits without giving the benefit of indexation on the cost of the capital
asset sold during the year.

 

The Tribunal upheld
the order of the A.O.

 

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

 

‘i)    Section 115JB deals with computation of book
profits of companies. By virtue of sub-section (5) of section 115JB, the
application of other provisions of the Act is open, except if specifically
barred by the section itself. The indexed cost of acquisition is a claim
allowed by section 48 to arrive at the income taxable as capital gains. The
difference between the sale consideration and the indexed cost of acquisition represents
the actual cost of the assessee, which is taxable u/s 45 at the rates provided
u/s 112. There is no provision in the Act to prevent the assessee from claiming
the indexed cost of acquisition on the sale of the asset in a case where the
assessee is subjected to section 115JB.

 

ii)    Since the indexed cost of acquisition was
subjected to tax under a specific provision, viz., section 112, the provisions
of section 115JB which is a general provision, could not be made applicable to
the case of the assessee. Also, considering the profits on sale of land without
giving the benefit of indexed cost of acquisition results in taxing the income
other than actual or real income. In other words, a mere book-keeping entry
cannot be treated as income. The assessee had to be given the benefit of
indexed cost of acquisition.’

Capital gains – Assessability – Slump sale – Section 2(42C) – Assets transferred to subsidiary company in accordance with scheme u/s 394 of the Companies Act – Assessee allotted shares – Scheme approved by High Court – No slump sale for purposes of capital gains tax

17. Areva T&D India Ltd. vs. CIT [2020] 428 ITR 1 (Mad.) Date of order: 8th September,
2020 A.Y.: 2006-07

 

Capital gains – Assessability – Slump sale
– Section 2(42C) – Assets transferred to subsidiary company in accordance with
scheme u/s 394 of the Companies Act – Assessee allotted shares – Scheme
approved by High Court – No slump sale for purposes of capital gains tax

 

The assessee filed
its return for the A.Y. 2006-07. During the course of scrutiny assessment, a
questionnaire was issued to the assessee calling for certain clarifications.
The assessee stated that it had transferred its non-transmission and
distribution business to its subsidiary company. The assessee further stated
that the transfer of the non-transmission and distribution business was by way
of a scheme of arrangement under sections 391 and 394 of the Companies Act,
1956 and could not be considered a ‘sale of business’ and that any transfer of
an undertaking otherwise than as a result of a sale would not qualify as a
slump sale and thus, the provisions of section 50B could not be applied to its
case. The A.O. held that the assessee had agreed that the transfer of the non-transmission
and distribution business to its subsidiary was a transfer in terms of the
provisions of section 50B and that the assessee had approached the relevant
bond-issuing authorities for the purpose of section 54EC in order to claim
deduction on it. Thus, the A.O. concluded that the assessee itself having
agreed that the transfer fell under the provisions of section 50B, the claim of
the assessee that it should not be regarded as transfer could not be accepted.

 

This was confirmed
by the Commissioner (Appeals) and the Tribunal.

 

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

 

‘i)    The fundamental legal principle is that
there is no estoppel in taxation law. An alternative plea can be raised
and it can even be a plea which is contradictory to the earlier plea.

 

ii)    Section 2(42C) defines the
expression “slump sale” to mean the transfer of one or more undertakings as a
result of sale for a lump sum consideration without values being assigned to
the individual assets and liabilities in such sale. Admittedly, the word “sale”
is not defined under the Act. Therefore, necessarily one has to rely upon the
definitions in the other statutes which define the word “sale”. Section 54 of
the Transfer of Property Act, 1882 defines the word “sale” to mean a transfer
of ownership in exchange for a price paid or promised or part paid and part
promised. The word “price” is not defined either under the Income-tax Act, 1961
or under the Transfer of Property Act, 1882, but is defined u/s 2(10) of the
Sale of Goods Act, 1930 to mean money consideration for the sale of goods.
Therefore, to bring the transaction within the definition of section 2(42C) as
a slump sale there should be a transfer of an undertaking as a result of the
sale for lump sum consideration. The sale should be by way of transfer of
ownership in exchange for a price paid or promised or part paid and part
promised and the price should be money consideration. If no monetary
consideration is involved in the transaction, it would not be possible for the
Revenue to bring the transaction done by the assessee within the definition of
the term “slump sale” as defined u/s 2(42C). Section 118 of the Transfer of
Property Act, 1882 defines the term “exchange” by stating that when two persons
mutually transfer the ownership of one thing for the ownership of another,
neither thing nor both things being money only, the transaction is called an
“exchange”.

iii)   The assessee was non-suited primarily on the
ground that it had accepted the transfer to be a sale falling within the
provisions of section 50B and approached the bond-issuing authorities for
investment in certain bonds in terms of section 54EC to avoid payment of
capital gains tax. The A.O., the Commissioner (Appeals) and the Tribunal had committed
a fundamental error in shutting out the contention raised by the assessee
solely on the ground that the assessee approached the bond-issuing authorities
for availing of the benefit u/s 54EC. In the assessee’s case, all the relevant
facts were available even before the A.O. while the scrutiny assessment was in
progress. Therefore, there was no estoppel on the part of the assessee
to pursue its claim.

 

iv)   The Tribunal had committed a factual mistake
in referring to a valuation report not concerning the transaction, which was
the subject matter of assessment. The explanation given by the assessee was
satisfactory because the net asset value of the non-transmission and
distribution business was determined at Rs. 31.30 crores as on 31st
December, 2005. But the parties agreed to have a joint valuation by using a
combination of three methods, namely, (a) price earnings capitalisation, (b)
net assets, and (c) market values reflected in actual dealings on the stock
exchanges during the relevant period. After following such a procedure, the
fair value was computed at Rs. 41.3 crores and this had been clearly set down
in the statement filed u/s 393 of the Companies Act before the High Court. In
the scheme of arrangement there was no monetary consideration, which was passed
on from the transferee-company to the assessee but there was only allotment of
shares. There was no suggestion on behalf of the Revenue of bad faith on the
part of the assessee-company nor was it alleged that a particular form of the
transaction was adopted as a cloak to conceal a different transaction. The mere
use of the expression “consideration for transfer” was not sufficient to
describe the transaction as a sale. The transfer, pursuant to approval of a
scheme of arrangement, was not a contractual transfer, but a statutorily
approved transfer and could not be brought within the definition of the word
“sale”.’

 

Capital gains – Exemption u/s 54(1) – Sale of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a residential house’ in section 54(1) – Includes the plural – Purchase of two residential properties – Assessee entitled to benefit of exemption – Amendment substituting ‘a’ by ‘one’ – Applies prospectively

16. Arun K. Thiagarajan vs. CIT(A) [2020] 427 ITR 190 (Kar.) Date of order: 18th June, 2020 A.Y.: 2003-04

 

Capital gains – Exemption u/s 54(1) – Sale
of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a
residential house’ in section 54(1) – Includes the plural – Purchase of two
residential properties – Assessee entitled to benefit of exemption – Amendment
substituting ‘a’ by ‘one’ – Applies prospectively

 

For the A.Y.
2003-04, the assessee declared long-term capital gains from sale of a house
property. Against this, the assessee had claimed deduction u/s 54 in respect of
two house properties purchased in different locations. The A.O. restricted the
deduction to acquisition of one residential building and accordingly allowed
deduction in respect of the higher value of investment in respect of such
property.

 

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)    To give a definite meaning to the expression
“a residential house”, the provisions of section 54(1) were amended with effect
from 25th April, 2015 by substituting the word “a residential house”
with the word “one residential house”. The amendment specifically applied only
prospectively with effect from the A.Y. 2015-16. The subsequent amendment of
section 54(1) fortifies the need felt by the Legislature to give a definite
meaning to the expression “a residential house”, which was interpreted as
plural by various courts taking into account the context in which the
expression was used.

ii)    The assessee was entitled to the benefit of
exemption u/s 54(1). The courts had interpreted the expression “a residential
house” and the interpretation that it included the plural was binding.

 

iii)   The substantial question of law framed by
this court is answered in favour of the assessee and against the Revenue. In
the result, the orders passed by the A.O., the Commissioner of Income-tax
(Appeals) and the Income-tax Appellate Tribunal insofar as they deprive the
assessee of the benefit of exemption u/s 54(1) are hereby quashed and the
assessee is held entitled to benefit of exemption u/s 54(1).’

Settlement Commission – Section 245C – Settlement of cases – Condition precedent – Full and true disclosure of undisclosed income – Income offered in application for settlement – Additional income offered during proceedings before Settlement Commission – No new source of income – Offer in order to avoid controversy – Acceptance of offer and passing of order by Settlement Commission – Justified

15. Principal CIT vs.
Shankarlal Nebhumal Uttamchandani [2020] 425 ITR 235 (Guj) Date of order: 7th January,
2020 A.Ys.: 2012-13 to 2016-17

 

Settlement
Commission – Section 245C – Settlement of cases – Condition precedent – Full
and true disclosure of undisclosed income – Income offered in application for
settlement – Additional income offered during proceedings before Settlement
Commission – No new source of income – Offer in order to avoid controversy –
Acceptance of offer and passing of order by Settlement Commission – Justified

 

The
assessee was carrying on the business of purchase and sale of land and trading
in textile items of art silk clothes. A survey u/s 133A was carried out on 3rd
July, 2015 at the office premises of the assessee. During the course of the
survey operation, various loose documents were found and impounded by the
Department. While assessment proceedings were pending, the assessee filed a
settlement application u/s 245(1) before the Settlement Commission offering
additional income for the A.Ys. 2012-13 to 2016-17. The assessee filed its
statement of facts before the Commission, preparing a statement of sources and
application of unaccounted income to demonstrate that investment, application
and rotation of unaccounted funds was covered by the overall source of
unaccounted funds generated and offered to tax. The assessee disclosed
additional income during the course of the hearing u/s 245D(4) aggregating to
Rs. 12 crores for the five years. The Commission accepted the disclosures made
by the assessee after considering the detailed item-wise explanation submitted
by the assessee and accordingly the case of the assessee was settled on the
terms and conditions stated in the order.

 

The
Department filed a writ petition and challenged the order on the ground that
there was no full and true disclosure of undisclosed income. The Gujarat High
Court dismissed the writ petition and held as under:

 

‘i)  The disclosure made during the course of the
proceedings before the Commission was not a new disclosure. The Settlement
Commission was right in considering the revised offer made by the assessee
during the course of the proceedings in the spirit of settlement.

 

ii)  On a perusal of the order passed by the
Commission, it was apparent that the application submitted by the assessee had
been dealt with in accordance with the provisions of sections 245C and 245D of
the Act. The Commission had observed the procedure while exercising powers u/s
245D(4) by examining thoroughly the report submitted by the Department under
rule 9 of the Income-tax Settlement Commission (Procedure) Rules, 1997. The
Commission had also provided proper opportunity of hearing to the respective
parties and therefore the amount which had been determined by the Commission
was just and proper.

 

iii)         The Commission was right in considering the revised offer
made by the respondent during the course of the proceedings in the nature of
spirit of settlement. We are therefore of the opinion that the order passed by
the Commission does not call for any interference.’

Securities Transaction Tax Act, 2004 – Stock exchange – Duty only to ensure tax collected, determined in accordance with Act and Rules and that amount collected deposited with Central Government – Stock exchange cannot collect securities transaction tax beyond client code – Addition to income of stock exchange on the ground that higher securities transaction tax ought to have been collected – Not justified

14. Principal CIT vs. National Stock Exchange [2020]
425 ITR 588 (Bom) Date
of order: 3rd February, 2020 A.Ys.: 2006-07

 

Securities
Transaction Tax Act, 2004 – Stock exchange – Duty only to ensure tax collected,
determined in accordance with Act and Rules and that amount collected deposited
with Central Government – Stock exchange cannot collect securities transaction
tax beyond client code – Addition to income of stock exchange on the ground
that higher securities transaction tax ought to have been collected – Not
justified

 

The
assessee is the National Stock Exchange of India Limited. For the A.Y. 2006-07,
the A.O. was of the view that there was a discrepancy between the total amount
of securities transaction tax collected by at least nine brokers from their foreign institutional investors and the amount of securities
transaction tax collected by the assessee. After considering the response of
the assessee, the A.O. passed an assessment order raising securities
transaction tax collectible by the assessee by an additional amount of Rs. 5 crores
over and above the securities transaction tax collected and deposited by the
assessee during the year under consideration. Penalty proceedings were also
initiated.

 

The
Tribunal deleted the addition made on this count as modified by the first
appellate authority, holding that the assessee had not committed any default
and that under the statute the assessee was not liable for any alleged short
deduction of securities transaction tax. Consequently, the levy of interest and
penalty were also deleted.

 

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

 

‘i)  Chapter VII of the Finance (No. 2) Act, 2004
deals with securities transaction tax. Securities transaction tax is charged at
a specified rate in accordance with section 98. Securities transaction tax is
payable either by the purchaser or by the seller and not by the stock exchange.
The value of taxable securities transaction has to be determined in accordance
with section 99 and the proviso
thereto. Rule 3 of the Securities Transaction Tax Rules, 2004, including the
Explanation thereto, have been notified prescribing how the value of the
securities transaction tax is to be determined.

 

ii)  The responsibility of the stock exchange is to
ensure firstly that securities transaction tax is collected as per section 98;
secondly, that it has been determined in accordance with section 99 read with
rule 3 and Explanation thereto; and lastly, such securities transaction tax
collected from the purchaser or seller is credited to the Central Government as
provided u/s 100. The stock exchange can only ensure determination of the value
of the taxable securities transaction of purchase and sale through a client
code at the prescribed rate. However, there is no mechanism provided enabling
the stock exchange to collect securities transaction tax beyond the client
code.

 

iii)  The Securities and Exchange Board of India
issued a circular to the stock exchanges for using two client codes, one for
sale and the other for purchase in respect of investors such as foreign
institutional investors whose transactions are to be settled through delivery
mode pursuant to which the stock exchange had issued a circular dated 30th
September, 2004 to its member brokers to use the two client codes. If a broker
had not taken any separate client code the stock exchange cannot be held
responsible. Such failure cannot be ascribed to the stock exchange because the
client codes are not provided by the stock exchange but by the member brokers.

 

iv) The Tribunal had returned a finding of fact
that the securities transaction tax collected by the assessee was through and
under the client codes of the member brokers and the collected securities
transaction tax had been credited into the account of the Central Government.
Hence the deletion of the addition and the consequent interest and penalty were
justified.’

Recovery of tax – Section 179 – Attachment and sale of property – Properties settled on trust for grandchildren by ‘S’ – Recovery proceedings against son of ‘S’ u/s 179 – Properties settled on trust cannot be attached

13. Rajesh T. Shah vs. TRO [2020]
425 ITR 443 (Bom) Date
of order: 13th March, 2020 A.Ys.: 1988-89 to 1990-91

 

Recovery
of tax – Section 179 – Attachment and sale of property – Properties settled on
trust for grandchildren by ‘S’ – Recovery proceedings against son of ‘S’ u/s
179 – Properties settled on trust cannot be attached

 

One ‘S’
during her lifetime settled a private family trust under a trust deed dated 10th
April, 1978 for the benefit of her grandchildren. By a deed of will dated 5th
March, 1985, ‘S’ bequeathed all her properties in favour of the trust. ‘S’
expired on 26th August, 1991. The petitioner ‘H’, who was one of the
trustees, in the year 1986 joined the assessee company as a Managing Director
and resigned from the company in the year 1993. In 1990, the Department carried
out a survey action in the case of the company. Orders of assessment were
passed for the A.Ys. 1988-89, 1989-90 and 1990-91. The liability of the M.D.
was quantified. For realisation of the liability, by separate attachment
orders, the Tax Recovery Officer attached three properties belonging to the
trust on the premise that the three properties belonged to the petitioner in
his individual capacity.

 

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

 

‘i) The
properties belonged to the trust which was settled by will by ‘S’ before
initiation of recovery proceedings by the Revenue against the petitioner. The
properties did not belong to the petitioner in his individual capacity or his
legal heirs or representatives. The trust had been formed in the year 1978 and
the will of ‘S’ was made in 1985, much before initiation of recovery proceedings.
There was no question of the properties being diverted to the trust to evade
payment of due tax.

 

ii) That being the
position, we set aside and quash the attachment orders.’

Non-resident – Taxability in India – Article 5(1) of DTAA between Mauritius and India – Meaning of ‘permanent establishment’ – Company in Mauritius engaged in telecasting sports events – Agreement with Indian company for exhibition of telecasts in India – Finding that agreement was on principal-to-principal basis – Indian company did not constitute permanent establishment of foreign company – Income earned not assessable in India

12. CIT (International Taxation) vs. Taj TV Ltd. [2020]
425 ITR 141 (Bom) Date
of order: 6th February, 2020 A.Ys.: 2004-05 and 2005-06

 

Non-resident
– Taxability in India – Article 5(1) of DTAA between Mauritius and India –
Meaning of ‘permanent establishment’ – Company in Mauritius engaged in telecasting
sports events – Agreement with Indian company for exhibition of telecasts in
India – Finding that agreement was on principal-to-principal basis – Indian
company did not constitute permanent establishment of foreign company – Income
earned not assessable in India

 

The assessee was a company
registered in Mauritius and was a tax resident of that country. The assessee
was engaged in telecasting a sports channel. The assessee had appointed ‘T’ as
its distributor to distribute the channel to cable systems for exhibition to
subscribers in India. In this connection, an agreement dated 1st
March, 2002 was entered into between the assessee and ‘T’. The A.O. held that
the income earned in terms of the agreement was assessable in India.

 

The Commissioner (Appeals)
found that ‘T’ was not acting as an agent of the assessee but had obtained the
right of distribution of the channel for itself and, subsequently, had entered
into contracts with other parties in its own name in which the assessee was not
a party, that the distribution of the revenue between the assessee and ‘T’ was
in the ratio of 60:40 and the entire relationship was on principal–to-principal
basis. The Commissioner (Appeals) reversed the order of the A.O. The Tribunal
noted that this finding of the first appellate authority was corroborated by
the terms and conditions of the distribution agreement as well as the
sub-distributor agreement. The Tribunal held that none of the conditions as
stipulated in article 5(4) of the Double Taxation Avoidance Agreement was
applicable to constitute agency permanent establishment, because ‘T’ was acting
independently qua its
distribution rights and the entire agreement was on principal-to-principal
basis. Therefore, it held that the distribution income earned by the assessee
could not be taxed in India because ‘T’ did not constitute an agency permanent
establishment under the terms of article 5(4) of the DTAA.

 

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

 

‘i)  Article 5 of the Double Taxation Avoidance
Agreement  entered into between India and
Mauritius defines “permanent establishment”. The sum and substance of paragraph
(4) of Article 5 is that a person acting in a Contracting State on behalf of an
enterprise of the other Contracting State shall be deemed to be a permanent
establishment of that enterprise in the first-mentioned Contracting State if he
habitually exercises in the first Contracting State an authority to conclude
contracts in the name of the enterprise and habitually maintains in the first
Contracting State a stock of goods or merchandise belonging to the enterprise
from which he regularly fulfils orders on behalf of the enterprise.

 

ii)  There was a concurrent finding of fact by the
Commissioner (Appeals) and the Tribunal. There was no evidence that the finding
of fact was perverse. Hence the income from distribution earned by the assessee
was not taxable in India.’

 

Cash credits – Section 68 – Assessee entry provider to customers making deposits in cash in lieu of cheques for lower amounts – Cash deposits accounted for in assessment orders of beneficiaries – Restriction of addition to difference between amounts deposited and cheques issued only as commission income as disclosed by assessee – Provisions of section 68 not attracted

11. Principal CIT vs. Alag Securities Pvt. Ltd. [2020]
425 ITR 658 (Bom) Date
of order: 12th June, 2020 A.Y.:
2003-04

 

Cash credits – Section 68 – Assessee entry
provider to customers making deposits in cash in lieu of cheques for lower amounts – Cash deposits accounted for in
assessment orders of beneficiaries – Restriction of addition to difference
between amounts deposited and cheques issued only as commission income as
disclosed by assessee – Provisions of section 68 not attracted

 

The assessee
provided accommodation entries to entry seekers. For the A.Y. 2003-04, the A.O.
held that the identity of the parties involved and the genuineness of the
transactions were not proved by the assessee and added the amount of cash
deposits to the income u/s 68.

 

The Commissioner
(Appeals) held that only 0.15% of the total deposits were to be treated as
income and restricted the addition to 0.15% of the total deposits as commission
in the hands of the assessee. The Tribunal upheld the order passed by the
Commissioner (Appeals) and dismissed the appeal of the Department.

 

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

 

‘i)  The provisions of section 68 would not be
attracted. The assessee had admitted that its business was to provide
accommodation entries. In return for the cash credits it issued cheques to its
customers and beneficiaries for smaller amounts, the balance being its
commission. Moreover, the cash credits had been accounted for in the respective
assessment of the beneficiaries.

 

ii)  Section 68 would be attracted only when any
sum was found credited in the books of the assessee and no explanation was
offered about the nature and source thereof or the explanation offered was not
in the opinion of the A.O. satisfactory. But it had been the consistent stand
of the assessee which had been accepted by the Commissioner (Appeals) and the
Tribunal that the business of the assessee centred around the customers and
beneficiaries who made the deposits in cash amounts and in lieu thereof took cheques from the assessee for amounts slightly lower
than the quantum of deposits, the difference representing the commission
realised by the assessee.

 

iii)  The assessee had never claimed the cash
credits as its income. The cash amounts deposited by the customers, i.e., the
beneficiaries, had been accounted for in the assessment orders of those
beneficiaries. Therefore, the question of adding such cash credits to the
income of the assessee, especially when the assessee was only concerned with
the commission earned on providing accommodation entries, did not arise.

 

iv) On the issue of the percentage of commission,
the Tribunal had already held 0.1% commission in similar types of transactions to be a reasonable percentage of commission and
therefore had accepted the percentage of commission at 0.15% disclosed by the
assessee itself. This finding was a plausible one and the rate of commission
was not arrived at in an arbitrary manner.

 

v)  The order of the Tribunal did not suffer from
any error or infirmity to warrant interference u/s 260A. No question of law
arose.’

Capital gains or business income – Sections 4 and 45 – Non-banking financial institution – Conversion of shares and securities held as stock-in-trade into investment – Sale of shares – No provision at time of transaction for treating income from sale of shares as business income – Income could not be taxed as business income

10. Kemfin Services Pvt. Ltd. vs. ACIT [2020]
425 ITR 684 (Kar.) Date
of order: 11th June, 2020 A.Y.: 2005-06

 

Capital gains or business income – Sections
4 and 45 – Non-banking financial institution – Conversion of shares and
securities held as stock-in-trade into investment – Sale of shares – No
provision at time of transaction for treating income from sale of shares as
business income – Income could not be taxed as business income

 

The assessee was a
non-banking financial corporation engaged in the activity of investment in
shares. The board of the assessee passed a resolution to stop its trading
activities in shares and securities under the portfolio management scheme and
to convert the stock-in-trade into investment on 1st April, 2004.
For the A.Y. 2005-06, the A.O. passed an order u/s 143(3) wherein, inter alia, he held that mere interchange of heads in books of account as
investment or stock-in-trade did not alter the nature of transaction, that the
transactions of the assessee fell within the ambit of business income and not
short-term capital gains and treated the transactions as business income.

 

The Commissioner
(Appeals), inter
alia, held that the shares had to be considered as
stock-in-trade and the income from the sale of shares was to be treated as
business income. The Tribunal, inter alia, held that the
assessee acquired certain shares under the portfolio management scheme and
those shares were treated by the assessee and accepted by the Department as
stock-in-trade for the A.Ys. 2003-04 and 2004-05, that the assessee changed the
character of its asset from stock-in-trade to investments, that a surplus arose
in the course of conversion of those shares and therefore, stock-in-trade was a
business asset and any income that arose on account of stock-in-trade was
business income. It also held that income always arose from an existing source
and not from a potential source and dismissed the appeals filed by the
assessee.

 

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

 

‘i) The assessee had converted stock-in-trade into
investments. Prior to introduction of the Finance Bill, 2018 by which
provisions of the Act had been amended to provide for taxability in cases where
stock-in-trade was converted into capital asset, there was no provision to tax
the transaction. In the absence of any provision in the Act, the transaction in
question could not have been subjected to tax.

 

ii) That statutory
interpretation of a taxing statute has to be strictly construed. The assessee
was not to be taxed without clear words for that purpose and every Act of
Parliament must be read according to the natural construction of its words.

 

iii)  In view of the preceding analysis, the
Tribunal erred in treating the income arising on sale of shares held as capital
asset after conversion from stock-in-trade as business income. The substantial
question of law framed in the appeals is answered in favour of the assessee and
against the Revenue.’

Advance tax – Interest for default in payment of advance tax – Sections 132, 132B, 234B and 234C – Computation of interest – Assessee paying four instalments of advance tax prior to search and seizure and communication sent to adjust advance tax against cash seized during search – Date of communication to be taken as date of payment of advance tax

9. Marble Centre International P. Ltd. vs. ACIT [2020]
425 ITR 654 (Kar.) Date
of order: 11th June, 2020 A.Y.:
2007-08

 

Advance tax – Interest for default in
payment of advance tax – Sections 132, 132B, 234B and 234C – Computation of
interest – Assessee paying four instalments of advance tax prior to search and
seizure and communication sent to adjust advance tax against cash seized during
search – Date of communication to be taken as date of payment of advance tax

 

The assessee was in
the business of trading. A search and seizure action was conducted u/s 132 in
the business premises of the assessee and residential premises of its director
and accountant. During the course of the search, Rs. 4.77 crores in cash was
seized by the Department. Prior to the seizure of the cash, the assessee had
paid advance tax in four instalments on 15th June, 2006, 14th
September, 2006, 14th December, 2006 and 8th March, 2007. The
assessee agreed to disclose Rs. 50 lakhs and stock of Rs. 1.40 crores as
additional income for the A.Y. 2007-08 and sent a communication dated 15th
March, 2007 in which a request was made to treat Rs. 50 lakhs out of the cash
seized as advance tax payable by the assessee for the A.Y. 2007-08. Notices
under sections 142(1) and 143(2) were issued and the assessee furnished the
details called for. An order dated 31st December, 2008 was passed
u/s 143(3). The assessee claimed that the date of the request letter, 15th
March, 2007, should be taken as the date of payment of advance tax of Rs. 50
lakhs out of the seized amount. The claim was not accepted.

 

The Commissioner
(Appeals), inter
alia, held that the assessee was entitled to relief
in respect of the interest from the date of filing of the return till the date
of the order of assessment and partly allowed the appeal. The Tribunal
dismissed the appeal filed by the assessee.

 

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

 

‘i)   The date of payment of tax by the assessee
was 15th March, 2007, i.e., the date on which the request was made
by the assessee to adjust the cash seized against the advance tax payable
towards the tax for the A.Y. 2007-08. The assessee had offered a sum of Rs. 50
lakhs on 15th March, 2007 towards the advance tax payable for the
A.Y. 2007-08. According to the statement of income prior to the seizure of
cash, the assessee had also paid advance tax in four instalments. However, the
Department did not adjust these amounts even though the cash was available with
it. The date of payment of tax shall be taken as 15th March, 2007,
i.e., the date on which the request was made by the assessee to adjust the cash
seized against the advance tax payable for the A.Y. 2007- 08.

 

ii)   In view of the preceding analysis, we hold
that the Tribunal ought to have held the date of payment of tax by the assessee
as 15th March, 2007, i.e., the date on which the request was made by
the assessee to adjust the cash seized against the advance tax payable towards
the tax for the A.Y. 2007-08.’

 

Special deduction u/s 80-IA of ITA, 1961 – Telecommunications services – Computation of profits u/s 80-IA(1) – Change in shareholding of company – Effect of section 79 – Losses which have lapsed cannot be taken into account for purposes of section 80-IA

8. Vodafone Essar
Gujarat Ltd. vs. ACIT [2020] 424 ITR 498
(Guj.) Date of order: 3rd
March, 2020 A.Ys.: 2005-06 and
2006-07

 

Special deduction u/s 80-IA of ITA, 1961 –
Telecommunications services – Computation of profits u/s 80-IA(1) – Change in
shareholding of company – Effect of section 79 – Losses which have lapsed
cannot be taken into account for purposes of section 80-IA

 

The assessee company, established in
1997-98, was in the business of providing cellular telecommunications services
in the State of Gujarat. During the previous year relevant to the A.Y. 2001-02,
there was a change in the shareholding of the assessee, as a result of which the provisions of section 79 of the IT Act, 1961 were made applicable and the accumulated losses from the A.Ys. 1997-98 to 2001-02 lapsed. The assessee made a claim for
deduction u/s 80IA for the first time for the A.Y. 2005-06. In the return of income, the assessee had shown total income of Rs. 191,59,84,008 and claimed the entire
amount as deduction u/s 80IA(4)(ii) of the Act. According to the A.O., the
quantum of deduction available to the assessee u/s 80IA(4)(ii) was to be
computed in accordance with the provisions of section 80IA(5), without the
application of the provisions of section 79.

 

This was upheld by the Commissioner
(Appeals) and the Tribunal.

 

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

 

‘i)  The application of section 80IA(5) to deny the
effect of provisions of section 79 cannot be sustained. When the loss of
earlier years has already lapsed, it cannot be notionally carried forward and
set off against the profits and gains of the assessee’s business for the year
under consideration in computing the quantum of deduction u/s 80IA(1). The
provisions of section 80IA(5) cannot be invoked to ignore the provisions of
section 79.

 

ii)
The appeals are allowed. The impugned orders passed by the Tribunal in the
respective tax appeals are quashed and set aside. The substantial question is
answered in favour of the assessee and against the Revenue.’

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Officer recording reasons and issuing notice must be the jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued by officer who did not have jurisdiction over assessee – Defect not curable u/s 292B – Notice and consequential proceedings and order invalid

7. Pankajbhai
Jaysukhlal Shah vs. ACIT [2020] 425 ITR 70
(Guj.) Date of order: 9th
April, 2019 A.Y.: 2011-12

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Officer recording reasons and issuing notice must be the
jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued
by officer who did not have jurisdiction over assessee – Defect not curable u/s
292B – Notice and consequential proceedings and order invalid

 

For the A.Y.
2011-12 an order u/s 143(1) of the Income-tax Act, 1961 was passed against the
assessee. Thereafter, a notice dated 29th March, 2018 u/s 148 was issued
to reopen the assessment u/s 147 of the Act. In response to the notice, the assessee submitted that the original return filed by him be
treated as the return filed in response to the notice u/s 148 and requested the
A.O. to supply a copy of the reasons recorded for reopening the assessment. The
assessee participated in the assessment proceedings and raised objections
against the initiation of proceedings u/s 147 on the ground that the assumption
of jurisdiction on the part of the A.O. by issuance of notice u/s 148 was
invalid, contending that the notice was issued by the Income-tax Officer, Ward
No. 2(2), whereas the reasons were recorded by the Deputy Commissioner of
Income-tax, Circle 2. The Department contended that issuance of the notice by
the Income-tax Officer was a procedural lapse which had happened on account of
the mandate of the E-assessment scheme and non-migration of the permanent
account number of the assessee in time and that such defect was covered under
the provisions of section 292B and therefore, the notice issued could not be
said to be invalid.

 

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

 

“i)  While the reasons for reopening the assessment
had been recorded by the jurisdictional A.O., viz., the Deputy Commissioner,
Circle 2, the notice u/s 148(1) had been issued by the Income-tax Officer, Ward
2(2), who had no jurisdiction over the assessee and, hence, such a notice was
bad on the count of having been issued by an Officer who had no authority to
issue such notice.

 

ii)   It was the Officer recording the reasons who
had to issue the notice u/s 148(1), whereas the reasons had been recorded by
the jurisdictional A.O. and the notice had been issued by an Officer who did
not have jurisdiction over the assessee. The notice u/s 148 being a
jurisdictional notice, any inherent defect therein could not be cured u/s 292B.

iii)  It was not possible for the jurisdictional
A.O., viz., the Deputy Commissioner, to issue the notice u/s 148 on or before
31st March, 2018 as migration of the permanent account number was
not possible within that short period and therefore, the Income-tax Officer had
issued the notice instead of the jurisdictional Assessing Officer. Thus there
was an admission on the part of the Department that the Deputy Commissioner,
Circle 2, who had jurisdiction over the assessee had not issued the notice u/s
148 but it was the Income-tax Officer, Ward 2(2) who did not have any
jurisdiction over the assessee who had issued such notice.

 

iv)  No proceedings could have
been taken u/s 147 in pursuance of such invalid notice. The notice u/s 148(1)
and all the proceedings taken pursuant thereto could not be sustained.’

 

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Notice issued in name of dead person – Objection to notice by legal heir and representative – Department intimated about death of assessee in reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction of A.O. in response to notice of reassessment u/s 148 – Provisions of section 292A not attracted – Notice and proceedings invalid

6. Durlabhai
Kanubhai Rajpara vs. ITO [2020] 424 ITR 428
(Guj.) Date of order: 26th
March, 2019 A.Y.: 2011-12

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Notice issued in name of dead person – Objection to notice by
legal heir and representative – Department intimated about death of assessee in
reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction
of A.O. in response to notice of reassessment u/s 148 – Provisions of section
292A not attracted – Notice and proceedings invalid

 

For the A.Y.
2011-12, the A.O. issued a notice in the name of the assessee who was the
father of the petitioner u/s 148 of the Income-tax Act, 1961 dated 28th
March, 2018 to reopen the assessment u/s 147. Even prior to that, the Deputy
Director (Investigation) had issued a witness summons u/s 131(1A) in the name
of the assessee, the father of the petitioner, to personally attend the office
and the notice was served upon the petitioner. The petitioner furnished the
death certificate of his late father before the authority and submitted that he
had expired on 12th June, 2015, therefore, the notice was required
to be withdrawn. Thereafter, the notice in question dated 28th
March, 2018 was issued in the name of the late assessee. The petitioner also
received a notice dated 16th July, 2018 issued u/s 142(1) on 17th
July, 2018. The petitioner filed a reply and submitted that his father had
expired on 12th June, 2015 and a copy of the death certificate was
also annexed. The petitioner also contended in his reply that the fact of the
death of his father was disclosed pursuant to the summons issued by the Deputy
Director (Investigation) u/s 131(1A), that the notice issued u/s 148 was
without any jurisdiction as it was issued against a dead person and prayed that
the proceedings be dropped. The Department rejected the objections.

 

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

 

‘i)  The petitioner at the first point of time had
objected to the issuance of notice u/s 148 in the name of his deceased father
(assessee) and had not participated or filed any return pursuant to the notice.
Therefore, the legal representatives not having waived the requirement of
notice and not having submitted to the jurisdiction of the A.O. pursuant
thereto, the provisions of section 292A would not be attracted and hence the
notice had to be treated as invalid.

 

ii)  Even prior to the issuance of such notice, the
Department was aware about the death of the petitioner’s father (the assessee)
since in response to the summons issued u/s 131(1A) the petitioner had
intimated the Department about the death of the assessee. Therefore, the
Department could not say that it was not aware of the death of the petitioner’s
father (the assessee) and could have belatedly served the notice u/s 159 upon
the legal representatives of the deceased assessee.

 

iii)
The notice dated 28th March, 2018 issued in the name of the deceased
assessee by the A.O. u/s 148 as well as further proceedings thereto were to be
quashed and set aside.’

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Amalgamation of companies – Notice issued against transferor-company – Amalgamating entity ceases to have its own existence and not amenable to reassessment proceedings – Notice and subsequent proceedings unsustainable

5. Gayatri Microns
Ltd. vs. ACIT [2020] 424 ITR 288
(Guj.) Date of order: 24th
December, 2019 A.Y.: 2012-13

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Amalgamation of companies – Notice issued against
transferor-company – Amalgamating entity ceases to have its own existence and
not amenable to reassessment proceedings – Notice and subsequent proceedings
unsustainable

 

In the return for the A.Y. 2015-16, the
assessee company furnished information regarding amalgamation of three
companies GMCL, GISL and GFL with it. In the return, under the heading ‘holding
status’, further details were provided below the column ‘business
organisation’, that is, the status of those three companies which were
amalgamated with it.

 

For the A.Y. 2015-16, the A.O. called for
certain information, and the assessee submitted the details categorically
stating that by virtue of the order passed by the High Court dated 18th
June, 2015, the amalgamation had taken place amongst the three companies. The
Assistant Commissioner issued a notice dated 25th March, 2019 u/s
148 of the Income-tax Act, 1961 for the A.Y. 2012-13 to GISL.

 

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

 

‘i)  The notice issued u/s 148 had been issued to
GISL which had been amalgamated with the assessee by order dated 18th
June, 2015 passed by the court and thus, it had ceased to have its own
existence so as to render it amenable to reassessment proceedings under the
provisions of section 147.

 

ii)  The amalgamation had taken place much prior to
the issuance of the notice dated 25th March, 2019 for reopening the
assessment. Thereafter, the assessee had informed the Assistant Commissioner
about the amalgamation of all the three companies with it with sufficient
details, viz., (i) the passing of the order dated 18th June, 2015 by
the court ; (ii) the communication dated 9th September, 2017
addressed by the assessee to the Income-tax Officer, during the assessment proceedings
for the A.Y. 2015-16 containing the information of amalgamation; and (iii) the
details of amalgamation in the return for the A.Y. 2015-16. Moreover, the
Assistant Commissioner and the Department were duly informed by the assessee
about the amalgamation and despite this a statutory notice u/s 148 (was sent).

 

iii)
The notice for reopening of the assessment being without jurisdiction, was not
sustainable. The notice and all the proceedings taken pursuant thereto were to
be quashed and set aside.’”

Income – Unexplained money – Section 69A of ITA, 1961 – Condition precedent for application of section 69A – There should be evidence that assessee was the owner of the money – Assessee acting as financial broker – Material on record showing amounts passing through his hands – No evidence that amounts belonged to him – Amounts not assessable in his hands u/s 69A

4. CIT vs.
Anoop Jain [2020] 424 ITR 115
(Del.) Date of order: 22nd
August, 2019 A.Y.: 1992-93

 

Income – Unexplained money – Section 69A of
ITA, 1961 – Condition precedent for application of section 69A – There should
be evidence that assessee was the owner of the money – Assessee acting as
financial broker – Material on record showing amounts passing through his hands
– No evidence that amounts belonged to him – Amounts not assessable in his
hands u/s 69A

 

The assessee
was a financial broker. During the course of assessment for the A.Y. 1992-93,
the A.O. found that the assessee had received 13 pay orders aggregating to Rs.
5,17,45,958 from Standard Chartered Bank, Bombay during the financial years in
question, and mostly between December, 1991 and February, 1992. All these pay
orders were utilised by him for purchasing units and shares from different banks
and mutual funds. The explanation offered by the assessee was that all the pay
orders were received from C, a Bombay broker, and the purchase of units and
shares was done by him on behalf of C and these were then sold back to C after
earning normal brokerage. The A.O. found that all 13 pay orders were actually
tainted pay orders relating to the securities scam of 1992 and that they had
been issued by the Standard Chartered Bank under extraordinary circumstances.
The Standard Chartered Bank had informed the Assistant Commissioner, Circle
7(3) that it had been a victim of a massive fraud perpetrated in 1992 by
certain brokers in collusion with some ex-employees of the Bank to siphon out
funds. It was also conveyed that the Standard Chartered Bank had filed a first
information report with the C.B.I. in which ‘JP’, an ex-employee, was named as
one of the accused and the 13 pay orders were part of a total of 15 pay orders
fraudulently issued by ‘JP’. The A.O. did not accept the explanation and added
an amount of Rs. 5,17,45,958 to the income of the assessee u/s 69A of the
Income-tax Act, 1961.

 

The Commissioner (Appeals) noted that
certain assets were found by the C.B.I. in the possession of C, who then
surrendered them to the Bureau. The Commissioner (Appeals) also held that there
was no evidence to show that the money in question was utilised by the
assessee. The Commissioner (Appeals) accordingly deleted the addition. This was
upheld by the Tribunal.

 

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

 

‘i)  The very basis for making the additions was
the inference drawn by the A.O. that the assessee had received pay orders and
spent the monies for purchase of shares and units as a result of some “financial
quid pro quo”. There were certain facts that stood out which showed that
these amounts received by the assessee as pay orders did not belong to him. The
assessee was only a conduit through whom the amounts were floated.

 

ii)  One of the essential conditions in section 69A
of the Act is that the assessee should be the “owner of the money” and it
should not be recorded in his books of account. There was overwhelming evidence
to show the involvement of C acting on behalf of SP for SMI. The C.B.I. also did
not proceed against the assessee and that discounted the case of any collusion
between the assessee and C along with P.

 

iii)
The assessee was at the highest used as a conduit by the other parties and did
not himself substantially gain from these transactions. In that view of the
matter, the concurrent view of both the Commissioner (Appeals) and the Tribunal
that the addition of the sum to the income of the assessee was not warranted
was justified.’

 


Income – Business income or income from house property – Sections 22 and 28 of ITA, 1961 – Company formed with object of developing commercial complexes – Setting up of commercial complex and rendering of services to occupants – Income earned assessable as business income

3. Principal CIT vs. City Centre Mall Nashik Pvt. Ltd. [2020] 424 ITR 85
(Bom.) Date of order: 13th
January, 2020 A.Y.: 2010-11

 

Income – Business income or income from
house property – Sections 22 and 28 of ITA, 1961 – Company formed with object
of developing commercial complexes – Setting up of commercial complex and
rendering of services to occupants – Income earned assessable as business
income

 

The assessee was a private limited company
incorporated with the object of construction and running of commercial and
shopping malls. The assessee set up a commercial complex-cum-shopping mall and
the operations commenced during F.Y. 2009-10. The assessee let out various
shops in this commercial complex dealing with various products.

 

Apart from letting out the premises, the
assessee also provided various services to the occupants such as security
services, housekeeping, maintenance, lighting, repairs to air conditioners,
marketing and promotional activities, advertisement and such other activities.
The premises were let out on leave and licence basis, and the compensation was
based on revenue-sharing basis. For the A.Y. 2010-11, the assessee declared its
income under the head ‘Income from business’. The A.O., however, treated it as
income from house property.

 

The Tribunal held that the income was
assessable as business income.

 

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

 

‘i) The object of
the assessee was clearly to acquire, develop, and let out the commercial
complex. The assessee provided even marketing and promotional activities. The
intention of the assessee was a material circumstance and the objects of
association, and the kind of services rendered, clearly pointed out that the
income was from business.

 

ii)
All the factors cumulatively taken demonstrated that the assessee had intended
to enter into a business of renting out commercial space to interested parties.
The findings rendered by the Tribunal on assessment of the factual position
before it that the income in question had to be treated as business income was
justified.’

Charitable institution – Exemption – Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit – Effect of proviso to section 2(15) – Concurrent finding of appellate authorities that the assessee was charitable institution – Event organised to raise money – Amount earned entitled to exemption

2. CIT (Exemption)
vs. United Way of Baroda [2020] 423 ITR 596
(Guj.) Date of order: 25th
February, 2020 A.Y.: 2014-15

 

Charitable institution – Exemption –
Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit
– Effect of proviso to section 2(15) – Concurrent finding of appellate
authorities that the assessee was charitable institution – Event organised to
raise money – Amount earned entitled to exemption

 

The assessee is a
charitable institution registered u/s 12A of the Act. For the A.Y. 2014-15, the assessee filed its return of income declaring total income as Nil after claiming exemption u/s
11. But the A.O. assessed the total income at Rs. 4,53,97,808. He had found
that the assessee had received a total sum of Rs. 5,48,04,054 which included
Rs. 4,37,61,637 as income from organising the event of garba during the
Navratri festival. According to the A.O., the assessee sold passes and gave
food stalls on rent, etc., which constitutes 79.85% of its total income. The
assessee, during the year, had declared gross receipts of Rs. 5,27,40,432 and
showed surplus of Rs. 26,27,243. The assessee thereby claimed Rs. 4,42,59,665
as income from charitable event. The A.O. held that the activities of the
assessee as per the amended provision of section 2(15) could not be said to be
advancement of any other object of general public utility and, therefore, the
assessee was not eligible to claim the benefit under sections 11 and 12,
respectively, more particularly in view of section 13(8) of the Act. The A.O.,
having regard to the gross receipts of Rs. 5,48,04,054, made the addition of
Rs. 58,90,500 on account of the interest on FSF fund and Rs. 1,67,90,118 on
account of anonymous donation.

 

The Commissioner of
Income-tax (Appeals), allowed the appeal of the assessee, taking the view that
the activities of the assessee could be termed as charitable in nature and the
assessee would be eligible for the benefit under sections 11 and 12. The
Tribunal concurred with the findings of the Commissioner (Appeals) and
dismissed the appeal filed by the Revenue.

 

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

 

‘i) Once the activity of the assessee falls within
the ambit of trade, commerce or business, it no longer remains a charitable
activity and the assessee is not entitled to claim any exemption under sections
11 and 12 of the Income-tax Act, 1961. The expression “trade”, “commerce” and
“business” as occurring in the first proviso to section 2(15) must be
read in the context of the intent and purport of section 2(15) and cannot be
interpreted to mean any activity which is carried on in an organised manner.
The purpose and the dominant object for which an institution carries on its
activities is material to determine whether or not it is business.

 

ii) The object of introducing the first proviso
is to exclude organisations which carry on regular business from the scope of
“charitable purpose”. An activity would be considered “business” if it is
undertaken with a profit motive, but in some cases, this may not be
determinative. Normally, the profit motive test should be satisfied, but in a
given case the activity may be regarded as a business even when the profit
motive cannot be established. In such cases, there should be evidence and
material to show that the activity has continued on sound and recognised
business principles and pursued with reasonable continuity. There should be
facts and other circumstances which justify and show that the activity
undertaken is in fact in the nature of business.

 

iii)  The main object of the
assessee could not be said to be organising the event of garba. The
assessee had been supporting 120 non-government organisations. The assessee was
into health and human services for the purpose of improving the quality of life
in society. All its objects were charitable. The activities like organising the
event of garba, including the sale of tickets and issue of passes, etc.,
cannot be termed as business. The two authorities had taken the view that
profit-making was not the driving force or the objective of the assessee. The
assessee was entitled to exemption under sections 11 and 12.’

 

 

 

Assessment: (i) Effect of electronic proceedings – Possibility of erroneous assessment if transactions and statement of account of assessee not properly understood – A.O. to call for assessee’s explanation in writing to conclude that cash deposits made by assessee post-demonetisation of currency was unusual; (ii) Unexplained money – Sections 69A and 115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly subscriptions / dues – Cash deposits of collection made post-demonetisation of currency by Government – Cash deposits during period in question not in variance with same period during preceding year – Addition of amount as unexplained money – Provisions of section 115BBE cannot be invoked

1. Salem Sree Ramavilas Chit Co. Pvt. Ltd. vs. Dy. CIT [2020] 423 ITR 525
(Mad.) Date of order: 4th
February, 2020 A.Y.: 2017-18

 

Assessment: (i) Effect of electronic
proceedings – Possibility of erroneous assessment if transactions and statement
of account of assessee not properly understood – A.O. to call for assessee’s
explanation in writing to conclude that cash deposits made by assessee post-demonetisation
of currency was unusual;

(ii) Unexplained money – Sections 69A and
115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly
subscriptions / dues – Cash deposits of collection made post-demonetisation of
currency by Government – Cash deposits during period in question not in
variance with same period during preceding year – Addition of amount as
unexplained money – Provisions of section 115BBE cannot be invoked

 

The assessee was in
the chit fund business. For the A.Y. 2017-18, the A.O. added the amounts
received and deposited by it during the period between 9th November,
2016 and 31st December, 2016, post-demonetisation of Rs. 500 and Rs.
1,000 notes by the Government on 8th November, 2016 to the income of
the assessee. The order stated that the assessee did not properly explain the
source and the purpose of cash along with party-wise break-up as required in
the notice issued u/s 142(1) of the Income-tax Act, 1961.

 

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

 

‘i) The order making the assessee liable to tax at the maximum marginal
rate of tax by invoking section 115BBE was misplaced. The assessee had prima
facie demonstrated that the assessment proceedings had resulted in
distorted conclusion on the facts that the amount collected by it during the
period was huge and remained unexplained and therefore the amount was liable to
be treated as unaccounted money in the hands of the assessee u/s 69A. The
closing cash on hand during the preceding months of the same year was not at
much variance with the closing cash on hand as on 31st October,
2016. The demonetisation of Rs. 500 and Rs. 1,000 notes by the Government was
on 8th November, 2016 and the collection of the assessee between 1st
November, 2016 and 8th November, 2016 was not unusual compared to
its collection during the month of November, 2015. The cash deposits made by
the assessee in the year 2016 were not at variance with the cash deposits made
by it in the preceding year. Collection of monthly subscription / dues by the
assessee during the period in question was reasonable as compared to the same
period in the year 2015.

 

ii) Since the
assessment proceedings no longer involved human interaction and were based on
records alone, such assessment proceedings could lead to erroneous assessment
if officers were not able to understand the transactions and statement of
accounts of the assessee or the nature of the assessee. The assessee was to
explain its stand in writing so that the A.O. could arrive at an objective
conclusion on the facts based on the record.

 

iii) Under these
circumstances, the impugned order is set aside and the case is remitted back to
the respondent to pass a fresh order within a period of sixty days from the
date of receipt of a copy of this order. The petitioner shall file additional
representation if any by treating the impugned order as the show cause notice
within a period of thirty days from the date of receipt of a copy of this
order. Since the Government of India has done away with the human interaction
during the assessment proceedings, it is expected that the petitioner will
clearly explain its stand in writing so that the respondent-A.O. can come to an
objective conclusion on facts based on the records alone. It is made clear that
the respondent will have to come to an independent conclusion on facts
uninfluenced by any of the observations contained herein.’

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement Commission – Application for settlement of case – Settlement Commission cannot consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

51. Hitachi Power Europe GMBH vs. IT Settlement Commission [2020] 423 ITR
472 (Mad.) Date of order: 17th February, 2020 A.Ys.: 2015-16 to
2018-19

 

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement
Commission – Application for settlement of case – Settlement Commission cannot
consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

 

In June, 2010, the National Thermal Power Corporation had invited bids
under international competitive bidding for the supply and installation of
eleven 660-megawatt steam generators at five locations in India. A bid was
successfully submitted by B, a company incorporated in India and engaged in
providing turnkey solutions for coal-based thermal power plants. B
sub-contracted a portion of the scope of work under three contracts to its
joint venture company, which in turn sub-contracted a portion thereof to the
assessee. One of the contentions raised by the assessee on the merits was that
the scope of work under each of the contracts was separate and distinct in all
respects including the delineation of the work itself, the modes of execution
of the contract and the payments therefor.

 

For this reason, the assessee took the stand that the income from offshore
supplies would not be liable to tax in India. For the A.Ys. 2015-16 to 2018-19
the assessee filed returns of income offering to tax the income from onshore
supply and services only. While assessment proceedings were pending, the
assessee applied for settlement of the case. The Settlement Commission held
that the contract was composite and indivisible and hence the applicant, i. e.,
the assessee, had failed to make a full and true disclosure of income.

 

On a writ petition against the order, the Madras High Court held as under:

 

‘i) The scheme of Chapter XIX-A of the Income-tax Act, 1961 is to provide a
holistic resolution of issues that arise from an assessment in the case of an assessee that has approached the
Commission. The question of full and true disclosure and the discharge of tax
liability at all stages prior to final hearing should be seen only in the
context of the issues offered for settlement and the remittances of additional
tax thereupon. Issues decided by the Commission and the liability arising
therefrom will be payable only at the stage of such determination, which is the
stage of final hearing u/s 245D(4) of the Act.

 

ii) The assessee had just applied for settlement of the case. The Commission,
however, in considering the “validity” or otherwise of the application,
proceeded to delve into the merits of the matter even at that stage. The order
of the Settlement Commission was beyond the scope of section 245D(2C) having
been passed on the merits of the issue raised and set aside the same. This writ
petition is allowed.’

 

 

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers and duties of Settlement Commission – Application for settlement – Duty of Commission either to reject or proceed with application filed by assessee – Settlement Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

50. Samdariya Builders Pvt. Ltd. vs. IT Settlement Commission [2020] 423
ITR 203 (MP) Date of order: 7th May, 2019 A.Ys.: 2008-09 to 2014-15

 

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers
and duties of Settlement Commission – Application for settlement – Duty of Commission
either to reject or proceed with application filed by assessee – Settlement
Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

 

The assessee was a part of a group of companies. Search and survey
operations under sections 132 and 133A of the Income-tax Act, 1961 were
conducted in the residential and business premises of the group, including
those of the assessee and some brokers. No incriminating material was found
against the assessee during the operations, but nine loose sheets of paper,
purportedly relating to the assessee, were seized from a broker. In compliance
with notices issued u/s 153A for the A.Ys. 2008-09 to 2013-14 and section
142(1) for the A.Y. 2014-15, the assessee filed returns of income. During the
assessment proceedings, the assessee filed an application u/s 245C(1) before
the Settlement Commission for settlement and the application was admitted u/s
245D(1) and was proceeded with by the Settlement Commission u/s 245D(2C).
Thereafter, the Principal Commissioner filed a report under Rule 9 of the
Income-tax Rules, 1962. The Settlement Commissioner, by his order u/s 245D(4)
relegated the assessee to the A.O. Hence, the A.O. issued a notice to the
assessee to comply with the earlier notice issued u/s 142(1).

 

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

 

‘i) The Settlement Commission’s power of settlement has to be exercised in
accordance with the provisions of the Income-tax Act, 1961. Though the
Commission has sufficient powers in assessing the income of the assessee, it
cannot make any order with a term of settlement which would be in conflict with
the mandatory provisions of the Act, such as in the quantum and payment of tax
and the interest. The object of the Legislature in introducing section 245C of
the Income-tax Act, 1961 is to see that protracted proceedings before the
authorities or in courts are avoided by resorting to settlement of cases.

 

ii) The Settlement Commission could have either rejected the application or
allowed it to be proceeded with further. If the Settlement Commission was of
the opinion that the matter required further inquiry, it could have directed
the Principal Commissioner or the Commissioner to inquire and submit the report
to the Commission to take a decision. The Commission could not get around the
application for settlement. When a duty was cast on the Commission, it is
expected that the Commission would perform the duty in the manner laid down in
the Act, especially when no further remedy is provided in the Act against the
order of the Settlement Commission. The order of the Settlement Commission
relegating the assessee to the A.O. was to be set aside.’

Offences and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section 391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of income – Conviction of managing director and executive director of assessee by judicial magistrate – Appeal – Evidence – Documents to prove there was no wilful default left out to be marked due to inefficiency and inadvertence – Interest of justice – Appellate court has power to allow documents to be let in as additional evidence; A.Y. 2012-13

49. Gangothri Textiles Ltd. vs. ACIT [2020] 423 ITR 382 (Mad.) Date of
order: 20th November, 2019 A.Y.: 2012-13

 

Offences
and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section
391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of
income – Conviction of managing director and executive director of assessee by
judicial magistrate – Appeal – Evidence – Documents to prove there was no
wilful default left out to be marked due to inefficiency and inadvertence –
Interest of justice – Appellate court has power to allow documents to be let in
as additional evidence; A.Y. 2012-13

 

The assessee company was a textile manufacturer. It
was represented by its managing director and executive director. The Assistant
Commissioner of Income-tax filed a complaint before the Judicial Magistrate u/s
200 and 190(1) of the Code of Criminal Procedure, 1973 against the petitioners
for offences u/s 276C(2) read with section 278B(3) of the Income-tax Act, 1961
for the A.Y. 2012-13 for wilful default in payment of penalty levied u/s
271(1)(c) of the IT Act.

 

The petitioners filed revision petitions and
contended that the trial court had failed to take into consideration the
necessity and requirement for marking the documents adduced by way of
additional evidence. The Madras High Court allowed the revision petition and
held as under:

 

‘i) Where documents of evidence are left out to be
marked due to carelessness and ignorance, they can be allowed to be marked for
elucidation of truth, in the interests of justice, by exercising powers u/s 391
of the Code of Criminal Procedure, 1973. The intention of section 391 of the
Code is to empower the appellate court to see that justice is done between the
prosecutor and the prosecuted in the interests of justice.

 

ii) According to section 391
of the Code, if the appellate court opined that additional evidence was
necessary, it shall record its reasons and take such evidence itself. The
petitioners had been charged u/s 276C(2) read with section 278B(3) of the Act
for having wilfully failed to pay the penalty and having deliberately failed to
admit the capital gains that arose from the sale transactions done by the
assessee. The criminal revision petition u/s 391 of the Code had been filed by
the petitioners even at the time of presentation of the appeal. The documents
sought to be marked as additional evidence were not new documents and they were
documents relating to filing of returns with the Department in respect of the
earlier assessment years, copies of which were also available with the
Department. By marking these documents, the nature or course of the case would
not be altered. The documents had not been produced before the trial court due
to inefficiency or inadvertence of the person who had conducted the case. Where
documents were left out to be marked due to carelessness and ignorance, they
could be allowed to be marked for elucidation of truth, in the interest of
justice, by exercising powers u/s 391 of the Code.

 

iii) The petitioners should be allowed to let in
additional evidence subject to the provisions of Chapter XXIII of the Code in
the presence of the complainant and his counsel.’

 

Income – Accrual of income – Mercantile system of accounting – Business of distribution of electricity to consumers – Surcharge levied on delayed payment of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

48. Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam
Ltd. [2020] 423 ITR 402 (P&H) Date of order: 29th November, 2018 A.Y.: 2005-06

 

Income – Accrual of income – Mercantile system of accounting – Business of
distribution of electricity to consumers – Surcharge levied on delayed payment
of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

 

The assessee distributed electricity. For the A.Y.
2005-06 the assessment was completed u/s 143(3). Subsequently, proceedings for
reassessment were initiated on the ground that the assessee had charged
surcharge on delayed payment of bill and this was charged as part of the single
bill along with the electricity charges. The assessee did not account for the
surcharge as part of its income on the ground that its recovery was not
definite. The A.O. made an addition on account of the surcharge levied but not
realised since the assessee followed the mercantile system of accounting.

 

The Commissioner (Appeals) deleted the addition
following his earlier orders. The Tribunal affirmed his order.

 

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

 

‘i) As and when the assessee received payment of
surcharge, it would be obliged to pay tax on such amount. There was no
illegality or perversity in the findings recorded by the appellate authorities
which warranted interference.

 

ii) No question of law arose.’

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 – Condition precedent – Relationship of employer and employee – Free samples distributed to doctors by pharmaceutical company – Not fringe benefit – Amount spent not liable to fringe benefits tax; A.Y. 2006-07

47. Principal CIT vs. Aristo Pharmaceuticals P. Ltd. [2020] 423 ITR 295 (Bom.) Date of order: 23rd January, 2020 A.Y.: 2006-07

 

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 –
Condition precedent – Relationship of employer and employee – Free samples
distributed to doctors by pharmaceutical company – Not fringe benefit – Amount
spent not liable to fringe benefits tax; A.Y. 2006-07

 

The
following questions were raised in the appeal filed by the Revenue before the
Bombay High Court:

 

‘i)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in setting aside the action of the A.O. without appreciating
the fact that the fringe benefit assessment was framed after duly considering
the CBDT Circular No. 8 of 2005 ([2005] 277 ITR (St.) 20] and the Explanatory
Notes to the Finance Act, 2005 on the provisions relating to fringe benefit
tax?

 

ii)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in ignoring the fact that the Tribunal has explained
considering the case of Eskayef vs. CIT [2000] 245 ITR 116 (SC),
of the Supreme Court that free medical samples distributed to doctors is in the
nature of sales promotion and, similarly, any expenditure on free samples of
other products distributed to trade or consumers would be liable to fringe
benefit tax?’

 

The
Bombay High Court held as under:

 

‘i) From
a bare reading of section 115WA of the Income-tax Act, 1961 it is evident that
for the levy of fringe benefits tax it is essential that there must be a
relationship of employer and employee and the fringe benefit has to be provided
or deemed to be provided by the employer to his employees. The relationship of
employer and employee is the sine qua non and the fringe benefits have
to be provided by the employer to the employees in the course of such
relationship.

 

ii) The
assessee was a pharmaceutical company. Since there was no employer-employee
relationship between the assessee on the one hand and the doctors on the other
hand to whom the free samples were provided, the expenditure incurred for them
could not be construed as fringe benefits to be brought within the additional
tax net by levy of fringe benefit tax.’

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41(1) – Deduction must have been claimed for the liability – Gains on repurchase of debenture bonds – Not assessable u/s 41(1)

46. CIT vs. Reliance Industries Ltd. [2020] 423 ITR 236 (Bom.) Date of order: 15th January, 2019

 

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of
trading liability – Condition precedent for application of section 41(1) –
Deduction must have been claimed for the liability – Gains on repurchase of
debenture bonds – Not assessable u/s 41(1)

 

The
assessee had issued foreign currency bonds in the years 1996 and 1997 carrying
a coupon rate of interest ranging between 10 and 11% and having a maturity
period of 30 to 100 years. The interest was payable half-yearly. According to
the assessee, on account of the attack on the World Trade Centre in the USA on
11th September, 2001, the financial market collapsed and the
investors of debentures and bonds started selling them which, in turn, brought
down the market price of such bonds and debentures which were traded in the
market at less than the face value. The assessee, therefore, purchased such
bonds and debentures from the market and extinguished them. In the process of
buyback, the assessee gained a sum of Rs. 38.80 crores. The A.O. treated this
as assessable to tax in terms of section 41(1) and made addition accordingly.

 

The
Commissioner (Appeals) deleted the addition. The Tribunal confirmed the
decision of the Commissioner (Appeals).

 

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

 

‘i) For
applicability of section 41(1), it is a sine qua non that there should
be an allowance or deduction claimed by the assessee in any assessment year in
respect of loss, expenditure or trading liability incurred. Then, subsequently,
during any previous year, if the creditor remits or waives any such liability,
the assessee is liable to pay tax u/s 41(1).

 

ii) It
was not the case of the Revenue that in the process of issuing the bonds the
assessee had claimed deduction of any trading liability in any year. Any
extinguishment of such liability would not give rise to applicability of
sub-section (1) of section 41.’

Capital gains – Transfer of bonus shares – Bonus shares in respect of shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade – Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to 2009-10

45. Principal CIT vs. Ashok Apparels (P.) Ltd. [2020] 423 ITR 412 (Bom.) Date of order: 8th April, 2019 A.Ys.: 2006-07 to 2009-10

Capital gains – Transfer of bonus shares – Bonus shares in respect of
shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade
– Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to
2009-10

 

In the
appeal by the Revenue against the order of the Tribunal, the following question
was raised before the Bombay High Court.

 

‘Whether
on the facts and in the circumstances of the case and in law, the Income-tax
Appellate Tribunal was justified in treating the bonus shares as investments
with a cost of acquisition of Rs. Nil for the year under consideration,
ignoring the fact that the original shares, for which bonus shares were
allotted, were present in the trading stock itself for the year under
consideration, thus the bonus shares allotted against the same were also
required to be treated as a part of trading stock itself?’

 

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

 

‘i) In CIT
vs. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) the Supreme Court
observed that bonus shares would normally be deemed to be distributed by the
company as capital and the shareholder receives the shares as capital. The
bonus shares are accretions to the shares in respect of which they are issued,
but on that account those shares do not become stock-in-trade of the business
of the shareholder. A trader may acquire a commodity in which he is dealing for
his own purposes and hold it apart from the stock-in-trade of his business.
There is no presumption that every acquisition by a dealer in a particular
commodity is acquisition for the purpose of his business; in each case the
question is one of intention to be gathered from the evidence of conduct and
dealings by the acquirer with the commodity.

 

ii) The
A.O. had merely proceeded on the basis that the origin of the bonus shares
being the shares held by the assessee by way of stock-in-trade, necessarily the
bonus shares would also partake of the same character. The Tribunal was
justified in the facts and circumstances of the case in treating the bonus
shares as investments.’

 

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house and purchase or construction of new residential house within stipulated time – Construction of new residential house need not begin after sale of original house; A.Y. 2012-13

44. Principal CIT vs. Akshay Sobti [2020] 423 ITR 321 (Del.) Date of order: 19th December, 2019 A.Y.: 2012-13

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house
and purchase or construction of new residential house within stipulated time –
Construction of new residential house need not begin after sale of original
house; A.Y. 2012-13

 

For the
A.Y. 2012-13 the assessee had claimed deduction u/s 54 in respect of capital
gains from the sale of residential house. The A.O. disallowed the deduction u/s
54 on the ground that the assessee had entered into an agreement dated 10th
February, 2006 and the date of the agreement was to be treated as the date of
acquisition, which fell beyond the one year period provided u/s 54 and was also
prior to the date of transfer.

 

The
Commissioner (Appeals) held that the assessee had booked a semi-finished flat
and was to make payments in instalments and the builder was to construct the
unfinished bare shell of a flat. Under these circumstances, the Commissioner
(Appeals) considered the agreement to be a case of construction of new
residential house and not purchase of a flat. He observed that since the
construction has been completed within three years of the sale of the original
asset, the assessee was entitled to relief u/s 54. The Tribunal upheld the
decision of the Commissioner (Appeals).

 

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

 

‘i)
Section 54 of the Income-tax Act, 1961 requires an assessee to purchase a
residential house property either one year before or within two years after the
date of transfer of a long-term capital asset, or construct a residential
house. It is not stipulated or indicated in the section that the construction
must begin after the date of sale of the original or old asset.

 

ii) The
assessee had fulfilled the conditions laid down in section 54 and was entitled
to the benefit under it.’

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration and extraction of oil – Conditions precedent for deduction – Expenditure should be infructuous or abortive exploration expenses, and area should be surrendered prior to commencement of commercial production – Meaning of expression ‘surrender’ – Does not always connote voluntary surrender – Assessee entering into production sharing contract with Government of India and requesting for extension at end of contract period – Government refusing extension – Assessee entitled to deduction u/s 42(1)(a); A.Y. 2008-09

43. Principal CIT vs. Hindustan Oil Exploration Co. Ltd. [2020] 423 ITR 465 (Bom.) Date of order: 25th March, 2019 A.Y.: 2008-09

 

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration
and extraction of oil – Conditions precedent for deduction – Expenditure should
be infructuous or abortive exploration expenses, and area should be surrendered
prior to commencement of commercial production – Meaning of expression
‘surrender’ – Does not always connote voluntary surrender – Assessee entering
into production sharing contract with Government of India and requesting for
extension at end of contract period – Government refusing extension – Assessee
entitled to deduction u/s 42(1)(a); A.Y. 2008-09

 

The assessee was engaged in the business of exploration and extraction of
mineral oil. It entered into a production-sharing contract with the Government
of India on 8th October, 2001 for the purposes of oil exploration.
According to the contract, a licence was issued to a consortium of three
companies, which included the assessee, to carry out the exploration initially
for a period of three years and the entire exploration was to be completed
within a period of seven years in three phases. At the end of the period,
extension was denied by the Government of India. In its Nil return of income
filed for the A.Y. 2008-09, the assessee claimed deduction u/s 42(1)(a) of the
Income-tax Act, 1961 on the expenditure on oil exploration on the ground that
the block was surrendered on 15th March, 2008. The A.O. was of the
opinion that it had not surrendered the right to carry on oil exploration since
the assessee was interested in extension of time which was denied by the
Government of India and disallowed the claim.

 

The Commissioner (Appeals) allowed the appeal. The Tribunal found that
according to article 14 of the contract, relinquishment and termination of
agreement were two different concepts and that by a letter dated 28th
March, 2007 the assessee was informed that its contract stood relinquished. The
Tribunal held that the assessee was covered by the deduction provision
contained in section 42, that such expenditure was not amortised or was not
being allowed partially year after year and it had to be allowed in full, and
therefore there was no justification to deny the benefit of deduction to the
assessee.

 

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

 

‘i) As long as the commercial production had not begun and the expenditure
was abortive or infructuous exploration expenditure, the deduction would be
allowed. The term “surrender” itself was a flexible one and did not always
connote the meaning of voluntary surrender. The surrender could also take place
under compulsion. The assessee had no choice but to surrender the oil blocks
because the Government of India had refused to extend the validity period of
the contract. Admittedly, commercial production of oil had not commenced. The
act of the assessee to hand over the oil blocks before the commencement of
commercial production was covered within the expression “any area surrendered
prior to the beginning of commercial production by the assessee”.

 

ii)   The
provisions of section 42 recognised the risks of the business of exploration
which activity was capital-intensive and high in risk of the entire expenditure
not yielding any fruitful result and provided for special deduction. The
purpose of the enactment would be destroyed if interpreted rigidly. For
applicability of section 42(1)(a) the elements vital were that the expenditure
should be infructuous or abortive exploration expenses and that the area should
be surrendered prior to the beginning of commercial production by the assessee.
As long as these two requirements were satisfied, the expenditure in question
would be recognised as a deduction. The term “surrender” had to be appreciated
in the light of these essential requirements of the deduction clause. It was
not the contention of the Department that the expenditure was infructuous or
abortive exploration expenditure.

 

iii) The interpretation of section 42(1)(a) by the Tribunal and its order
holding the assessee eligible for deduction thereunder were not erroneous.’

i) Business expenditure – Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed capital – Finding that investment from interest-free funds available with assessee – Presumption that advances made out of interest-free funds available with assessee – Deletion of addition made u/s 14A justified (ii) Unexplained expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were bogus based on information from sales tax authority – Neither independent inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of addition by appellate authorities justified; A.Y. 2010-11

42. Principal CIT vs.
Shapoorji Pallonji and Co. Ltd. [2020] 423 ITR 220
(Bom.) Date of order: 4th
March, 2020 A.Y.: 2010-11

 

(i) Business expenditure –
Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed
capital – Finding that investment from interest-free funds available with
assessee – Presumption that advances made out of interest-free funds available
with assessee – Deletion of addition made u/s 14A justified

 

(ii) Unexplained
expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were
bogus based on information from sales tax authority – Neither independent
inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of
addition by appellate authorities justified; A.Y. 2010-11

 

For the
A.Y. 2010-11, the A.O. held that the purchases made by the assessee from two
sellers were bogus; according to information received from the Sales Tax
Department, Government of Maharashtra, those two sellers had not actually sold
any material to the assessee. Accordingly, he issued a show cause notice in
response to which the assessee furnished copies of the bills and entries made
in its books of accounts in respect of such purchases. However, the A.O. in his
order made addition u/s 69C of the Income-tax Act, 1961. He also made
disallowances under sections 14A and 36(1)(iii) of the Act.

 

The
Commissioner (Appeals) deleted the disallowances. The Tribunal upheld the
decision of the Commissioner (Appeals). According to the Tribunal, the A.O. had
merely relied upon the information received from the Sales Tax Department but
had not carried out any independent inquiry. The Tribunal recorded a finding
that the A.O. failed to show that the purchased materials were bogus, whereas
the assessee produced materials to show the genuineness of the purchases and
held that there was no justification to doubt the genuineness of the purchases
made by the assessee.

 

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

 

‘i) On
the facts as found by the Commissioner (Appeals) and as affirmed by the
Tribunal, the presumption that if there were funds available with the assessee,
both interest-free and overdraft or loans, the investments were out of the
interest-free funds generated or available with the assessee was established.
The Tribunal had affirmed the order of the Commissioner (Appeals) deleting the
addition made by the A.O. u/s 14A on the ground that the interest-free funds
available with the assessee were far in excess of the advance given. The
principle of apportionment under Rule 8D of the Income-tax Rules, 1962 did not
arise as the jurisdictional facts had not been pleaded by the Department.

 

ii) The
finding of the Commissioner (Appeals) as affirmed by the Tribunal was that the
assessee had not utilised interest-bearing borrowed funds for making
interest-free advances but had its own interest-free fund far in excess of
interest-free advance. No question of law in respect of the deletion of the
disallowance made by the A.O. u/s 36(1)(iii) arose.

 

iii) The Tribunal was justified in deleting the addition
made u/s 69C on the ground of bogus purchases. Merely on suspicion based on the
information received from another authority, the A.O. ought not to have made
the additions without carrying out independent inquiry and without affording
due opportunity to the assessee to controvert the statements made by the
sellers before the other authority.’

Search and seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s 158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of notice – Assessment vitiated

39. CIT vs.
Sodder Builder and Developers (P) Ltd.; [2019] 419 ITR
436 (Bom.) Date of order:
16th July, 2019

 

Search and
seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s
158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of
notice – Assessment vitiated

 

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the assessee’s premises. A notice was issued u/s 158BC to assess
the undisclosed income. The Assistant Commissioner passed an assessment order
u/s 158BC. The records indicated that no notice u/s 143(2) was issued to the
assessee.

 

The assessee contended that non-issuance of such a notice vitiated the
assessment made under the special procedure under Chapter XIV-B. The Tribunal
accepted the assessee’s claim and allowed the appeal filed by the assessee.

 

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

 

‘i)   In the present case,
admittedly, no notice u/s 143(2) of the said Act was ever issued to the
assessee. By applying the law laid down by the Hon’ble Apex Court in Asst.
CIT vs. Hotel Blue Moon (210) 321 ITR 362 (SC), we will have to hold
that the assessment made in the present case stands vitiated.

 

ii)   Therefore, even if we were to
hold in favour of the Revenue with regard to the other substantial questions of
law framed at the time of admission of this appeal, the assessment made in the
present matter would nevertheless stand vitiated for want of mandatory notice
u/s 143(2) of the said Act.

 

iii)  The assessment made by the
Assistant Commissioner pursuant to the notice issued u/s 158BC was vitiated for
want of the mandatory notice u/s 143(2).’

 

 

Search and seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third person – Jurisdiction of AO – Addition made u/s 68 not based on material seized during search – Not sustainable

38. Principal
CIT vs. Ankush Saluja; [2019] 419 ITR
431 (Del.) Date of order:
14th November, 2019 A.Y.: 2007-08

 

Search and
seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third
person – Jurisdiction of AO – Addition made u/s 68 not based on material seized
during search – Not sustainable

 

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the S group. Cash and jewellery which belonged to the assessee
were found and seized from the residence of the assessee’s father in whose name
the search warrant of authorisation was issued. The satisfaction note was
recorded by the AO in this regard and a notice u/s 153C read with section 153A
was issued against the assessee. In response thereto, the assessee filed his
return of income. The AO treated the unsecured loans as unexplained cash credit
u/s 68 of the Act and made an addition to that effect.

 

The Commissioner (Appeals) held that the addition u/s 68 was not based
on any incriminating document found and seized during the search and,
therefore, the addition could not be sustained. The Tribunal upheld the order
of the Commissioner (Appeals).

 

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

‘i)   There were concurrent
findings of fact to the effect that the additions made by the Assessing Officer
u/s 68 were not based on any incriminating document found or seized during the
search action u/s 132. In this view of the matter, the assumption of
jurisdiction u/s 153C by the Assessing Officer was not justified and
accordingly the additions made u/s 68 could not be sustained.

 

ii)   No question of law arose.’

 

Reassessment – Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible material to show escapement of income from taxation – Agricultural income disclosed in return and accepted – Subsequent advisory by IT Department that claims of agricultural income should be investigated – Notice based solely on advisory – Not valid

37. Ravindra
Kumar (HUF) vs. CIT; [2019] 419 ITR
308 (Patna) Date of order:
6th August, 2019 A.Y.: 2011-12

 

Reassessment –
Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible
material to show escapement of income from taxation – Agricultural income
disclosed in return and accepted – Subsequent advisory by IT Department that
claims of agricultural income should be investigated – Notice based solely on
advisory – Not valid

 

For the A.Y. 2011-12, the assessee had filed return of income which
included agricultural income. On 22nd March, 2018, the AO issued
notice u/s 133(6) of the Income-tax Act, 1961 requiring the assessee to furnish
the information relating to the agricultural income disclosed in his return.
The assessee did not respond to this notice. The notice was followed by a
notice u/s 148. The reassessment notice was based on an advisory issued by the
Income-tax Department. The advisory directed the AO to verify whether there was
any data entry error in the returns filed, to provide feedback where assessment
was complete and in cases where assessment was pending, to thoroughly verify
the claims on agricultural income. The assessee filed a writ petition and
challenged the notice.

 

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

 

‘i)   A power to reopen an
assessment would vest in the Assessing Officer only if there is tangible material
in his possession for coming to a conclusion that there was escapement of
income chargeable to tax, from assessment, and the reasons with the Assessing
Officer must have a live link with the formation of belief.

 

ii)   The Assessing Officer
mentioned in the “reasons” supplied that the assessee had not
produced certain evidence in support of agricultural income and in the absence
of which the claim towards agricultural income could not be substantiated. The
admission by the Assessing Officer regarding absence of material could not lead
to the formation of belief that the disclosure was incorrect and chargeable to
tax u/s 147 of the Act. The reason was firstly that such opportunity was very
much available to the Assessing Officer at the stage of filing of the returns
when in exercise of powers u/s 142/143 such directions could have been issued
for production of records and a failure of the assessee to satisfy the
Assessing Officer on such count could have led to a best judgment assessment
u/s 144 at the stage of original assessment; but having not done so, such
recourse could not be adopted by relying upon the statutory provisions of
section 147 of the Act.

 

iii)  Secondly such enabling powers
were only to be exercised where there was tangible material available with the
Assessing Officer and not in the absence thereof. In view of the clear fact
situation available on the record where such reopening was simply founded on
the advisory dated 10th March, 2016 issued by the Department and
where the reasons so present for the formation of belief was not resting on any
tangible material in possession of the Assessing Officer, the entire exercise
was illegal and de hors the provisions of section 147 / 148’.

 

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration – Cancellation of registration – Condition precedent – The assessee is hit by proviso to section 2(15) is not a ground for cancellation of registration

22. Goa Industrial Development Corporation vs. CIT [2020] 421 ITR 676 (Bom.) [2020] 116 taxmann.com 42 (Bom.) Date of order: 4th February, 2020

 

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration
– Cancellation of registration – Condition precedent – The assessee is hit by proviso
to section 2(15) is not a ground for cancellation of registration

 

The appellant is a statutory corporation established under the Goa,
Daman and Diu Industrial Development Corporation Act, 1965 (GIDC Act) with the
object of securing orderly establishment in industrial areas and industrial
estates and industries so that it results in the rapid and orderly
establishment, growth and development of industries in Goa. The appellant was
granted registration u/s 12A of the Income-tax Act, 1961 on 16th
December, 1983 and the same continued until the making of the impugned orders
in these appeals. By an order dated 27th December, 2011, the
Commissioner of Income-tax withdrew the registration granted to the appellant
by observing that it is crystal clear that the activities of the appellant are
inter-connected and inter-woven with commerce or business. The Commissioner of
Income- tax has based its decision almost entirely on the proviso to
section 2(15) of the Income-tax Act which defines ‘charitable purpose’. This proviso
was introduced with effect from 1st April, 2009.

 

The Tribunal dismissed the appeal filed by the assessee.

 

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

‘i)    The cancellation of registration has to be
initiated strictly in accordance with the provisions u/s 12AA(3) of the
Income-tax Act, 1961. The power of cancellation of registration can be
exercised by the Commissioner where the Commissioner is satisfied that the
activities of the trust or institution are not genuine or are not being carried
out in accordance with the objects of the trust or institution, as the case may
be. The powers u/s 12AA(3) cannot be exercised merely because the institution
in question may be covered under the proviso to section 2(15) after the
amendment, or that the income limit specified in the proviso is
exceeded.

 

ii)    There were no categorical
findings that the activities of the assessee were not genuine or were not in
accordance with the objects of the trust or the institution. Merely because, by
reference to the amended provisions in section 2(15), it may be possible to
contend that the activities of the assessee were covered under the proviso,
that, by itself, did not render the activities of the assessee as non-genuine
activities so as to entitle the Commissioner to exercise powers u/s 12AA(3).
The cancellation of registration was not valid.’

 

Cash credits (Bogus purchases) – Section 68 of ITA, 1961 – Assessee had declared certain purchases to be made during year and A.O. added entire quantum of purchases to income of assessee on plea that purchases were bogus purchases – Tribunal held that only reasonable profit at rate of 5% on purchases should be added back to income of assessee – Tribunal was justified in its view; A.Y.: 2010-11

21. Principal CIT vs. Rishabhdev Technocable Ltd. [2020] 115 taxmann.com 333 (Bom.) Date of order: 10th February, 2020 A.Y.: 2010-11

 

Cash credits (Bogus purchases) – Section 68 of ITA, 1961 – Assessee had
declared certain purchases to be made during year and A.O. added entire quantum
of purchases to income of assessee on plea that purchases were bogus purchases
– Tribunal held that only reasonable profit at rate of 5% on purchases should
be added back to income of assessee – Tribunal was justified in its view; A.Y.:
2010-11

 

The assessee is a company engaged in the business of manufacturing and
dealership of all kinds of industrial power controlling instrument cables and
related items. For the A.Y. 2010-11, the assessee filed return of income
declaring income of Rs. 1,35,31,757. The A.O. noticed that the Sales Tax
Department, Government of Maharashtra, had provided a list of persons who had
indulged in the unscrupulous act of providing bogus hawala entries and
purchase bills. The names of beneficiaries were also provided. The A.O. also
noticed that the assessee was one of the beneficiaries of such bogus hawala
bills. He referred to the purchases allegedly made by the assessee through four
hawala entries for the assessment year under consideration. He
disallowed the entire expenditure shown as incurred by the assessee on
purchases and made the addition.

 

The CIT(A) enhanced the quantum of such purchases from Rs. 24,18,06,385
to Rs. 65,65,30,470. The CIT(A) held that there can be no sales without
purchases. When the sales were accepted, then the corresponding purchases could
not be disallowed. Therefore, the CIT(A) held that only the profit element
embedded in the purchases would be subject to tax and not the entire purchase
amount. The CIT(A) added 2% of the purchase amount of Rs. 65,65,30,470 as
profit which worked out to Rs. 1,31,30,609 to the income of the assessee and
the balance addition was deleted. On appeal by the Revenue, the Tribunal
increased the profit element from 2% to 5% and increased the addition
accordingly.

 

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

 

‘i)     In Bholanath Polyfab
(P.) Ltd. (Supra), the Gujarat High Court was also confronted with a
similar issue. In that case the Tribunal was of the opinion that the purchases
might have been made from bogus parties but the purchases themselves were not
bogus. Considering the facts of the situation, the Tribunal was of the opinion
that not the entire amount of purchases but the profit margin embedded in such
amount would be subjected to tax. The Gujarat High Court upheld the finding of
the Tribunal. It was held that whether the purchases were bogus or whether the
parties from whom such purchases were allegedly made were bogus, was
essentially a question of fact. When the Tribunal had concluded that the
assessee did make the purchase, as a natural corollary not the entire amount
covered by such purchase but the profit element embedded therein would be
subject to tax.

 

ii)     We are in respectful
agreement with the view expressed by the Gujarat High Court.

 

iii)    Thus, we do not find any
merit in this appeal. No substantial question of law arises from the order
passed by the Tribunal. Consequently, the appeal is dismissed.’

Business expenditure – Allowability of (prior period expenses) – Section 37 of ITA, 1961 – Assessee had prior period income and prior period expenses – Assessee set off the two and offered only net amount of expenses for disallowance – A.O. disallowed the claim – Tribunal allowed the claim – No substantial question of law arose from Tribunal’s order; A.Y.: 2004-05

20. Principal CIT vs. Mazagon Dock Ltd. [2020] 116 taxmann.com 325 (Bom.) Date of order: 20th August, 2019 A.Y.: 2004-05

 

Business expenditure – Allowability of (prior period expenses) – Section
37 of ITA, 1961 – Assessee had prior period income and prior period expenses –
Assessee set off the two and offered only net amount of expenses for
disallowance – A.O. disallowed the claim – Tribunal allowed the claim – No
substantial question of law arose from Tribunal’s order; A.Y.: 2004-05

 

The assessee had prior period income and prior period expenses. The
assessee had set off the two and offered only the net amount of expenses for
disallowance. The A.O. did not accept the method of setting off of prior period
income with prior period expenses as claimed by the assessee and disallowed the
expenditure.

 

The Tribunal held that the assessee was justified in computing the
disallowance after setting off prior period income against the prior period
expenses. In fact, the Tribunal noted the fact that for the A.Y. 2007-08, the
Revenue had accepted the net income offered after set-off of prior period
income with prior period expenses. This is in that year where expenses of prior
period were less than prior period income. The Tribunal allowed the assessee’s
claim.

 

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

 

‘Whether on the facts and in the circumstances of the case and in law,
the Tribunal is correct in allowing the setting off of the prior period income
against the prior period expenditure without ascertaining the nexus between
income and expenditure?’

 

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

 

‘i)    We find that the view taken
by the Tribunal on the facts cannot be found fault with. This particularly as
the Revenue for a subsequent period accepted this practice of set-off, which
resulted in income and subjected it to tax. The basis / principles for allowing
the set-off of prior period income with prior period expenses has to be consistent
for years. Therefore, the view taken by the Tribunal cannot be faulted.

 

ii)    In view of the above, the
question as framed does not give rise to any substantial question of law. Thus,
not entertained.’

 

Business expenditure – Section 37 of ITA, 1961 – General principles – Difference between ascertained and contingent liability – Public sector undertaking – Provision for revision of pay by government committee – Liability not contingent – Provision deductible u/s 37 Income – Accrual of income – Principle of real income – Public sector undertaking – Amounts due as fees – Amounts included in accounts in accordance with directions of Comptroller and Auditor-General – Amounts had not accrued – Not assessable; A.Y.: 2007-08

19. Housing and Urban Development Corporation Ltd. vs.
Additional CIT [2020] 421 ITR 599 (Del. [2020] 115 taxmann.com 166 (Del.) Date of order: 6th February, 2020 A.Y.: 2007-08

 

Business expenditure – Section 37 of ITA, 1961 – General principles –
Difference between ascertained and contingent liability – Public sector
undertaking – Provision for revision of pay by government committee – Liability
not contingent – Provision deductible u/s 37

 

Income – Accrual of income – Principle of real income – Public sector
undertaking – Amounts due as fees – Amounts included in accounts in accordance
with directions of Comptroller and Auditor-General – Amounts had not accrued –
Not assessable; A.Y.: 2007-08

 

The assessee was a public sector undertaking. For the A.Y. 2007-08, it
claimed deduction of Rs. 1.60 crores on account of the provision for revision
of pay in its books of accounts. The deduction was made in the light of the Pay
Revision Committee appointed by the Government of India. The A.O. disallowed
the claim, holding that the expenditure was purely a provision against an
unascertained liability and could not be claimed as expenditure for the A.Y.
2007-08. The disallowance was upheld by the Tribunal.

 

The assessee was following the accrual or mercantile system of
accounting and was accounting the ‘fees’ as its revenue from the date of
signing of the loan agreement. The amount was finally realised from the loan
amount, when it was actually disbursed to the borrower. There were instances
when the loan agreement was signed and the borrower would not take the
disbursement and, accordingly, fees would not be realised. The Comptroller and
Auditor-General (CAG) objected to this on the ground that the accounting
treatment was not in accordance with the Accounting Standards issued by the
Institute of Chartered Accountants of India which provide guidance for
determination of income on accrual basis. The assessee assured the CAG that the
accounting policy was reviewed for the F.Y. 2006-07 and, accordingly, the Board
had approved the change in accounting policy in its meeting held on 27th
September, 2007. The revised accounting policy recognised the fees as on the
date of their realisation, instead of the date of signing of the loan
agreement. For the A.Y. 2007-08, the A.O. made an addition of Rs. 1.28 crores
on the ground that the change had resulted in understatement of profits and
also because the change was introduced after the closing of the financial year.
The addition was upheld by the Tribunal.

 

The Delhi High Court allowed the assessee’s appeal and held as under:

 

‘(i)   The position was that the
liability to pay revised wages had already arisen with certainty. The committee
was constituted for the purpose of wage revision. That the wages would be
revised was a foregone conclusion. Merely because the making of the report and
implementation thereof took time, it could not be said that there was no basis
for making the provision. The expenditure of Rs. 1.60 crores on account of
anticipated pay revision in the A.Y. 2007-08 was deductible.

 

(ii)   No income accrued at the
point of execution of agreement. The change in the accounting policy was a
result of the audit objection raised by the CAG. The assessee had claimed
deduction in profits in the computation of the total income and added it as
income in the subsequent assessment year, which had been accepted by the A.O.
The change was, thus, revenue-neutral. The addition of Rs. 1,28,00,000 was not
justified.’

Revision – TDS – Non-resident – Shipping business – Section 263 and section 172, r/w sections 40(a)(ia), 194C and 195 of ITA, 1961 – Where assessee had paid export freight to a shipping agent of non-resident ship-owner or charter without deduction of tax at source, provisions of section 172 would be applicable and provisions of section 194C or section 195 which provide for deduction of tax at source shall not be applicable; A.Y.: 2014-15

26. Principal
CIT vs. Summit India Water Treatment and Services Ltd. [2020]
116 taxmann.com 107 (Guj.) Date
of order: 3rd February, 2020 A.Y.:
2014-15

 

Revision –
TDS – Non-resident – Shipping business – Section 263 and section 172, r/w sections
40(a)(ia), 194C and 195 of ITA, 1961 – Where assessee had paid export freight
to a shipping agent of non-resident ship-owner or charter without deduction of tax at source, provisions of section 172 would
be applicable and provisions of section 194C or section 195 which provide for
deduction of tax at source shall not be applicable; A.Y.: 2014-15

 

For the A.Y. 2013-14, the assessee filed its return of income declaring
total loss of Rs. 1,35,18,193. By an order dated 22nd March, 2016,
the A.O. finalised the assessment u/s 143(3). The Principal Commissioner of
Income-tax (‘the PCIT’) invoked the power of revision u/s 263 of the Act, 1961
on the ground that without deducting TDS on the export freight, the assessee
company had paid export freight amounting to Rs. 2,03,66,683 to Inter-Ocean
Shipping and Logistic Services. According to the PCIT, as no TDS return showing
the details of deduction of any tax in respect of the aforesaid export freight
had been filed and as the A.O. had not verified the same, the scope of
provisions of TDS on export freight, the entire amount was required to be
disallowed u/s 40(a)(ia) of the Act. By an order u/s 263 dated 21st
March, 2018, the PCIT directed the A.O. to pass a fresh assessment order after
providing an opportunity of being heard to the assessee in view of the
observations made in the order u/s 263.

 

The Tribunal
came to the conclusion that the A.O. has accepted the total loss declared by
the assessee in the return of income and passed order u/s 143(3) dated 22nd
March, 2016. The Tribunal considered the materials placed before it and found
that the respondent assessee had made payment for export freight to the Indian
Ocean Shipping and Logistics Services, which was an Indian agent acting on
behalf of the non-resident shipping company for collecting freight demurrage
and other charges and reimbursing the same to the shipping company. Therefore,
relying on the CBDT Circular No. 723 dated 19th September, 1995, the
Tribunal held that where payment is made to the shipping agents of the
non-resident ship-owner or charter, the agent steps into the shoe of the
principal, i.e. the shipping company, and according to the provisions u/s 172
of the Act, which provides for shipping business in respect of non-residents
would be applicable and the provisions of section 194C or 195 which provides
for deduction of tax at source shall not be applicable. The Tribunal,
therefore, held that the PCIT failed to consider that the assessee had
furnished the relevant materials in respect of export freight payment and it is
also not controverted by the PCIT; and therefore, it cannot be said that the
assessment order is erroneous or prejudicial to the interest of the Revenue in
any manner. The Tribunal set aside the order of the PCIT passed u/s 263 of the
Act.

 

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

 

‘i)   In view of the facts emerging
from the record and the finding of facts arrived at by the Tribunal, none of
the questions can be termed as substantial questions of law from the impugned
order passed by the Tribunal.

 

ii)   The appeal, therefore, fails
and is accordingly dismissed.’

 

Business expenditure – Obsolescence allowance – Sections 36 and 145A of ITA, 1961 – Assessee following particular accounting policy from year to year consistent with provisions of section 145A – Concurrent finding of fact by appellate authorities that stock had been rendered obsolete – Loss allowable

1. CIT vs. Gigabyte
Technology (India) Ltd.

[2020] 421 ITR 21 (Bom.)

Date of order: 7th
January, 2020

 

Business expenditure –
Obsolescence allowance – Sections 36 and 145A of ITA, 1961 – Assessee following
particular accounting policy from year to year consistent with provisions of
section 145A – Concurrent finding of fact by appellate authorities that stock
had been rendered obsolete – Loss allowable

 

In its return, the assessee
claimed losses towards stock obsolescence in respect of laptops and
motherboards. The A.O. held that the laptops and the motherboards which had a
long shelf life could not be considered to have become obsolete and disallowed
the losses in his order passed u/s 143(3) of the Income-tax Act, 1961.

 

The Commissioner (Appeals)
allowed the appeal filed by the assessee. The Tribunal held that the obsolete
stock which was not disposed of or sold was allowable as expenditure and
dismissed the appeal filed by the Department.

 

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

 

‘i)    There were concurrent findings of fact recorded by the
Commissioner (Appeals) as well as the Tribunal that the laptops and
motherboards had been rendered obsolete. There were findings of fact in respect
of the assessee consistently following a particular accounting policy from year
to year, which was consistent with the provisions of section 145A.

 

ii)    The Tribunal was right in holding that the obsolete stock which
was not disposed of or sold was allowable as expenditure.’

Deemed income – Section 41(1) of ITA, 1961 – Section 41(1) will not apply to waiver of loan as waiver of loan does not amount to cessation of trading liability; A.Y.: 2003-04

25. Principal CIT vs. SICOM Ltd. [2020] 116 taxmann.com 410 (Bom.) Date of order: 21st January, 2020 A.Y.: 2003-04

 

Deemed income – Section 41(1) of ITA, 1961 – Section 41(1) will not
apply to waiver of loan as waiver of loan does not amount to cessation of
trading liability; A.Y.: 2003-04

In the
assessment proceedings for the A.Y. 2003-04, the A.O. considered the issue of
waiver of loan by the Government of Maharashtra and held that an amount of Rs.
114.98 crores covered by the loan given by the Government of Maharashtra is
taxable under sections 28(iv) and 41(1) of the Income-tax Act, 1961.
Accordingly, the said amount was treated as income of the assessee for the year
under consideration and added back to its total income.

 

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

 

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

 

‘i)    The first appellate authority had followed
the decision of this Court in Mahindra & Mahindra Ltd. (Supra)
in deleting the addition made by the A.O. on account of remission of loan. The
decision of this Court in Mahindra & Mahindra (Supra) was
contested by the Revenue before the Supreme Court in Commissioner vs.
Mahindra & Mahindra Ltd. [2018] 404 ITR 1. The issue before the
Supreme Court was whether waiver of loan by the creditor is taxable as
perquisite u/s 28(iv) of the Act or taxable as remission of liability u/s 41(1)
of the Act. The Supreme Court held as under:

(a)   Section 28(iv) of the IT Act does not apply
in the present case since the receipts of Rs 57,74,064 are in the nature of
cash or money.

(b)   Section 41(1) of the IT Act does not apply
since waiver of loan does not amount to cessation of trading liability.

 

ii)    On careful examination of the matter, we are
of the considered opinion that the decision of the Supreme Court is squarely
applicable to the facts of the present case.

 

iii)    Consequently, we do not find any merit in
the appeal to warrant admission. Appeal is accordingly dismissed.’

Reassessment – Sections 147 and 148 of ITA, 1961 – Notice after four years – Failure to disclose material facts necessary for assessment – No duty to disclose investments – Notice for failure to disclose investment – Not valid

36. Bhavik
Bharatbhai Padia vs. ITO; [2019] 419 ITR
149 (Guj.) Date of order:
19th August, 2019 A.Y.: 2011-12

 

Reassessment –
Sections 147 and 148 of ITA, 1961 – Notice after four years – Failure to disclose
material facts necessary for assessment – No duty to disclose investments –
Notice for failure to disclose investment – Not valid

 

For the A.Y. 2011-12, the assessee-petitioner received a notice u/s 148
of the Income-tax Act, 1961 dated 30th March, 2018. The reasons
assigned by the AO for reopening are as under:

‘As per information available with this office during the year under
consideration the assessee had made investment of Rs. 50,00,000 in the pension
policies of LIC of India. The assessee has filed his return of income for the
A.Y. 2011-12 declaring total income at Rs. 72.78 lakhs. The information was
received from the Income-tax Officer (I & CI)-1, Ahmedabad on 27th
March, 2018. On a perusal of the information, it is found that the assessee has
made investment of Rs. 50,00,000 in the pension policies of LIC of India during
the F.Y. 2010-11 relevant to the A.Y. 2011-12. During the inquiries conducted
by the Income-tax Officer (I & CI), the investment of Rs. 50,00,000 made by
the assessee remains unexplained. Thus, there is an escapement of Rs. 50,00,000
and the case requires to be reopened u/s 147 of the Act.’

 

The assessee filed his objections to the notice
issued u/s 148 of the Act pointing out that he had disclosed all the income
liable to be offered and to be brought to tax in its return of income. The
assessee further pointed out in his objections that as the assessee did not
have any business income during the A.Y. 2011-12, he was not obliged to
disclose his investment of Rs. 50,00,000 in the pension policies of the LIC of
India in his return of income. The assessee further pointed out that he had
salary, income from other sources and capital gains and in such circumstances,
he was required to file form ITR-2 for the A.Y. 2011-12. It was also pointed
out that the Form ITR-2 does not include the column for the disclosure of
investments. In such circumstances, the assessee could not have been expected
to disclose his investments in his return of income. The assessee further
pointed out that his total income for the A.Y. 2011-12 was Rs. 71.50 lakhs. He
had sufficient past savings and the current year’s income to make an investment
of Rs. 50,00,000 in the LIC policies. He also pointed out to the respondent
that just because he had made an investment of Rs. 50,00,000 his case should
not be reopened, as he could be said to have made full and true disclosure of
his income. By an order dated 8th October, 2018, the AO rejected the
objections. The assessee filed a writ petition and challenged the order.

 

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

 

‘The notice for reassessment had been issued after four years on the
ground that the assessee had failed to disclose investments. It was not in
dispute that the form of return of income, i.e., ITR-2, then in force had no
separate column for the disclosure of any investment. The notice was not
valid.’