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

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.’

 

 

Income Declaration Scheme, 2016 – Scope of – Amount paid as advance tax can be adjusted towards amount due under Scheme

35. Alluri
Purnachandra Rao vs. Pr. CIT; [2019] 419 ITR
462 (Tel.) Date of order:
18th September, 2019 A.Ys.: 2010-11
to 2015-16

 

Income
Declaration Scheme, 2016 – Scope of – Amount paid as advance tax can be adjusted
towards amount due under Scheme

The petitioner filed the subject declaration under the Income
Declaration Scheme, 2016 in Form 1 on 30th June, 2016 for the A.Ys.
2010-11 to 2015-16 declaring undisclosed income of Rs. 40,98,706. In terms of
the Income Declaration Scheme, the petitioner was liable to pay a sum of Rs.
18,44,418 towards tax, surcharge and penalty on this undisclosed income. In
that regard, the petitioner claimed credit of a sum of Rs. 12,11,611 being his
tax deducted at source (TDS). He also claimed credit of a sum of Rs. 1,10,000,
being the advance tax / prepaid tax paid by him for the assessment year
2013-14. After adjusting the aforesaid credits, he paid the balance sum of Rs.
5,22,807 in three instalments as required.

 

The Principal Commissioner of Income Tax-6, Hyderabad, rejected the
declaration filed by the petitioner on the ground that he had failed to pay the
tax, surcharge and penalty on the undisclosed income declared by him before the
due date, i.e., 30th September, 2017. This was because he did not
give credit to the advance tax of Rs. 1,10,000 paid by the petitioner for the
A.Y. 2013-14. The petitioner filed a writ petition and challenged the order of
the Principal Commissioner.

 

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

 

‘i)   The Income Declaration
Scheme, 2016, was promulgated under sections 184 and 185 of the Finance Act,
2016 enabling an assessee to pay tax at 30% on undisclosed income along with
surcharge and penalty at 25% on the tax payable. Under section 187 of the Act,
read with Notification No. S. O. 2476(E) dated 20th July, 2016
([2016] 386 ITR [ST] 5), the tax, surcharge and penalty were to be paid in
three instalments between 30th November, 2016 and 30th
September, 2017.

 

ii)   The Central Board of Direct
Taxes issued Circular No. 25 of 2016, dated 30th June, 2016 ([2016]
385 ITR [ST] 22), furnishing clarifications on the Income Declaration Scheme;
question No. 4 thereunder was whether credit for tax deducted at source, if
any, in respect of the income declared should be allowed. The answer to this
was in the affirmative and to the effect that credit for tax deducted at source
should be allowed in those cases where the related income was declared under the
Scheme and credit for the tax had not already been claimed in the return of
income filed for any assessment year. Once the tax deducted at source relevant
for the period covered by the declaration filed under the Income Declaration
Scheme is given credit in accordance with the clarification of the Central
Board of Direct Taxes itself, there is no reason why advance tax paid for the
very same period, which has not been given credit to earlier, should not be
adjusted against the amount payable under the Scheme.

 

iii)  The assessee’s declaration
pertained to the A.Ys. 2010-11 to 2015-16. Advance tax of Rs. 1,10,000 had been
paid by him for the A.Y. 2013-14. Admittedly, there was no regular assessment
for that year, whereby the advance tax could have been adjusted. Therefore,
there was no rationale in denying the assessee credit of this amount while
computing the amount payable by him under the Income Declaration Scheme. If the
amount paid by the assessee for the A.Y. 2013-14, being a sum of Rs. 1,10,000,
were adjusted, the payments made by him on 21st November, 2016 (Rs.
1,50,000), 28th March, 2017 (Rs. 1,50,000) and 27th
September, 2017 (Rs. 2,22,807) would be sufficient to discharge his liability
in respect of the tax, surcharge and penalty payable by him towards his
undisclosed income declared under the Income Declaration Scheme. Hence the
rejection of the declaration was not valid.

 

iv)  The writ petition is
accordingly allowed setting aside the impugned proceedings dated 6th
February, 2018 passed by the Principal Commissioner of Income Tax-6, Hyderabad,
rejecting the declaration filed by the petitioner under the Income Declaration
Scheme, 2016. The said declaration shall be considered afresh by the Principal
Commissioner of Income Tax-6, Hyderabad, duly giving credit not only to the tax
deducted at source but also to the advance tax paid by the petitioner for the
A.Y. 2013-14. This exercise shall be completed expeditiously and, in any event,
not later than four weeks from the date of receipt of a copy of the order, be
it from whatever source.’

 

 

Exemption u/s 10(10AA) of ITA, 1961 – Leave salary (government employees) – Government employees enjoy protection and privileges under Constitution and other laws which are not available to other employees and government employees form a distinct class; they are governed by different terms and conditions of employment – Consequently, retired employees of PSUs and nationalised bank cannot be treated as government employees and, thus, they are not entitled to get full tax exemption on leave encashment after retirement / superannuation u/s 10(10AA)

34. Kamal Kumar
Kalia vs. UOI; [2019] 111
taxmann.com 409 (Delhi) Date of order:
8th November, 2019

 

Exemption u/s
10(10AA) of ITA, 1961 – Leave salary (government employees) – Government
employees enjoy protection and privileges under Constitution and other laws
which are not available to other employees and government employees form a
distinct class; they are governed by different terms and conditions of
employment – Consequently, retired employees of PSUs and nationalised bank
cannot be treated as government employees and, thus, they are not entitled to
get full tax exemption on leave encashment after retirement / superannuation
u/s 10(10AA)

 

The petitioners, who were employees of Public Sector Undertakings and
nationalised banks, filed a writ contending that although they were Central and
State Government employees, they were discriminated against. They were granted
complete exemption in respect of the cash equivalent of leave salary for the
period of earned leave standing to their credit at the time of their
retirement, whether on superannuation or otherwise. However, all others,
including the employees of PSUs and nationalised banks, are granted exemption
only in respect of the amount of leave salary payable for a period of ten
months, subject to the limit prescribed.

 

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

 

‘i)   So far as the challenge to
provisions of section 10(10AA) of the Income-tax Act, 1961 on the ground of
discrimination is concerned, there is no merit therein. This is because
employees of the Central Government and the State Government form a distinct
class and the classification is reasonable having nexus with the object sought
to be achieved. The Central Government and State Government employees enjoy a
“status” and they are governed by different terms and conditions of employment.
Thus, Government employees enjoy protection and privileges under the
Constitution and other laws, which are not available to those who are not
employees of the Central and State Governments.

 

ii)   There is no merit in the
submission of the petitioner that the employees of PSUs and nationalised banks
are also rendering services for the government and such organisations are
covered by Article 12 of the Constitution of India as “State”. Merely because
PSUs and nationalised banks are considered as “State” under article 12 of the
Constitution of India for the purpose of entertainment of proceedings under
Article 226 of the Constitution and for enforcement of fundamental rights under
the Constitution, it does not follow that the employees of such public sector
undertakings, nationalised banks or other institutions which are classified as
“State” assume the status of Central Government and State Government employees.

 

iii)  Therefore, the instant
petition is rejected, insofar as the petitioners’ challenge to the provisions
of section 10(10AA) is concerned.’

 

Charitable purpose – Meaning of – Sections 2(15) and 11 of ITA, 1961 – Preservation of environment is an object of general public utility – Polluting industries setting up company for prevention of pollution – Object not to earn profit – Fact that members of company would benefit is not relevant – Company entitled to exemption u/s 11

33. CIT vs.
Naroda Enviro Projects Ltd.; [2019] 419 ITR
482 (Guj.) Date of order:
29th July, 2019 A.Ys.: 2009-10

 

Charitable
purpose – Meaning of – Sections 2(15) and 11 of ITA, 1961 – Preservation of environment
is an object of general public utility – Polluting industries setting up
company for prevention of pollution – Object not to earn profit – Fact that
members of company would benefit is not relevant – Company entitled to
exemption u/s 11

 

The assessee company was incorporated on 19th October, 1995
and was later converted into a company limited by shares incorporated u/s 25 of
the Companies Act, 1956. The assessee company was engaged in the activity of
preservation of environment by providing pollution control treatment for
disposal of liquid and solid industrial waste. The assessee company was
registered u/s 12AA of the Income-tax Act, 1961 as a charitable institution.
For the A.Y. 2009-10 the assessee had filed its return of income declaring total
income (loss) of Rs. 258 (Rupees two hundred and fifty eight only) along with
the auditor’s report u/s 12A(b) of the Act in Form 10B claiming exemption u/s
11 of the Act. The AO took the view that the assessee company is not entitled
to seek exemption u/s 11 and held as under:

 

‘i)   The assessee is carrying on
business activity under the pretext of charitable activity. The incidental
profit cannot be for all the years and not to the extent reflected in the table
given in the order.

 

ii)   The objects specified in the
memorandum of association are important but the same have to be considered with
reference to the real practice adopted for running the activity, i.e., whether
it is charitable or for the purpose of making profit. The object included in
definition of “charitable purpose” as defined in section 2(15) should be
evidenced by charity; otherwise even environment consultant will also claim
exemption u/s 11 being a trust or a company u/s 25.

 

iii) The action is carried out for
the benefit of members to discharge their onus of treatment of chemicals, etc.
with substantial charge with intention to earn profit under the shelter of
section 25 of the Companies Act.

 

iv) Hence it is held that the assessee is rendering service of pollution
control as per the norms laid down by the Gujarat State Pollution Control Board
or any other authority responsible for the regulation of pollution in relation
to any trade, commerce or business carried out by the industries located in the
industrial area of Naroda, Vatva and Odhav for a uniform cess or fee or any
other consideration, irrespective of the nature of use or application, or
retention, of the income of such activity. Since the aggregate value of
receipts are more than Rs. 10,00,000 both the provisos to section 2(15)
are applicable to the assessee company and it is not entitled for exemption.’

 

The Commissioner (Appeals) and the Tribunal held that taking an overall
view, the dominant objects of the assessee were charitable as the dominant
object was not only preservation of the environment, but one of general public
utility and, therefore, the assessee was entitled to seek exemption u/s 11 of
the Act.

 

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

 

‘i)   The assessee was a company
engaged in the activity of preservation of the environment by providing
pollution control treatment for disposal of liquid and solid industrial waste.
The benefit accrued to the members of the company. The members were none other
than the owners of the polluting industries. These members were obliged in law
to maintain the parameters as prescribed by the Gujarat Pollution Control Board
and in law for the purpose of discharge of their trade effluents, in other
words, discharge of solid and liquid waste. If they did not do so, they would
be liable to be prosecuted and their units would also be liable to be closed.

 

ii)   However, this, by itself, was
not sufficient to take the view that the company had not been set up for a
charitable purpose. The birth of this company also needed to be looked into
closely. The fact that the members of the assessee company were benefited was
merely incidental to the carrying out of the main or primary purpose and if the
primary purpose was charitable, the fact that the members of the assessee
benefited would not militate against its charitable character nor would it make
the purpose any less charitable.

iii)  Prior to the introduction of
the proviso to section 2(15) of the Act, the assessee company was
granted registration u/s 12A of the Act. From this it was clear that prior to
the introduction of the proviso to section 2(15) of the Act, the
authority, upon due consideration of all the relevant aspects, had arrived at
the satisfaction that the assessee company was established for charitable
purposes. The company continued to be recognised as a charitable institution.
The certificate issued u/s 12A, after due inquiry, was still in force.

 

iv)  The driving force was not the
desire to earn profit, but the object was to promote, aid, foster and engage in
the area of environment protection, abatement of pollution of various kinds
such as water, air, solid, noise, vehicular, etc., without limiting its scope.
In short, the main object was preservation and protection of the environment.

 

v)   The Commissioner (Appeals) and
the Appellate Tribunal had concurrently held that taking an overall view, the
dominant objects of the assessee were charitable as the dominant object was not
only preservation of the environment, but one of general public utility and,
therefore, the assessee was entitled to seek exemption under section 11 of the
Act. The Tribunal was the last fact-finding body. As a principle, this court
should not disturb the findings of fact in an appeal under section 260A of the
Act unless the findings of fact are perverse.’

 

Capital gains – Exemption u/s 54 of ITA, 1961 – Scope – Additional cost of construction incurred within stipulated time though not deposited in capital gains account – Entitled to deduction

32. Venkata Dilip Kumar vs. CIT; [2019] 419 ITR 298 (Mad.) [2019] 111 taxmann.com 180 (Mad.) Date of order: 5th November, 2019

 

Capital gains – Exemption u/s 54 of ITA, 1961 – Scope – Additional cost
of construction incurred within stipulated time though not deposited in capital
gains account – Entitled to deduction

 

The assessee had long-term capital gain on transfer of a residential
house and invested the same in a new residential house. The assessee claimed
deduction u/s 54 of the Income-tax Act, 1961, an amount of Rs. 1.5 crores being
paid to the builder for the new house. This was allowed by the AO. The assessee
had also claimed further deduction of Rs. 57.25 lakhs u/s 54 contending that
though such sum was not deposited in the capital gains deposit account, it was
utilised for the purpose of additional expenditure towards the construction
cost and that the sum was drawn out of the capital gains deposited in the same
bank branch, although in a savings bank account. The AO refused to grant
deduction u/s 54. This was confirmed by the Tribunal.

 

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

 

‘i)   Section 54 of the Income-tax
Act, 1961 deals with profits on sale of property used for residence. The
capital gains so arising in the hands of the assessee, instead of being dealt
with as income, will be dealt with by giving deduction to such capital gains,
provided the assessee satisfies the requirement contemplated under the
provision. For seeking benefit of deduction u/s 54, the assessee should have
purchased one residential house either one year before the transfer or two
years after the date of such transfer, or constructed a residential house
within a period of three years after the date of such transfer. Meeting the
expenses towards the cost of construction of the house within a period of three
years entitles an assessee to the deduction u/s 54.

 

ii)   Section 54(2) contemplates
that if the amount of the capital gains is not appropriated by the assessee
towards purchase of the new asset within one year before the date on which the
transfer of the original asset took place, or is not utilised by him for the
purchase of the new asset before the date of furnishing the return of income
u/s 139, he has to deposit the sum in an account in any such bank and utilise
in accordance with any scheme which the Central Government may, by
notification, frame in that behalf. In other words, if the assessee has not
utilised the amount of the capital gains either in full or part, such
unutilised amount should be deposited in a capital gains account to get the
benefit of deduction in the succeeding assessment years. Section 54(2) cannot
be read in isolation and on the other hand, application of section 54(2) should
take place only when the assessee fails to satisfy the requirement u/s 54(1).
While the compliance with the requirement u/s 54(1) is mandatory and if
complied with, has to be construed as substantial compliance to grant the
benefit of deduction, the compliance with the requirement u/s 54(2) could be
treated only as directory in nature. If the assessee with material details and
particulars satisfies that the amount for which deduction is sought u/s 54 is
utilised either for purchasing or constructing the residential house in India
within the time prescribed u/s 54(1), the deduction is bound to be granted
without reference to section 54(2). Mere non-compliance with a procedural
requirement u/s 54(2) itself cannot stand in the way of the assessee getting
the benefit u/s 54, if he is, otherwise, in a position to satisfy that the
mandatory requirement u/s 54(1) is fully complied with within the time limit
prescribed therein.

iii)  The
assessee had claimed that it had utilised the disputed sum towards the cost of
the additional construction within the period of three years from the date of
the transfer and therefore, if such contention were factually correct, the
assessee had to be held to have satisfied the mandatory requirement u/s 54(1)
to get the deduction.

iv)  Matter remanded to verify
whether the sum was utilised by the assessee within the time stipulated u/s
54(1) for the purpose of construction. If such utilisation was found to have
been made within such time, the Department was bound to grant deduction.’

 

Search and seizure – Assessment u/s 153A of ITA, 1961 – Scope of section 153A – Assessee can raise new claims for deduction in return filed u/s 153A; A.Y. 2008-09

33. Principal
CIT vs. JSW Steel Ltd. [2020]
422 ITR 71 (Bom.) Date
of order: 5th February, 2020 A.Y.:
2008-09

 

Search and
seizure – Assessment u/s 153A of ITA, 1961 – Scope of section 153A – Assessee
can raise new claims for deduction in return filed u/s 153A; A.Y. 2008-09

 

The assessee is a widely-held public limited company engaged in various
activities including production of sponge iron, galvanised sheets and
cold-rolled coils through its steel plants located at Dolve and Kalmeshwar in
Maharashtra. For the A.Y. 2008-09, the assessee had filed return of income on
30th September, 2008 under the provisions of section 139(1) of the
Income-tax Act, 1961, declaring loss at Rs. 104,17,70,752. The assessee’s case
was selected for scrutiny and notice u/s 143(2) was issued on 3rd
September, 2009. During the pendency of the assessment proceedings, a search
was conducted u/s 132 of the Act on the ISPAT group of companies on 30th
November, 2010. Following the search, notice u/s 153A was issued. In response,
the assessee filed return of income declaring total loss at Rs. 419,48,90,102
on 29th March, 2012. In this return of income, the assessee made a
new claim for treating gain on prepayment of deferred value added tax / sales
tax on the net present value (NPV) basis for an amount of Rs. 318,10,93,993 as
‘capital receipt’. This new / fresh claim of the assessee was disallowed by the
A.O. while finalising the assessment u/s 143(3) read with section 153A. The
primary question that arose before the A.O. was whether the claim which was not
made in the earlier original return of income filed u/s 139(1) could be
considered in the subsequent return filed by the assessee in pursuance of
notice u/s 153A? The A.O. held that the assessee could not raise a new claim in
the return filed u/s 153A which was not raised in the original return of income
filed u/s 139(1). Thereafter, the claim was disallowed and was treated as
‘revenue receipt’.

 

The Tribunal
allowed the assessee’s claim.

 

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

 

‘i)   Section 153A of the Income-tax Act, 1961
provides for the procedure for assessment in search cases. The section starts
with a non-obstante clause stating that it is notwithstanding anything
contained in sections 147, 148 and 149. Further, clause (a) of section 153A(1)
provides for issuance of notice to the persons in respect of whom search was
conducted u/s 132 to furnish a return of income. However, the second proviso
to section 153A makes it clear that assessment relating to any assessment year
filed within a period of the six assessment years pending on the date of search
u/s 132 of the Act shall abate.

 

ii)   Thus, if on the date of initiation of search
u/s 132 any assessment proceeding relating to any assessment year falling
within the period of the six assessment years is pending, it shall stand abated
and the assessing authority cannot proceed with such pending assessment after
initiation of search u/s 132. The crucial expression is “abate”. To
“abate”, as applied to an action, is to cease, terminate, or come to an
end prematurely. Once the assessment abates, the original return which had been
filed loses its originality and the subsequent return filed u/s 153A takes the
place of the original return. In such a case, the return of income filed u/s
153A(1) would be construed to be one filed u/s 139(1) and the provisions of the
Act shall apply to it accordingly.

 

iii)  If that be the position, all legitimate claims
would be open to the assessee to raise in the return of income filed u/s
153A(1). It is open for the assessee to lodge a new claim in a proceeding u/s
153A(1) which was not claimed in his regular return of income.’

 

Loss – Set-off of – Sections 72(2), 72A and 263 of ITA, 1961 and sections 18 and 32(2) of SICA, 1985 – Amalgamation of companies – Provision for carry forward by amalgamated company of accumulated loss and unabsorbed depreciation of amalgamating company – Sick industrial company – Sanction of scheme by Board for Industrial and Financial Reconstruction implies that requirements of section 72(2) satisfied; A.Y. 2004-05

32. CIT
vs. Lakshmi Machine Works Ltd. [2020]
422 ITR 235 (Mad.) Date
of order: 13th February, 2019 A.Y.:
2004-05

 

Loss –
Set-off of – Sections 72(2), 72A and 263 of ITA, 1961 and sections 18 and 32(2)
of SICA, 1985 – Amalgamation of companies – Provision for carry forward by
amalgamated company of accumulated loss and unabsorbed depreciation of
amalgamating company – Sick industrial company – Sanction of scheme by Board
for Industrial and Financial Reconstruction implies that requirements of
section 72(2) satisfied; A.Y. 2004-05

 

Two spinning
units of a company amalgamated with the assessee under a rehabilitation scheme
under the Sick Industrial Companies (Special Provisions) Act, 1985 by an order
of sanction by the Board for Industrial and Financial Reconstruction. The
assessee claimed the carried forward loss u/s 72A of the Income-tax Act, 1961
in its return. The A.O. issued notices under sections 142(1) and 143(2) of the
1961 Act and required the assessee to show compliance with the conditions laid
down u/s 72A. The assessee submitted that it was entitled to the claim for
carry forward of loss u/s 72A by virtue of the scheme having been sanctioned by
the Board for Industrial and Financial Reconstruction which took into account the
provisions of that section as well. The A.O. agreed with the view of the
assessee and allowed the claim in his order u/s 143(3). But the Commissioner
was of the view that there was no application of mind by the A.O. while he
allowed the claim made by the assessee u/s 72A and that there were no reasons
in support thereof. Accordingly, he passed a revision order u/s 263 of the 1961
Act.

 

The Tribunal
held that the very fact that the Board for Industrial and Financial
Reconstruction had sanctioned the scheme was sufficient and no further
compliance was called for in regard to the conditions set out u/s 72A as the
provisions of the 1985 Act overrode those of the 1961 Act, and confirmed the
order of the A.O. allowing the claim of the assessee for the carry forward of
loss. Accordingly, the Tribunal set aside the order of the Commissioner passed
u/s 263.

 

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

 

‘i)   The financial viability or otherwise of the
amalgamating company has to be determined first in order to attract the
provisions of section 72A of the Income-tax Act, 1961. After the enactment of
the Sick Industrial Companies (Special Provisions) Act, 1985 and the
constitution of the Board for Industrial and Financial Reconstruction, the
question of sickness or robust health of the entity is to be determined by the
Board. It is only when the Board is satisfied that it would have entertained
applications for revival, sanctioning an appropriate scheme for rehabilitation.
Thus, a sanction by the Board for the scheme of amalgamation implies that the
requirements of section 72A have been met.

 

ii)   The view taken by the A.O. to the effect that
the claim of the assessee u/s 72A of the 1961 Act was liable to be allowed in
the light of the provisions of section 32(2) of the 1985 Act and its
interpretation by the Supreme Court was the correct one. Section 263 of the
1961 Act empowered the Commissioner to revise an order of assessment if it was
erroneous or prejudicial to the interests of the Revenue. Both conditions were
to be satisfied concurrently. The action of the A.O. though prejudicial, could
hardly be termed “erroneous” insofar as the A.O. had followed the dictum laid
down by the Supreme Court in the case of Indian Shaving Products Ltd. vs.
BIFR [1996] 218 ITR 140 (SC). Thus, in the absence of concurrent
satisfaction of the two conditions u/s 263 of the 1961 Act, the action of the
Commissioner was contrary to the statute and was therefore to be set aside.

 

iii)  The appeal filed by the Revenue is dismissed.
The substantial question of law is answered in favour of the assessee and
against the Revenue.’

Exemption u/s 10(17A) of ITA, 1961 – Award for meritorious service in public interest – Scope of section 10(17A) – Approval of State Government or Central Government – Formal approval not mandatory – Approval may be implied; A.Y. 2010-11

31. K.
Vijaya Kumar vs. Principal CIT [2020]
422 ITR 304 (Mad.) Date
of order: 26th February, 2020 A.Y.:
2010-11

 

Exemption
u/s 10(17A) of ITA, 1961 – Award for meritorious service in public interest –
Scope of section 10(17A) – Approval of State Government or Central Government –
Formal approval not mandatory – Approval may be implied; A.Y. 2010-11

 

The
petitioner has had a distinguished career in the Indian Police Service and is
at present engaged as a senior security adviser to the Union Home Ministry. In
the course of his service, he had been appointed as the Chief of the Special
Task Force (STF) leading ‘Operation Cocoon’ against forest brigand Veerappan,
leading to Veerappan’s fatal encounter on 18th October, 2004. In
recognition of the special and commendable services of the STF, the Government
of Tamil Nadu had issued G.O. Ms. No. 364, Housing and Urban Development
Department, dated 28th October, 2004 instituting an award in
national interest to STF personnel for the valuable services rendered by them
as part of the team. Pursuant thereto, the petitioner had received a cash award
of Rs. 1,08,43,000 in the F.Y. 2009-10, relevant to A.Y. 2010-11. This amount
was sought to be assessed as income by the Commissioner u/s 263 of the
Income-tax Act, 1961 for which the assessee claimed exemption u/s 10(17A). The
Commissioner directed the A.O. to allow the claim of exemption u/s 10(17A) only
if the assessee was able to produce an order granting approval of exemption by
the Government of India u/s 10(17A)(ii).

 

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

 

‘i)   The object of section 10(17A) of the
Income-tax Act, 1961 is to reward an individual who has been recognised by the
Centre or the State for rendition of services in public interest. While clause
(i) of section 10(17A) is concerned with an award whether in cash or in kind,
instituted in public interest by the Central or any State Government or
instituted by any other body and approved by the Central Government in this
behalf, clause (ii) refers to a reward by the Central or a State Government for
such purposes as may be approved by the Central Government in this behalf in
public interest.

 

ii)   No specification or prescription has been set
out in terms of how the approval is to be styled or even whether a formal
written approval is required. Nowhere in the rules or forms is there reference
to a format of approval to be issued in this regard. That apart, one should
interpret the provision and its application in a purposive manner bearing in
mind the spirit and object for which it has been enacted. It is clear that the
object of such a reward is by way of recognition by the State of an
individual’s efforts in protecting public interest and serving society in a
significant manner. Thus, the reference to “approval” in section 10(17A) does
not only connote a paper conveying approval and bearing the stamp and seal of the
Central Government, but any material available in the public domain indicating
recognition for such services rendered in public interest.

 

iii)  The assessee had been recognised by the
Central Government on several occasions for meritorious and distinguished
services and from the information available in the public domain, it could be
seen that he was awarded the Jammu and Kashmir Medal, Counter Insurgency Medal,
Police Medal for Meritorious Service (1993) and the President’s Police Medal
for Distinguished Service (1999). Specifically for his role in nabbing
Veerapan, he was awarded the President’s Police Medal for Gallantry on the eve
of Independence Day, 2005. The assessee was entitled to exemption on the awards
received from the State Government. The writ petition is allowed.’

Deduction u/s 80-IB(10) of ITA, 1961 – Housing projects – Scope of section 80-IB(10) – Not necessary that developer should be owner of land – Joint venture agreement showing assessee was developer – Assessee entitled to special deduction u/s 80-IB(10); A.Y. 2010-11

30. Bashyam
Constructions P. Ltd. vs. Dy. CIT [2020]
422 ITR 346 (Mad.) Date
of order: 30th January, 2019 A.Y.:
2010-11

 

Deduction
u/s 80-IB(10) of ITA, 1961 – Housing projects – Scope of section 80-IB(10) –
Not necessary that developer should be owner of land – Joint venture agreement
showing assessee was developer – Assessee entitled to special deduction u/s
80-IB(10); A.Y. 2010-11

 

A claim for deduction u/s 80-IB(10) of the Income-tax Act, 1961 was
allowed by the Commissioner (Appeals) but denied by the Tribunal. The reason
assigned by the Tribunal for reversing the order passed by the Commissioner
(Appeals) was that the assessee could not be considered a developer of the
housing project, as a joint venture would happen only when the owner, that is,
the assessee, treated the land as stock-in-trade in its books of accounts.

 

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

 

‘i)   A plain reading of section 80-IB(10) of the
Income-tax Act, 1961 makes it clear that deduction is available in a case where
an undertaking develops and builds a housing project. The section clearly draws
a distinction between “developing” and “building”. The provision does not
require that the ownership of land must vest in the developer for it to qualify
for such deduction.

 

ii)   The joint venture agreement clearly showed
that the assessee was the developer and ETA was the builder and mutual rights
and obligations were inextricably linked with each other and undoubtedly, the
project was a housing project. Therefore, the assessee would be entitled to
claim deduction u/s 80-IB(10).’

 

Business expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Amounts not deductible – Payments liable to deduction of tax at source – Failure to deduct tax at source – Law applicable – Effect of amendment of section 40(a)(ia) with effect from 1st April, 2013 providing for cases where recipient has declared income in question and paid tax thereon – Amendment retrospective – Non-deduction of tax at source not causing loss to Revenue – Disallowance not applicable; A.Y. 2005-06

29. CIT
vs. S.M. Anand [2020]
422 ITR 209 (Kar.) Date
of order: 23rd August, 2019 A.Y.:
2005-06

 

Business
expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Amounts not deductible
– Payments liable to deduction of tax at source – Failure to deduct tax at
source – Law applicable – Effect of amendment of section 40(a)(ia) with effect
from 1st April, 2013 providing for cases where recipient has
declared income in question and paid tax thereon – Amendment retrospective –
Non-deduction of tax at source not causing loss to Revenue – Disallowance not
applicable; A.Y. 2005-06

 

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

 

‘Whether the
second proviso to section 40(a)(ia) of the Act inserted by the Finance
Act, 2012 is clarificatory and retrospective in nature and cancellation of the
disallowance u/s 40(a)(ia) by the Tribunal is justifiable where the recipient
of the amount has already discharged his tax liability therein?’

 

The
Karnataka High Court held as under:

 

‘i)   The scheme of section 40(a)(ia) of the
Income-tax Act, 1961 is aimed at ensuring that an expenditure should not be
allowed as deduction in the hands of an assessee in a situation in which income
embedded in such expenditure has remained untaxed due to tax withholding lapses
by the assessee. It is not a penalty for tax withholding lapse but a sort of
compensatory deduction restriction for an income going untaxed due to tax
withholding lapse. The penalty for tax withholding lapse per se is
separately provided for in section 271C and section 40(a)(ia) does not add to
it. The provisions of section 40(a)(ia), as they existed prior to insertion of
the second proviso thereto, went much beyond the obvious intentions of
the lawmakers and created undue hardships even in cases in which the assessee’s
tax withholding lapses did not result in any loss to the exchequer.

 

ii)   In order to cure these shortcomings of the
provision, and thus obviate the unintended hardships, an amendment in law was
made. In view of the well-settled legal position to the effect that a curative
amendment to avoid unintended consequences is to be treated as retrospective in
nature even though it may not state so specifically, the insertion of the
second proviso must be given retrospective effect from the point of time
when the related legal provision was introduced. The insertion of the second proviso
to section 40(a)(ia) is declaratory and curative in nature and it has
retrospective effect from 1st April, 2005, being the date from which
sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

 

iii)  It was not disputed that the payments made by
the assessee to the sub-contractors had been offered to tax in their respective
returns of income, uncontroverted by the authorities. There was no actual loss
of revenue. Hence, section 40(a)(ia) was not applicable.

 

iv)  Accordingly, we answer the substantial
question of law against the Revenue and in favour of the assessee.’

 

Business expenditure – Section 37 of ITA, 1961 – General principles – Donations made by company under corporate social responsibility – Deductible u/s 37; A.Y. 2010-11

28. Principal CIT vs. Gujarat Narmada
Valley Fertilizer and Chemicals Ltd. [2020]
422 ITR 164 (Guj.) Date
of order: 16th July, 2019 A.Y.:
2010-11

 

Business
expenditure – Section 37 of ITA, 1961 – General principles – Donations made by
company under corporate social responsibility – Deductible u/s 37; A.Y. 2010-11

 

The assessee
was engaged in the business of manufacturing, sale and trading of chemical
fertilizers and chemical industrial products. The company was also engaged in
the business of information and technology. For the A.Y. 2010-11 the assessee
claimed expenditure of Rs. 17,50,36,756 u/s 37(1). Such claim was put forward
in fulfilment of its corporate social obligation and responsibility. The A.O.
disallowed the claim. The Appellate Tribunal relied on its order passed for
A.Y. 2009-10 and took the view that the assessee was entitled to claim
deduction towards the expenditure incurred for discharging its corporate social
responsibility u/s 37(1).

 

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

 

‘The word
“business” used in section 37(1) in association with the expression “for the
purposes of” is a word of wide connotation. In the context of a taxing statute,
the word “business” would signify an organised and continuous course of
commercial activity, which is carried on with the end in view of making or
earning profits. Under section 37(1), therefore, the connection has to be
established between the expenditure incurred and the activity undertaken by the
assessee with such object. The concept of business is not static. It has
evolved over a period of time to include within its fold the concrete
expression of care and concern for society at large and the people of the
locality in which the business is located in particular. It is not open to the
Court to go behind the commercial expediency which has to be determined from
the point of view of a businessman.

 

The test of
commercial expediency cannot be reduced to a ritualistic formula, nor can it be
put in a water-tight compartment. As long as the expenses are incurred wholly
and exclusively for the purpose of earning income from the business or
profession, merely because some of these expenses are incurred voluntarily,
i.e., without there being any legal or contractual obligation to incur them,
those expenses do not cease to be deductible in nature.

 

Explanation 2 to section 37(1) comes into play with effect from 1st
April, 2015. This disallowance is restricted to the expenses incurred by the
assessee under a statutory obligation u/s 135 of the Companies Act, 2013, and
there is thus now a line of demarcation between expenses incurred by the
assessee on discharging corporate social responsibility under such a statutory
obligation and under a voluntary assumption of responsibility. As for the
former, the disallowance under Explanation 2 to section 37(1) comes into play,
but for the latter there is no such disabling provision as long as the
expenses, even in discharge of corporate social responsibility on voluntary
basis, can be said to be “wholly and exclusively for the purposes of business”.

 

The assessee company was a polluting company. The assessee company was
conscious of its social obligations towards society at large. The assessee
company was a Government undertaking and, therefore, obliged to ensure
fulfilment of all the protective principles of State policy as enshrined in the
Constitution of India. The moneys had been spent for various purposes and could
not be regarded as outside the ambit of the business concerns of the assessee.
The order passed by the Appellate Tribunal was just and proper and needed no
interference in the present appeal.’

Appeal to Appellate Tribunal – Duty of Tribunal to decide appeal on merits – Rule 24 of ITAT Rules, 1963 Rectification of mistakes – Section 254 of ITA, 1961 – Order of Tribunal dismissing appeal ex parte for non-prosecution – Rejection of application for recall on ground of limitation – Not justified – Assessee granted liberty to apply for recall of order; A.Y. 2006-07

27. Golden
Times Services Pvt. Ltd. vs. Dy. CIT [2020]
422 ITR 102 (Del.) Date
of order: 13th January, 2020 A.Y.:
2006-07

 

Appeal to
Appellate Tribunal – Duty of Tribunal to decide appeal on merits – Rule 24 of
ITAT  Rules, 1963

 

Rectification
of mistakes – Section 254 of ITA, 1961 – Order of Tribunal dismissing appeal ex
parte for non-prosecution – Rejection of application for recall on ground
of limitation – Not justified – Assessee granted liberty to apply for recall of
order; A.Y. 2006-07

 

The relevant
year is the A.Y. 2006-07. In an appeal before the Income-tax Appellate Tribunal,
the petitioner company had challenged the addition of Rs. 19,00,000 which was
confirmed by the Commissioner (Appeals). The appeal was filed on 11th
December, 2014 and was heard on 30th August, 2016. The appeal was
dismissed by an order dated 18th October, 2016. In the said order,
the Tribunal, while noting that no one was present on behalf of the assessee at
the time of hearing, proceeded to dispose of the appeal, observing that notice
was sent to the assessee on 15th July, 2016 at the address mentioned
in the memo of appeal but despite that the assessee remained unrepresented. It
was further noted that the notice had come back unserved with a report that the
property was locked for quite some time. It was also noted that the earlier
notice, sent on 1st June, 2016 on the same address of the assessee,
had also been received back unserved with similar comments. The Tribunal, thus,
held that the assessee was presumably not serious in pursuing the appeal and
dismissed the same in limine. At the same time, the assessee was granted
liberty to approach the Income-tax Appellate Tribunal for a recall of the order
if it was able to show a reasonable cause for non-appearance. Thus, there was
no adjudication on the merits of the appeal.

 

On 8th February,
2018 when an inquiry was made about the status of the appeal, the petitioner
came to know that the appeal had been dismissed ex parte for
non-prosecution. Thereafter, on 8th March, 2018 an application was
filed for recall of the order dated 18th October, 2016. The petitioner
filed the application giving the grounds for non-appearance, with an
explanation that the absence was beyond its control. However, the application
was dismissed by an order dated 30th August, 2019 on the ground that
the same is barred by limitation u/s 254(2) of the Act.

 

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

 

‘i)   Rule 24 of the Income-tax (Appellate
Tribunal) Rules, 1963 mandates the Appellate Tribunal to decide the appeal on
its merits. It is the duty and obligation of the Appellate Tribunal to dispose
of the appeal on merits after giving both the parties an opportunity of being
heard. No limitation is provided in Rule 24 of the Rules.

 

ii)   Section 254(2) of the Income-tax Act, 1961
refers to suo motu exercise of the power of rectification by the
Appellate Tribunal, whereas the second part refers to rectification and
amendment on an application being made by the Assessing Officer or the assessee
pointing out the mistake apparent from the record. Section 254(2) was amended
by the Finance Act, 2016 with effect from 1st June, 2016 and the
words “four years from the date of the order” were substituted by
“six months from the end of the month in which the order was passed”.

 

iii)  Section 254(3) stipulates that the Appellate
Tribunal shall send a copy of the order passed by it to the assessee and the
Principal Commissioner. Further, Rule 35 of the Income-tax (Appellate Tribunal)
Rules, 1963 also requires that the orders are required to be communicated to
the parties. The section and the Rule mandate the communication of the order to
the parties. Thus, the date of communication or knowledge, actual or
constructive, of the orders sought to be rectified or amended u/s 254(2) of the
Act becomes critical and determinative for the commencement of the period of
limitation.

 

iv)  The appeal had been dismissed ex
parte for non-prosecution. At the same time, the assessee was granted
liberty to approach the Appellate Tribunal for recall of the order if it was
able to show a reasonable cause for non-appearance. Thus, there was no
adjudication on the merits of the appeal. The dismissal of the application for
recall of the order on the ground of limitation was not valid.

 

v)  The course adopted by the Appellate Tribunal
at the first instance, by dismissing the appeal for non-prosecution, and then
compounding the same by refusing to entertain the application for recall of the
order, cannot be sustained. We, therefore have no hesitation in quashing the
impugned order. Accordingly, the present petition is allowed. The order dated
30th August, 2019 is quashed and the matter is remanded back to the
Income-tax Appellate Tribunal with a direction that they shall hear and dispose
of I.T.A. No. 6739/Del/2014 on merits.’

Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

18. Ajay Gupta vs. CIT

[2020] 114 taxmann.com 577 (All.)

Date of order: 13th November, 2019

 

Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

 

The residential premises of the assessee were searched u/s 132 of the Income-tax Act, 1961 on 28th February, 2000. Pursuant to a notice u/s 158BC, the assessee filed return of income declaring NIL undisclosed income. The A.O. assessed the undisclosed income at Rs. 65,33,302.

 

The CIT (Appeals) partly allowed the appeal of the assessee. The CIT (Appeals) deleted the addition of Rs. 5,58,870 made by the A.O. on account of papers found during the search. The Tribunal reversed the order of the CIT (Appeals) and restored that of the A.O. The appeal by the assessee was admitted on the following questions of law:

 

‘1. Whether the presumption u/s 132(4A) of the Income-tax Act can be raised in the assessment proceedings?

 

2. Whether, apart from section 132(4A) of the Act, the burden to explain the documents seized from the possession of the assessee during search is upon him, and if it is so, then has he discharged the burden?’

 

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

 

‘i) It is not in dispute that two loose papers were found during search from the premises of assessee, however, during block assessment proceedings, the assessee had denied the documents and statement was recorded by Deputy Director of Investigation; he had submitted that he had no concern with the said documents so seized. Further, the A.O. while passing the assessment order, had only on basis of the loose papers found during search made addition to the undisclosed income of the assessee while the entries of said papers remained uncorroborated.

 

ii) This Court, in the case of CIT vs. Shadiram Ganga Prasad, 2010 UPTC 840, has held that the loose parchas found during search at the most could lead to a presumption, but the Department cannot draw inference unless the entries made in the documents so found are corroborated by evidence.

 

iii) As section 132(4A) of the Act provides that any books of accounts, documents, money, bullion, jewellery or other valuable articles or things found in possession of, or in control of any person in course of search may be presumed to be belonging to such person, and further, if the contents of such books of accounts and documents are true. But this presumption is not provided in absolute terms and the word used is “may” and not “shall”, as such the Revenue has to corroborate the entries made in the seized documents before presuming that transactions so entered were made by the assessee. Presumption so provided is not in absolute terms but is subject to corroborative evidence.

 

iv) In the present case, the Tribunal only on basis of presumption u/s 132 (4A) of the Act, reversed the finding of CIT (Appeals) without recording any finding as to how the loose sheets which were recovered during search were linked with the assessee. In the absence of corroborative evidence, the Tribunal was not justified in reversing the finding by the CIT (Appeals).

 

v) In view of the above, we are of the considered view that the order passed by the Tribunal reversing the finding of CIT (Appeals) in regard to deletion of the addition made of Rs. 5,58,870 and restoring the order of the A.O. on mere presumption is unsustainable. The order dated 12th March, 2010 is set aside to that extent and the matter is remitted back to the Tribunal to decide afresh as far as addition of Rs. 5,58,870 is concerned, within a period of three months from today.’

Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

17. Principal CIT vs. Cartier Leaflin (P) Ltd.

[2019] 112 taxmann.com 63 (Bom.)

[2020] 268 Taxman 222 (Bom.)

Date of order: 15th October, 2019

A.Y.: 2011-12


Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

 

The assessee was engaged in the business of financing and trading in shares. In its return of income, the assessee declared a total loss of Rs. 11.29 crores. In assessment, the A.O. made a few additions / disallowances which resulted in the assessee’s taxable income reaching Rs. 35.50 crores. Subsequently, the Principal Commissioner opined that the amount of Rs. 8.79 crores shown under ‘other operating losses’ seemed to be a trading loss incurred by the assessee company out of its business of financial and capital market activities, which was its main business activity. He opined that on perusal of the assessment records, it was noticed that no examination of the books of accounts, transaction accounts of the share trading activity carried out by the assessee company vis-a-vis the demat accounts was carried out by the A.O. and that the entire operating loss as mentioned was accepted without any verification or proper application of mind. He, thus, held that the assessment order passed by the A.O. appeared to be erroneous and prejudicial to the interest of Revenue. Notice u/s 263 of the Income-tax Act, 1961 was issued by the Principal Commissioner.

 

On the assessee’s appeal, the Tribunal noted that from the records available it was evident that complete details in support of the claim of operating loss of Rs. 8.79 crores were made available by the assessee company to the A.O. In fact, the manner in which the operating loss was arrived at was submitted in a tabulated form along with item-wise details of all transactions during the assessment proceedings. Thus, the Tribunal concluded that the show cause notice u/s 263 by the Principal Commissioner was issued without examining the assessment records and the view taken by the A.O. after examination of exhaustive details and evidence was a possible view. The Tribunal held that the notice u/s 263 is not valid.

 

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

‘i) The finding of fact in the order of the Tribunal is that the proceedings u/s 263, on the face of it, have been initiated without examination of records before the A.O. is not shown to be perverse. It is clear that the show cause notice proceeds on the basis that the books of accounts, transaction accounts of share trading carried out by the assessee vis-a-vis demat accounts have not been examined by the A.O. during the course of assessment proceedings. However, in the assessment order dated 28th March, 2014 itself, the A.O. had recorded that he examined the demat account in order to verify the share trading activities claimed by the assessee. Moreover, before passing the assessment order, sale, purchase and closing stocks were also examined by the A.O.

 

ii) Thus, the basis to invoke section 263 factually did not exist as there was due inquiry by the A.O. during the assessment proceedings leading to the assessment order. Thus, it is amply clear that the A.O. had applied his mind while accepting the claim of the assessee of operating loss of Rs. 8.79 crores making the proceedings u/s 263 bad in law. In any event, the view taken on facts by the A.O. is a possible view and the same is not shown to be bad.

 

iii) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. And appeal is, therefore, dismissed.’

Return of income – Filing of, in electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72 of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he was entitled to – Assessee was directed to make representation before CBDT where he was not able to reflect set-off available in terms of section 72 in prescribed return of income in electronic form

16. Samir Narain Bhojwani
vs. Dy.CIT

[2020] 115 taxmann.com 70
(Bom.)

Date of order: 22nd
October, 2019

A.Y.: 2019-20

 

Return of income – Filing of, in
electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72
of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return
as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he
was entitled to – Assessee was directed to make representation before CBDT
where he was not able to reflect set-off available in terms of section 72 in
prescribed return of income in electronic form

 

The assessee was obliged u/s 139D
of the Income-tax Act, 1961 read with Rule 12 of the Income-tax Rules, 1962 to
file his return of income electronically with his digital signature. However,
he was not able to reflect in the prescribed return of income in electronic
form the set-off available in terms of section 72, i.e., setting off of current
year’s business income against the carry-forward loss from the earlier years.
This was because the return which was filed electronically required certain
columns to be filled in by the petitioner while the other columns were
self-populated. The assessee was thus unable to change the figures and make a
claim for set-off u/s 72 in the present facts. This resulted in excess income
being declared, resulting in an obligation to pay more tax on income which in
terms of section 72 was allowed to be set off against carried-forward losses of
earlier years.

 

Therefore, the assessee filed a
writ petition under Article 226 of the Constitution of India and sought a
direction from the High Court to the Respondent No. 1, the A.O., and Respondent
No. 2, the CBDT, to accept the petitioner’s return of income for A.Y. 2019-20
in paper form u/s 139(1) of the Act and the same be taken up for assessment in
accordance with the Act.

 

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

 

‘i) The claim sought to be urged by the assessee,
viz., set-off of business profits of this year offered to tax under the head
“capital gain” being set off against carried-forward loss is prima facie
supported by the decisions of the Tribunal in the case of M.K. Creations
vs. ITO [IT Appeal No. 3885 (Mum.) of 2014, dated 7th April, 2017]
and in ITO vs. Smart Sensors & Transducers Ltd. [2019] 104 taxmann.com
129/176 ITD 104 (Mum.–Trib.). It is also not disputed by the Revenue
that the return of income in electronic form is self–populated, i.e., on
filling in some entries, the other entries in the return are indicated by the
system itself. Thus, the petitioner is unable to make a claim which according
to him he is entitled to in law. In case the petitioner is compelled to file in
the prescribed electronic form, it could be declared by the A.O. as defective
(if all entries are not filled), or raise a demand for tax on the basis of the
declared income u/s 143(1), or if the assessment is taken to scrutiny u/s
143(3), then the petitioner will not be entitled to raise a claim of set-off
u/s 72 during the assessment proceedings. This, in view of the decision of the
Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT [2006]
157 Taxman 1/284 ITR 323 wherein it has been held that if a claim is
not made by the assessee in its return of income, then the A.O. would have no
power to entertain a claim otherwise than by way of revised return of income.
The revised return of income, if the petitioner attempts to file it, would
result in the petitioner not being able to make the claim for which the revised
return is filed as the revised return of income would also have to be filed in
the prescribed electronic form which does not provide for such an eventuality.
Thus, for the purposes of the subject assessment year if the return of income
is filed electronically, it (the assessee) would have given up, at least before
the A.O., his claim to benefit of section 72; this, whether the return of
income is processed u/s 143(1) or undergoes scrutiny u/s 143(3).

 

ii) The purpose and object of e-filing of return is simplicity and
uniformity in procedure. However, the above object cannot in its implementation
result in an assessee not being entitled to make a claim of set-off which he
feels he is entitled to in accordance with the provisions of the Act. The
allowability or disallowability of the claim is a subject matter to be
considered by the A.O. However, the procedure of filing the return of income
cannot bar an assessee from making a claim under the Act to which he feels he
is entitled.

 

iii) It is true that in terms of Rule 12 of the Rules the returns are
to be filed by the petitioner only electronically and he is bound by the Act
and the Rules, thus (the Department) cannot accept the paper return. However,
in terms of section 139D, it is for the CBDT to make rules providing for filing
of returns of income in electronic form. This power has been exercised by the
CBDT in terms of Rule 12 of the Rules. However, the form as prescribed does not
provide for (the) eventuality that has arisen in the present case and may also
arise in other cases. Thus, this is an issue to be brought to the notice of the
CBDT, which would in case it finds merit in this submission, issue necessary
directions to cover this gap.

 

iv) In the normal course, the petitioner would have been directed to
file representation with the CBDT making a demand for justice, before
considering issuing of a writ of mandamus. However, in the peculiar
facts of this case, the petitioner is required to file return of income by 31st
October, 2019. It is only when the petitioner was in the process of
filing his return electronically that he realised that he is unable to make a
claim of set-off u/s 72, even though the claim itself is prima facie
allowable in view of the decisions of the Tribunal in M.K. Creation
(Supra) and Smart Sensors & Transducers Ltd. (Supra). In the
absence of the petitioner filing its return of income on or before 31st
October, 2019, the petitioner is likely to face penal consequences. The issue
raised is a fundamental issue, which needs to be addressed by the CBDT.

 

v) Therefore, it would be appropriate that the petitioner make a
representation on the above issue to the CBDT, who would then consider it in
the context of the facts involved in the instant case and issue necessary
guidelines for the benefit of the entire body of assessees if the petitioner is
right in his claim that the prescribed return of income to be filed
electronically prohibits an assessee from making its claim. However, in the
meantime, the petitioner, without prejudice to his rights and contentions, would
file the return of income in electronic form on the system before the last
date. Besides, (he would) also file his return of income for the subject
assessment year in paper form with the A.O. before the last date. This return
of income in paper form would be accepted by the A.O. without prejudice to the
Revenue’s contention that such a return cannot be filed.

 

vi) In the meantime, till such time as the
CBDT takes a decision on the petitioner’s representation, the Revenue would not
act upon the electronically filed return of income so as to initiate any
coercive recovery proceedings.’

Recovery of tax – Stay of demand pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530 dated 6th March, 1989 – The Circular stating that a stay of demand be granted if there are conflicting views of High Court can be extended to conflicting views of different Benches of Tribunal as well

15. General Insurance
Corporation of India vs. ACIT

[2019] 111 taxmann.com 412
(Bom.)

[2019] 267 Taxman 596 (Bom.)

Date of order: 14th
October, 2019

A.Y.: 2017-18

 

Recovery of tax – Stay of demand
pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530
dated 6th March, 1989 – The Circular stating that a stay of demand
be granted if there are conflicting views of High Court can be extended to
conflicting views of different Benches of Tribunal as well

 

For the A.Y. 2017-18, the
assessee filed an appeal against the assessment order. The assessee also filed
an application for stay of demand u/s 220(6) of the Income-tax Act, 1961. The
assessee was directed to deposit 20% of tax demand during pendency of appellate
proceedings.

 

The assessee filed a writ
petition challenging the order and claimed that the assessee is entitled to
unconditional stay till disposal of appellate proceedings in view of the fact
that there were conflicting decisions of co-ordinate Benches of the Tribunal so
far as the merit of the assessee’s case was concerned. The Bombay High Court
allowed the writ petition and held as under:

 

‘i) The CBDT Circular No. 530 dated 6th March, 1989 states that stay
of demand be granted where there are conflicting decisions of the High Court.
This principle can be extended to the conflicting decisions of the different
Benches of the Tribunal. Thus, in the above facts a complete stay of the demand
on the above head, i.e., Item No. 1 of the above chart, was warranted in the
petitioner’s favour.

ii) Therefore, unconditional stay was to be granted to assessee till
disposal of appellate proceedings.’

Reassessment – Sections 147, 148 and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of sanction granted by Chief Commissioner – Since Chief Commissioner was not specified officer u/s 151(2) to grant such sanction, impugned notice was to be quashed

14. Miranda Tools (P) Ltd.
vs. ITO

[2020] 114 taxmann.com 584
(Bom.)

Date of order: 14th
November, 2019

A.Y.: 2014-15

 

Reassessment – Sections 147, 148
and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of
sanction granted by Chief Commissioner – Since Chief Commissioner was not
specified officer u/s 151(2) to grant such sanction, impugned notice was to be
quashed

 

The petitioner is a company
engaged in the business of manufacture and marketing of fabrics. The petitioner
filed its return of income for the A.Y. 2014-15 on 22nd September,
2014 declaring NIL income. The assessment was completed u/s 143(3) of the
Income-tax Act, 1961 by an order dated 1st September, 2016.
Thereafter, on 26th February, 2019, the A.O. issued a notice u/s 148
of the Act on the ground that he has reason to believe that the income
chargeable to tax in respect of share application money for the relevant
assessment year has escaped assessment. The petitioner submitted its
objections. The A.O. rejected the objections.

 

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

 

‘i) As per the provisions of section 151(2) of the Act, a sanction to
issue notice for reopening u/s 148 of the Act has to be given by the Joint
Commissioner of Income Tax in case the reassessment is sought to be done before
(or within) four years. Under section 2(28C) of the Act, a Joint
Commissioner also means Additional Commissioner of Income Tax. In the present
case, the A.O. submitted a proposal to the Principal Chief Commissioner of Income
Tax for reopening the assessment u/s 148 on 6th February, 2019.

 

ii) The question arises whether the sanction granted by the Chief
Commissioner of Income Tax would fulfil the requirement of section 151. It has
long been settled that when the statute mandates the satisfaction of a
particular authority for the exercise of power, then it has to be done in that
manner only. Adopting this principle, the Division Benches of this Court in the
cases of Ghanshyam K. Khabrani vs. Asstt. CIT [2012] 20 taxmann.com
716/210 Taxman 75 (Mag.)/346 ITR 443 and CIT vs. Aquatic Remedies
(P) Ltd. [2018] 96 taxmann.com 609/258 Taxman 357/406 ITR 545 have held
that sanction for issuance of reopening notice has to be obtained from the
authority mentioned in section 151 and not from any other officer, including a
superior officer. In the present case the Chief Commissioner of Income tax is
not the officer specified in section 151 of the Act. There is thus a breach of
requirement of section 151(2) of the Act regarding sanction for issuance of
notice u/s 148 of the Act. Consequently, the impugned notice and the impugned
order cannot be sustained in law. The petitioner, therefore, is entitled to
succeed.

 

iii) Accordingly, the impugned notice dated
26th February, 2019 and the impugned order dated 15th
July, 2019 are quashed and set aside.’

Charitable or religious trust – Registration procedure (Deemed registration) – Sections 12AA and 13 of ITA, 1961 – Where Commissioner (Exemption) did not decide application u/s 12AA within six months from date on which matter was remitted by Tribunal, registration u/s 12AA(2) would be deemed to be granted to assessee society; A.Ys.: 2010-11 to 2014-15

24. CIT(E) vs. Gettwell Health and Education Samiti [2020] 115 taxmann.com 66 (Raj.) Date of order: 15th March, 2019 A.Ys.: 2010-11 to 2014-15

 

Charitable
or religious trust – Registration procedure (Deemed registration) – Sections
12AA and 13 of ITA, 1961 – Where Commissioner (Exemption) did not decide
application u/s 12AA within six months from date on which matter was remitted
by Tribunal, registration u/s 12AA(2) would be deemed to be granted to assessee
society; A.Ys.: 2010-11 to 2014-15

 

The assessee
is a society registered under the Rajasthan Societies Registration Act, 1958 vide
registration certificate dated 3rd January, 2008. Its main object is
to provide medical facilities in the State of Rajasthan. The assessee is
running a hospital at Sikar in the name of Gettwell Hospital & Research
Centre. The assessee filed an application in Form 10A seeking registration u/s
12AA of the Income-tax Act, 1961 on 19th January, 2010. The
Commissioner of Income Tax (Exemptions) [‘the CIT(E)’] rejected that
application by an order dated 23rd July, 2010. By an order dated 22nd
July, 2011, the Tribunal set aside the order dated 23rd July, 2010
and remanded the matter back to the CIT(E) on the ground that it had not
communicated the A.O.’s report to the assessee and therefore restored the issue
of registration back on the file of the CIT(E) with a direction that the
assessee should be given an opportunity before deciding the issue of
registration and should be confronted with all the materials which are
considered adverse to the assessee. After remand of the matter, the CIT(E)
passed a fresh order on 9th October, 2015 and rejected the
application of the assessee, holding that the assessee was running the hospital
for the benefit of the family members of Shri B.L. Ranwa and there was no
charity in it.

 

The Tribunal allowed the assessee’s appeal.

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

 

‘i)    The Tribunal also noted that once the matter
was remanded back to the CIT(E) then the limitation for passing the order /
decision cannot be more than the limitation provided for deciding the
application u/s 12AA of the Act. There is no dispute that as per the provisions
of section 12AA(2) of the Act the limitation for granting or refusing the
registration is prescribed as before the expiry of six months from the end of
the month in which the application was received. Relying on the judgment of the
Supreme Court in CIT vs. Society for the Promotion  of Education [2016] 67 taxmann.com 264/238
Taxman 330/382 ITR 6 which upheld the judgment of the Allahabad High
Court and judgment of this Court in CIT vs. Sahitya Sadawart Samiti
[2017] 88 taxmann.com 703/396 ITR 46 (Raj.), the Tribunal held that
once the limitation prescribed u/s 12AA of the Act expired and the
consequential default on the part of the CIT(E) in deciding the application,
would result in deemed grant of registration is a settled proposition.

 

ii)    Therefore, it has been held
by the Tribunal that the judgment of the CIT(E) is reversed on merits and
registration would stand granted to the assessee by prescription of law made in
section 12AA(2) of the Act. The Tribunal in this behalf relied on the judgment
of the Lucknow Bench of the Tribunal in Harshit Foundation vs. CIT [2013]
38 taxmann.com 309/60 SOT 147 (URO) in which case it was held that
where the Commissioner does not pass any order even after six months from the
receipt of the Tribunal’s order remitting the matter to him, the registration
will be deemed to have been granted.

 

iii)    This is subject to exercise
of the Commissioner’s power u/s 12AA(3) of the Act in appropriate cases.

iv)   In view of the above, we
hardly find any justification in admitting this appeal as in our considered
view it does not raise any question of law, much less substantial question of
law. The appeal is therefore dismissed.’

 

Charitable purpose – Section 2(15) r/w sub-sections 11, 12 and 13 of ITA, 1961 – Where India Habitat Centre, inter alia set up with primary aim and objective to promote habitat concept, was registered as a charitable trust, principle of mutuality for computation of its income was not required to be gone into as income was to be computed as per sections 11, 12 and 13; A.Y.: 2012-13

23. CIT (Exemption) vs. India Habitat Centre [2020] 114 taxmann.com 84 (Del.) Date of order: 27th November, 2019 A.Y.: 2012-13

 

Charitable purpose – Section 2(15) r/w sub-sections 11, 12 and 13 of
ITA, 1961 – Where India Habitat Centre, inter alia set up with primary
aim and objective to promote habitat concept, was registered as a charitable
trust, principle of mutuality for computation of its income was not required to
be gone into as income was to be computed as per sections 11, 12 and 13; A.Y.:
2012-13

 

For the A.Y.
2012-13, the assessee filed its return of income on 28th September,
2012 in the status of ‘Trust’, declaring ‘Nil income’. Its assessment was
framed u/s 143 (3) of the Income-tax Act, 1961, computing total income as Rs.
5,86,85,490 and holding that the activities of the assessee are hybrid in
nature; they were partly covered by provisions of section 11 read with section
2(15), and partly by the principle of mutuality. It was held by the A.O. that
since the assessee is not maintaining separate books of accounts, income cannot
be bifurcated under the principle of mutuality or otherwise. The entire surplus
in I&E account, amounting to Rs. 5,83,92,860, was treated as taxable income
of the assessee.

The CIT(Appeals) allowed the appeal of the assessee by relying upon the
judgment of the Delhi High Court in the assessee’s own case dated 12th
October, 2011 for A.Ys. 1988-89 to 2006-07 and the decision of the Hon’ble
Supreme Court in the case of Radha Soami Satsang vs. CIT [1992] 193 ITR
321/60 Taxman 248. The Tribunal confirmed the decision of the
CIT(Appeals).

 

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

 

‘i)    The fundamental question is
that if the assessee has taken the plea of mutuality, whether it could be
deprived of the benefit of section 2(15) of the Act. On this aspect, the A.O.
has proceeded to classify the assessee’s activities as ?hybrid”, holding that
part of the activities are covered by provisions of section 11 r/w section
2(15) and part by principle of mutuality. The CIT(A), after examining the records,
has given a categorical finding that the activities of the centre fall within
the meaning of the definition of ?charitable activities” as provided u/s 2(15)
of the Act.

 

ii)    Applying the test of profit motive, it was
held that the surpluses generated by the assessee are not being appropriated by
any individual or group of individuals. Merely because the assessee is charging
for certain goods and services it does not render such activities as commercial
activities, and the fact that the A.O. has accepted that the assessee is
promoting public interest as provided in the proviso to section 2(15),
there cannot be any doubt that the assessee should be regarded as a charitable
organisation and given the full benefit of exemption provided to such
organisations under the Act. Relying on this premise, it has been held that
since the assessee has not generated any surpluses from anyone, members or
non-members, it was not correct to say that the assessee has claimed relief
partly as charitable organisation and partly as mutual association.

 

iii)    Further, it was rightly
held that the principle of mutuality becomes superfluous in view of the fact
that the activities were held to be charitable. Applying the principle of
consistency, the CIT(A) held that there is no fundamental change in the nature of
activities of the assessee for the period prior to A.Y. 2008-09 and subsequent
years. The ITAT has confirmed the findings of the CIT(A). Though the principles
of res judicata are not applicable to the income tax proceedings,
however, at the same time, one cannot ignore the fact that there is no dispute
with respect to the consistency in the nature of activities of the assessee.
All the income tax authorities have held that the assessee is a charitable
institution and this consistent finding of fact entitles the assessee to have
its income computed under sections 11, 12 and 13 of the Act.

 

iv)   In this background, we find
no ground to disentitle the assessee to the benefits of section 2(15) of the
Act. This being the position, we find no perversity in the impugned decision
and, therefore, no question of law, much less substantial question of law,
arises for consideration. As a result, the appeal of the Revenue is dismissed.’

Settlement of cases – Section 245D of ITA, 1961 – Proceedings for settlement are not adjudicatory proceedings – Assessee disputing liability but offering to pay additional tax – No non-disclosure of full and true facts – Order of Settlement Commission accepting offer of assessee is valid

8. Principal CIT vs.
Shreyansh Corporation

[2020] 421 ITR 153 (Guj.)

Date of order: 7th
October, 2019

A.Y.: 2004-05

 

Settlement of cases – Section
245D of ITA, 1961 – Proceedings for settlement are not adjudicatory proceedings
– Assessee disputing liability but offering to pay additional tax – No
non-disclosure of full and true facts – Order of Settlement Commission accepting
offer of assessee is valid

On an application for settlement
after considering the issues put forth by the Principal Commissioner in the
report u/r 9 of the Income-tax Rules, 1962 and the rejoinders of the assessees
and the documents submitted along with the statement of facts and the
submissions of the respective parties, the Settlement Commission noted that
insofar as the addition to partner’s capital was concerned, the assessees had
submitted affidavits made by M and the two assessees and it was further stated
that if at any stage these affidavits were found to be false, it may be treated
as a misrepresentation of facts u/s 245D(6) of the Act and the consequences as
u/s 245D(7) of the Act may follow in the case of the two assessees. The
Settlement Commission further noted that the assessees had offered additional
income for bringing quietus to certain issues in the spirit of a
settlement.

 

Taking into account all the facts
and discussions on record, the Settlement Commission was of the view that the additional
income offered during the section 245D(4) proceedings by the applicant’s letter
dated 8th June, 2018 over the additional income disclosed in the
settlement applications could be accepted with reference to the income
disclosed in the settlement applications. It further noted that the
Commissioner and the A.O. also did not make any further submissions. The
Settlement Commission accordingly settled the cases of the assessees on the
terms and conditions set out in the order.

 

The Principal Commissioner filed
writ petitions and challenged the order of the Settlement Commission. The
Gujarat High Court dismissed the petitions and held as under:

 

‘i)    The proceedings before the Settlement Commission are in the
nature of settlement between the parties and are not strictly speaking
adjudicatory proceedings. On a perusal of the order passed by the Settlement
Commission it was abundantly clear that the assessees had not accepted the
liability of 5% of trading expenses but in the spirit of settlement offered to
pay the amount computed by the A.O. with a view to bring quietus to the
matter and buy peace of mind. The offer to pay such amounts in addition to the
amounts disclosed in the applications u/s 245C of the Act could not be said to
be disclosure of any further amounts under that section as they had been
offered only to bring about a settlement.

 

ii)    The fact that the assessees had offered to pay such amounts, the
liability whereto they had not accepted, could not be termed as non-disclosure
of full and true facts in the applications u/s 245C of the Act.


iii)  Under the circumstances, considering
the amounts so offered by way of settlement, which were quite meagre
considering the overall disclosure made, there was no infirmity in the order
passed by the Settlement Commission warranting interference in exercise of
powers under article 226 of the Constitution of India’.

Revision – Section 264 of ITA, 1961 – Application for revision – Powers of Commissioner – Powers u/s 264 are very wide – Mistake in computation of income and revised return barred by limitation – Commissioner finding that mistake was inadvertent and claim for deduction bona fide – Order rejecting application for revision is not valid Income-tax – General principles – Effect of Article 265 of the Constitution of India – No tax collection except by authority of law

7. Sharp Tools vs. Principal
CIT

[2020] 421 ITR 90 (Mad.)

Date of order: 23rd
October, 2019

A.Y.: 2013-14

 

Revision – Section 264 of ITA,
1961 – Application for revision – Powers of Commissioner – Powers u/s 264 are
very wide – Mistake in computation of income and revised return barred by
limitation – Commissioner finding that mistake was inadvertent and claim for
deduction bona fide – Order rejecting application for revision is not
valid

 

Income-tax – General principles –
Effect of Article 265 of the Constitution of India – No tax collection except
by authority of law

 

The assessee
filed its return of income for the A.Y. 2013-14. It then received an intimation
u/s 143(1) of the Income-tax Act, 1961 accepting the returned income.
Thereafter, the assessee realised that a mistake had inadvertently crept in
while filling up the quantum in column 14(i) of the return. Therefore, on 9th
January, 2016, the assessee filed a revised return rectifying the mistake. The
return was not processed by the Central Processing Centre, since it was
considered as a revised return filed beyond the specified time u/s 139(5) of
the Act. The assessee made an application to the A.O. for rectification u/s
154. The A.O. rejected the plea,  stating
that the claim was belated. Thereafter, the assessee filed a revision petition
u/s 264. Though the Principal Commissioner found that the mistake was inadvertent
and that the claim was bona fide, he rejected the revision petition.

 

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

‘i)    A careful perusal of section 264 of the Income-tax Act, 1961
would show that it empowers the Principal Commissioner or the Commissioner to
exercise the revisional jurisdiction over “any order” other than the
order to which section 263 applies. Such power is wider and confers on such
authority the responsibility to set things right wherever he finds that an
injustice has been done to the assessee. Before passing any order u/s 264 of
the Act, it is open to the authority to make such inquiry or cause such inquiry
to be made. However, such order should not be prejudicial to the assessee.

 

ii)    Article 265 of the Constitution of India specifically states that
no tax shall be levied or collected except by authority of law. Therefore, both
the levy and collection must be with the authority of law, and if any levy or
collection is later found to be wrong or without authority of law, certainly
such levy or collection cannot withstand the scrutiny of the Constitutional
provision and would be in violation of article 265 of the Constitution of
India.

 

iii)   A mere typographical error committed by the
assessee could not cost it payment of excess tax as collected by the Revenue.
The denial of repayment of such excess collection would amount to great
injustice to the assessee. Even though the statute prescribes a time limit for
getting the relief before the A.O. by way of filing a revised return, there was
no embargo on the Commissioner to exercise his power and grant the relief u/s
264. The order rejecting the application for revision was not valid.

 

iv)    Accordingly, this writ petition is
allowed and the impugned order is set aside. Consequently, the matter is
remitted back to the respondent for considering the claim of the petitioner and
to pass appropriate orders in the light of the observations and findings
rendered supra. The respondent shall, accordingly, pass such fresh order
within a period of six weeks from the date of receipt of a copy of this order.’

Recovery of tax – Company in liquidation – Recovery from director – Section 179 of ITA, 1961 – Where A.O. issued a notice u/s 179 against assessee director of a company seeking to recover tax dues of the company, since such notice was totally silent regarding fact that tax dues could not be recovered from company and, further, there was no whisper of any steps being taken against company for recovery of outstanding amount, impugned notice u/s 179 against director was to be set aside

6. Ashita Nilesh Patel vs.
ACIT

[2020] 115 taxmann.com 37
(Guj.)

Date of order: 20th
January, 2020

A.Ys.: 2011-12 to 2014-15

 

Recovery of tax – Company in
liquidation – Recovery from director – Section 179 of ITA, 1961 – Where A.O.
issued a notice u/s 179 against assessee director of a company seeking to
recover tax dues of the company, since such notice was totally silent regarding
fact that tax dues could not be recovered from company and, further, there was
no whisper of any steps being taken against company for recovery of outstanding
amount, impugned notice u/s 179 against director was to be set aside

 

The assessee was a director in
the company TPPL which failed to make payment of outstanding tax demand of
certain amount. The A.O. observed that it was noticed from the records of the
company that there were no recoverable assets in the name of the assessee
company. In such circumstances, proceedings u/s 179 of the Income-tax Act, 1961
were initiated by way of issuing of notice to the assessee treating her as
jointly and severally liable for payment of such tax.

 

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

 

‘i)    Section 179(1) provides for the joint and several liability of
the directors of a private company, wherein the tax dues from such company in
respect of any income of any previous year cannot be recovered. The first
requirement, therefore, to attract such liability of the director of a private
limited company is that the tax cannot be recovered from the company itself.
Such requirement is held to be a pre-requisite and necessary condition to be
fulfilled before action u/s 179 can be taken. In the context of section 179
before recovery in respect of the dues from a private company can be initiated
against the directors, to make them jointly and severally liable for such dues,
it is necessary for the Revenue to establish that such recovery cannot be made
against the company and then alone can it reach to the directors who were
responsible for the conduct of the business during the previous year in
relation to which liability exists.

 

ii)    There is no escape from the fact that the perusal of the notice
u/s 179 reveals that the same is totally silent as regards the satisfaction of
the condition precedent for taking action u/s 179, viz., that the tax dues
cannot be recovered from the company. In the show cause notice, there is no
whisper of any steps having been taken against the company for recovery of the
outstanding amount. Even in the impugned order, no such details or information
has been stated.

 

iii)   In the circumstances referred to above, the question is whether
such an order could be said to be sustainable in law. The answer has to be in
the negative. At the same time, in the peculiar facts and circumstances of the
case and, more particularly, when it has been indicated by way of an additional
affidavit-in-reply as regards the steps taken against the company for the
recovery of the dues, one chance is to be given to the Department to undertake
a fresh exercise so far as section 179 is concerned. If the show cause notice
is silent including the impugned order, the void left behind in the two
documents cannot be filled by way of an affidavit-in-reply. Ultimately, it is
the subjective satisfaction of the authority concerned that is important and it
should be reflected from the order itself based on some cogent materials.

 

iv)   The impugned notice as well as the
order is hereby quashed and set aside. It shall be open for the respondent to
issue fresh show cause notice for the purpose of proceeding against the writ
applicant u/s 179.’

Income – Business income – Section 41 of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41 – Assessee must have obtained benefit in respect of liability – Mere change of name in books of accounts not sufficient – Interest liability of State Government undertaking on government loans converted by order of State Government into equity share capital – No cessation of liability – Section 41 not applicable

5. CIT vs. Metropolitan
Transport Corporation (Chennai) Ltd.

[2020] 421 ITR 307 (Mad.)

Date of order: 9th
July, 2019

A.Y.: 2001-02

 

Income – Business income –
Section 41 of ITA, 1961 – Remission or cessation of trading liability –
Condition precedent for application of section 41 – Assessee must have obtained
benefit in respect of liability – Mere change of name in books of accounts not
sufficient – Interest liability of State Government undertaking on government
loans converted by order of State Government into equity share capital – No
cessation of liability – Section 41 not applicable

 

The assessee was a wholly-owned
Tamil Nadu Government undertaking, operating transport services. The assessee
had taken over the assets and liabilities of the transport services, which were
previously run by the Tamil Nadu State Government. The State Government treated
a part of the net worth of the undertaking as its share capital and the balance
as loan, on which the assessee claimed and was allowed interest payable year
after year as deduction u/s 37 of the Income-tax Act, 1961. The Government of
Tamil Nadu took a decision and issued G.O. (Ms). No. 18, dated 7th
March, 2001 converting the interest outstanding of Rs. 8,264.17 lakhs payable
by the assessee company on 31st October, 2000 into equity shares.
The A.O. held that the sum of Rs. 8,264.17 lakhs was assessable u/s 41(1) of
the Act.

 

The Tribunal held that the amount
was not assessable u/s 41.

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

 

‘i)    It is a prerequisite condition before having recourse to section
41 of the Income-tax Act, 1961 that the assessee must have either obtained the
amount in respect of the loss, expenditure or trading liability incurred
earlier by it, or it should have received any benefit in respect of such
trading liability by way of remission or cessation thereof. The objective is to
tax the amount or benefit received by the assessee, thereby making him pay back
the benefit availed of earlier by him by way of claiming loss, expenditure or
liability in respect of that amount. Remission is a positive conduct on the
part of the creditor. Mere change of nomenclature in the books of accounts
without anything more brings no benefit to the assessee and its liability to
pay to the creditor does not get extinguished. The treatment given in
accounting entries does not give rise to a taxable event. To invoke section 41
of the Act, the initial burden is on the Revenue to establish cessation or
remission of liability.

 

ii)    When there was no writing off of liabilities and only the
sub-head under which the liability was shown in the account books of the
assessee was changed, there could be no cessation of liability. When the
assessee company was liable to pay and it continued to remain liable even after
change of entries in the books of accounts, no benefit would accrue to the
assessee company merely on account of change of nomenclature, and consequently
the question of treating it as profit and gain would not arise.

 

iii)   For all the above reasons, the appeal
filed by the Revenue is dismissed and the substantial question of law is
answered against the Revenue.’

Search and seizure – Block assessment – Sections 132, 158BC, 292CC of ITA, 1961 – Validity of search must be established before block assessment – Computation of income should be based on undisclosed income discovered during search; B.P. 1991-92 to 1998-99

40. Ramnath Santu
Angolkar vs. Dy. CIT [2020] 422 ITR 508 (Kar.) Date of order: 27th November, 2019 B.P.: 1991-92 to 1998-99

 

Search and seizure – Block assessment – Sections
132, 158BC, 292CC of ITA, 1961 – Validity of search must be established before
block assessment – Computation of income should be based on undisclosed income
discovered during search; B.P. 1991-92 to 1998-99

 

The appellant is an individual dealing in real estate and is engaged in
the activity of providing service to landowners for getting compensation in
case of land acquisition for promoting housing schemes, land development and
selling of plots on behalf of the owners on commission or service charges. The
appellant filed his return of income for the A.Ys. 1991-92 to 1998-99. The
aforesaid returns were processed u/s 143(1). On 19th November, 1998,
a search u/s 132 of the Act was conducted in the residential premises of the
appellant and a notice u/s 158BC was issued to the appellant by which he was
required to file his return of income. In response to the aforesaid notice, the
appellant filed the return of income for the block period, i.e., 1st April,
1988 to 19th November, 1998 and declared an additional income of Rs.
4,53,156. Thereafter, a notice u/s 143(2) was issued to the appellant and he
was directed to produce all the details. The A.O. passed an order of assessment
on 28th November, 2000 u/s 158BC(c) and determined undisclosed
income of the appellant at Rs. 1,63,54,846.

 

Being aggrieved, the appellant filed an appeal before the Commissioner
of Income-tax (Appeals). The appeal was decided by an order dated 23rd
August, 2002 which was partly allowed. The Revenue being aggrieved by this
order, filed an appeal before the Income-tax Appellate Tribunal. The appellant
filed a cross-objection in the aforesaid appeal, to the extent that the appeal
was decided against the appellant. The Tribunal by an order dated 18th
January, 2007, set aside the order of the Commissioner of Income-tax (Appeals)
and remitted the matter to the Commissioner of Income-tax (Appeals) and
directed the issues to be adjudicated afresh by affording an opportunity of
hearing to the parties in accordance with law. The Commissioner thereafter, by
an order dated 30th May, 2008, decided the appeal and partly allowed
the appeal filed by the appellant. The appellant and the Revenue being
aggrieved by this order, again filed appeals before the Tribunal. The Tribunal,
by an order dated 9th September, 2011, partly allowed both the
appeals.

 

The appellant filed an appeal before the High Court and raised the
following questions of law:

 

‘(1) Whether the assessment order passed for the block period u/s
158BC(c) of the Act in the name of the individual, when the warrant of
authorisation issued in the joint name of the appellant and others is valid in
law on the facts and circumstances of the case?

 

(2) Whether the authorities below ought to have examined the validity of
the search and then only proceeded to initiate block assessment proceedings on
the facts and circumstances of the case?

 

(3) Whether the Tribunal was justified in law in holding that there is
no merit to challenge the action of the A.O. to assess u/s 158BC of the Act
when the conditions precedent are not existing as much as for computation of
income u/s 158BC shall be restricted to seized material on the facts and
circumstances of the case?’

 

The Karnataka High Court held as under:

 

‘i)   Section 292CC of the
Income-tax Act, 1961 merely provides that it shall not be necessary to issue an
authorisation u/s 132 or make a requisition u/s 132A separately in the name of
each person. However, it is pertinent to note that where an authorisation is
made in the name of more than one person, the section does not provide that the
names of such persons need not be mentioned in the warrant of authorisation.

 

ii)   The authorities are under an
obligation to examine the validity of the search and only thereafter proceed to
initiate the block assessment proceedings.

 

iii)  From a perusal of section
158BC it is evident that while computing the undisclosed income for the block
period, the evidence found as a result of search or requisition of books of
accounts or other books of accounts and such other material or information as
is available with the A.O. and relatable to such evidence, has to be taken into
consideration. In other words, it is evident that the computation of
undisclosed income should be based on such evidence which is seized during the
search which is not accounted in the regular books of accounts.

 

iv)  The assessment order passed
for the block period u/s 158BC(c) of the Act in the name of the individual,
when the warrant of authorisation was issued in the joint names of the assessee
and others, was not valid in law. Moreover the authorities ought to have
examined the validity of the search and only then proceeded to initiate block
assessment proceedings on the facts and circumstances of the case.

 

v)   From a
perusal of the material on record, it was evident that there was no seizure
with regard to the A.Ys. 1988-89 and 1989-90 during the course of the search
and seizure operations. However, the A.O. while computing the undisclosed
income had taken into account the income in respect of these years also and
thus the order passed by the A.O. was in violation of section 158BC(c). The
order of block assessment was not valid.’

Income – Accounting – Section 145 of ITA, 1961 – Rejection of accounts and estimate of income – Discretion of A.O. must be exercised in a judicious manner

4. Rameshchandra Rangildas
Mehta vs. ITO

[2020] 421 ITR 109 (Guj.)

Date of order: 15th July,
2019

A.Y.: 2011-12

 

Income – Accounting – Section 145
of ITA, 1961 – Rejection of accounts and estimate of income – Discretion of
A.O. must be exercised in a judicious manner

 

For the A. Y. 2011-12 the
appellant had filed his return of income on 15th September, 2011
declaring total income at Rs. 5,34,342. The case was selected for scrutiny and notice
u/s 143(2) of the Income-tax Act, 1961 was issued dated 31st July,
2012. The appellant filed his revised return of income on 30th
March, 2012, declaring a total income of Rs. 7,44,070 and claimed refund of Rs.
23,26,700. According to the appellant, he derived income from civil contracts
(labour job works). The appellant showed gross business receipts of Rs.
12,00,02,100 and a net profit of Rs. 5,37,942. The refund of Rs. 23,26,700 out
of the prepaid taxes contained tax deducted by M/s PACL Limited against the
payment for labour. The appellant showed labour receipts for income account of
Rs. 12,00,02,100.

 

The A.O., relying on the
statement of the appellant recorded u/s 131 of the Act and the information
received subsequent to the search in the case of M/s PACL India Limited, came
to the conclusion that the dealings of the appellant with M/s PACL India
Limited were accommodation entries. The A.O. issued show cause notice dated 14th
March, 2014 calling upon the appellant to show cause as to why the labour
receipt income of Rs. 12,00,02,100 should not be treated as income from other
sources u/s 56 of the Act. The appellant, vide his reply dated 21st
March, 2014, explained that he had only received commission of Rs. 0.30 on Rs.
100, i.e., Rs. 3,60,000 on Rs. 12,00,02,100 which had already been included in
the net profit and reflected in the profit and loss account. The A.O. rejected
the books of accounts u/s 145(3) of the Act and estimated the income at 10% of
the gross receipts; he made an addition of Rs. 1,20,00,210 as income from other
sources u/s 56 of the Act.

 

The appellant submitted before
the Commissioner of Income-tax (Appeals) that the estimation of net profit at
10% was on the higher side and he had received commission at 0.45% only. He
also pointed out that the returned income included the profit of Rs. 4,13,742
from the labour contract receipts and set-off should have been granted against
the addition of commission income by the A.O. The Commissioner (Appeals)
estimated the commission at Rs. 24,00,042, i.e., 2% on the basis that the same
is 6.7% of the tax benefit derived by PACL India Limited, i.e., 30%, and the
same was a reasonable estimate. The Commissioner (Appeals) took the view that
the set-off of only the net income from the fictitious contract receipts could
be granted. Further, he reduced the interest income and retail sales from the
net profit to grant the set-off. The set-off granted by the Commissioner
(Appeals) came to only Rs. 1,46,942 [Rs. 5,37,942 (net profit) – Rs. 1,20,000
(interest income) – Rs. 2,71,000 (retail sales)]. Thus, the Commissioner
(Appeals) partly confirmed the addition to the extent of Rs. 22,53,100.

 

Being dissatisfied with the order
passed by the Commissioner (Appeals), the Department preferred an appeal before
the Income-tax Appellate Tribunal. The appellant preferred cross-objection. The
Appellate Tribunal confirmed the order of the Commissioner (Appeals).

 

Dissatisfied with the order
passed by the Appellate Tribunal, the appellant filed an appeal before the High
Court and proposed the following substantial question of law:

 

‘Whether in the facts and
circumstances of the case, the Income-tax Appellate Tribunal was right in law
in confirming addition of Rs. 22,53,100 on account of alleged commission income
at 2% without there being any evidence or material on record for making such
estimate?’

 

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

 

‘i)    Section 145 of the Income-tax Act, 1961 gives power to the A.O.
to reject the assessee’s accounts. Although sub-section (3) of section 145
gives him the discretion to make an assessment in the manner provided in
section 144, yet this discretion cannot be exercised arbitrarily. The question
to determine in every such case is whether there is any material for the basis
adopted by the A.O. or the Tribunal, as the case may be, for computing the
income of the assessee. The material which is irrelevant or which amounts to
mere guesswork or conjecture is no material.

 

ii)    The A.O. thought it fit to estimate 10% commission for providing
accommodation entries to the tune of Rs. 12,00,02,100. The Commissioner
(Appeals) took the view that the estimation of commission at 10% by the A.O. is
one-third of the benefit, which could be termed as excessive and not a
reasonable estimate. The Commissioner (Appeals), without there being anything on
record, thought it fit to take the view that the estimate by the assessee at 3%
translated to 1% of the benefit derived, which could be termed too low, and in
such circumstances, estimated it at 2%, which would translate to about 6.7% of
the benefit alleged to have been derived by P. This was nothing but pure
guesswork without there being any material or basis for arriving at the same.
The Tribunal was not right in law in confirming the addition.

 

iii)   Ordinarily, we would not have entertained the appeal of the
present nature having regard to the fact that the income has been assessed
based on estimation. However, the way the authorities have proceeded with the
guesswork, it cannot be approved.

 

iv)   In view of the above, this tax appeal
succeeds and is hereby allowed. The question of law is answered in favour of
the assessee and against the Revenue. The impugned order passed by the
Income-tax Appellate Tribunal is hereby quashed and set aside.’

Charitable purpose (objects of general public utility) – Section 2(15) r.w.s. 12A of ITA, 1961 – Where assessee association was engaged in primary aim and objective to organise and arrange all licensed third party administrators (TPAs) to be members of trust for mutual betterment of TPA business, merely because certain benefits accrued to TPA members and certain objects of trust were for advancement of business of TPA, it would not ipso facto render trust to be non-charitable

3. CIT (Exemption) vs.
Association of Third Party Administrators

[2020] 114 taxmann.com 534
(Delhi)

Date of order: 20th
January, 2020

 

Charitable purpose (objects of
general public utility) – Section 2(15) r.w.s. 12A of ITA, 1961 – Where
assessee association was engaged in primary aim and objective to organise and
arrange all licensed third party administrators (TPAs) to be members of trust
for mutual betterment of TPA business, merely because certain benefits accrued
to TPA members and certain objects of trust were for advancement of business of
TPA, it would not ipso facto render trust to be non-charitable

 

On 12th December, 2005
the assessee association of third party administrators (ATPA) filed an
application seeking registration u/s 12A of the Income-tax Act, 1961. The said
application was rejected by the Director (Exemption) holding that certain
objects of the trust were not charitable and trustees had discretion in
applying the trust’s income to any of the objects. The Director (Exemption)
held that the assessee ATPA was aiming at industry status for third party
administrator (TPA) business and was working for mutual benefit of its members.

 

The Tribunal allowed the appeal
in favour of the assessee and directed the Commissioner (Exemption) to provide
registration to the assessee u/s 12AA of the Act.

 

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

 

‘i)    At the initial stage of registration, it is
to be examined whether the proposed activities of the assessee can be
considered charitable within the meaning of section 2(15). On an application
for registration of a trust or institution made under section 12AA, the
Principal Commissioner or Commissioner shall call for such documents or
information from the trust or institution as he thinks necessary in order to
satisfy himself about the genuineness of the activities of the trust or
institution; and the compliance of such requirements of any other law for the
time being in force by the trust or institution, as are material for the
purpose of achieving its objects, and he may also make such inquiries as he may
deem necessary in this behalf. Once he is satisfied about the objects of the
trust or institution and the genuineness of its activities, he shall pass an
order under the said provision. On this aspect the tax authorities have looked
into the aims and objects of the trust.

 

ii)    The primary or dominant object of the trust satisfies the
conditions laid down u/s 2(15). Even if some ancillary or incidental objects
are not charitable in nature, the institution would still be considered as a
charitable organisation. Merely because some facilities were beyond its main
object, that by itself would not deprive the institution of the benefits of a
charitable organisation. If the primary purpose of advancement of objects is
for general public utility, the institution would remain charitable, even if
there are incidental non-charitable objects for achieving the said purpose.

 

iii)   Merely because the objects of the trust are for the advancement of
the business of TPA, it would not ipso facto render the trust to be
non-charitable. The objects of the trust are not exclusively for the promotion
of the interests of the TPA members. The objects were to provide benefit to the
general public in the field of insurance and health facilities. In the course
of carrying out the main activities of the trust, the benefits accruing to the
TPA members cannot, by itself, deny the institution the benefit of being a
charitable organisation.

 

iv)     For
the foregoing reasons, there is no substantial question of law arising.
Accordingly, the appeal is dismissed.’

Business expenditure – Disallowance of expenditure relating to exempted income – Section 14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal restricting disallowance to extent offered by assessee – Proper

2. Principal CIT vs. HSBC Invest Direct (India) Ltd.

[2020] 421 ITR 125 (Bom.)

Date of order: 4th
February, 2019

A.Y.: 2009-10

 

Business
expenditure – Disallowance of expenditure relating to exempted income – Section
14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal
restricting disallowance to extent offered by assessee – Proper

 

The assessee
is a limited company. In the return of income filed for the A.Y. 2009-10, the
question of making disallowance to the expenditure claimed by the assessee in
terms of section 14A of the Income-tax Act, 1961 read with Rule 8D of the
Income-tax Rules, 1962 came up for consideration. During the assessment in the
appellate proceedings, the assessee offered restricted disallowance of Rs. 1.30
crores. The Department contended firstly that the statutory auditors in the
report had made a disallowance of Rs. 2.53 crores u/s 14A of the Income-tax
Act, 1961, and secondly that in view of the assessee’s income which was exempt,
the disallowance had to be made under Rule 8D of the Income-tax Rules, 1962.
The Tribunal accepted the assessee’s voluntary offer of disallowance of
expenditure.

 

The Revenue filed an appeal
against the judgment of the Income-tax Appellate Tribunal, raising the
following question for consideration:

 

‘(i) Whether the order of the
Tribunal is perverse in law as it ignored the disallowance computed by the
auditors of the assessee which was in accordance with section 14A of the
Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962?’

 

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

‘i) The disallowance of expenditure incurred to earn the exempt
income could not exceed the exempt income earned. The ratio of the decisions in
the cases of Cheminvest Ltd. vs. CIT [2015] 378 ITR 33 (Delhi) and
CIT vs. Holcim India (P) Ltd. (I.T.A. No. 486 of 2014 decided on 5th
September, 2014) would include a facet where the assessee’s exempt
income was not nil, but had earned exempt income which was more than the
expenditure incurred by the assessee in order to earn such income.

 

ii) The order of the Tribunal which
restricted the disallowance of the expenditure to the extent voluntarily
offered by the assessee was not erroneous.’

Revision – Section 263 of ITA, 1961 – Diversion of income by overriding title – Interpretation of Will – Testator’s direction to executor of Will to sell property and pay balance to assessee after payment to trusts and expenses – Expenses and payments to trusts stood diverted before they reached assessee – Order of A.O. after due inquiry accepting assessee’s offer to tax amount of sale consideration – Revision erroneous; A.Y. 2012-13

39. Kumar Rajaram vs. ITO(IT) [2020] 423 ITR 185 (Mad.) Date of order: 5th August, 2019 A.Y.: 2012-13

 

Revision – Section 263 of ITA, 1961 –
Diversion of income by overriding title – Interpretation of Will – Testator’s
direction to executor of Will to sell property and pay balance to assessee
after payment to trusts and expenses – Expenses and payments to trusts stood
diverted before they reached assessee – Order of A.O. after due inquiry
accepting assessee’s offer to tax amount of sale consideration – Revision
erroneous; A.Y. 2012-13

 

The assessee was a non-resident. During the
A.Y. 2012-13 he derived income from capital gains and interest income assessed
under the head ‘Other sources’. The assessee’s father bequeathed land and
residential property to him under a Will and testament with directions to the
executor of the Will. The executor was to give effect to the terms and
conditions of the Will and dispose of his properties as stated by him in the
Will. The executor was entitled to professional fees and all expenses for the
due execution of the Will from and out of the estate of the deceased testator.
The executor was to arrange to sell the property after a period of one year
from the date of his demise so as to accommodate his wife for her stay and
distribute the sale proceeds in favour of four charitable institutions
specifying the amount to be paid to each of them after incurring the necessary
expenses towards stamp duty, fees to the executor, etc. The balance sale
consideration was to be paid to the assessee who was to repatriate, according
to the Reserve Bank of India Rules, the amount so received for the education of
his children.

 

Accordingly, the assessee received a sum of
Rs. 8,19,50,000. The A.O. issued notices under sections 143(2) and 142(1) along
with a questionnaire. In response to the notice u/s 142(1), the assessee
submitted the details including the last Will and testament executed by his
father, a copy of the sale deed, the legal opinion obtained from his counsel
regarding the eligibility for exclusion of the payments to the charitable
institutions and remuneration to the executor in computing the long-term
capital gains on sale of the property. The A.O. accepted the claim of the
assessee in respect of the expenses and passed an order u/s 143(3) and accepted
the sale consideration as mentioned by the assessee in his return of income.
However, the plea raised by the assessee with regard to the indexation of the
cost was not accepted and the A.O. allowed indexation only from the financial
year 2011-12 in accordance with Explanation (iii) in section 48.

 

The Commissioner issued a notice u/s 263
proposing to disallow the exclusion of the sum of Rs. 68,02,500 being the
payment made to the charitable institutions and the sum of Rs. 8,02,500 being
the professional fees of the executor of the Will and the other expenditure
incurred in connection with the sale of the property. The Commissioner
disallowed the exclusion of Rs. 68,02,500 and directed the A.O. to re-compute
the total income and the tax thereon.

 

The Tribunal affirmed the order of the
Commissioner that the exclusion of the payments made by the assessee by
applying the diversion of income by overriding the title could not be allowed
and that there was no evidence for professional fee, commission paid, etc.

 

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

 

‘i) The Commissioner could not have invoked
the power u/s 263. While issuing the show cause notice u/s 263 he did not rely
upon any independent material or on any interpretation of law but on perusal of
the records and was of the view that the expenditure could not be allowed as
deduction u/s 48(i). The Commissioner had conducted a roving inquiry and
substituted his view for that of the view taken by the A.O. who had done so
after conducting an inquiry into the matter and after calling for all documents
from the assessee, one of which was the last Will and testament executed by the
assessee’s father.

 

ii) The A.O. after perusal of the copy of
the last Will and testament of the assessee’s father, the sale deed of the
property and the legal opinion given by the counsel for the assessee, had taken
a stand and passed the order. Therefore, it could not be stated that the A.O.
did not apply his mind to the issue. It was not the case of the Commissioner
that there was a lack of inquiry or inadequate inquiry.

 

iii) The testator bequeathed only a portion
of the sale consideration left over after effecting payments directed to be
made by him. The use of the expression “absolutely” occurring in the Will was
to disinherit the testator’s third wife from being entitled to any portion of
the funds and all that the testator stated was not to sell the property for one
year till his wife vacated the house. The sale deed recorded that the
stepmother of the assessee had in unequivocal terms agreed to the sale and had
vacated the property and granted no objection for transfer of the property.
There was a specific direction to the executor to pay specific sums of money to
the charitable institutions, clear the property tax arrears, claim his
professional fee, meet the stamp duty expenses and pay the remaining amount to
the assessee. The order passed by the Commissioner was erroneously confirmed by
the Tribunal.

 

iv) The Tribunal erred in holding that the
exclusion of payment to charities by applying the principle of diversion of
income by overriding title could not be allowed. The assessee at no point of
time was entitled to receive the entire sale consideration. The sale was to be
executed by the executor of the Will who was directed to distribute the money
to the respective organisations, defray the expenses, pay the property tax,
deduct his professional fee and pay the remaining amount to the assessee.
Therefore, to interpret the Will in any other fashion would be doing injustice
to the intention of the testator and the interpretation given by the
Commissioner was wholly erroneous. The intention of the testator was very clear
that the assessee was not entitled to the entire sale consideration. The
testator did not bequeath the property but part of the sale consideration which
was left behind after meeting the commitments mentioned in the Will to be truly
and faithfully performed by the executor of the Will. The major portion of the
sale consideration on being received from the purchaser of the property stood
diverted before it reached the assessee and under the Will there was no
obligation cast upon the assessee to receive the sale consideration and
distribute it as desired by the testator.

 

v) The
assessee had produced the copies of the receipts signed by the respective
parties before the A.O. who was satisfied with them in the absence of any fraud
being alleged with regard to the authenticity of those documents. The order of
the Tribunal in not allowing the sum of Rs. 8,02,500 being expenditure incurred
in connection with the sale alleging that there was no evidence when the
evidence in support was on record, was not justified and the expenditure was
allowable u/s 48(i). The Commissioner could not have revised the assessment by
invoking section 263.’

 

 

Reassessment – Sections 124(3), 142(1), 143(3), 147, 148 of ITA, 161 – Notice u/s 148 – Assessment proceedings pursuant to notice u/s 142(1) pending and time for completion of assessment not having lapsed – Issue of notice u/s 148 not permissible – That assessee had not objected to jurisdiction of A.O. not relevant; A.Ys. 2011-12

38. Principal CIT vs. Govind Gopal Goyal [2020] 423 ITR 106 (Guj.) Date of order: 15th July, 2019 A.Y.: 2011-12

 

Reassessment – Sections 124(3), 142(1),
143(3), 147, 148 of ITA, 161 – Notice u/s 148 – Assessment proceedings pursuant
to notice u/s 142(1) pending and time for completion of assessment not having
lapsed – Issue of notice u/s 148 not permissible – That assessee had not
objected to jurisdiction of A.O. not relevant; A.Ys. 2011-12

 

The Directorate of Revenue Intelligence
received information that the assessee had undervalued the import price of polyester films during the A.Y. 2011-12. At the relevant point of time, it was noticed that the assessee had not filed
his return of income for the A.Y. 2011-12. Therefore, a notice dated 1st December, 2011 u/s
142(1) was issued against the assessee to furnish his return of income for the A.Y. 2011-12 by 9th December, 2011. The assessee did not file his return of income and submitted a letter dated 3rd January, 2012,
stating that his books of accounts and other records were seized by the Directorate of Revenue Intelligence and that he had
applied to be provided with a copy of the books of accounts and other records
and informed the A.O. that he would file his return of income once he was
provided with the books and other records. While the assessment proceedings
initiated u/s 142(1) were pending, the A.O. issued a notice dated 16th January,
2013 u/s 148 against the assessee to file his return of income for the A.Y.
2011-12. The assessment proceedings were completed, making an addition on
account of unexplained expenditure u/s 69C and estimating the net profit.

 

The Tribunal held that when the assessment
proceedings were already initiated by issuing of notice u/s 142(1) calling for
the return of income, no notice u/s 148 should have been issued and the
assessment was required to be completed within the time limit allowed u/s
143(3) or section 144.

 

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

 

‘i) It is settled law that unless the return
of income filed by the assessee is disposed of, notice for reassessment u/s 148
cannot be issued, i.e., no reassessment proceedings can be initiated so long as
the assessment proceedings are pending on the basis of the return already filed
(and) are not terminated.

 

ii) If an assessment is pending either by
way of original assessment or by way of reassessment proceedings, the A.O.
cannot issue a notice u/s 148.

 

iii) Section 142(1) and section 148 cannot
operate simultaneously. There is no discretion vested with the A.O. to utilise
either of them. The two provisions govern different fields and can be exercised
in different circumstances. If income escapes assessment, then the only way to
initiate assessment proceedings is to issue a notice u/s 148.

 

iv) Income
could not be said to have escaped assessment u/s 147 when the assessment proceedings
were pending. If the notice had already been issued u/s 142 and the proceedings
were pending, a return u/s 148 could not be called for. The Tribunal had
applied the correct principle of law and had passed the order holding that the
assessment order passed u/s 143(3) read with section 147 was bad in law and
could not be sustained. Section 124(3) which stipulates a bar to any contention
about lack of jurisdiction of an A.O. would not save the illegality of the
assessment in the assessee’s case.’

 

Settlement of cases – Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement Commission – Undisclosed income of non-resident Indians – Charge under Black Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement Commission is valid

47. Principal CIT vs.
IT Settlement Commission; [2020] 420 ITR 149
(Guj.) Date of order: 8th
November, 2019 A.Ys.: 2004-05 to
2015-16

 

Settlement of cases –
Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement
Commission – Undisclosed income of non-resident Indians – Charge under Black
Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of
Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement
Commission is valid

 

A search and seizure operation came to
be carried out at the residential and business premises of the B group of
companies of which the assessees were directors. Pursuant to the search,
notices under sections 148 and 153A of the Income-tax Act, 1961 were issued to
the three assessees for the A.Ys. 2005-06 to 2013-14, 2004-05 to 2015-16, and
2004-05 to 2015-16, respectively. In response thereto, the assessees filed
income tax returns disclosing undisclosed foreign income and assets.
Thereafter, they filed separate applications u/s 245C of the 1961 Act before
the Settlement Commission disclosing additional undisclosed foreign income and
assets. The Settlement Commission passed an order on 30th January,
2019 settling the cases and granting reliefs. On 18th February,
2019, the A.O. passed orders giving effect to the order of the Settlement
Commission and determined the additional tax payable and issued notices of
demand u/s 156 of the Act on the same day. Each of the assessees paid the
additional tax payable.

 

On a writ petition filed by the Department
on 30th May, 2019 challenging the orders passed by the Settlement
Commission as without jurisdiction since the Settlement Commission had no
jurisdiction to pass an order under the 1961 Act in relation to undisclosed
foreign income and assets covered under the 2015 Act, the Gujarat High Court
dismissed the petition and held as under:

 

‘i)   On a conjoint reading of sections 3 and 2(9)
of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of
tax Act, 2015, it is clear that undisclosed foreign income or assets become
chargeable to tax from the A.Y. 2016-17. However, when undisclosed foreign
assets become chargeable to tax from the A.Y. 2016-17 onwards, the date of
acquisition of such assets may relate to any assessment year prior to the A.Y.
2016-17. Therefore, even after the coming into force of the 2015 Act, insofar
as assessment years prior to the A.Y. 2016-17 are concerned, the undisclosed
foreign income would be chargeable to tax under the relevant provisions of the
Income-tax Act, 1961.

 

ii)   What sub-section (3) of section 4 of the 2015
Act provides is that what is included as income and asset under the 2015 Act
cannot be included in the total income under the 1961 Act. The said sub-section
does not contain a non obstante clause ousting the applicability of the
1961 Act, insofar as undisclosed foreign income and assets are concerned. The
2015 Act is a taxing statute and provides for stringent penalties and
prosecution and it is by now well settled that a taxing statute must be
interpreted in the light of what is clearly expressed. The second proviso
to section 147 of the 1961 Act does away with the limitation of four years as
provided in the first proviso to section 147 in the case of undisclosed
foreign income. By virtue of clause (c) of sub-section (1) of section 149, the
time limit for reopening of assessments has been extended to sixteen years in
respect of any asset, including financial interest in any entity located
outside India, so that the bar applies for periods beyond sixteen years in such
cases. Clearly, therefore, the scheme of the Income-tax Act, 1961 is not meant
to tax only disclosed foreign income but also undisclosed foreign income.

 

iii)  It was an admitted position that the
residential status of two of the assessees was non-resident for the A.Y.
2016-17 and for the third for the A.Y. 2014-15 onwards. Thus, when the 2015 Act
came into force, the assessees were not residents. It could not be said that
the assessees fell within the ambit of the expression ‘assessee’ as defined
under clause (2) of section 2 of the 2015 Act as it stood prior to its
amendment by the Finance (No. 2) Act of 2019. The expression ‘assessee’ was
amended on 1st August, 2019, albeit with retrospective effect
from 1st July, 2015, and as on the date when the Settlement
Commission passed the order, namely, 30th January, 2019, the
assessees were not ‘assessees’ within the meaning of such expression as
contemplated u/s 2(2) of the 2015 Act and were, therefore, not covered by the
provisions of that Act. The search proceedings were conducted after the 2015
Act came into force and, consequently, the notices under sections 148 and 153A
of the 1961 Act were also issued after the 2015 Act came into force. The fact
that these notices under sections 148 and 153A of the 1961 Act were issued in
respect of undisclosed foreign income or assets could be substantiated on a
perusal of the reasons recorded for reopening the assessment for the A.Y.
2000-01.

 

The Revenue authorities were well aware
of the fact that the provisions of the 2015 Act covered undisclosed foreign
income only from the A.Y. 2016-17 onwards and, therefore, categorically
submitted to the jurisdiction of the Settlement Commission and requested it to
proceed further pursuant to the applications made by the assessees u/s 245C of
the Income-tax Act, 1961. It was only for this reason that notices under the
2015 Act were issued only for the A.Ys. 2017-18 and 2018-19. The A.O. had
issued notices under sections 148 and 153A of the 1961 Act for different
assessment years. Therefore, proceedings for assessment or reassessment as
contemplated under clauses (i) and (iiia) of the Explanation to clause (b) of
section 245A had commenced and were pending before the A.O. when the
applications u/s 245C of the 1961 Act came to be made. Therefore, the
requirements of the provisions of section 245C of the 1961 Act were duly
satisfied when the applications thereunder came to be made by the assessees.
Upon receipt of the applications made u/s 245C of the 1961 Act, the Settlement
Commission proceeded further in accordance with the provisions of section 245D
of the 1961 Act. At the stage when it was brought to its notice that notices
u/s 10 of the 2015 Act had been issued to the assessees, the Settlement
Commission gave ample opportunity to the Revenue to decide what course of
action it wanted to adopt, and it was the Revenue which categorically invited
an order from the Settlement Commission in respect of the undisclosed foreign
income and assets disclosed before it.

 

The record of the case showed that the
requirements of section 245D of the 1961 Act had been duly satisfied prior to
the passing of the order u/s 245D(4). The proceedings before the Settlement
Commission were taken in connection with notices issued under sections 148 and
153A of the 1961 Act and it was, therefore, that the Settlement Commission had
the jurisdiction to decide the applications u/s 245C of that Act, which related
to the proceedings in respect of those notices. If it was the case of the
Revenue that the undisclosed foreign income and assets of the assessees were
covered by the provisions of the 2015 Act, the notices under sections 148 and
153A of the 1961 Act, which mainly related to undisclosed foreign income, ought
to have been withdrawn and proceedings ought to have been initiated under the
relevant provisions of the 2015 Act. The Settlement Commission had the
jurisdiction to decide the applications u/s 245C.

 

iv)  The Settlement Commission, after considering
the material on record, had given a finding of fact to the effect that there
was a full and true disclosure made by the assessees and that there was no
wilful attempt to conceal material facts. If for the reason that issues which
pertained to past periods could not be reconciled due to lack of further
evidence, the assessees, with a view to bring about a settlement, agreed to pay
a higher amount as proposed by the Revenue, it certainly could not be termed a
revision of the original disclosure made u/s 245C of the 1961 Act, inasmuch as,
there was no further disclosure but an acceptance of additional liability based
on the disclosure already made before the Settlement Commission.

 

v)   Another aspect of the matter was that it was
an admitted position that prior to the presentation of the writ petition, the
order of the Settlement Commission came to be fully implemented. This was not
mentioned in the writ petition. Therefore, there was suppression of material
facts. The order passed by the Settlement Commission was valid.’

 

Refund – Withholding of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope of section 241A – A.O. must apply his mind before withholding refund – Mere issue of notice for scrutiny assessment for a later assessment year not a ground for withholding refund

46. Maple Logistic P.
Ltd. vs. Principal CIT; [2020] 420 ITR 258
(Del.) Date of order: 14th
October, 2019 A.Ys.: 2017-18 and
2018-19

 

Refund – Withholding
of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope
of section 241A – A.O. must apply his mind before withholding refund – Mere
issue of notice for scrutiny assessment for a later assessment year not a
ground for withholding refund

 

The petitioner, by way of writ petition
under Articles 226 and 227 of the Constitution of India, sought a writ in the
nature of mandamus directing the respondent to refund the income tax
amount on account of excess deduction of tax at source in respect of the
assessment years 2017-18 and 2018-19 and other consequential directions to
adjust the outstanding amount of tax deducted at source and the goods and
services tax payable by the petitioner-company against the pending refund
amount without charging of any interest for the delayed payments. The Delhi
High Court allowed the writ petition and held as under:

 

‘i)   U/s 241A of the Income-tax Act, 1961 the
legislative intent is clear and explicit. The processing of return cannot be
kept in abeyance merely because a notice has been issued u/s 143(2) of the Act.
Post-amendment, sub-section (1D) of section 143 is inapplicable to returns
furnished for the assessment year commencing on or after 1st April,
2017. The only provision that empowers the A.O. to withhold the refund in a
given case at present is section 241A. Now refunds can be withheld only in
accordance with this provision. The provision is applicable to such cases where
refund is found to be due to the assessee under the provisions of sub-section
(1) of section 143, and also a notice has been issued under sub-section (2) of
section 143 in respect of such returns. However, this does not mean that in
every case where a notice has been issued under sub-section (2) of section 143
and the case of the assessee is selected for scrutiny assessment, the
determined refund has to be withheld. The Legislature has not intended to
withhold the refunds just because scrutiny assessment is pending. If such had
been the intent, section 241A would have been worded so. On the contrary,
section 241A enjoins the A.O. to process the determined refunds, subject to the
caveat envisaged u/s 241A.

 

ii)   The language of section 241A envisages that
the provision is not resorted to merely for the reason that the case of the
assessee is selected for scrutiny assessment. Sufficient checks and balances
have been built in under the provision and have to be given due consideration
and meaning. An order u/s 241A should be transparent and reflect due
application of mind. The A.O. is duty-bound to process the refunds where they
are determined. He cannot deny the refund in every case where a notice has been
issued under sub-section (2) of section 143. The discretion vested with the
A.O. has to be exercised judiciously and is conditioned and channelised. Merely
because a scrutiny notice has been issued that should not weigh with the A.O.
to withhold the refund. The A.O. has to apply his mind judiciously and such
application of mind has to be found in the reasons which are to be recorded in
writing. He must make an objective assessment of all the relevant circumstances
that would fall within the realm of ‘adversely affecting the Revenue’. The
power of the A.O. has been outlined and defined in terms of section 241A and he
must proceed giving due regard to the fact that the refund has been determined.

 

iii)  The fact that notice u/s 143(2) has been
issued would obviously be a relevant factor, but that cannot be used to
ritualistically deny refunds. The A.O. is required to apply his mind and
evaluate all the relevant factors before deciding the request for refund of
tax. Such an exercise cannot be treated to be an empty formality and requires
the A.O. to take into consideration all the relevant factors. The relevant
factors, to state a few, would be the prima facie view on the grounds
for the issuance of notice u/s 143(2), the amount of tax liability that the
scrutiny assessment may eventually result in vis-a-vis the amount of tax refund
due to the assessee, the creditworthiness or financial standing of the assessee,
and all factors which address the concern of recovery of revenue in doubtful
cases. Therefore, merely because a notice has been issued u/s 143(2), it is not
a sufficient ground to withhold refund u/s 241A and the order denying refund on
this ground alone would be laconic. Additionally, the reasons which are to be
recorded in writing have to also be approved by the Principal Commissioner, or
Commissioner, as the case may be, and this should be done objectively.

 

iv)  The reasons relied upon by the Revenue to
justify the withholding of refund were lacking in reasoning. Except for
reproducing the wording of section 241A of the Act, they did not state anything
more. The order withholding the refund was not valid.’

 

Reassessment – Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions precedent for notice – Amount assessed in block assessment – Addition of amount deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

45. Audhut Timblo vs.
ACIT; [2020] 420 ITR 62 (Bom.) Date of order: 27th
November, 2019 A.Ys.: 2002-03

 

Reassessment
– Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions
precedent for notice – Amount assessed in block assessment – Addition of amount
deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

 

Pursuant to a search
action u/s 132 of the Income-tax Act, 1961, block assessment order u/s 158BC
was passed by the A.O. on 27th September, 2002 making an addition of
Rs. 10.33 crores as unexplained cash credits. The Commissioner (Appeals), by an
order dated 13th July, 2006, deleted the addition of Rs. 10.33
crores. On 13th September, 2006, the Department appealed against the
order of the Commissioner to the Appellate Tribunal. On 18th
October, 2006, the Department issued notice invoking the provisions of section
147 / 148 of the Act stating that this very income of Rs. 10.33 crores had
escaped assessment and therefore reassessment or reopening of assessment was
proposed for the A.Y. 2002-03.

 

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

‘i)   The A.O. can reopen an assessment only in
accordance with the express provisions in section 147 / 148 of the Income-tax
Act, 1961. Section 147 clothes the A.O. with jurisdiction to reopen an
assessment on satisfaction of the following: (a) the A.O. must have reason to
believe that (b) income chargeable to tax has escaped assessment and (c) in
cases where the assessment sought to be reopened is beyond the period of four
years from the end of the relevant assessment year, then an additional
condition is to be satisfied, viz., there must be failure on the part of the
assessee to fully and truly disclose all material facts necessary for assessment.

 

ii)   Since there was full disclosure and, in fact,
the amount had even become the subject matter of the assessment both u/s 158BC
and u/s 143(3), there could have been no reason to believe that the income
chargeable to tax had indeed escaped assessment. The notice of reassessment was
not valid.’

Penalty – Concealment of income – Search and seizure – Immunity from penalty – Effect of section 271AAA of ITA, 1961 – Assessee admitting undisclosed income during search proceedings and explaining source – No inquiry regarding manner in which income was earned – Immunity cannot be denied because of absence of such explanation

44. Principal CIT vs. Patdi Commercial and Investment Ltd.; [2020] 420 ITR 308 (Guj.) Date of order: 17th September, 2019 A.Y.: 2011-12

 

Penalty – Concealment
of income – Search and seizure – Immunity from penalty – Effect of section
271AAA of ITA, 1961 – Assessee admitting undisclosed income during search
proceedings and explaining source – No inquiry regarding manner in which income
was earned – Immunity cannot be denied because of absence of such explanation

 

The Tribunal deleted the penalty u/s
271AAA of the Income-tax Act, 1961. On appeal by the Revenue, the Gujarat High
Court upheld the decision of the Tribunal and held as under:

 

‘i)   Section 271AAA of the Income-tax Act, 1961
provides for penalty in cases of search. Sub-section (2) specifies that such
penalty will not be imposed if the following three conditions are satisfied:
(i) in the course of the search, in a statement under sub-section (4) of
section 132, the assessee admits the undisclosed income and specifies the
manner in which such income has been derived; (ii) the assessee substantiates
the manner in which the undisclosed income was derived; and (iii) pays the tax
together with interest, if any, in respect of the undisclosed income. In
accordance with the settled legal position, where the Revenue has failed to
question the assessee while recording the statement u/s 132(4) of the Act as
regards the manner of deriving such income, it cannot raise a presumption
regarding it.

 

ii)   Both the Commissioner (Appeals) as well as
the Tribunal had recorded concurrent findings of fact that during the course of
search the director of the assessee company had admitted undisclosed income of
Rs. 15 crores as unaccounted cash receivable for the year under consideration,
i.e., F.Y. 2010-11. The director of the assessee in his statement had explained
that the income was earned out of booking / selling shops and had specified the
buildings. Thereafter, the assessee could not be blamed for not substantiating
the manner in which the disclosed income was derived. The cancellation of
penalty by the Tribunal was justified.’

 

 

Capital gains – Unexplained investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property – Difference between stamp value and value shown in sale deed – Effect of section 50C – Presumption that stamp value is real one – Section 50C enacts a legal fiction – Section 50C cannot be applied to make addition u/s 69

43. Gayatri
Enterprises vs. ITO; [2020] 420 ITR 15
(Guj.) Date of order: 20th
August, 2019 A.Y.: 2011-12

 

Capital gains – Unexplained
investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property –
Difference between stamp value and value shown in sale deed – Effect of section
50C – Presumption that stamp value is real one – Section 50C enacts a legal
fiction – Section 50C cannot be applied to make addition u/s 69

 

The assessee purchased a piece of land.
He disclosed the transaction in his returns for the A.Y. 2011-12. This was
accepted by the A.O. Subsequently, the order was set aside in revision and an
addition was made to his income u/s 69 of the Income-tax Act, 1961 on the
ground that there was a difference between the value of the land shown in the
sale deed and the stamp duty value. The order of revision was upheld by the
Tribunal.

 

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

 

‘i)   Section 50C was introduced in the Income-tax
Act, 1961 by the Finance Act, 2002 with effect from 1st April, 2003
for substituting the valuation done for the stamp valuation purposes as the
full value of the consideration in place of the consideration shown by the
transferor of the capital asset, being land or building, and, accordingly,
calculating the capital gains u/s 48. Under section 50C when the stamp duty
valuation of a property is higher than the apparent sale consideration shown in
the instrument of transfer, the onus to prove that the fair market value of the
property is lower than such valuation by the stamp valuation authority is on
the assessee who can reasonably discharge this onus by submitting necessary
material before the A.O., such as valuation by an approved valuer. Thereafter,
the onus shifts to the A.O. to show that the material submitted by the assessee
about the fair market value of the property is false or not reliable. Section
50C enacts a legal fiction which is confined to what is stated in the
provision. The provisions of section 50C cannot be applied for the purpose of
making an addition u/s 69.

ii)   Section 50C will apply to the seller of the
property and not to the purchaser. Section 69B does not permit an inference to
be drawn from the circumstances surrounding a transaction of sale of property
that the purchaser of the property must have paid more than what was actually
recorded in his books of accounts for the simple reason that such an inference
could be very subjective and could involve the dangerous consequence of a
notional or fictional income being brought to tax contrary to the strict
provisions of Article 265 of the Constitution of India which must be
“taxes on income other than agricultural income”.

 

iii)  There was nothing on record to indicate what
the price of the land was at the relevant time. Even otherwise, it was a pure
question of fact. Apart from the fact that the price of the land was different
from that recited in the sale deed unless it was established on record by the
Department that, as a matter of fact, the consideration as alleged by the
Department did pass to the seller from the purchaser, it could not be said that
the Department had any right to make any additions. The addition was
not justified.’

 

 

Business expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax at source – Charges paid by assessee to banks for providing credit card processing services – Bank not rendering services in nature of agency – Charges paid to bank not in nature of commission within meaning of section 194H – Disallowance u/s 40(a)(ia) not warranted

42. Principal CIT vs.
Hotel Leela Venture Ltd.; [2020] 420 ITR 385
(Bom.) Date of order: 18th
December, 2018 A.Y.: 2009-10

 

Business expenditure
– Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax
at source – Charges paid by assessee to banks for providing credit card
processing services – Bank not rendering services in nature of agency – Charges
paid to bank not in nature of commission within meaning of section 194H –
Disallowance u/s 40(a)(ia) not warranted

 

The assessee was in the hospitality
business. For the A.Y. 2009-10, the A.O. found that the assessee had not
deducted tax u/s 194H of the Income-tax Act, 1961 on payments made by it to
banks for processing of credit card transactions and disallowed the
corresponding expenditure u/s 40(a)(ia).

 

The Commissioner (Appeals) deleted the
disallowance and the Tribunal upheld his order.

 

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

 

‘i)   The Tribunal had not committed any error in holding
that the bank did not act as an agent of the assessee while it processed the
credit card payments and, therefore, the charges collected by the bank for such
services did not amount to commission within the meaning of section 194H. The
Tribunal was justified in upholding the deletion of disallowance made u/s
40(a)(ia) by the Commissioner (Appeals).

 

ii)   No question of law arose.’

 

 

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s 139(1) has to be considered for purpose of computing period of limitation under sub-section (2) of section 143 and not date on which defects actually came to be removed u/s 139(9)

 41. Kunal Structure
(India) (P) Ltd. vs. Dy. CIT; [2020] 113
taxmann.com 577 (Guj.) Date of order: 24th
October, 2019

 

Assessment – Notice
u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s
139(1) has to be considered for purpose of computing period of limitation under
sub-section (2) of section 143 and not date on which defects actually came to
be removed u/s 139(9)

 

The petitioner is a company registered
under the Companies Act, 2013. For the A.Y. 2016-17, the petitioner had filed
its return of income u/s 139(1) of the Income-tax Act, 1961 on 10th
September, 2016. Thereafter, the petitioner received an intimation of defective
return u/s 139(9) on 17th June, 2017. The petitioner received a
reminder on 5th July, 2017 granting him an extension of 15 days to
comply with the notice issued u/s 139(9) of the Act and accordingly, the time
limit for removal of the defects u/s 139(9) of the Act stood extended till 20th
July, 2017. The petitioner removed the defects on 7th July, 2017
within the time granted. Subsequently, the return was processed under
sub-section (1) of section 143 of the Act on 12th August, 2017,
wherein the date of original return is shown to be 10th September,
2016. Thereafter, the impugned notice u/s 143(2) of the Act came to be issued
on 9th August, 2018, informing the petitioner that the return of
income filed by it for A.Y. 2016-17 on 7th July, 2017 has been
selected for scrutiny calling upon the petitioner to produce any evidence on
which it may rely in support of its return of income.

 

The petitioner filed a writ petition
under Articles 226 and 227 of the Constitution of India and challenged the
notice u/s 143(2) dated 9th August, 2018 and the proceedings
initiated pursuant thereto. The Gujarat High Court allowed the writ petition
and held as under:

 

‘i)   On a plain reading of sub-section (2) of
section 143 of the Act, it is apparent that the notice u/s 143(2) must be
served on the assessee within a period of six months from the end of the
financial year in which such return is furnished. Thus, if, after furnishing a
return of income, the assessee does not receive a notice under sub-section (2)
of section 143 of the Act within the period referred to in the sub-section, the
assessee is entitled to presume that the return has become final and no
scrutiny proceedings are to be started in respect of that return. It is only
after the issuance of notice under sub-section (2) of section 143 of the Act
that the A.O. can proceed further under sub-section (3) thereof to make an
assessment order. Therefore, the notice u/s 143(2) of the Act is a statutory
notice, upon issuance of which the A.O. assumes jurisdiction to frame the
scrutiny assessment under sub-section (3) of section 143 of the Act.
Consequently, if such notice is not issued within the period specified in
sub-section (2) of section 143 of the Act, viz., before the expiry of six months
from the end of the financial year in which the return is furnished, it is not
permissible for the A.O. to proceed further with the assessment.

 

ii)   In the facts of the present case, the
petitioner filed its return of income under sub-section (1) of section 139 of
the Act on 10th September, 2016. Since the return was defective, the
petitioner was called upon to remove such defects, which came to be removed on
7th July, 2017, that is, within the time allowed by the A.O.
Therefore, upon such defects being removed, the return would relate back to the
date of filing of the original return, that is, 10th September, 2016
and consequently the limitation for issuance of notice under sub-section (2) of
section 143 of the Act would be 30th September, 2017, viz., six
months from the end of the financial year in which the return under sub-section
(1) of section 139 came to be filed. In the present case, it is an admitted
position that the impugned notice under sub-section (2) of section 143 of the
Act has been issued on 9th August, 2018, which is much beyond the
period of limitation for issuance of such notice as envisaged under that
sub-section. The impugned notice, therefore, is clearly barred by limitation
and cannot be sustained.

 

iii)  For the foregoing reasons, the petition
succeeds and is, accordingly, allowed. The impugned notice dated 9th August,
2018 issued under sub-section (2) of section 143 of the Act and all proceedings
taken pursuant thereto are hereby quashed and set aside.’

 

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144 of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and wholesale remand for framing a fresh assessment, A.O. could not deny to evaluate fresh claim raised by assessee during remand assessment proceedings

40. Curewel
(India) Ltd. vs. ITO; [2020] 113
taxmann.com 583 (Delhi) Date of order:
28th November, 2019 A.Y.: 2002-03

 

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144
of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and
wholesale remand for framing a fresh assessment, A.O. could not deny to
evaluate fresh claim raised by assessee during remand assessment proceedings

 

For the A.Y.
2002-03, the A.O. passed best judgment assessment u/s 144 of the Income-tax
Act, 1961 without examining the books of accounts of the assessee. The Tribunal
set aside the said assessment and remanded the matter to the A.O. to pass a
fresh order after considering the documents and submissions of the assessee.
During remand assessment, the assessee raised a fresh claim regarding
non-taxability of income arising from write-off of liability by Canara Bank
which was earlier offered as taxable income. The A.O. rejected the said claim
holding that in remand proceedings the assessee could not raise a fresh claim.

 

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

 

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

 

‘i)   The remand made by the
Tribunal to the A.O. vide order dated 10th March, 2011 was a
complete and wholesale remand for framing a fresh assessment. The remand was
not limited in its scope and was occasioned upon the Tribunal finding the
approach of the A.O. and the CIT(A) to be excessive, harsh and arbitrary. The
earlier assessment had been framed on the basis of best judgment without
examining the books of accounts of the assessee, which the assessee has claimed
were available.

ii)   That being the position, the
A.O. ought to have evaluated the claim made by the assessee for write-off of
liability by Canara Bank in its favour amounting to Rs. 1,36,45,525 and should
not have rejected the same merely on the ground of it being raised for the
first time. The reliance placed by the Tribunal on Saheli Synthetics (P)
Ltd. (Supra) is misplaced in the light of the scope and nature of
remand in the present case. The findings returned by the Tribunal in paragraphs
8, 9 and 12 of the impugned order are erroneous since the Tribunal has not
appreciated the scope and nature of the remand ordered by it by its earlier
order dated 10th March, 2011.

 

iii)  We, therefore, answer the
questions framed aforesaid in favour of the assessee and set aside the impugned
order. Since the A.O. has not evaluated the appellant’s claim regarding
non-taxability of income arising from write-off of liability by Canara Bank in
its favour amounting to Rs. 1,36,45,525 on merits, we remand the matter back to
the A.O. for evaluation of the said claim on its own merits.’

Principal Officer (condition precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor hearing of petitioner before treating petitioner as a Principal Officer was involved, and connection of petitioner with management and administration of company was also not established, A.O. could not have named petitioner as Principal Officer

13. A. Harish Bhat vs. ACIT (TDS)

[2019] 111 taxmann.com 210 (Karn.)

Date of order: 17th October, 2019

F.Ys.: 2009-10 to 2012-13

 

Principal Officer (condition
precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor
hearing of petitioner before treating petitioner as a Principal Officer was
involved, and connection of petitioner with management and administration of
company was also not established, A.O. could not have named petitioner as
Principal Officer

 

The petitioner was treated as a
Principal Officer of the company Kingfisher Airlines for the F.Ys. 2009-10 to
2012-13 u/s 2(35) of the Income-tax Act, 1961. The petitioner filed a writ
petition and challenged the order.

 

He contended
that to come within the ambit of key management personnel, the petitioner had
to be either Managing Director or the Chief Executive Officer, whole-time
director / company secretary / chief financial officer / or in any way be
connected with the management or administration of the company. The Revenue, on
the other hand, justifying the said order, submitted that the petitioner was
the treasurer of the U.B. Group of Companies during the relevant financial
years and hence he was treated as Principal Officer. Further, neither a
personal hearing nor an order was necessary to treat the person as a Principal
Officer. It was sufficient if a notice of the intention of the A.O. of treating
any person as Principal Officer was issued. The petitioner assailed the order
of the Commissioner on the ground that the objections submitted by the
petitioner to the notice had not been duly considered and hence sought to set
aside the said order.

 

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

‘i) The impugned order deserves to be set aside for the reason that a
Principal Officer, as contemplated u/s 2(35), used with reference to a local
authority or a company or any other public body or any association of persons
or any body of individuals, means the secretary, treasurer, manager or agent of
the authority, company, association or body, or any person connected with the
management or administration of the local authority, company, association or
body upon whom the A.O. has served a notice of his intention of treating him as
the Principal Officer thereof.

 

ii) It is clear that to treat any person as a Principal Officer, such
person should be connected with the management or administration of the local
authority / company or association or body. Such connection with the management
or administration is the basis for treating any person as a Principal Officer.
Such connection has to be established or to be supported with substantial
material to decide the connection of any person with the management or
administration. Without disclosing the basis, no person can be treated as a
“Principal Officer” of the company recognising him as the Key Management Personnel
of the company. The details of such information on the basis of which the Key
Management Personnel tag is made, have to be explicitly expressed in the notice
of the intention of treating any person as a Principal Officer by the A.O.
Neither in the show cause notice nor in the order impugned was such a
connection of the petitioner with the management or administration of the
company Kingfisher Airlines Limited established. The phrase “Key Management
Personnel” of the company has a wide connotation and the same has to be
supported with certain material; unless such connection is established, no
notice served on the petitioner would empower the respondent authority to treat
the petitioner as a “Principal Officer”.

 

iii) In the instant case, the question inasmuch as
(sic) neither service of notice nor hearing of the petitioner before
treating the petitioner as a Principal Officer is involved. The fulcrum of
dispute revolves around the aspect whether the petitioner is the person
connected with the management or administration of the company. Such finding
has to be supported by substantial material and has to be reflected in the
notice issued u/s 2(35) to treat a person as a Principal Officer of the company
which will have wider consequences. The said aspect is lacking in the present
order impugned. Merely on surmises and conjectures, no person shall be treated
as a Principal Officer.

 

iv) The writ petition is to be allowed. The
impugned order is to be quashed.’

Industrial undertaking – Special deduction u/s 80-IA(4) – Industrial undertaking engaged in production of power – Meaning of ‘power’ in section 80-IA(4) – Power would include steam; A.Y. 2011-12

37. Principal CIT vs. Jay Chemical Industries Ltd. [2020] 422 ITR 449 (Guj.) Date of order: 17th February, 2020 A.Y.: 2011-12

 

Industrial undertaking – Special deduction
u/s 80-IA(4) – Industrial undertaking engaged in production of power – Meaning
of ‘power’ in section 80-IA(4) – Power would include steam; A.Y. 2011-12

 

For the A.Y. 2011-12 the assessee had
claimed deduction of Rs. 32,51,080 u/s 80-IA(4) of the ITA, 1961. This claim
was on account of the operation of the captive power plant. The assessee showed
income from sale of power to the tune of Rs. 1,23,10,500 and the sale of vapour
at Rs. 6,59,77,170. The A.O. took the view that ‘vapour’ would not fall within
the meaning of ‘power’.

 

The Commissioner (Appeals) and the Tribunal
allowed the assessee’s claim.


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

 

‘i) Section 80-IA(4) of the Income-tax Act,
1961 provides for special deduction to industrial undertakings engaged in the
production of power. The word “power” should be understood in common parlance
as “energy”. “Energy” can be in any form, mechanical, electricity, wind or
thermal. In such circumstances, “steam” produced by an assessee can be termed
as power and would qualify for the benefits available u/s 80-IA(4).

 

ii) Steam had
to be considered as “power” for the purpose of deduction u/s 80-IA(4).’

Deemed income – Section 41(1)(a) of ITA, 1961 – Remission or cessation of liability – Condition precedent – Assessee, a co-operative society, obtaining loan from National Dairy Development Board for which state government stood guarantee on payment of commission – Commission claimed by assessee as revenue expenditure in earlier assessment years – State government writing off liability and allowing it to be treated as capital grant to be used only for capital and rehabilitation purposes – Assessee continues to remain liable to repay those amounts – No remission or cessation of liability u/s 41(1)(a) – Cannot be treated as deemed income u/s 41(1)(a); A.Y. 2004-05

36. Principal CIT
vs. Rajasthan Co-Operative Dairy Federation Ltd. [2020] 423 ITR 89 (Raj.) Date of order: 23rd July, 2019 A.Y.: 2004-05

 

Deemed income – Section 41(1)(a) of ITA,
1961 – Remission or cessation of liability – Condition precedent – Assessee, a
co-operative society, obtaining loan from National Dairy Development Board for
which state government stood guarantee on payment of commission – Commission
claimed by assessee as revenue expenditure in earlier assessment years – State
government writing off liability and allowing it to be treated as capital grant
to be used only for capital and rehabilitation purposes – Assessee continues to
remain liable to repay those amounts – No remission or cessation of liability
u/s 41(1)(a) – Cannot be treated as deemed income u/s 41(1)(a); A.Y. 2004-05

 

The assessee, a
co-operative society involved in milk and milk product processing, secured a
loan from the National Dairy Development Board for which the government of
Rajasthan stood guarantor subject to payment of commission of Rs. 25 lakhs per annum.
This was claimed as expenditure by the assessee for several years up to the
A.Y. 2004-05. The amount remained outstanding and was shown as payable to the
government of Rajasthan. The state later wrote off that liability and allowed
it to be treated as a capital grant to be used only for capital and
rehabilitation purposes. The A.O. was of the view that the transaction, i.e.,
cessation of liability, involved the utilisation of receipts which had been
treated as revenue all along and, therefore, treated it as deemed income u/s
41(1)(a) of the Income-tax Act, 1961 for the A.Y. 2004-05.

 

The Commissioner (Appeals) allowed the
appeal and held that the amount payable to the government was to be treated as
capital grant to be used for rehabilitation or capital requirement of the
assessee and could not be used for any further distribution of dividend or
revenue expenditure, and that it was not a case of remission or cessation of
the liability as envisaged u/s 41(1)(a). The Tribunal concurred with the view
of the Commissioner (Appeals) and dismissed the appeal filed by the Department.

 

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

 

‘Both the Commissioner (Appeals) and the
Tribunal had rendered concurrent findings on the facts. The record also
supported their findings in that the loan utilised by the assessee was for
capital purposes and the loan was given by the National Dairy Development
Board. The assessee continued to remain liable to repay those amounts. The
state, instead of fully writing off the amounts, had imposed a condition that
they would be utilised only for capital or rehabilitation purposes. This was
therefore a significant factor, i.e., the writing off was conditional upon use
of the amount in the hands of the assessee which was for the purpose of
capital. No question of law arose.’

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Notice calling for rectification of defects in return u/s 139(9) – Rectification within time allowed in notice – Not a case of revised return but of corrected return which relates back to date of original return – Limitation for notice u/s 143(2) runs from date of original return, not date of rectified return; A.Y. 2016-17

35. Kunal Structure (India) Private Ltd. vs. Dy.CIT [2020] 422 ITR 482 (Guj.) Date of order: 24th October, 2019 A.Y.: 2016-17

 

Assessment
– Notice u/s 143(2) of ITA, 1961 – Limitation – Notice calling for
rectification of defects in return u/s 139(9) – Rectification within time
allowed in notice – Not a case of revised return but of corrected return which
relates back to date of original return – Limitation for notice u/s 143(2) runs
from date of original return, not date of rectified return; A.Y. 2016-17

 

For
the A.Y. 2016-17, the petitioner company had filed its return of income u/s
139(1) on 10th September, 2016. Thereafter, the petitioner received
an intimation of defective return u/s 139(9) of the Act on 17th
June, 2017. The petitioner received a reminder on 5th July, 2017
granting him an extension of fifteen days to comply with the notice issued u/s
139(9) and accordingly, the time limit for removal of the defects u/s 139(9) of
the Act stood extended till 20th July, 2017. The petitioner removed
the defects on 7th July, 2017 within the time granted. Subsequently,
the return was processed u/s 143(1) on 12th August, 2017 wherein the
date of original return is shown to be 10th September, 2016.
Thereafter, the impugned notice u/s 143(2) of the Act came to be issued on 9th
August, 2018, informing the petitioner that the return of income filed by it for the A.Y. 2016-17 on 7th
July, 2017 has been selected for scrutiny.

 

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

 

‘i)  A study of the provisions of section 139 of
the Income-tax Act, 1961 shows that under sub-section (1) thereof, an assessee
is required to file return on or before the due date. If one looks at the
language employed in sub-sections (1), (3) and (5) of section 139, a common
thread in all the sub-sections is that the assessee is required to file a
return of income under those sub-sections. However, from the language employed
in sub-section (9) of section 139 of the Act, it does not require any return to
be filed by the assessee. All that the section says is that the assessee is
required to be given an opportunity to rectify the defect in the return filed
by him within the time provided, failing which such return would be treated as
an invalid return.

 

ii)  Unlike sub-section (5) of section 139 of the
Act which requires an assessee to file a revised return of income in case of
any omission or wrong statement in the return of income filed under sub-section
(1) thereof, sub-section (9) of section 139 of the Act does not require an
assessee to file a fresh return of income, but requires the assessee to remove
the defects in the original return of income filed by him within the time
provided therein. Once the defects in the original return of income are
removed, such return would be processed further under the Act. In case such
defects are not removed within the time allowed, such return of income would be
treated as an invalid return.

 

iii) There is a clear distinction between a revised
return and a correction of return. Once a revised return is filed, the original
return must be taken to have been withdrawn and substituted by a fresh return
for the purpose of assessment. There is no concept of corrected return of
income under the Act. Therefore, in effect and substance, what the notice under
sub-section (9) of section 139 does is to call upon the assessee to remove the
defects pointed out therein. Therefore, mere reference to the expression “corrected
income” in the notice under sub-section (9) of section 139 of the Act does not
mean that a fresh return of income has been filed under that sub-section. The
action of removal of the defects would relate back to the filing of the
original return of income and, accordingly, it is the date of filing of the
original return which has to be considered for the purpose of computing the
period of limitation under sub-section (2) of section 143 of the Act and not
the date on which the defects actually came to be removed.

 

iv) The assessee filed its return of income under sub-section (1) of
section 139 on 10th September, 2016. Since the return was defective,
the assessee was called upon to remove such defects, which came to be removed
on 7th July, 2017, that is, within the time allowed by the A.O.
Therefore, upon such defects being removed, the return would relate back to the
date of filing of the original return, that is, 10th September, 2016
and consequently the limitation for issuance of notice under sub-section (2) of
section 143 of the Act would be 30th September, 2017, viz., six
months from the end of the financial year in which the return under sub-section
(1) of section 139 was filed. The notice under sub-section (2) of section 143
of the Act had been issued on 9th August, 2018, which was much
beyond the period of limitation for issuance of such notice as envisaged under
that sub-section. The notice, therefore, was barred by limitation and could not
be sustained.’

 

 

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Defective return – Rectification of defects – Relates back to date of original return – Time limit for issue of notice u/s 143(2) – Not from date of rectification of defects but from date of return – Return filed on 17th September, 2016 and return rectified on 12th September, 2017 – Notice u/s 143(2) issued on 10th August, 2018 – Barred by limitation; A.Y. 2016-17

34. Atul Projects India (Pvt.) Ltd. vs. UOI [2020] 422 ITR 478
(Bom.) Date of order: 2nd
January, 2019 A.Y.: 2016-17

 

Assessment
– Notice u/s 143(2) of ITA, 1961 – Limitation – Defective return –
Rectification of defects – Relates back to date of original return – Time limit
for issue of notice u/s 143(2) – Not from date of rectification of defects but
from date of return – Return filed on 17th September, 2016 and
return rectified on 12th September, 2017 – Notice u/s 143(2) issued
on 10th August, 2018 – Barred by limitation; A.Y. 2016-17

 

For
the A.Y. 2016-17, the assessee filed its return on 17th October,
2016 and it was found to be defective. The A.O. issued a notice u/s 139(9) of
the Income-tax Act, 1961 and called upon the assessee to remove the defects
which the assessee did within the permitted period on 12th
September, 2017. Yet another notice was issued by the Department on 19th
September, 2017 u/s 139(9) which stated that the return filed on 12th
September, 2017 in response to the directions for removing the defects, was
also considered to be defective. On 29th September, 2017, the
assessee electronically represented to the Department that there was no defect
in the return but this communication was not responded to by the Department. On
10th February, 2018, the A.O. passed an order u/s 143(1).
Thereafter, on 10th August, 2018, the A.O. issued a notice u/s
143(2) for scrutiny assessment u/s 143(3).

 

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

 

‘i)
The date of filing of the return would be the date on which it was initially
presented and not the date on which the defects were removed. The assessee had
filed its return of income on 17th October, 2016 and it was found to
be defective. The Department had called upon the assessee to remove the
defects, which the assessee did on 12th September, 2017. On a
representation by the assessee, the Department did not raise this issue further
and thus had impliedly accepted the assessee’s representation that there were
no further defects after the assessee had removed the defects on 12th
September, 2017. The notice dated 10th August, 2018 issued u/s
143(2) was barred by limitation.

 

ii) In the result, the impugned
notice dated 10th August, 2018 is set aside.’

Income from undisclosed sources – Section 69 of ITA, 1961 – Addition on basis of statement made by partner of assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence – Addition not justified

12. Principal CIT vs. Nageshwar Enterprises

 [2020] 421 ITR 388 (Guj.)

Date of order: 3rd February, 2020

A.Y.: 2007-08

 

Income from undisclosed sources –
Section 69 of ITA, 1961 – Addition on basis of statement made by partner of
assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence –
Addition not justified

 

In the course of a search
conducted by the Customs Department, a partner of the assessee in his statement
recorded on oath admitted before the Directorate of Revenue Intelligence the
undervaluation of goods, part of which pertained to A.Y. 2007-08, the year of
search. He admitted that the undervalued amount was paid in cash to the sellers
which were foreign companies. During the assessment the A.O. rejected the
submissions of the assessee and made additions on account of unaccounted
investment and unaccounted purchases.

 

The
Commissioner (Appeals) found that the A.O. did not make further inquiries and
that the only evidence with him was in the form of a confessional statement of
the partner of the assessee recorded on oath u/s 108 of the Customs Act, 1962
and that in the absence of any corroborative evidence or finding, no addition
could be made merely on the basis of the admission statement. The Tribunal
found that the addition was made based on the show cause notice issued by the
Revenue Intelligence, that the statement was retracted by the partner and that
the Customs Excise and Service Tax Appellate Tribunal had dropped the
proceedings initiated against the assessee. The Tribunal held that in the
absence of any documentary evidence no addition could be made on the action of
a third party, i.e., the Directorate of Revenue Intelligence.

 

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

‘i) The Tribunal was correct in holding that no addition could be made
on the basis of the action of the third party, i.e., the Directorate of Revenue
Intelligence. The Department could not start with the confessional statement of
the assessee. The confessional statement had to be corroborated with other
material on record.

 

ii) The appellate authorities had
concurrently recorded a finding that except the statement of the partner
recorded u/s 108 of the Customs Act, 1962, there was no other evidence. No
question of law arose.’

Income – Exemption u/s 10(24) of ITA, 1961 – Registered trade union – Amount received on settlement of dispute between company and its workers disbursed to workers – Amount not assessable in hands of trade union

11. Gujarat Rajya Kamdar Sabha Union Machiwadi vs. ITO

[2020] 421 ITR 341 (Guj.)

Date of order: 7th January, 2020

A.Y.: 2009-10

 

Income – Exemption u/s 10(24) of
ITA, 1961 – Registered trade union – Amount received on settlement of dispute
between company and its workers disbursed to workers – Amount not assessable in
hands of trade union

 

The assessee was a registered
trade union. Its managing committee passed a unanimous resolution that as a
result of a compromise arrived at between the assessee and a company in the
Labour Court, whatever amount was received from the company would be fully
distributed to the workers of the company. In such circumstances a settlement
was arrived at on 15th May, 2008, which was reduced into writing in
the form of a memorandum of settlement between the company, i.e, the employer,
and the assessee. In view of the settlement, the assessee received payment of
Rs. 60,96,818. The amount was assessed in the hands of the assessee as income
for the A.Y. 2009-10.

 

The Tribunal upheld the
assessment and the addition.

 

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

 

‘i) Once the factum of settlement was not disputed coupled with
the factum of receipt of a particular amount from the company, and the
amount had been distributed amongst the employees, the case would squarely
stand covered u/s 10(24) of the Income-tax Act, 1961. Though the contribution
from the employer was received as per the settlement agreement, it was only
incidental to the activities of the services of the assessee in resolving the
dispute between the member workers and the employer with the intention of
advancement of welfare of the members.

 

ii) The amount was not assessable as income of the assessee.’

Income – Accrual of (time of accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during relevant assessment year and as per MOU part of sale consideration was payable by purchaser on completion of assessee’s obligation under MOU – Assessee having not met conditions of MOU during relevant year, such amount was not taxable in relevant assessment year

10. Principal CIT vs. Rohan
Projects

[2020] 113 taxmann.com 339
(Bom.)

Date of order: 18th
November, 2019

A.Y.: 2012-13

 

Income – Accrual of (time of
accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during
relevant assessment year and as per MOU part of sale consideration was payable
by purchaser on completion of assessee’s obligation under MOU – Assessee having
not met conditions of MOU during relevant year, such amount was not taxable in
relevant assessment year

 

The assessee
is engaged in the business termed Promoter and Developer. It had sold land to
M/s Symboisis which transaction took place in the previous year relevant to the
A.Y. 2012-13. The land was sold under  a
Memorandum of Understanding (MOU) dated 2nd February, 2012 for a
total consideration of Rs. 120 crores. However, the assessee offered only a sum
of Rs. 100 crores for tax in the return for the A.Y. 2012-13. This was because
the MOU provided that a sum of Rs. 20 crores would be paid by the purchaser
(M/s Symboisis) on execution of the sale deed after getting the plan sanctioned
and on inclusion of the name of the purchaser in the 7/12 extract. However, as
the assessee was not able to meet the conditions of the MOU during the subject
assessment year, the sum of Rs. 20 crores, according to the assessee, could not
be recognised as income for the subject assessment year. The A.O. did not accept
this and held that the entire sum of Rs. 120 crores is taxable in the subject
assessment year.

 

The Tribunal, after recording the
above facts and relying upon the decision of the Supreme Court in Morvi
Industries Ltd. vs. CIT [1971] 82 ITR 835, held that the income accrues
only when it becomes due, i.e., it must also be accompanied by corresponding
liability of the other party to pay the amount. On facts it was found that the
amount of Rs. 20 crores was not payable in the previous year relevant to the subject
assessment year as the assessee had not completed its obligation under the MOU
entirely. Moreover, it also found that Rs. 20 crores was offered to tax in the
subsequent assessment year and also taxed. Thus, the Tribunal allowed the
assessee’s appeal.

 

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 was justified in holding
that a sum of Rs. 20 crores is not taxable in the subject assessment year?’

 

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

 

‘i) We note that the finding of fact arrived at by the Tribunal that
the respondent was not able to comply (with) its obligations under the MOU in
the previous year relevant to the subject assessment year so as to be entitled
to receive Rs. 20 crores is not shown to be perverse. In fact, the issue is
covered by the decision of the Apex Court in the case of CIT vs. Shoorji
Vallabdas & Co. [1962] 46 ITR 144 wherein it is held that “Income
tax is a levy on income. No doubt, the Income-tax Act takes into account two
points of time at which the liability to tax is attracted, viz., the accrual of
the income or its receipt; but the substance of the matter is the income; if
income does not result at all, there cannot be a tax ” So also in Morvi
Industries Ltd. (Supra), the Supreme Court has held that income accrues
when there is a corresponding liability on the other party. In the present
facts, in terms of the MOU there is no liability on the other party to pay the
amounts.

 

ii) In any event, the amount of Rs. 20 crores has been offered to tax
in the subsequent assessment year and also taxed. This Court, in the case of CIT
vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom.) has observed as
follows:

 

“3. We have often wondered why
the Income-tax authorities, in a matter such as this where the deduction is
obviously a permissible deduction under the Income-tax Act, raise disputes as
to the year in which the deduction should be allowed. The question as to the
year in which a deduction is allowable may be material when the rate of tax
chargeable on the assessee in two different years is different; but in the case
of income of a company, tax is attracted at a uniform rate, and whether the
deduction in respect of bonus was granted in the assessment year 1952-53 or in
the assessment year corresponding to the accounting year 1952, that is, in the
assessment year 1953-54, should be a matter of no consequence to the
Department; and one should have thought that the Department would not fritter
away its energies in fighting matters of this kind. But, obviously, judging
from the references that come up to us every now and then, the Department
appears to delight in raising points of this character which do not affect the
taxability of the assessee or the tax that the Department is likely to collect
from him whether in one year or the other.”

 

Nothing has been shown to us as
to why the above observation will not apply to the present facts.

 

iii) In the aforesaid circumstances, the
view taken by the Tribunal on facts is a possible view and calls for no
interference. In any event the tax on the amount of Rs. 20 crores has been paid
in the next year. Therefore, the proposed question does not give rise to any
substantial question of law. Hence, not entertained. The appeal is, therefore,
dismissed.’

Search and seizure – Assessment of third person – Section 153C of ITA, 1961 – Undisclosed income – Assessment based solely on statement of party against whom search conducted – A.O. not making any further inquiry or investigation on information received from Deputy Commissioner – No cogent material produced to fasten liability on assessee – Concurrent findings of fact by appellate authorities; A.Y. 2002-03

41. CIT vs. Sant
Lal [2020] 423 ITR 1 (Del) Date of order: 11th March, 2020 A.Y.: 2002-03

 

Search and seizure – Assessment of third
person – Section 153C of ITA, 1961 – Undisclosed income – Assessment based
solely on statement of party against whom search conducted – A.O. not making
any further inquiry or investigation on information received from Deputy
Commissioner – No cogent material produced to fasten liability on assessee –
Concurrent findings of fact by appellate authorities; A.Y. 2002-03

 

For the A.Y. 2002-03, the assessee declared
income from salary, house property and capital gains. On the basis of
information from the Deputy Commissioner that search and seizure conducted in
the premises of BMG revealed that BMG was engaged in hundi business
wherein previously undisclosed money was arranged from various parties
including the assessee, the A.O. issued a notice u/s 148 and passed an order
including the undisclosed cash transactions with the BMG group as unexplained
income u/s 69A which had escaped assessment.

 

The Commissioner (Appeals) deleted the
addition. The Tribunal confirmed the order of the Commissioner (Appeals) on the
ground that the issues in appeal were directly covered in its earlier
decisions.

 

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

 

‘i) On the facts and the concurrent findings
given by the Commissioner (Appeals) and the Tribunal, it was evident that the
Department had not been able to produce any cogent material which could fasten
the liability on the assessee.

 

ii) The
Commissioner (Appeals) had also examined the assessment record and had observed
that the A.O. did not make any further inquiry or investigation on the
information passed on by the Deputy Commissioner with respect to the party in
respect of whom the search was conducted. No attempt or effort was made to
gather or corroborate evidence in respect of the addition made u/s 69A by the
A.O. No question of law arose.’

 

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company engaged in business of development of real estate had, in ordinary course of business, made certain advance for purchase of land to construct commercial complex but same was forfeited as assessee could not make payment of balance amount – Forfeiture of advance would be allowed as business expenditure

9. Principal CIT vs.
Frontiner Land Development P. Ltd.

[2020] 114 taxmann.com 688
(Delhi)

Date of order: 25th
November, 2019

A.Y: 2012-13

 

Business expenditure – Section
37(1) of ITA, 1961 – Where assessee company engaged in business of development
of real estate had, in ordinary course of business, made certain advance for
purchase of land to construct commercial complex but same was forfeited as
assessee could not make payment of balance amount – Forfeiture of advance would
be allowed as business expenditure

 

The assessee, a company engaged
in the business of real estate development, had entered into a contract with
HDIL for purchase of land to construct a commercial complex in 2004 and had
paid an advance of Rs. 3.50 crores. However, it could not pay the balance
amount and, therefore, HDIL forfeited the advanced amount in 2011. In the
relevant year, i.e., A.Y. 2012-13, the entire capital gain and interest income
of the assessee company was offset with the amount so forfeited. The A.O. held
that forfeiture of advance was a colourable device to adjust capital gains. He
characterised the forfeiture as capital expenditure and made an addition.

 

The Commissioner (Appeals)
allowed the assessee’s appeal and deleted the addition of Rs. 3.5 crores. 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)   From the facts narrated in the impugned order, it emanates that
the transaction between the assessee and HDIL is not disputed. The transaction,
in fact, has also been accepted by the A.O. while treating the write-off as
capital expenditure. Thus, the only question that arises for consideration is
whether such a transaction could be categorised as “colourable device”
and the forfeiture of Rs. 3.50 crores could be treated as capital expenditure.
Since the genuineness of the transaction is not disputed, we are unable to find
any cogent ground or reason for the same to be considered as colourable device.
In fact, the assessee had produced several documents in support of the
forfeiture, such as the copy of the agreement to sell dated 12th
October, 2004; letter requesting for extension of agreement; letters granting
extension from HDIL; letter granting final opportunity; and letter of
forfeiture of advance, which in fact has been extracted in the impugned order.

 

ii) In order to claim deduction, the assessee has
to satisfy the requirements of section 37(1) of the Act which lays down several
conditions, such as, the expenditure should not be in the nature described
under sections 30 to 36; it should not be in the nature of capital expenditure;
it should be incurred in the previous year; it should be in respect of business
carried out by the assessee; and be expended wholly and exclusively for the
purpose of such business.

 

iii) The assessee is a company which is engaged in the business of real
estate. The main object of the business of the company is development of real
estate. It made a payment of Rs. 3.50 crores as advance to HDIL for purchase of
land to construct a commercial complex for the development of real estate.
Since it did not make the payment of the balance amount, for whatever reason,
the advance given was forfeited. In this view of the matter, the advance given
in the ordinary course of business has been rightly treated as loss incurred by
the company.

 

iv) We are unable to find any material on
record to suggest to the contrary. In view of the aforesaid factual findings,
the treatment given to the forfeiture of advance of Rs. 3.50 crores could not
be categorised as capital expenditure. Therefore, the question of law urged by
the appellant does not arise for consideration as the issue is factual. The
appeal is, accordingly, dismissed.’

Section 37 and Insurance Act, 1938– Business expenditure – Disallowance – Payments prohibited by law – Effect of Explanation 1 to section 37 – Reinsurance payments to non-residents – Not prohibited by law – Deduction allowable

8. Cholamandalam
MS General Insurance Co. Ltd. vs. Dy. IT; 411 ITR 386 (Mad): Date
of order: 12th December, 2018 A.Y.:
2009-10

 

Section
37 and Insurance Act, 1938– Business expenditure – Disallowance – Payments
prohibited by law – Effect of Explanation 1 to section 37 – Reinsurance
payments to non-residents – Not prohibited by law – Deduction allowable

 

The legal
issue in this appeal before the High Court relates to disallowance of
reinsurance premium ceded to non-resident reinsurers. The assessee has raised
the following substantial questions of law for consideration:

 

“i)   Whether the ITAT erred in deciding the
validity of reinsurance ceded to the non-resident reinsurers when such issue
was not even raised before it by either the Department or the appellant?

ii)   Whether the ITAT erred in holding that the
IRDA (General Insurance-Reinsurance) Regulation, 2000 is contrary to section
101A of the Insurance Act, 1938 when it does not have the power to decide the
validity of regulations made by the IRDA?

iii)   Whether the ITAT erred in holding that
reinsurance payments to non-residents are prohibited by law and therefore hit
by Explanation 1 to section 37 of the Income-tax Act, 1961?”

 

The Madras
High Court held in favour of the assessee and held as under:

“i)   The Tribunal has no jurisdiction to declare a
transaction to be either prohibited or illegal occurring under a different
statute over which it has no control.

ii)   The Insurance Act, 1938 stood amended w.e.f.
01.04.1961. It inserted section 101A. Section 2(16B) of the Act defines
‘reinsurance’ to mean the insurance of all or part of one insurer’s risk by
another insurer who accepts the risk for a mutually-acceptable premium. There
is no distinction drawn between an Indian reinsurer and a foreign reinsurer. On
and after the introduction of section 101A to the Insurance Act, 1938 there is
a mandatory requirement for other insurer to reinsure with Indian reinsurers
and such percentage is put to a maximum of 30%. The language of section 101A
nowhere prohibits the reinsurance with foreign reinsurance companies above the
percentage specified by the authority with previous approval by the Central
government.

iii)   A reading of the Insurance Regulatory and
Development Authority (General Insurance-Reinsurance) Regulations, 2000 also
clearly shows that there is absolutely no prohibition for reinsurance with a
foreign reinsurance company.

iv)  A reading of Circular No. 38(XXXIII-7), dated
03.10.1956 would clearly reveal that at no point of time has the Income-tax
Department taken a stand that the reinsurance business with a foreign
reinsurance company was a prohibited business.

v)   A reading of the order passed by the Tribunal
showed that the decision of the Tribunal on the effect of certain provisions of
the Insurance Act, 1938, whether reinsurance was permissible with foreign
entities and whether it was prohibited or valid in law, were all queries which
were raised by the Tribunal suo motu when the appeals were heard.

vi)  The sum and substance of the conclusion of the
Tribunal was that the entire reinsurance arrangement of the assessee company
was in violation and contrary to the provisions of section 2(9) of the
Insurance Act and, therefore, the entire reinsurance premium had to be
disallowed u/s. 37 of the Act. The Tribunal held that there was a clear
prohibition for payment of reinsurance premium to non-resident reinsurance companies.
The Tribunal held that an Indian insurer could not have any reinsurance
arrangement with a reinsurance company other than the insurer, as defined in
section 2(9) of the Insurance Act. The Tribunal was of the view that unless and
until a branch was opened by the foreign reinsurance company, the question of
conducting reinsurance business in India could not be done. This conclusion of
the Tribunal was not sustainable. Such a finding was without noticing the
reinsurance regulations, which had been provided by the Insurance Regulatory
Authority of India.

vii)  The Tribunal erred in drawing a presumption
regarding prohibition of reinsurance with foreign reinsurance companies. This
presumption was erroneous for the simple reason that the statement of objects
of the Insurance Act itself clearly stipulated wherever there was a
prohibition.

viii) The Tribunal had no jurisdiction to declare any
provisions of the regulations to be inconsistent with the provisions of the
Insurance Act. This was wholly outside the purview of the Tribunal.

ix)  The Tribunal did not consider the correctness
of the order passed by the Assessing Officer or that of the Commissioner
(Appeals). Therefore, the Tribunal could not have held that the Assessing
Officer rightly disallowed the insurance premium u/s. 40(a)(i).”

Refund – Sections 237 and 143 of ITA, 1961 – Disability pension of retired army personnel – Exempt by CBDT Circular – Tax paid by mistake – Claim for refund – Non-adherence to technical procedures – Cannot be ground to deny entitlement to legitimate relief of armed forces – Department has to refund tax recovered with interest

27. Col.
Madan Gopal Singh Negi (Retd.) vs. CIT; [2019]
419 ITR 143 (MP) Date
of order: 28th February, 2019 A.Ys.:
2008-09 to 2015-16

 

Refund
– Sections 237 and 143 of ITA, 1961 – Disability pension of retired army
personnel – Exempt by CBDT Circular – Tax paid by mistake – Claim for refund –
Non-adherence to technical procedures – Cannot be ground to deny entitlement to
legitimate relief of armed forces – Department has to refund tax recovered with
interest

 

The
assessee, a retired army personnel, was medically boarded out of the army and was receiving 30% as disability pension for
life on account of disability suffered by him according to a pension payment
order which was issued on 1st December, 2007. The CBDT, by way of a
memorandum dated 2nd July, 2001, had notified that the disability
pension received by officers of the Indian Armed Forces was completely exempted
from tax. The assessee, under a bona fide mistake had paid the tax on
his entire income for the years 2008 to 2016, including the disability pension.
The assessee then came to know about the exemption of pension from tax. He then
made applications to the AO in 2017, requesting him to refund the tax so paid
by mistake which totalled Rs. 11,16,643. In spite of repeated requests, the
Department did not refund the amount. The assessee filed a writ petition before
the Madhya Pradesh High Court requesting for appropriate directions to the
Income Tax Department for granting refund of the tax so paid by mistake.

 

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

 

‘i)   As the income
of the assessee was exempted, the Department had to refund the amount of the
tax deducted. The assessee could not be made to run from pillar to post on
account of various technicalities in such matters by those who are invested
with administrative powers to deal and decide the affairs of the personnel of
the Indian Armed Forces.

 

ii)   The Department
was directed to refund the entire amount of tax recovered, which was an
exempted amount and which the assessee had paid in respect of his disability
pension. The assessee was entitled to interest at the rate of 12% per annum
from the date the amount was deposited with the Department till the amount was
refunded to the assessee. If this order was not complied within 30 days as
directed, the rate of interest would be 18% per annum from the date of
entitlement till the actual payment of the amount to the assessee.’

 

Penalty – Concealment of income – section 271(1)(c) of ITA, 1961 – Income-tax survey showing undisclosed income – Amount offered in survey and included in return – Return accepted – No concealment of income – Penalty cannot be imposed u/s 271(1)(c)

26. Pr. CIT vs. Shree Sai Developers; [2019] 418 ITR 306 (Guj.) Date of order: 23rd July, 2019 A.Y.: 2012-13

 

Penalty – Concealment of income – section 271(1)(c) of ITA, 1961 –
Income-tax survey showing undisclosed income – Amount offered in survey and
included in return – Return accepted – No concealment of income – Penalty
cannot be imposed u/s 271(1)(c)

 

On 17th July, 2012, a survey was carried
out u/s 133A of the Income-tax Act, 1961 in
the premises of the assessee. In the course of the survey proceedings, the
assessee declared unaccounted income of Rs. 1,78,50,000 received during
the A.Y. 2012-13. Later, the assessee filed its return of income for the A.Y.
2012-13 on 28th September, 2012 declaring total income of Rs.
2,59,11,800, including the unaccounted income of Rs. 1,78,50,000 disclosed
during the course of survey proceedings. The assessment was completed by an
order u/s 143(3) of the Act accepting the returned income. Penalty was also
levied u/s 271(1)(c) of the Act on the premise
that the assessee had furnished inaccurate particulars of its income which led
to concealment of income.

 

The Commissioner (Appeals) deleted the penalty and
this was confirmed by the Tribunal.

 

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

 

‘i)   Section
271(1)(c) of the Income-tax Act, 1961, is a penal provision and such a
provision has to be strictly construed. Unless the case falls within the four
corners of the provision, penalty cannot be imposed.

 

ii)   The
words “in the course of any proceedings under this Act” in section 271(1)(c)
are prefaced by the satisfaction of the Assessing Officer or the Commissioner
(Appeals). When a survey is conducted by a survey team, the question of
satisfaction of the Assessing Officer or the Commissioner (Appeals) or the
Commissioner does not arise. Concealment of particulars of income or furnishing
of inaccurate particulars of income by the assessee has to be in the income tax
return filed by it. The deletion of penalty was justified.’

 

 

Export – Deduction u/s 80HHC of ITA, 1961 – Computation of profits for purposes of section 80HHC – Interest on fixed deposit in bank – Bank had unilaterally converted part of export earnings to fixed deposit for added security on loan – Interest includible in business profits

25.  JVS Exports vs. ACIT; [2019] 419 ITR 123
(Mad.) Date of order: 23rd July, 2019 A.Y.: 2004-05

 

Export – Deduction u/s 80HHC of ITA, 1961 –
Computation of profits for purposes of section 80HHC – Interest on fixed
deposit in bank – Bank had unilaterally converted part of export earnings to
fixed deposit for added security on loan – Interest includible in business
profits

 

The assessee is a
partnership firm engaged in the business of manufacture, sale and export of
handloom towels and other items. For the A.Y. 2004-05, the assessee had
included interest on fixed deposit in bank in the business profits for the
purpose of computation of deduction u/s 80HHC of the Income-tax Act, 1961. The
bank had unilaterally converted part of the export earnings to fixed deposit for
added security on loan. The AO excluded the interest on fixed deposits from
business profits for the purpose of computation of deduction u/s 80HHC.

 

The Tribunal upheld the order.

 

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

 

‘i)   The
material on record showed that the bank from which the assessee had availed of
loan for its export business, in no uncertain terms had mentioned that from and
out of the export sale proceeds, the bank would divert a part upon realisation
of the sale proceeds towards fixed deposits in the name of the assessee as
additional security for loans. Thus, the conversion of a portion of the export
sale proceeds on realisation, as fixed deposits, was not on the volition of the
assessee, but by a unilateral act of the bank over which the assessee had no
control. Furthermore, the bank had made it explicitly clear that the fixed deposits
were created for being treated as additional security for the loans availed by
the assessee.

 

ii)   The
Department did not dispute the fact that the loans availed by the assessee were
for its export business. The interest income had to be included in computing
the profits and gains of business u/s 80HHC.’

 

 

Business expenditure – Section 37 of ITA, 1961 – General principles – Assessee carrying on iron ore business – Agreement with State Government to construct houses for poor people affected by floods – Amount spent on construction of house for purposes of commercial expediency – Amount deductible u/s 37

24. Kanhaiyalal Dudheria
vs. JCIT; [2019] 418 ITR 410 (Karn.) Date of order: 31st July, 2019
A.Ys.: 2011-12 and 2012-13

 

Business expenditure –
Section 37 of ITA, 1961 – General principles – Assessee carrying on iron ore
business – Agreement with State Government to construct houses for poor people
affected by floods – Amount spent on construction of house for purposes of
commercial expediency – Amount deductible u/s 37

 

The assessee was carrying
on the business of extraction and trading of iron ore. On account of
unprecedented floods and abnormal rain which severely ravaged the North
Interior Karnataka during the last week of September and the first week of
October, 2009, it entered into a memorandum of understanding (MOU) on 1st
December, 2009 with the Government of Karnataka, under which the assessee
agreed to construct houses to rehabilitate the flood victims at the earliest
possible time, and for undertaking the task the appropriate Government provided
the assessee the land free from encumbrances, upon which the construction of
houses came to be commenced, executed and handed over within the time limit
agreed to under the MOU. The assessee spent an amount of Rs. 1,61,30,480 on
such construction during the A.Y. 2011-12 and Rs. 55,90,080 during the A.Y.
2012-13. The assessee claimed deduction of said amounts as business expenditure
u/s 37 of the Income-tax Act, 1961. The claim was rejected by the AO and this
was upheld by the Tribunal.

 

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

 

‘i)   The expression “wholly and exclusively” found in section 37 of the
Act cannot be understood in a narrow manner. In other words, it has to be given
interpretation so as to achieve the object of the Act. Thus, where the amount
is expended and claimed as an expenditure allowable u/s 37(1) of the Act, it
need not be that such disbursement is made in the course of, or arises out of,
or is connected with the trade, or is made out of the profits of the trade. It
must be made for the purpose of earning the profits. The purpose and intent
must be the sole purpose of expending the amount as a business expenditure. If
the activity be undertaken with the object both of promoting business and also
with some other purpose, such expenditure so incurred would not be disqualified
from being claimed as a business expenditure, solely on the ground that the
activity involved for such expenditure is not directly connected to the
business activity. In other words, the issue of commercial expediency would also
arise. The circumstances in which the expenditure incurred and claimed as
allowable u/s 37 of the Act would have to be examined on the facts obtained in
each case. There cannot be a straitjacket formula in this regard. What might be
commercial expediency to one business enterprise may not be so for another
undertaking.

 

ii)   The assessee was carrying on the business of iron ore and also
trading in iron ore. Thus, day in and day out the assessee would be approaching
the appropriate Government and its authorities for grant of permits, licences
and as such the assessee in its wisdom and as a prudent business decision had
entered into a memorandum of understanding with the Government of Karnataka and
incurred the expenditure towards construction of houses for the needy persons,
not only as a social responsibility but also keeping in mind the goodwill and
benefit it would yield in the long run in earning profit which was the ultimate
object of conducting business and as such, expenditure incurred by the assessee
would be in the realm of “business expenditure”. The amounts were deductible.’

 

 

Income – Accrual of income – Difference between accrual and receipt – Specified amount retained under contract to ensure there are no defects in execution of contract – Amount retained did not accrue to assessee Business loss – Bank guarantee for satisfactory execution of contract – Contract cancelled and bank guarantee encashed – Loss due to encashment of bank guarantee was deductible

42.  CIT vs. Chandragiri
Construction Co.; [2019] 415 ITR 63 (Ker.) Date of order: 13th
March, 2019; A.Ys.: 2002-03 to 2005-06; and 2007-08

 

Income – Accrual of income – Difference between accrual and receipt –
Specified amount retained under contract to ensure there are no defects in
execution of contract – Amount retained did not accrue to assessee

 

Business loss – Bank guarantee for satisfactory execution of contract –
Contract cancelled and bank guarantee encashed – Loss due to encashment of bank
guarantee was deductible

 

The assessee entered into a contract and furnished
a guarantee for satisfactory execution of the contract. There was a defect
liability period reckoned from the date of completion of the contract for which
period the awarder retained certain amounts for the purpose of ensuring that
there arose no defects in the work executed by the assessee. The assessee
claimed that the amount retained did not accrue to it. This claim was rejected
by the AO. The contract was cancelled by the awarder and the bank guarantee was
encashed. An arbitration proceeding was pending between the awarder and the
awardee. The assessee claimed the bank guarantee amount as business loss. The
AO disallowed the claim holding that till the arbitration proceedings were
concluded the assessee could not claim the amount as business loss.

 

The Tribunal allowed both the claims of the assessee.

 

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

 

‘i)   Accrual
and receipt are two independent incidents and their matching or correspondence
in time in a given case, if so occurring, is purely a matter of coincidence,
both immaterial and irrelevant for the purpose of determining the fact of
accrual, which has to be on its own terms.

ii)    By the specific terms of the contract itself, the awarder was
entitled to retain the amount so as to rectify any defects arising in the
period in which as per the terms of the contract the amount was retained. There
could be no accrual found on the completion of contract, since the assessee’s
right to such amount would depend on there being no defects arising in the
subsequent period during which the awarder was enabled retention of such
amounts.

iii)   The
assessee did not have the amounts with it and the bank guarantee had been
encashed and it was a loss which occurred in the A.Y. 2007-08. It was
deductible.’

 

Section 55A of ITA 1961 – Capital gain – Cost of acquisition – Reference to Valuation Officer – Refusal by AO to make reference to Valuation Officer not proper – Matter remanded to AO for reference to Valuation Officer

41. C.V. Sunny vs. CIT; [2019] 415 ITR 127 (Ker.) Date of order: 19th
March, 2019;

 

Section 55A of ITA 1961 – Capital gain – Cost of acquisition – Reference
to Valuation Officer – Refusal by AO to make reference to Valuation Officer not
proper – Matter remanded to AO for reference to Valuation Officer

 

The assessee, his son and
wife purchased land comprised in the same survey number for the same price on
the same day in 1975. The assessee and his son sold the land on 19th
January, 2006 at the same price. The assessee showed the cost of acquisition of
the land as on 1st April, 1981 at Rs. 1,15,385 per cent, which was
later revised to Rs. 94,132 per cent. The AO did not accept this. He held that
since the cost of acquisition of land owned and sold by the assessee’s son as
on 1st April, 1981 was fixed at Rs. 1,000 per cent, the cost of
acquisition of the land owned and sold by the assessee should also be fixed at
the same rate.

 

The Commissioner (Appeals) dismissed the appeal
filed by the assessee. The Tribunal found that the cost of acquisition
determined in respect of the land owned by the assessee’s son had been approved
by the court in the case filed by him. It held that there existed no
circumstances to make a reference u/s 55A of the Income-tax Act, 1961 as
contended by the assessee and that there was no illegality committed by the AO
and the Commissioner (Appeals) in adopting the same value as the cost of
acquisition in respect of the land owned and sold by the assessee.

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

 

‘i)   The AO
should have made a reference to the Valuation Officer u/s 55A in respect of the
cost of acquisition of the land sold by the assessee.

ii)    The AO
had taken it for granted that since the assessee and his son had purchased the
property in the same survey number on the same day at the same rate, the cost
of acquisition would not be different in respect of the two lands and therefore
it was not necessary to make a reference u/s 55A.

iii)   In the
assessee’s son’s judgement the court had not approved or disapproved the
valuation of the capital asset made by the AO in respect of the land owned and
sold by the son of the assessee who did not seek any reference u/s 55A at the
first Appellate stage but raised such contention only before the Tribunal for
which reason the court did not interfere with the valuation of the land made by
the AO. Therefore, the authorities were not justified in holding that the court
had approved the cost of acquisition of the land owned and sold by the son of
the assessee as Rs. 1,000 per cent. Even before the AO, the assessee had
produced the report of a registered valuer and the assessee had based his claim
on the estimate made by the registered valuer. The AO had not shown any reason
whatsoever to have rejected the valuation made by the registered valuer.

iv)   The
assessment order passed by the AO and the revised order as confirmed by the
Appellate authorities are set aside. The matter is remitted to the AO to make a
reference u/s 55A to the Valuation Officer.’

 

 

Sections 2(47) and 45(4) of ITA 1961 – Capital gains – Firm – Retirement of partners – Consequential allotment of their shares in assets in firm – Not transfer of capital assets – Provisions of section 45(4) not attracted – No taxable capital gain arises

40.  National Co. vs. ACIT; [2019]
415 ITR 5 (Mad.) Date of order: 8th April, 2019;A.Y.: 2004-05

 

Sections 2(47) and 45(4) of ITA 1961 – Capital gains – Firm – Retirement
of partners – Consequential allotment of their shares in assets in firm – Not
transfer of capital assets – Provisions of section 45(4) not attracted – No
taxable capital gain arises

 

The assessee was a partnership firm with four
partners. Two of the partners agreed to retire from the partnership business
and the remaining two partners, with their son being admitted as another
partner, continued the business. At the time of retirement of the two partners,
the assets and liabilities of the firm were valued and the retiring partners
were allotted their share in the assets in the firm. The AO made an addition on
account of capital gains u/s 45 of the Income-tax Act, 1961 on the ground that the long-term capital gains arose out of transfer of immovable
properties by the assessee to the retiring partners.

 

The Commissioner (Appeals) held that the reconstitution
of the partnership would not attract the provisions of section 45(4) and
deleted the addition made on account of long-term capital gains. The Tribunal
allowed the appeal filed by the Department and held that section 45(4) applied
to the assessee and that there was transfer of assets within the meaning of
section 2(47)(vi) of the Act.

 

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

 

‘i)   When a
partner retires from a partnership he receives his share in the partnership and
this does not represent consideration received by him in lieu of relinquishment
of his interest in the partnership asset. There is in this transaction no
element of transfer of interest in the partnership assets by the retiring
partner to the continuing partner.

ii)    The
provisions of section 45(4) would not be attracted on the retirement of the two
partners and consequential allotment of their share in the assets in the
assessee firm. There was only reconstitution of the firm on the retirement of
the two partners and admission of another partner. The partnership continued.
There was only a division of the assets in accordance with their entitlement to
their shares in the partnership, on the retirement of the partners. There was
no element of transfer of interest u/s 2(47) in the partnership assets by the
retiring partners to the continuing partners in this transaction.

 

iii)   We
therefore answer the substantial question of law in favour of the assessee and
against the Revenue. The appeals of the assessee are allowed.’

 

 

Section 37 of ITA 1961 – Business loss –Embezzlement of cash by director of assessee – Recovery of amount or outcome of pending criminal prosecution against director before Magistrate Court – Not relevant – Deduction allowable

39.  Principal CIT vs. Saravana
Selvarathnam Trading and Manufacturing Pvt. Ltd.; [2019] 415 ITR 146 (Mad.)
Date of order: 14th March, 2019; A.Y.: 2012-13

 

Section 37 of ITA 1961 – Business loss –Embezzlement of cash by director
of assessee – Recovery of amount or outcome of pending criminal prosecution
against director before Magistrate Court – Not relevant – Deduction allowable

 

For the accounting year 2012-13, the assessee claimed as bad debt u/s 36
of the Income-tax Act, 1961 the amount embezzled by a director who dealt with
the day-to-day business activities. Upon the embezzlement being found out
during the internal audit, the director was removed from the board of
directors. A criminal prosecution against him was still pending before the
Metropolitan Magistrate. The Assessing Officer disallowed the claim for
deduction.

 

The Tribunal held that the conditions prescribed u/s 36(2) were not
complied with and therefore deduction of the embezzled amount could not be
allowed as bad debt but the embezzled amount claimed was allowable as a
business loss suffered by the assessee in the course of its business activity.

 

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

 

‘i)         The embezzlement by one
of the directors or an employee of the business of the assessee during the
ordinary course of business would be a business loss irrespective of the
criminal prosecution of the director or employee. The final outcome of the
criminal proceedings or recovery of the amount in question would not determine
the claim of the assessee in the A.Y. 2012-13 when it was written off as a
business loss.

ii)         The Tribunal had
rightly held it to be a business loss as it was treated to be only pilferage of
the assessee company’s funds by a director on the board of the company. No
question of law arose.’

 

Search and seizure – Survey converted into – Sections 131, 132 and 133A of ITA, 1961 – Scope of power u/s 132 – Income-tax survey not showing concealment of income – Proceedings cannot be converted into search u/s 132

15. Pawan Kumar Goel vs.
UOI; [2019] 417 ITR 82
(P&H) Date of order: 22nd
May, 2019

 

Search and seizure –
Survey converted into – Sections 131, 132 and 133A of ITA, 1961 – Scope of
power u/s 132 – Income-tax survey not showing concealment of income –
Proceedings cannot be converted into search u/s 132

 

In the case of the assessee petitioner, survey operation u/s 133A of the
Income-tax Act, 1961 was carried out which was then converted into search
action u/s 132 of the Act. The assessee filed a writ petition challenging the
validity of the search action with a prayer that the process of search and
seizure be quashed.

 

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

 

‘(i)  A search which is conducted
u/s 132 of the Income-tax Act, 1961 is a serious invasion into the privacy of a
citizen. Section 132(1) has to be strictly construed and the formation of the
opinion or reason to believe by the authorising officer must be apparent from
the note recorded by him. The opinion or the belief so recorded must clearly
show whether the belief falls under clause (a), (b) or (c) of section 132(1).
No search can be ordered except for any of the reasons contained in clause (a),
(b) or (c). The satisfaction note should itself show the application of mind
and the formation of the opinion by the officer ordering the search. If the
reasons which are recorded do not fall under clause (a), (b) or (c) then the
authorisation u/s 132(1) will have to be quashed.

 

(ii)   The summons issued to the
assessee was of a survey and as stated by him he voluntarily disclosed the
retention of cash in his premises. In this situation, it was imperative upon
the officials to have recorded their suspicion to initiate further action if
they wanted to convert the survey into seizure. Besides, the summons issued to
the assessee was totally vague. No documents were mentioned which were required
of the assessee, nor was any other thing stated.

 

(iii)  The income-tax authority
violated the procedure completely. Nowhere was any satisfaction recorded either
of non-co-operation of the assessee or a suspicion that income had been
concealed by the assessee warranting recourse to the process of search and
seizure. The proceedings were not valid. The impugned action of the respondents
is quashed.’

 

Reassessment – Validity of notice – Sections 115A, 147 and 148 of ITA, 1961 – Non-filing of return in respect of alleged taxable income – Notice not automatic – Filing of return not an admission that notice is valid – Assessee exempted from filing return u/s 115A – Investment of shares in subsidiary did not give rise to taxable income – Notice not valid

14. Nestle SA vs. ACIT;
[2019] 417 ITR 213 (Del.) Date of order: 7th
August, 2019 A.Y.: 2011-12

 

Reassessment – Validity
of notice – Sections 115A, 147 and 148 of ITA, 1961 – Non-filing of return in
respect of alleged taxable income – Notice not automatic – Filing of return not
an admission that notice is valid – Assessee exempted from filing return u/s
115A – Investment of shares in subsidiary did not give rise to taxable income –
Notice not valid

 

The assessee was a company incorporated in Switzerland. A notice of
reassessment u/s 148 of the Income-tax Act, 1961 was issued to it for the A.Y.
2011-12 for the reason that it had entered into a share transaction. The
assessee filed the return and raised the following objections: (i) that the
assessee’s income from India consisted only of dividend and interest on which
tax had been deducted at source in accordance with the Act or the DTAA; and
(ii) that the share transaction was with its subsidiary and no taxable income
had been generated. The objections were rejected.

 

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

 

‘(i)  Under Explanation (2) to
section 147 of the Income-tax Act, 1961 a notice of reassessment can be issued
in case of non-filing of return of taxable income. The Income-tax Department
has set up a non-filers monitoring system. The CBDT instruction sets down the
standard operating procedure that is required to be adopted in this regard. A
system-generated notice detecting the assessee as a non-filer does not
automatically mean that the assessee has to be issued a notice u/s 148 of the
Act. Even assuming that at the time the notice was issued the AO was perhaps
not fully aware of all the relevant facts, once the assessee submits its
objections, it is obligatory for the AO to apply his mind to those points.

 

(ii)   The averment of the assessee
that during the A.Y. 2011-12 its receipts from its Indian subsidiary was
comprising only of dividend and interest on which tax was deductible at source
and had been deducted in accordance with the provisions of the Act, had not
been disputed by the Revenue. It was also not disputed that the assessee was
specifically exempted from filing the return u/s 115A(5).

 

(iii)  The principal objection of
the assessee that its investment in the shares of its subsidiary could not be
treated as income was well founded. Therefore, the fundamental premise that the
investment by the assessee in the shares of its subsidiary amounted to “income”
which had escaped assessment was flawed. The question of such a transaction
forming a live link for reasons to believe that income had escaped assessment
was entirely without basis. The notice was not valid.’

 

Reassessment – Survey – Sections 133A, 147 and 148 of ITA, 1961 – Notice of reassessment based only on statement recorded during income-tax survey – No material to show escapement of income – Notice not valid

13. A. Thangavel Nadar
Stores vs. ITO; [2019] 417 ITR 50 (Mad.) Date of order: 25th
February, 2019 A.Ys.: 2013-14 to
2015-16

 

Reassessment – Survey –
Sections 133A, 147 and 148 of ITA, 1961 – Notice of reassessment based only on
statement recorded during income-tax survey – No material to show escapement of
income – Notice not valid

 

For the A.Ys. 2013-14 to 2015-16 the assessee, a partnership firm, filed
returns of income and the returns were processed u/s 143(1) of the Income-tax
Act, 1961. Subsequently, survey u/s 133A of the Act was conducted at the
premises of the assessee and a statement of a partner was recorded. On the
basis of the statement, and without any corroborating material, the AO issued
notices u/s 148 of the Act for reopening the assessments for the three years.

 

The assessee filed writ petitions and challenged the validity of the
notices. The Madras High Court allowed the writ petitions and held as under:

 

‘(i)  A statement recorded u/s 133A
of the Income-tax Act, 1961 in the course of survey is different and distinct
from a statement recorded u/s 132(4) in the course of search and seizure and
the evidentiary value ascribed to the two is not the same. Whereas u/s 132(4) a
statement recorded by a searching officer is specifically permitted to be used
as evidence in any proceedings under either the 1922 or the present Act, there
is no such sanctity conferred on a statement recorded u/s 133A(3)(iii).

 

(ii)   The utility of a statement
recorded in the course of survey is limited to the extent to which it is useful
or relevant to any proceedings under the Act. Thus, a statement recorded in the
course of survey can, at best, support a proceeding for reassessment. It cannot
be a sole basis for reassessment.

 

(iii)  There was no dispute that
the survey initiated by the Department had yielded no tangibly incriminating
material. In fact, the Mahazarnama of even date revealed as much.
Notwithstanding this, the Department had gone ahead with the proceedings for
reassessment based solely upon the sworn statement recorded u/s 133A from one
of the partners which he had retracted later. The notices of reassessment were
not valid.’

 

 

Reassessment – Settlement of cases – Sections 147, 148, 245C, 245D(4) and 245-I of ITA, 1961 – Order passed by Settlement Commission u/s 245D(4) – Notice for reassessment u/s 148 in respect of issues covered by such order – Not valid

12. Komalkant Fakirchand
Sharma vs. Dy. CIT; [2019] 417 ITR 11 (Guj.) Date of order: 6th
May, 2019 A.Y.: 2011-12

 

Reassessment –
Settlement of cases – Sections 147, 148, 245C, 245D(4) and 245-I of ITA, 1961 –
Order passed by Settlement Commission u/s 245D(4) – Notice for reassessment u/s
148 in respect of issues covered by such order – Not valid

 

The assessee, an individual, had filed his return of income for the A.Y.
2011-12. A search took place at the premises of the assessee on 17th
February, 2012. Thereafter, the assessee filed an application u/s 245C of the
Income-tax Act, 1961 before the Settlement Commission. The application was
admitted and the Settlement Commission passed an order u/s 245D(4) of the Act
on 12th January, 2015. Subsequently, the AO issued a notice u/s 148
of the Act for reopening the assessment for the A.Y. 2011-12.

 

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

 

‘(i)  There is a difference between
assessment in law [regular assessment or assessment u/s 143(1)] and assessment
by settlement under Chapter XIX-A. The order u/s 245D(4) of the Income-tax Act,
1961 is not an order of regular assessment. An application u/s 245C is akin to
a return of income, wherein the assessee is required to make a full and true
disclosure of his income, and the order u/s 245D(4) of the Act is in the nature
of an assessment order. Therefore, the assessment of the total income of the
assessee for the assessment year in relation to which the Settlement Commission
has passed the order u/s 245D(4) of the Act stands concluded and in terms of
section 245-I of the Act, such order shall be conclusive as to the matters
stated therein and no matter covered by such order shall, save as otherwise provided
in Chapter XIX-A, be reopened in any proceedings under the Act or under any
other law for the time being in force.

 

(ii)   Therefore, once an order is
passed by the Settlement Commission u/s 245D(4), it is conclusive insofar as
the assessment year involved is concerned. The only ground on which an order of
settlement made u/s 245D of the Act can be reopened is, if it is subsequently
found by the Settlement Commission that the order u/s 245D(4) of the Act had
been obtained by fraud or misrepresentation of facts. Therefore, once an order
has been passed u/s 245D of the Act by the Settlement Commission, the
assessment for the year stands concluded and the AO thereafter has no
jurisdiction to reopen the assessment.

 

(iii)  The petition succeeds and
is, accordingly, allowed. The impugned notice u/s 148 of the Act is hereby
quashed and set aside.’

 

 

International transactions – Arm’s length price – Section 92B of ITA, 1961 – Acquisition of shares of 100% subsidiary at premium – Alleged shortfall between fair market price of shares and issue price – That assessee would sell shares at a loss in future thereby reducing tax liability, a mere surmise – Cannot be basis for taxation – Difference cannot be treated as income of assessee

11. Principal CIT vs.
PMP Auto Components Pvt. Ltd.; [2019] 416 ITR 435 (Bom.) Date of order: 20th
February, 2019 A.Y.: 2010-11

 

International
transactions – Arm’s length price – Section 92B of ITA, 1961 – Acquisition of
shares of 100% subsidiary at premium – Alleged shortfall between fair market
price of shares and issue price – That assessee would sell shares at a loss in future
thereby reducing tax liability, a mere surmise – Cannot be basis for taxation –
Difference cannot be treated as income of assessee

 

For the A.Y. 2010-11, in respect of the
international transactions made by the assessee, the Transfer Pricing Officer
(TPO) made transfer pricing adjustments on account of premium money paid to its
associated enterprise for acquiring its shares and the interest chargeable on
the purported loan transaction. The AO passed a draft assessment order u/s
143(3) read with section 144C(13) of the Income-tax Act, 1961. The Dispute
Resolution Panel (DRP) held that the premium paid on account of acquiring the
shares by the associated enterprise was taxable as held by the AO and deleted
the interest chargeable on the additional capital investment made to purchase
such shares on the ground that this adjustment done by the TPO was a secondary
transfer pricing adjustment. Accordingly, the AO passed the final order.

 

Both the assessee and the Department filed appeals before the Tribunal.
The Tribunal allowed the appeal filed by the assessee and held that no income
arose to the assessee on account of purchase of shares from its associated
enterprise as it was on capital account.

 

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

 

‘(i)  Section 92 of the Act
requires income to arise from an international transaction while determining
the arm’s length price. Therefore, the sine qua non is that income must
first arise on account of the international transaction.

 

(ii)   The amount paid by the
assessee to acquire equity shares of its associated enterprise could not be
considered to be a loan to the associated enterprise. The shares which had been
purchased by the assessee were on capital account. The Department had brought
the difference between the actual investment and the fair market value of the
shares (investment) to tax without being able to specify under which
substantive provision such income arose. The distinction which was sought to be
made by the Department on the basis of this being an inbound investment and not
an outbound investment was a distinction of no significance. The Legislature
had made no distinction while it provided for determination of any income on
adjustments to arrive at an arm’s length price that arose from an international
transaction.

 

(iii)  The submission of the
Department that the assessee might sell those shares at a loss as it had
purchased them at a much higher price than their fair market value, which would
give rise to a reduction of its tax liability in future, was in the realm of
speculation and hypothetical. The Department had not shown any provision of the
Act which allowed it to tax a potential income in the present facts.

 

(iv)  The Tribunal was correct in
deleting the transfer pricing adjustment made on account of excess money paid
by the assessee to its associated enterprise for acquisition of shares. No
question of law arose.’