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

Industrial undertaking – Special deduction u/s 80-IA of ITA, 1961 – Computation – Assessee having two manufacturing units – Deduction to be at 30% of profits of eligible business and not of total income

10. CIT vs. Apollo Tyres
Ltd. (No. 5); [2019] 416 ITR 571
(Ker.) Date of order: 14th
March, 2019 A.Y.: 1995-96

 

Industrial undertaking –
Special deduction u/s 80-IA of ITA, 1961 – Computation – Assessee having two
manufacturing units – Deduction to be at 30% of profits of eligible business
and not of total income

 

The assessee manufactured and sold automobile tyres and tubes. It had
two manufacturing units. The profit from the eligible business was Rs.
7,16,68,439 and the total income was Rs. 6,46,55,496. For the A.Y. 1995-96, the
AO restricted the deduction u/s 80-IA of the Income-tax Act, 1961 to 30% of
total income, instead of 30% of the profits of the Baroda unit as claimed by
the assessee.

 

The Commissioner (Appeals) and the Tribunal allowed the assessee’s
claim. The Tribunal held that according to section 80-IA, for the purpose of
allowing deduction the profits of the eligible unit alone should be considered
as if it was the only business of the assessee.

 

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

 

‘(i)  The understanding of the
Department with regard to the scope of section 80AB to enable them to reckon
the deduction at 30%, confining it to the lower extent of the total income from
all sources, instead of reckoning it as 30% of the business profits from the
eligible business, was wrong and misconceived.

 

(ii)   The assessee was eligible to
have the deduction as allowed by the Commissioner (Appeals) and upheld by the
Tribunal.’

 

Section 37(1) – Business expenditure – Allowability of (Consultancy charges) – Assessee made payments to one ‘S’, a consultant, and claimed deduction of same as business expenditure – AO, on the basis of a statement of ‘S’ recorded during search operations, held that ‘S’ had not rendered any service to assessee so as to receive such payments and disallowed expenditure – Appellate Authorities allowed payments made to ‘S’ holding that there was sufficient evidence justifying payments made to ‘S’ and AO, other than relying upon statement of ‘S’ recorded in search, had no independent material to make disallowance – Allowance of payments made to ‘S’ was justified

7. CIT
vs. Reliance Industries Ltd.; [2019] 102 taxmann.com 372 (Bom): Date
of order: 30th January, 2019

 

Section
37(1) – Business expenditure – Allowability of (Consultancy charges) – Assessee
made payments to one ‘S’, a consultant, and claimed deduction of same as
business expenditure – AO, on the basis of a statement of ‘S’ recorded during
search operations, held that ‘S’ had not rendered any service to assessee so as
to receive such payments and disallowed expenditure – Appellate Authorities
allowed payments made to ‘S’ holding that there was sufficient evidence
justifying payments made to ‘S’ and AO, other than relying upon statement of
‘S’ recorded in search, had no independent material to make disallowance –
Allowance of payments made to ‘S’ was justified

 

The
assessee made payments to one ‘S’, a consultant, and claimed deduction of same
as business expenditure. The Assessing Officer on the basis of a statement of
‘S’ recorded during search operations held that the said person had not
rendered any service to the assessee so as to receive such payments. He
accordingly disallowed the payments made to ‘S’.

 

The
Commissioner (Appeals) allowed the payments made to ‘S’ holding that ‘S’ had
retracted the statement recorded during search, the assessee had pointed out
the range of services provided by ‘S’, and the Assessing Officer had no other
material to disallow the expenditure. The Tribunal confirmed the view of the
Commissioner (Appeals). It held that ‘S’ retracted his statement within a short
time by filing an affidavit. Subsequently, his father’s statement was recorded
in which he also reiterated the stand taken in the affidavit.

 

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

“The
entire issue is based on the appreciation of materials on record. The
Commissioner (Appeals) and the Tribunal concurrently held that there was
sufficient evidence justifying the payments made to ‘S’, a consultant, and the
Assessing Officer other than relying upon the statement of ‘S’ recorded in
search had no independent material to make the disallowance. No question of law
arises.”

Income or capital – Subsidies – Book profit – Computation – Sections 2(24) and 115JB of ITA, 1961 – Receipts and power subsidies granted as incentives by State Government under schemes for setting up units in specified backward areas in State – Capital in nature – Not income – Cannot be included for purpose of computation of book profit u/s 115JB

9. Principal CIT vs. Ankit
Metal and Power Ltd.; [2019] 416 ITR 591 (Cal.) Date of order: 9th
July, 2019 A.Y.: 2010-11

 

Income
or capital – Subsidies – Book profit – Computation – Sections 2(24) and 115JB
of ITA, 1961 – Receipts and power subsidies granted as incentives by State
Government under schemes for setting up units in specified backward areas in
State – Capital in nature – Not income – Cannot be included for purpose of computation
of book profit u/s 115JB

 

The assessee was a
manufacturer who invested in a sponge iron plant and mega project that made him
eligible for subsidy under the West Bengal Incentive Scheme, 2000 and the West
Bengal Incentive to Power Intensive Industries Scheme, 2005. For the A.Y.
2010-11 the assessee disclosed Nil income under the normal computation and an
amount as book profits u/s 115JB of the Income-tax Act, 1961. In the course of
the assessment proceedings, he filed a revised computation of income under the
normal provisions and section 115JB in order to claim deduction of the sums of
interest subsidy and power subsidy amounts received by him under those schemes
as capital receipts which he had treated as revenue receipts in the original
return. The AO treated the subsidies as revenue receipts and brought them to
tax.

 

The Tribunal held that the
‘interest subsidy’ and ‘power subsidies’ were capital receipts and would be
excluded while computing the book profits u/s 115JB.

 

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

 

‘(i)  According to the West Bengal Incentive Scheme, 2000 and the West
Bengal Incentive to Power Intensive Industries Scheme, 2005 the subsidies were
granted with the sole intention of setting up new industry and attracting
private investment in the State of West Bengal in the specified areas which
were industrially backward, and hence the subsidies were of the nature of
non-taxable capital receipts. Thus, according to the “purpose test” laid out by
the Supreme Court and the High Courts, the subsidy should be treated as a
capital receipt in spite of the fact that the computation of “power subsidy”
was based on the power consumed by the assessee.

 

(ii)   Once the purpose of the subsidy was established, the mode of
computation was not relevant. The mode of giving incentive was reimbursement of
energy charges. The nature of subsidy depended on the purpose for which it was
given. The entire reason behind receiving the subsidies was for setting up of a
plant in the backward region. Therefore, the incentive subsidies of interest
subsidy and power subsidy received by the assessee were “capital receipts” and
not “income” liable to be taxed in the A.Y. 2010-11.

 

(iii)  The amendment to the definition of income u/s 2(24) wherein
sub-clause (xviii) has been inserted including “subsidy” for the first time by
Finance Act, 2015, w.e.f. 1st April, 2016, i.e., A.Y. 2016-17 has
prospective effect and has no effect on the law on the subject applicable to
the year in question.

 

(iv)  Where a receipt was not in the nature of income it could not be
included in the book profits for the purpose of computation u/s 115JB.
Therefore, the interest and the power subsidies received by the assessee under
the government schemes would have to be excluded while computing the book
profits u/s 115JB, when they were capital receipts and did not fall within the
definition of income u/s 2(24).’

 

Settlement of cases – Section 145D(1) of ITA, 1961 – Condition precedent – Pendency of assessment proceedings – Assessment proceedings pending till service of assessment order upon assessee

31. M3M India Holdings
Pvt. Ltd. vs. IT Settlement Commission; [2019] 419 ITR 17
(P&H) Date of order: 22nd
October, 2019 A.Y.: 2013-14

 

Settlement of cases –
Section 145D(1) of ITA, 1961 – Condition precedent – Pendency of assessment
proceedings – Assessment proceedings pending till service of assessment order
upon assessee

 

While the assessment proceedings were pending, the assessee sent a mail
to the AO on 26th February, 2018 indicating that the assessment
proceedings should be deferred because it intended to file an application u/s
245D(1) of the Income-tax Act, 1961 before the Settlement Commission. On 27th
December, 2018, the AO finalised the assessment, passed the order and
dispatched it through post. Before it was received or even delivered by the
postal authorities, the assessee filed the application before the Settlement
Commission on 28th February, 2018. The Settlement Commission
accepted the contention of the Department that on the date of the application
the assessment proceedings having been concluded, the application would not lie
and rejected the application.

 

The assessee challenged the order by filing a writ petition and
contended that the assessment proceedings could not have been said to be
concluded till such time as the assessment order was not served upon the
assessee.

 

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

 

‘i)   The assessee had communicated
to the Assessing Officer prior to the passing of the assessment order that it
was intending to move an application before the Settlement Commission. The
assessee was entitled to proceed on the basis that till the service of the
assessment order, the case continued to be pending with the Assessing Officer
till the date the assessment order was not served upon it.

 

ii)   Consequently, the order of
the Settlement Commission rejecting the application filed by the assessee u/s
245D(1) was to be set aside.’

 

Rectification of mistakes – Section 154 of ITA, 1961 – Section 154(1A) places an embargo on power of rectification of assessment order in cases where matter had been considered and decided in appeal or revision – However, there is no embargo on power of amendment if an appeal or revision is merely pending since such pending appeal / revision does not assume character of a subjudice matter

21. Piramal Investment Opportunities
Fund vs. ACIT; [2019]
111 taxmann.com 5 (Bom.) Date
of order: 4th September, 2019 A.Y.:
2015-16

 

Rectification of mistakes – Section 154 of ITA, 1961 –
Section 154(1A) places an embargo on power of rectification of assessment order in cases where matter had been considered
and decided in appeal or revision – However, there is no embargo on power of amendment if
an appeal or revision is merely pending since such pending appeal / revision
does not assume character of a subjudice matter

 

For the A.Y. 2015-16, the assessee had paid advance tax of Rs. 16.80
crores. In the original return, the assessee had computed total income at Rs.
65.66 crores. In the revised return the total income was computed at Nil. The
AO completed the assessment u/s 143(3) of the Income-tax Act, 1961. The
assessee filed an appeal before the Commissioner (Appeals) on the ground that
the AO did not give credit for the advance tax of Rs.16.80 crores. The assessee
also made an application u/s 154 to the AO for rectification of the mistake.
The assessee stated that by a mistake apparent on record, the credit of payment
of advance tax of Rs.16.80 crores had not been given and the assessee was
entitled to a refund. The AO rejected the rectification application stating
that the assessee did not inform that an appeal was filed on the same issue for
which rectification was sought. Since the assessee was agitating on similar
ground before the appellate authority, it was not proper on the part of the AO,
following the doctrine of judicial discipline, to adjudicate on the same issue
pending before the appellate authority; therefore, the rectification
application assumed the character of a subjudice matter.

 

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

 

‘(i)      Section 154(1A) provides
that where any matter has been considered and decided in any proceeding by way
of appeal or revision, contained in any law for the time being in force, such
order shall not be amended. Section 154(1A), thus, places an embargo on the
power of rectification in cases where the matter has been considered and
decided in appeal or revision. It is of importance that the legislature has
used the phrase “considered and decided” in the past tense.

 

(ii)      The phrase “considered
and decided” cannot be read as “pending consideration in appeal or revision”.
To do so would be adding and changing the plain language of the statute. By
modifying and adding the words in this manner, which is not permissible, the
Assistant Commissioner has divested himself of the power of amendment. In view
of the plain language of section 154, there is no embargo on the power of
amendment if an appeal or revision is merely pending.

 

(iii)      The rejection of the
rectification application on this ground was unwarranted. The appeal is still
pending. The Assistant Commissioner has failed to exercise the jurisdiction
vested in him and, thus, the impugned order will have to be set aside and the
application will have to be decided.

 

(iv)     The Writ Petition succeeds.
The impugned order is to be quashed and set aside. The rectification
application filed by the petitioner u/s 154 stands restored to the file of
Assistant Commissioner to be disposed of on its own merits.’

 

Settlement of cases – Sections 245C, 245D(2C) and 245D(4) of ITA, 1961 – Settlement Commission – Jurisdiction – Applications filed for settlement of cases for several assessment years allowed to be proceeded with – Order directing that application for years in which nil or no disclosure of additional income or loss was declared not to be proceeded with – Order giving retrospective effect on request of Department – Settlement Commission has no jurisdiction to pre-date its order

30. Pr.
CIT vs. IT Settlement Commission; [2019]
418 ITR 339 (Bom.) Date
of order: 28th February, 2019 A.Ys.:
2008-09 to 2013-14

 

Settlement
of cases – Sections 245C, 245D(2C) and 245D(4) of ITA, 1961 – Settlement Commission
– Jurisdiction – Applications filed for settlement of cases for several
assessment years allowed to be proceeded with – Order directing that
application for years in which nil or no disclosure of additional income or
loss was declared not to be proceeded with – Order giving retrospective effect
on request of Department – Settlement Commission has no jurisdiction to
pre-date its order

 

The assessee applied to the Settlement Commission for
settlement of its cases u/s 245C of the Income-tax Act, 1961 for the A.Ys.
2008-09 to 2013-14 and did not disclose an additional income in some of the
years. The Settlement Commission passed an order dated 29th January,
2015 u/s 245D(2C) wherein it held that the five applicants had made a true and
full disclosure, that there were no technical objections from the Department,
that the five applicants had complied with the basic requirement u/s 245C(1)
and that all the applications were valid and allowed them to be proceeded with.
Thereafter, the Department contended before the Settlement Commission that the
settlement applications for the assessment years in which no additional income
was disclosed by the assessee should be treated as invalid u/s 245D(2C). The
Settlement Commission thereupon passed an order on 31st May, 2016
u/s 245D(4) of the Act excluding from the purview of the settlement those
assessment years where ‘nil’ or ‘no disclosure of additional income’ was made
u/s 245C(1) or where the disclosure was a loss, and directing that the
settlement applications for those assessment years were not to be proceeded
from the stage of section 245D(2C) and that such declaration was effective from
29th January, 2015. The Income Tax Department filed a writ petition
and challenged this order.

 

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

 

‘i)   Once the Settlement Commission had passed an
order u/s 245D(2C), whether legally permissible or not, it had no authority or
jurisdiction to pre-date such an order. While giving retrospective effect to
its order of invalidation it had acted without jurisdiction.

ii)   Under no circumstances could it have made a
declaration of invalidity on 31st May, 2016 giving it a retrospective
effect of 29th January, 2015. The portion of the order giving
retrospective effect to the declaration of invalidity of the settlement
application was severable from the main order of invalidation. While therefore,
striking down the severable portion of the order as illegal, the principal
declaration made by the Commission was not disturbed.

iii)  The direction giving retrospective effect to
the order was set aside and the order passed by the Settlement Commission on 31st
May, 2016 would take effect from such date.’

 

Capital gains – Transfer – Sections 45(4) and 47 of ITA, 1961 – Conversion of firm to private limited company – Transaction not transfer giving rise to capital gains

4.      
Principal CIT vs. Ram Krishnan
Kulwant Rai Holdings P. Ltd.; [2019] 416 ITR 123 (Mad.) Date of order: 16th July, 2019 A.Y.: 2009-10

 

Capital gains – Transfer – Sections 45(4)
and 47 of ITA, 1961 – Conversion of firm to private limited company –
Transaction not transfer giving rise to capital gains

 

The assessee was a
private limited company. Originally, the assessee was a partnership firm and it
was converted into a private limited company. The firm revalued its assets and
in the revaluation, the value of the assets was increased to Rs. 117,24,04,974,
but the book value of the assets on the date of revaluation was Rs. 52,16,526.
The AO held that the total value of the capital account of all the four
partners after being revalued stood at Rs. 117,32,87,069, that the shares were
allotted to the partners of the firm for a total amount of Rs. 10 lakhs and
that the balance of Rs. 117,22,87,070 was given as credit of loan to the
partners of the erstwhile firm in the same proportion as their share capital of
the firm, that this was a deviation stipulated u/s 47(xiii) of the Income-tax
Act, 1961 for exemption from the capital gains and made an addition of Rs.
117,22,87,070 towards short-term capital gains and brought the amount to tax.

 

The Tribunal held
that the capital gains tax could not be levied in the hands of the
assessee-company, which succeeded to the assets and the liabilities of the firm
and allowed the appeal of the assessee.

 

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

 

‘(i)   The legal position having been well settled
that when vesting takes place, it vested in the company as it existed.
Therefore, unless and until the first condition of transfer by way of
distribution of assets is satisfied, section 45(4) of the Act would not be
attracted. In the facts and circumstances, there was no transfer by way of
distribution of assets.

 

(ii)   The Commissioner (Appeals) did not take into
consideration the legal issue involved, i.e., when a firm was succeeded by a
company with no change either in the number of members or in the value of
assets with no dissolution of the firm and no distribution of assets with
change in the legal status alone, whether there was a “transfer” as
contemplated u/s 2(47) and 45(4) of the Act. The Tribunal rightly decided the
issue.’

Business expenditure – Difference between setting up of business and starting commercial activities – Company formed to design, manufacture and sell commercial vehicles – Commencement of research and development and construction of factory – Business had been set up – Assessee entitled to deduction of operating expenses, financial expenses and depreciation

3.      
Daimler India Commercial
Vehicles P. Ltd. vs. Dy. CIT.; [2019] 416 ITR 343 (Mad.) Date of order: 5th July, 2019 A.Y.: 2010-11

 

Business expenditure – Difference between
setting up of business and starting commercial activities – Company formed to
design, manufacture and sell commercial vehicles – Commencement of research and
development and construction of factory – Business had been set up – Assessee
entitled to deduction of operating expenses, financial expenses and
depreciation

 

The assessee was a
company. In terms of its memorandum of association, it was incorporated for a
bundle of activities, viz., designing, manufacturing, distributing, selling,
after-sales engineering services and research and development of commercial
vehicles and related products and components for the domestic Indian and
overseas market. The AO disallowed the operating expenses, financial expenses
and depreciation. The reason given by him was that the commercial operation of
manufacture and sale of commercial vehicles had not commenced so far and,
therefore, the expenditure incurred by the assessee under the three heads could
not be allowed.

 

The Tribunal upheld
the order on the ground that the business of the assessee had not been set up.

 

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

 

‘(i)   There is a clear distinction between a person
commencing a business and a person setting up a business. When a business is
established and ready to commence business, then it can be said of that
business that it is set up. The test is of common sense and what in the eye of
a business can be said to be the commencement of business. One business
activity may precede the other and what is required to be seen is whether one
of the essential activities for the carrying on of the business of the assessee
as a whole was or was not commenced. In the case of a composite business, a
variety of matters bearing on the unity of the business have to be
investigated, such as unity of control and management, conduct of the business
through the same agency, the interrelation of business, the employment of same
capital, the maintenance of common books of accounts, employment of same staff
to run the business, the nature of the different transactions, the possibility
of one being closed without affecting the texture of the other, etc.

 

(ii)   There was no dispute with regard to the date
on which the assessee had set up its business. The business of the assessee had
been set up in the relevant assessment year. The Tribunal erred in holding that
merely because the manufacturing and sale of the vehicle did not take place the
business of the assessee had not been set up. This was never an issue before
the AO and the Tribunal had no jurisdiction to unsettle the finding of the date
on which the business of the assessee was set up. The order of the Tribunal had
necessarily to be set aside.

 

(iii)   The assessee had commenced and performed
activities relating to designing of commercial vehicles and related products
research and development, buying and selling of parts and in the process of construction
of factory building for manufacture of commercial vehicles. The unity of
control, management, etc., of the assessee in respect of each of its activity
had not been disputed by the Revenue. In such circumstances, the assessee on
showing that it had commenced several of its activities for which it was
incorporated would definitely qualify for deduction of the expenditure incurred
by it under the head operating expenses, financial expenses and depreciation.’

Business expenditure – Disallowance u/s 43B of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to pay service tax into treasury arises only upon receipt of consideration by assessee – Service tax debited to profit and loss account – Cannot be disallowed

2.     Principal CIT vs. Tops Security
Ltd.; [2019] 415 ITR 212 (Bom.) Date of order: 10th September,
2018 A.Y.: 2006-07

 

Business expenditure – Disallowance u/s 43B
of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to
pay service tax into treasury arises only upon receipt of consideration by
assessee – Service tax debited to profit and loss account – Cannot be
disallowed

 

The assessee
provided detection and security services to its clients. The AO found from the
balance sheet that the assessee had claimed the amount of unpaid service tax as
its liability. The AO held that according to section 43B of the Income-tax Act,
1961 the service tax could be allowed only when paid and that the amount was
not allowable as deduction. The assessee submitted that the gross receipts
included the service tax but whenever it was due and payable, namely, when the
amount for the services was realised, it would be remitted.

 

The Commissioner
(Appeals) held that the tax became payable only when it was collected from the
customer. The Tribunal found that though the service tax was included in the
bill raised on the customers, it was not actually collected from them and
confirmed the order of the Commissioner (Appeals).

 

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

 

‘(i)   The Tribunal was justified in holding that
the service tax debited to the profit and loss account but not credited to the
Central Government by the assessee could not be disallowed u/s 43B.

 

(ii)   The liability to pay service tax into the
treasury arose only when the assessee had received the funds and not otherwise.
The consideration has to be actually received and thereupon the liability to
pay tax would arise. No question of law arose.’

Appeal to High Court – Territorial jurisdiction – Sections 116, 120, 124, 127, 260A and 269 of ITA, 1961 – Territorial jurisdiction of High Court is not governed by seat of the AO – Appeal would lie to High Court having jurisdiction over place where Tribunal which passed order is situated

1.      
Principal CIT vs. Sungard
Solutions (I) Pvt. Ltd.; [2019] 415 ITR 294 (Bom.) Date of order: 26th February,
2019 A.Y.: 2008-09

 

Appeal to High Court – Territorial
jurisdiction – Sections 116, 120, 124, 127, 260A and 269 of ITA, 1961 –
Territorial jurisdiction of High Court is not governed by seat of the AO –
Appeal would lie to High Court having jurisdiction over place where Tribunal
which passed order is situated

 

In this case, the
Bangalore Bench of the Tribunal had passed an order on 30th July,
2015. On 8th September, 2015, an order was passed u/s 127 of the
Income-tax Act, 1961 transferring the respondent-assessee’s case from an
Assessing Officer (AO) at Bangalore to an AO at Pune. On the basis of the place
of the new AO, the Revenue filed an appeal against the order of the Tribunal in
the Bombay High Court. The assessee’s advocate raised a preliminary objection
about the maintainability of the appeal before the Bombay High Court.

 

The Bombay High
Court accepted the assessee’s plea and held as under:

 

‘(i)   A bare reading of sections 116, 120, 124,
127, 260A and 269 of the Income-tax Act, 1961 establishes that Chapter XIII of
the Act would be applicable only to the income-tax authorities under the Act as
listed out in section 116 thereof. Thus, it follows that the provisions of
sections 120, 124 and 127 of the Act will also apply only to the authorities
listed in section 116 of the Act. The Tribunal and the High Court are not
listed in section 116 of the Act as income-tax authorities under the Act.

 

(ii)   The jurisdiction of the court which will hear
appeals from the orders passed by the Tribunal would be governed by the
provisions of Chapter XX of the Act which is a specific provision dealing with
appeals, amongst others to the High Court. In particular, sections 260A and 269
of the Act when read together would mean that the High Court referred to in
section 260A of the Act will be the High Court as defined in section 269, i.e.,
in relation to any State, the High Court of that State. Therefore, the seat of
the Tribunal (in which State) would decide jurisdiction of the High Court to
which the appeal would lie under the Act.

 

(iii)   The High Court to which the appeal would lie
is not governed by the seat of the Assessing Officer. The words “all
proceedings under this Act” in section 127 have to be harmoniously read with
the other provisions of the Act and have to be restricted only to the
proceedings under the Act before the authorities listed in section 116 of the
Act. Thus, a harmonious reading of the various provisions of law would require
that the appeal from the order of the Tribunal is to be filed to the Court
which exercises jurisdiction over the seat of the Tribunal.

 

(iv)  Accordingly, the Bombay High Court did not
have jurisdiction to entertain appeals u/s 260A of the Act in respect of orders
dated 30th July, 2015 passed by the Bangalore Bench of the
Tribunal.’

 

Sections 194, 194D and 194J of ITA, 1961 – TDS – Works contract or professional services – Outsourcing expenses – Services clerical in nature – Not technical or managerial services – Tax deductible u/s 194C and not u/s 194J TDS – Insurance business – Insurance agent’s commission – Service tax – Quantum of amount on which income-tax to be deducted – Tax deductible on net commission excluding service tax

38.  CIT vs. Reliance Co. Ltd.; 414 ITR 551 (Bom.)

Date of order: 10th
June, 2019

A.Y.: 2009-10

 

Sections 194, 194D and 194J of ITA,
1961 – TDS – Works contract or professional services – Outsourcing expenses –
Services clerical in nature – Not technical or managerial services – Tax
deductible u/s 194C and not u/s 194J

 

TDS – Insurance business –
Insurance agent’s commission – Service tax – Quantum of amount on which
income-tax to be deducted – Tax deductible on net commission excluding service
tax

 

The assessee,
an insurance company, deducted tax at source u/s 194C of the Income-tax Act,
1961 on payment of outsourcing expenses. The Department held that the tax ought
to have been deducted u/s 194J on the ground that the payments were for
managerial and technical services. The assessee deducted the tax at source on
the agent’s commission excluding the service tax component, which it directly
deposited with the Government. The Department contended that the service tax
component ought to have been part of the amount on which tax was required to be
deducted at source.

 

The
Commissioner (Appeals) and the Tribunal found that the services outsourced were
clerical in nature and that the payments made by the assessee were neither for
managerial services nor for technical services and that the charges for event
management paid by the assessee were for services in the nature of travel agent
and allowed the assessee’s claim. The Tribunal referred to the Circular of the
CBDT wherein it was provided that the deduction of tax at source was to be made
in relation to the income of the payee and held that tax was deductible on the
net insurance commission of the agent after excluding the service tax component
from the gross commission.

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

 

“(i)   The work outsourced by the assessee was in
the nature of clerical work. The Tribunal was justified in holding that the tax
at source was deductible u/s 194C and not u/s 194J.


(ii)         The
commission payment made to the agent was the net commission payable excluding
the service tax component which was required to be directly deposited with the
Government. The Tribunal was justified in holding that the tax was deductible
from the payment of net commission to the agents, after excluding the service
tax component from the gross commission.”

Sections 132 and 133A of ITA, 1961 – Search and seizure – Survey converted into search – Preconditions not satisfied – Action illegal and invalid

37.  Pawan Kumar Goel vs. UOI; [2019] 107
taxmann.com 21 (P&H)

Date of order: 22nd
May, 2019

 

Sections 132 and 133A of ITA, 1961
– Search and seizure – Survey converted into search – Preconditions not
satisfied – Action illegal and invalid

 

The respondent tax officials
entered the business premises of the assessee and he was allegedly asked to
sign documents without disclosing their contents. Upon raising a question the
respondents supplied him with a copy of summons u/s 131 of the Income-tax Act,
1961 informing him that the officials wanted to carry out a survey operation
u/s 133A. The assessee submitted that although the summons indicated survey
operations but the procedure was converted into search and seizure which was
impermissible in law.

 

The assessee therefore filed a writ
petition with a prayer that the process of search and seizure conducted by the
respondents on his business premises be quashed and set aside.

 

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

 

“(i)   The respondents have not demonstrated from any material as to
whether the assessee failed to co-operate, which is an eventuality where the
income-tax authority would be required to record its reasons to resort to the
provisions of section 131(1) and convert the whole process into search and
seizure. But this is completely missing from the process.

 

(ii)   This, to our minds, is fatal to the cause of the respondents
because in a procedure like this which can often turn draconian the inherent
safeguard of at least recording a reason and satisfaction of non-co-operation
to resort to other coercive steps needs to be set out clearly by the income-tax
authority.

 

(iii)   The action of the respondents is therefore bad in the eye of law.
Besides, the summons issued to the assessee was totally vague. No documents
were mentioned which were required of the assessee and neither was any other
thing stated.

 

(iv)  Similarly, the argument of the assessee that provisions of section
131(1) could be invoked only if some proceedings were pending is agreeable. In
the instant case there was only a survey operation and no proceedings were
pending at that point of time. But the income-tax authority exercised the
powers of a court in the absence of any pending proceedings.

(v)   Thus,
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 has been concealed by the assessee warranting resort to the process
of search and seizure.

 

(vi)        For the reasons above, it is to be
concluded that the instant petition deserves to succeed. The impugned action of
the respondents is quashed. The consequential benefits would flow to the
assessee forthwith.

Ordered accordingly.”

Section 4 of ITA, 1961 – Income or capital – Assessee a Government Corporation wholly owned by State – Grant-in-aid received from State Government for disbursement of salaries and extension of flood relief – Funds meant to protect functioning of assessee – No separate business consideration between State Government and the assessee – Flood relief not constituting part of business of assessee – Grant-in-aid received is capital receipt – Not taxable

36.  Principal CIT vs. State Fisheries Development
Corporation Ltd.; 414 ITR 443 (Cal.)

Date of order: 14th
May, 2018

A.Y.: 2006-07

 

Section 4 of ITA, 1961 – Income or
capital – Assessee a Government Corporation wholly owned by State –
Grant-in-aid received from State Government for disbursement of salaries and
extension of flood relief – Funds meant to protect functioning of assessee – No
separate business consideration between State Government and the assessee –
Flood relief not constituting part of business of assessee – Grant-in-aid
received is capital receipt – Not taxable

 

The assessee was engaged in
pisciculture and was a wholly-owned company of the State Government. It
received certain amounts as grant-in-aid from the State Government towards
disbursement of salary and provident fund dues and for extension of flood
relief. The AO treated the amount as revenue receipts on the ground that the
funds were applied for items which were revenue in nature and disallowed the
claim for deduction by the assessee. It was contended by the assessee that
though the funds were applied for salary and provident fund dues, the object of
the assistance was to ensure its survival.

 

The Tribunal allowed the assessee’s
claim.

 

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

 

“(i)   The finding of the Tribunal that the amount received by the assessee
from the State Government in the form of grant-in-aid utilised for clearing the
salary and provident fund dues and flood relief was capital in nature was
correct.

 

(ii)   The amount received by the assessee was not on account of any
general subsidy scheme. Though the grant-in-aid was received from the public
funds, the State Government being a hundred per cent shareholder, its position
would be similar to that of a parent company making voluntary payments to its
loss-making undertaking. It was apparent that the actual intention of the State
Government was to keep the assessee, facing a cash crunch, floating and
protecting employment in a public-sector organisation. There was no separate
business consideration on record between the grantor-State Government and the
recipient-assessee.

 

(iii)        Since flood relief did not constitute
part of the business of the assessee, the funds extended for flood relief could
not constitute revenue receipt.”

Section 5 of ITA, 1961 – Income – Accrual of income – Mercantile system of accounting – Bill raised for premature termination of contract and contracting company not accepting bill – Income did not accrue – Another bill of which small part received after four years – Theory of real income – Sum not taxable – Any claim of assessee by way of bad debts was to be adjusted

35.  CIT(IT) vs. Bechtel International Inc.; 414
ITR 558 (Bom.)

Date of order: 4th June,
2019

A.Y.: 2002-03

 

Section 5 of ITA, 1961 – Income –
Accrual of income – Mercantile system of accounting – Bill raised for premature
termination of contract and contracting company not accepting bill – Income did
not accrue – Another bill of which small part received after four years –
Theory of real income – Sum not taxable – Any claim of assessee by way of bad
debts was to be adjusted

 

The assessee was in the
construction business. It did not include in its return two sums of Rs. 26.47
crores and Rs. 59.51 crores, respectively, for which it had raised bills but
had not accounted for in its income. The AO rejected the assessee’s contention
that those amounts had not accrued to it and that even on the basis of the
mercantile system of accounting followed by it, the amounts need not be offered
to tax. But the AO was of the opinion that since the assessee had raised the
bills, whether the payments were made or not was irrelevant since the assessee
followed the mercantile system of accounting.

 

The
Commissioner (Appeals) held that the sum of Rs. 59.51 crores, for which the
assessee had raised the bill after the termination of the contract, could not
have been brought to tax since the bill pertained to the mobilisation and site
operation cost; but in respect of the sum of Rs. 26.47 crores, he did not grant
any relief on the ground that the bill pertained to the construction work that
had already been carried out before the termination of the contract. The
Tribunal found that in respect of the sum of Rs. 59.51 crores, the assessee was
awarded the contract of the project of the parent company of the contracting
company, that the parent company was in severe financial crises, that the
assessee raised the bill after the termination of contract, that the bill was
not even accepted by the contracting company and that the income never accrued
to the assessee. In respect of the amount of Rs. 26.47 crores, the Tribunal
found that due to the financial crises of the parent company of the contracting
company, the assessee could not receive any payment for a long time and could
recover only 8.58% of the total claim and, inter alia applying the
theory of real income, deleted the addition. The assessee had also in a later
year claimed the same amount by way of bad debts. The Tribunal while giving
relief to the assessee ensured that any such amount claimed by way of bad debts
was to be adjusted.

 

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

 

“(i)   The Tribunal did not err in holding that no real income accrued to
the assessee as only 8.58% of the total claim was received, applying the real
income theory, bill amount of Rs. 26.47 crores due to the financial crises of
the parent company of the contracting company, and in respect of the sum of Rs.
59.51 crores on the ground that the bill was raised after the termination of
the contract and the bill was not even accepted by the contracting party.

 

(ii)         The claim of Rs. 59.51 crores was for
damages for the premature termination of the contract. Any further examination
of the issue would be wholly academic since the assessee could have claimed the
amount by way of bad debts. In fact, such claim was allowed, but in view of the
further development, pursuant to the decision taken by the Tribunal, such claim
was ordered to be adjusted.”

Sections 2(24) and 4 of ITA, 1961 – Income – Meaning of – Assessee collecting value-added tax on behalf of State Government – Excess over expenditure deposited in State Government Treasury – No income accrued to assessee

34.  Principal CIT vs. H.P. Excise and Taxation
Technical Service Ltd.; 413 ITR 305 (HP)

Date of order: 7th
December, 2018

A.Ys.: 2007-08 to 2011-12 and
2013-14

 

Sections 2(24) and 4 of ITA, 1961 –
Income – Meaning of – Assessee collecting value-added tax on behalf of State
Government – Excess over expenditure deposited in State Government Treasury –
No income accrued to assessee

 

The assessee-society was registered
under the Societies Registration Act, 1860 on 27th August, 2002.
Under the objects of its formation the assessee was entrusted with the
responsibility of collection of value-added tax. The assessee maintained all
the multi-purpose barriers in the State of Himachal Pradesh from where all
goods entered or left the State in terms of section 4 of the Himachal Pradesh
Value-Added Tax Act, 2005. A form was to be issued to the person declaring the
goods at a cost of Rs. 5 per form till the levy was further enhanced to Rs. 10
w.e.f. 18th May, 2009. In terms of the bye-laws, the assessee used
to deposit Re. 1 per declaration  form
with the Government Treasury out of the Rs. 5 received till the year 2009; this
was later enhanced to Rs. 2 after the tax amount was increased from Rs. 5 to Rs
10 per declaration form. The assessee had been showing the surplus of income
over expenditure in its income-expenditure statements. The AO, therefore,
issued notices u/s 148 of the Income-tax Act, 1961 for taxing the excess of
income over expenditure. For the A.Y.s 2007-08 and 2010-11 the assessee
contested the notices stating that all the surplus income was payable to the
State Government and, therefore, it had earned no taxable income. The AO rejected
the assessee’s claim.

 

The Tribunal considered the
memorandum of association of the assessee as well as the details of its
background, functional requirements, operation and model, accounting structure
and ultimate payment to the exchequer of the Government. It also went into the
composition of the governing body, organisational structure, funds and
operation of the accounts of the assessee as enumerated in its bye-laws. It
held that the amount was not assessable in the hands of the assessee.

 

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

“(i)   The assessee neither created any source of income nor generated
any profit or gain out of such source. The assessee merely performed the
statutory functions under the 2005 Act and collected the tax amount for and on
behalf of the State and transferred such collection to the Government Treasury.
Even if the tax collection remained temporarily parked with the assessee for
some time, it could not be treated as ‘income’ generated by the assessee as the
amount did not belong to it.

 

(ii)   The Tribunal had rightly concluded that the surplus of income over
expenditure, as reflected in the entries or the returns filed by the assessee,
also belonged to the State Government and was duly deposited in the Government
Treasury. Hence, it did not partake of the character of ‘profit or gain’ earned
by the assessee.

 

(iii)        The non-registration of the assessee u/s
12AA of the Act was inconsequential.”

Section 14A of ITA, 1961 r.w.r. 8D(2)(iii) of ITR, 1962 – Exempt income – Disallowance of expenditure relating to exempt income – Voluntary disallowance by assessee of expenditure incurred to earn exempt income – AO cannot disallow expenditure far in excess of what has been disallowed by assessee

33.  Principal CIT vs. DSP Adiko Holdings Pvt.
Ltd.; 414 ITR 555 (Bom.)

Date of order: 3rd
June, 2019

A.Y.: 2009-10

 

Section 14A of ITA, 1961 r.w.r.
8D(2)(iii) of ITR, 1962 – Exempt income – Disallowance of expenditure relating
to exempt income – Voluntary disallowance by assessee of expenditure incurred
to earn exempt income – AO cannot disallow expenditure far in excess of what
has been disallowed by assessee

 

The assessee was in investment
business. It earned interest income from investment in mutual funds. It claimed
total expenses of Rs. 24.19 lakhs and voluntarily disallowed an amount of Rs.
7.79 lakhs as expenditure relatable to earning tax-free income u/s 14A of the
Income-tax Act, 1961. The AO rejected such working and applied Rule 8D(2)(iii)
of the Income-tax Rules, 1962 and made a disallowance of Rs. 2.19 crores.

 

The Commissioner (Appeals)
restricted the disallowance to Rs. 24.19 lakhs, the amount which was claimed as
total expenses. The Tribunal reduced it further to the assessee’s original
offer of Rs. 7.79 lakhs.

 

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

 

“(i)   The computation of the AO would lead to disallowance of
expenditure far in excess of what was claimed by the assessee itself. The
assessee’s entire claim of expenditure in relation to its business activity was
Rs. 24.19 lakhs out of which the assessee had voluntarily reduced the sum of
Rs. 7.79 lakhs in relation to income not forming part of the total income u/s
14A which was accepted by the Tribunal.

 

(ii)   Quite apart from the correctness of the approach of the Tribunal,
accepting the stand of the AO would lead to disallowance of expenditure far in
excess of what is claimed by the assessee itself. No question of law arose.”

Sections 37 and 43B(g) of ITA, 1961 – Business expenditure – Deduction only on actual payment – Assessee paying licence fee to Railways for use of land – Railways enhancing licence fee and damages with retrospective effect and disputes arising – Assessee making provision for sum payable to Railways – Nature of fee not within description of ‘duty’, ‘cess’, or ‘fee’ payable under law at relevant time – Sum payable under contract – Deduction allowable

32.  CIT vs. Jagdish Prasad Gupta; 414 ITR 396
(Del.)

Date of order: 25th
March, 2019

A.Y.: 2007-08

 

Sections 37 and 43B(g) of ITA, 1961
– Business expenditure – Deduction only on actual payment – Assessee paying
licence fee to Railways for use of land – Railways enhancing licence fee and
damages with retrospective effect and disputes arising – Assessee making
provision for sum payable to Railways – Nature of fee not within description of
‘duty’, ‘cess’, or ‘fee’ payable under law at relevant time – Sum payable under
contract – Deduction allowable

 

The assessee was allotted lands by
the Railways and the licence fee was collected for the use of the land. The
Railways revised the licence fee periodically and also claimed damages,
unilaterally, on retrospective basis applicable from anterior dates. These led
to disputes. Therefore, the assessee made provision for the amounts which were
deemed payable to the Railways but which were disputed by it and ultimately
became the subject matter of arbitration proceedings. For the A.Y. 2007-08, the
AO disallowed the claim for deduction of the amounts on the ground that it fell
within the purview of section 43B of the Income-tax Act, 1961 and that by
virtue of the conditions laid down in section 43B, especially (a) and (b), the
licence fee payable periodically and the damages as well could not have been
allowed as deduction since they were not paid within that year in accordance
with the provision.

 

The Tribunal allowed the assessee’s
claim.

 

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

 

“(i)   The reference to ‘fee’ in section 43B(a) had to be always read
along with the expression ‘law in force’. According to the documents placed on
record, the transaction between the parties was a commercial one, while the
land was allotted for a licence fee.

 

(ii)   The Notes on Clauses to the Bill which inserted section 43B(g)
stated that the amendment would take effect from 1st April, 2017 and would
accordingly apply only to the A.Y. 2017-18 and subsequent years. Thus, the
notion of clarificatory amendment would not be applicable. The contentions of
the Department with respect to applicability of section 43B were untenable.

 

(iii)        The assessee was entitled to deduction
on the enhanced licence fee in the year in which such enhancement had accrued
even though it was not paid in that year.”

Sections 48, 54F, 19 and 143 of ITA, 1961 – Assessment – Duty of Assessing Officer – It is a sine qua non for the AO to consider claims of deduction / exemption made by the assessee and thereafter to return the said claims if the assessee is not entitled to the same by assigning reasons

31.  Deepak Dhanaraj vs. ITO; [2019] 107
taxmann.com 76 (Karn.)

Date of order: 28th
May, 2019

A.Y.: 2016-17

 

Sections 48, 54F, 19 and 143 of
ITA, 1961 – Assessment – Duty of Assessing Officer – It is a sine qua non
for the AO to consider claims of deduction / exemption made by the assessee and
thereafter to return the said claims if the assessee is not entitled to the
same by assigning reasons

 

For the A.Y. 2016-17 the
petitioner-assessee had filed a return of income on 30th March, 2018
offering to tax the capital gains along with other sources of income. The said
return was held to be a defective return. The assessee thereafter filed a
revised return on 18th September, 2018 declaring long-term capital
gains and claiming deduction u/s 48 and exemption u/s 54F of the Income-tax
Act, 1961. The AO completed the assessment u/s 143(3) without considering the
return and the revised return and the claims for deduction / exemption u/ss 48
and 54F.

 

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

 

“(i)   Ordinarily, the Court would have relegated the petitioner-assessee
to avail the statutory remedy of appeal available under the Act provided the
principles of natural justice are adhered to. As could be seen from the order
impugned, the respondent has not whispered about the revised return filed by
the assessee except observing that the returns filed by the assessee were
invalidated being defective returns. If that being the position, no opportunity
was provided to the assessee u/s 139(9) to remove the defects in the returns
pointed out by the AO, nor was an opportunity provided to file a return
pursuant to the notice issued u/s 142(1). Even assuming the arguments of the
Revenue that no revised returns could be accepted enlarging the claim of
deduction / exemption beyond the time prescribed under the Act, it is a sine
qua non for the AO to consider the claims of deduction / exemption made by
the petitioner-assessee and thereafter to return the said claims if the
assessee is not entitled to the same by assigning the reasons. The impugned
assessment order prima facie establishes that the deduction claimed u/s
54F is not considered while computing the taxable turnover. This would
certainly indicate the non-application of mind by the respondent / Revenue.

 

(ii)   It is clear that recording of ‘reasons’ is a sine qua non
for arriving at a conclusion by the quasi-judicial authority and it is
essential to adopt, to subserve the purposes of the justice delivery system.
The reasons are the soul and heartbeat of the orders without which the order is
lifeless and void. Where the reasons are not recorded in the orders, it would
be difficult for the Courts to ascertain the minds of the authorities while
exercising the power of judicial review.

 

(iii)   It is a well-settled legal principle that there is no bar to
invoke the writ jurisdiction against a palpable illegal order passed by the
Assessing Authority in contravention of the principles of audi alteram
partem. On this ground alone, the order impugned cannot be approved. There
is no cavil with the arguments of the respondent placing reliance on the
judgement of the Apex Court in Goetze (India) Ltd. vs. CIT [2006] 157
Taxman 1/284 ITR 323 that no claim for deduction other than by filing a
revised return can be considered but not in the absence of the AO analysing,
adjudicating and arriving at a decision by recording the reasons. It is
apparent that no reasons are forthcoming for rejecting the revised returns as
well as the claims made u/s 54F. Such a perfunctory order passed by the AO
cannot be held to be justifiable.

 

(iv)  Hence, for the aforesaid reasons, without expressing any opinion on
the merits or demerits of the case, the order impugned and the consequent
demand notice issued u/s 156 as well as the recovery notice issued by the
respondent are quashed. The proceedings are restored to the file of the
respondent to reconsider the matter and to arrive at a decision after providing
an opportunity of hearing to the petitioner, assigning valid reasons as
aforementioned.”

Revision – Section 264 of ITA, 1961 – Delay in filing application – Condonation of delay – Assessee including non-taxable income in return – Assessee acting in time to correct return by filing revised return and rectification application – Revised return rejected on technical ground – Consequent delay in filing application for revision was to be condoned

28 Ramupillai Kuppuraj
vs. ITO; [2019] 418 ITR 458
(Mad.) Date of order: 28th
June, 2018 A.Y.: 2009-10

 

Revision – Section
264 of ITA, 1961 – Delay in filing application – Condonation of delay –
Assessee including non-taxable income in return – Assessee acting in time to
correct return by filing revised return and rectification application – Revised
return rejected on technical ground – Consequent delay in filing application
for revision was to be condoned

 

The assessee, a non-resident seafarer, filed his
return for the A.Y. 2009-10. He then filed, in time, a revised return excluding
an amount of Rs. 19.84 lakhs which was erroneously included in the return
though, according to him, it was income received from abroad and hence not
taxable in India. The revised return was rejected for a technical reason. An
application for rectification was also rejected and a notice of demand was
issued. The assessee filed an application for revision u/s 264 of the
Income-tax Act, 1961 which was rejected solely on the ground of delay. The
assessee filed a writ petition and challenged the order.

 

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

 

‘i)   The
Commissioner has powers to condone a delay in the application for revision u/s
264 of the Income-tax Act, 1961. There is no restriction regarding the length
of delay that can be condoned. In case of delay whether sufficient cause has
been made out or not is always a question which depends on the facts and
circumstances of each case and it has to be established based on records of
that case.

 

ii)   The
period of one year for filing an application u/s 264 expires on 22nd
October, 2011, as the order of assessment u/s 143(1) came to be passed on 23rd
October, 2010. Within this one year, i.e., on 5th August, 2011
itself, the assessee had taken the first step to have his Rs. 19.84 lakhs
excluded qua the assessment year by filing a revised return. This
revised return was rejected u/s 139(5) on a technical ground. The assessee
filed a rectification application, on which no orders were passed. Without
passing orders on the application for rectification, a demand notice was issued
triggering a second application for rectification from the assessee which came
to be dismissed. A demand was made on 31st January, 2018, the second
rectification application was filed by the assessee on 2nd July,
2018; the assessee ultimately filed a petition u/s 264.

 

iii)  Therefore,
this was not a case where the assessee had not acted in time. The rejection of
the application for revision solely on the ground of delay was not justified.’

 

 

Refund of tax wrongly paid – Income-tax authorities – Scope of power u/s 119 of ITA, 1961 – Tax paid by mistake – Application for revision u/s 264 not maintainable – Income-tax authorities should act u/s 119

8.      
Karur Vysya Bank Ltd. vs.
Principal CIT; [2019] 416 ITR 166 (Mad.) Date of order: 12th June, 2019 A.Y.: 2007-08

 

Refund of tax
wrongly paid – Income-tax authorities – Scope of power u/s 119 of ITA, 1961 –
Tax paid by mistake – Application for revision u/s 264 not maintainable –
Income-tax authorities should act u/s 119

The assessee is a
bank. For the A.Y. 2007-08, the assessee paid fringe benefits tax in respect of
contribution to an approved pension fund. For the A.Y. 2006-07, the Tribunal
held that fringe benefits tax was not payable on such contribution. Therefore, for
the A.Y. 2007-08, the assessee filed an application u/s 264 of the Income-tax
Act, 1961 for refund of the tax wrongly paid. The application was rejected on
the ground of delay.

 

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

 

‘(i) The Income-tax
Department represents the sovereign power of the State in matters of taxation.
Whether the Department had illegally collected the tax from the citizen or
whether the assessee mistakenly paid the tax to the Department, the consequence
is one and the same. If the assessee had mistakenly paid, it is a case of
illegal retention by the Department.

 

(ii) It is
well-settled principle of administrative law that if the authority otherwise
had the jurisdiction, mere non-quoting or misquoting of provision will not
vitiate the proceedings.

 

(iii)   Section 264 was clearly not applicable in
this case. But section 119 could have been invoked. The authority ought to have
posed only one question to himself, i.e., whether the assessee was liable to
pay the tax in question or not. If he was not liable to pay the tax in
question, the Department had no business to retain it even if it was wrongly
paid.

 

(iv)  In this view of the matter, the order impugned
in this writ petition is quashed and the respondent is directed to pass orders
afresh u/s 119 of the Act within a period of eight weeks from the date of
receipt of this order.’

Refund – Interest on refund – Section 244A of ITA, 1961 – Amount seized from assessee in search proceedings shown as advance tax in return – Return accepted and assessment made – Assessee entitled to interest u/s 244A on such amount

7.      
Agarwal Enterprises vs. Dy.
CIT; [2019] 415 ITR 225 (Bom.) Date of order: 24th January, 2019 A.Y.: 2015-16

 

Refund – Interest on refund – Section 244A
of ITA, 1961 – Amount seized from assessee in search proceedings shown as
advance tax in return – Return accepted and assessment made – Assessee entitled
to interest u/s 244A on such amount

 

In the course of
the search proceedings u/s 132 of the Income-tax Act, 1961 conducted in the
office premises of the assessee on 9th October, 2014 cash of Rs. 35
lakhs was seized. The assessee applied for release of the seized cash after
adjusting tax liability due on the amount but the same was not accepted by the
AO. The assessee filed its return of income for the A.Y. 2015-16, declaring
total income of Rs. 39.15 lakhs, which included the cash of Rs. 35 lakhs seized
during the course of the search. The assessee showed the seized cash of Rs. 35
lakhs as advance tax and claimed a refund of Rs. 27.50 lakhs. The AO passed an
assessment order u/s 143(3) of the Act including the said cash of Rs. 35 lakhs
in the total income. However, the amount of Rs. 35 lakhs which was shown as
advance tax was not accepted and an independent demand of Rs. 9.18 lakhs was
raised on the assessee u/s 156 of the Act. The demand was paid by the assessee.
Subsequently, on application for refund of seized cash of Rs. 35 lakhs, the AO
refunded Rs. 31.5 lakhs after deducting the outstanding penalty demand of Rs.
3.5 lakhs. However, the AO refused to pay interest on the refunded amount.

 

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

 

‘(i)   It was an undisputed position that Rs. 35
lakhs was seized when the officers of the Revenue searched the assessee’s
premises. It was also undisputed position that consequent to the seizure of Rs.
35 lakhs, the assessment was done not u/s 153A of the Act, but u/s 143(3) of
the Act in respect of the A.Y. 2015-16.

 

(ii) The assessee in its return of income filed on 22/09/2015 had shown
Rs. 35 lakhs being the seized cash, as advance tax. While passing the
assessment order, the Assessing Officer did not adjust the seized cash as
advance tax paid on behalf of the assessee. This non-adjustment by the
Assessing Officer of the amount being offered as advance tax by the assessee
was unjustified and without reasons. Under the circumstances, the character of
the seized cash underwent a change and became advance tax. This was more
particularly so as for the subject assessment year, it had been accepted as
income. Though the Revenue did not accept the declaration made by the assessee
in its return of advance tax, the fact was that the assessee claimed it to be
tax.

 

(iii) Therefore, on the date the demand notice u/s 156 of the Act was
issued, there was an excess amount with the Revenue which the assessee was
claiming to be tax. Therefore, in terms of the Explanation to section
244A(1)(b) the amount of Rs. 35 lakhs was excess tax (on change of its character
from seized amount to tax paid) and the assessee was entitled to interest on
Rs. 35 lakhs w.e.f. 16/12/2016 on the passing of the assessment order. The
Assessing Officer had to give interest at 6% per annum from 16/12/2016 up to
31/05/2017 on Rs. 35 lakhs (i.e. before the adjustment of penalty of Rs. 3.5
lakhs of Rs. 35 lakhs) and on Rs. 31.50 lakhs from 01/06/2017 to 07/03/2018
when the sum of Rs. 31.5 lakhs was paid to the assessee.’

Industrial undertaking – Deduction u/s 80-IB of ITA, 1961 – Condition precedent – Profit must be derived from industrial undertaking – Assessee manufacturing pig iron – Profit from sale of slag, a by-product in manufacture of pig iron – Profit entitled to deduction u/s 80-IB

6.      
Sesa Industries Ltd. vs. CIT;
[2019] 415 ITR 257 (Bom.) Date of order: 18th April, 2019 A.Y.: 2004-05

 

Industrial undertaking – Deduction u/s
80-IB of ITA, 1961 – Condition precedent – Profit must be derived from
industrial undertaking – Assessee manufacturing pig iron – Profit from sale of
slag, a by-product in manufacture of pig iron – Profit entitled to deduction
u/s 80-IB

 

For the A.Y.
2004-05, the assessee claimed deduction u/s 80-IB of the Income-tax Act, 1961
for one of its industrial undertakings which was engaged in the manufacture of
pig iron. The AO computed the deduction u/s 80-IB only on the profits arising
from the sale of pig iron, without considering the profits arising on sale of
‘slag’ which, according to the assessee, was a by-product in the manufacture of
pig iron.

 

The Commissioner
(Appeals) allowed the assessee’s claim. The Tribunal held that the Commissioner
(Appeals) had taken the correct view holding that profits from sale of slag
generated out of the manufacturing process were a part of the profits derived
from the industrial undertaking engaged in the manufacturing of pig iron, but
allowed the appeal of the Revenue.

 

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

 

‘(i)   The conclusion drawn by the Tribunal was
contrary to the finding rendered by it and perverse. The slag generated during
the process of manufacturing activity of pig iron was part of the manufacturing
process and was a by-product of pig iron and an integral part of the
manufacturing activity conducted by the assessee and thus the profits earned
from the sale of such by-product would have to be considered as part of the
profits derived from the business of the industrial undertaking.

 

(ii)   The slag generated during the manufacturing activity
satisfied the test of first degree source and, thus, the assessee was eligible
to seek deduction u/s 80-IB for the profits earned out of the sale of slag, in
addition to the deduction already availed of by the assessee on the profits
earned on sale of pig iron.’

 

Capital gains – Exemption u/s 54F of ITA, 1961 – Agreement to sell land in August, 2010 and earnest money received – Sale deed executed in July, 2012 – Purchase of residential house in April, 2010 – Assessee entitled to benefit u/s 54F

20. Kishorbhai
Harjibhai Patel vs. ITO; [2019]
417 ITR 547 (Guj.) Date
of order: 8th July, 2019

A.Y.:
2013-14

 

Capital
gains – Exemption u/s 54F of ITA, 1961 – Agreement to sell land in August, 2010
and earnest money received – Sale deed executed in July, 2012 – Purchase of
residential house in April, 2010 – Assessee entitled to benefit u/s 54F

 

The
assessee entered into an agreement to sell agricultural land at Rs. 4 crores on
13th August, 2010. An amount of Rs. 10 lakhs towards the earnest
money was received by the assessee as part of the agreement. On 15th
October, 2011, possession of the land was handed over by the assessee to the
purchasers of the land. On 3rd July, 2012 the sale deed came to be
executed by the assessee in favour of the purchaser of the land. The assessee
had purchased a new residential house in April, 2010 and claimed exemption u/s
54F of the Income-tax Act, 1961. The AO denied the exemption on the ground that
the transfer of the land took place on 3rd July, 2012 and the
purchase of the residential house on 22nd April, 2010, thus it was beyond
the period of one year as required u/s 54F.

 

The
Tribunal upheld the decision of the AO.

 

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

‘(i)      The Act gives a precise definition to the
term “transfer”. Section 2(47)(ii) of the Act talks about extinguishment of
rights. The Supreme Court, in Sanjeev Lal vs. CIT (2014) 365 ITYR 389
(SC) is very clear that an agreement to sell would extinguish the
rights and this would amount to transfer within the meaning of section 2(47) of
the Act. This definition of transfer given in the Act is only for the purpose
of the income-tax.

 

(ii)      The assessee had purchased the new
residential house in April, 2010. The agreement to sell which had been executed
on 13th April, 2010 (and) could be considered as the date on
which the property, i.e., the agricultural land had been transferred. Hence,
the assessee was entitled to the benefit u/s 54F.’

Charitable purpose – Exemption u/s 11 of ITA, 1961 – Assessee entitled to allocate domain names providing basic services of domain name registration charging annual subscription fees and connectivity charges – Activity in nature of general public utility – Fees charged towards membership and connectivity charges – Incidental to main objects of assessee – Assessee entitled to exemption

19.  CIT vs. National Internet Exchange of India; [2019]
417 ITR 436 (Del.) Date
of order: 9th January, 2018 A.Y.:
2009-10

 

Charitable
purpose – Exemption u/s 11 of ITA, 1961 – Assessee entitled to allocate domain
names providing basic services of domain name registration charging annual
subscription fees and connectivity charges – Activity in nature of general
public utility – Fees charged towards membership and connectivity charges –
Incidental to main objects of assessee – Assessee entitled to exemption

 

The
assessee was granted registration u/s 12A of the Income-tax Act, 1961 from the
A.Y. 2004-05. The assessee was engaged in general public utility services. He
was the only nationally designated entity entitled to allocate domain names to
its applicants who sought it in India. It was also an affiliate national body
of the Internet Corporation for assigned names and numbers and authorised to
assign ‘.in’ registration and domain names according to the Central
Government’s letter dated 20th November, 2004. It provided basic
services by way of domain name registration for which it charged subscription
fee on annual basis and also collected connectivity charges.

 

The AO was
of the opinion that the subscription fee and the fee charged by the assessee
towards various services provided by it were in the nature of commercial
activity and fell outside the charitable objects for which it was established
and denied exemption u/s 11 of the Act.

 

The Commissioner (Appeals) held that the assessee had been incorporated
without any profit motive, that the nature of services provided by the assessee
were of general public utility and that the services provided were towards
membership and connectivity charges which were only incidental to the main
objects of the assessee. The Tribunal confirmed 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)      The assessee had been incorporated without
any profit motive. The services provided by the assessee were of general public
utility and were towards membership and connectivity charges and were
incidental to its main objects. The assessee (though not a statutory body)
carried on regulatory work.

 

(ii)      Both the appellate authorities had
concluded that the assessee’s objects were charitable and that it provided
basic services by way of domain name registration for which it charged
subscription fee on an annual basis and also collected connectivity charges. No
question of law arose.’

 

Charitable institution – Registration u/s 12AA of ITA, 1961 – Cancellation of registration – No finding that activities of charitable institution were not genuine or that they were not carried out in accordance with its objects – Mere resolution of governing body to benefit followers of a particular religion – Cancellation of registration not justified

18. St.
Michaels Educational Association vs. CIT; [2019]
417 ITR 469 (Patna) Date
of order: 13th August, 2019

 

Charitable institution – Registration u/s 12AA of ITA,
1961 – Cancellation of registration – No finding that activities of charitable
institution were not genuine or that they were not carried out in accordance
with its objects – Mere resolution of governing body to benefit followers of a
particular religion – Cancellation of registration not justified

 

The
assessee was an educational institution running a high school and was granted
registration u/s 12AA of the Income-tax Act, 1961 in April, 1985. In August,
2011 the Commissioner issued a show-cause notice proposing to cancel
registration and cancelled the registration exercising powers u/s 12AA(3) of
the Act.

 

The
Tribunal upheld the order of the Commissioner cancelling the registration.

 

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

 

‘(i)      A plain reading of the enabling power vested
in the Commissioner in section 12AA(3) would confirm that it is only in two
circumstances that such power can be exercised by the Principal Commissioner or
the Commissioner:

(a) if the
activities of such trust or institution are not found to be genuine; or (b) the
activities of such trust or institution are not being carried out in accordance
with the objects of the trust or institution. Where a statute provides an act
to be done in a particular manner it has to be done in that manner alone and every
other mode of discharge is clearly forbidden.

(ii)      The ground for cancellation of
registration is that in some of the subsequent governing body meetings some
resolutions were passed for the benefit of the Christian community. The order
of cancellation has been passed by the Commissioner without recording any
satisfaction, either on the issue of the activities of the school being not
genuine or that they were not being carried out in accordance with the objects
for which the institution had been set up. The order of cancellation of the
registration was not valid.’

 

Business expenditure – Section 37 of ITA, 1961 – Prior period expenses – Assessment of income of prior period – Prior period expenses deductible – No need to demonstrate that expenses relate to income

16. Principal
CIT vs. Dishman Pharmaceuticals and Chemicals Ltd.; [2019]
417 ITR 373 (Guj.) Date
of order: 24th June, 2019 A.Y.:
2006-07

 

Business expenditure – Section 37 of ITA, 1961 – Prior
period expenses – Assessment of income of prior period – Prior period expenses
deductible – No need to demonstrate that expenses relate to income

 

For the
A.Y. 2006-07, the AO found that the assessee had credited Rs. 3,39,534 as net
prior period income, i.e., prior period income of Rs. 46,50,648 minus prior
period expenses of Rs. 43,11,114. The AO took the view that ‘prior period
income’ was taxable, but the ‘prior period expenses’ were not allowable. Thus,
he made an addition of Rs. 46,50,648 as prior period income and denied the
set-off of the prior period expenses on the basis that a different set of rules
applied to such income and expenses.

 

The
Commissioner (Appeals) confirmed the addition and held that prior period expenses
cannot be adjusted against the prior period income in the absence of any
correlation or nexus. The Tribunal allowed the assessee’s claim and held that
once the assessee offers the prior period income, then the expenditure incurred
under the different heads should be given set-off against that income and only
the net income should be added.

 

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

 

‘(i)      The only requirement u/s 37 of the
Income-tax Act, 1961 is that the expenses should be incurred for the purposes
of the business or profession. There is no need to demonstrate that a certain
expense relates to a particular income in order to claim such expense.

 

(ii)      Once prior period income is held to be
taxable, prior period expenditure also should be allowed to be set off and the
assessee is not obliged in law to indicate any direct or indirect nexus between
the prior period income and prior period expenditure.’

 

Capital gains – Exemption u/s 54EC of ITA, 1961 – Investment in notified bonds within time specified – Part of consideration for sale of shares placed in escrow account and released to assessee after end of litigation two years later – Amount taxable in year of receipt and invested in specified bonds in year of receipt – Investment within time specified and assessee entitled to exemption u/s 54EC

5.      
Principal CIT vs. Mahipinder
Singh Sandhu; [2019] 416 ITR 175 (P&H) Date of order: 12th March 2019 A.Y.: 2008-09

 

Capital gains – Exemption u/s 54EC of ITA,
1961 – Investment in notified bonds within time specified – Part of
consideration for sale of shares placed in escrow account and released to
assessee after end of litigation two years later – Amount taxable in year of
receipt and invested in specified bonds in year of receipt – Investment within
time specified and assessee entitled to exemption u/s 54EC

 

On 28th
November, 2007, the assessee sold certain shares and received a part of sale
consideration during the previous year relevant to the A.Y. 2010-11. The
assessee made investment in Rural Electrification Corporation bonds on 6th
August, 2010 and claimed exemption u/s 54EC of the Income-tax Act, 1961 in the
A.Y. 2010-11. The AO held that such income was to be taxed in the A.Y. 2008-09
and that since the assessee had made investment in REC bonds on 6th
August, 2010, i.e., after a period of six months from the date of transfer of
the shares, irrespective of when the whole or part of sale consideration was
actually received, the assessee was not entitled to deduction u/s 54EC of the
Act.

 

The Tribunal, inter
alia, held that the amount of Rs. 18 lakhs was deposited in an escrow
account as a security in respect of future liabilities of the company /
transferor, that since there was no certainty of the time of release of the
amount or part of the amount to either of the parties as dispute between the
parties had occurred and the litigation was going on, it could not be said that
the assessee had a vested right to receive the amount in question and that it
was only at the end of the litigation that the rights and liabilities of the
transferor and the transferee were ascertained and thereupon the share of the
assessee was passed on to the assessee for which the assessee had offered
capital gains in the immediate assessment year 2010-11. The Tribunal held that
the assessee was entitled to the benefit of exemption u/s 54EC as the amount
was invested by him in REC bonds in the year of receipt which was also the year
of taxability of the capital gains.

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

 

‘There was no error in the findings recorded by the Tribunal which
warranted interference. No question of law arose.’

 

Sections 9(1)(vii)(b) and 195 of ITA 1961 – TDS – Income deemed to accrue or arise in India – Non-resident – TDS from payment to non-resident – Payment made to non-resident for agency services as global coordinator and lead manager to issue of global depository receipt – Services neither rendered nor utilised in India and income arising wholly outside India from commercial services rendered in course of carrying on business wholly outside India – Tax not deductible at source

46.  CIT(IT) vs. IndusInd Bank
Ltd.; [2019] 415 ITR 115 (Bom.) Date of order: 22nd April, 2019;

 

Sections 9(1)(vii)(b) and 195 of ITA 1961 – TDS – Income deemed to
accrue or arise in India – Non-resident – TDS from payment to non-resident –
Payment made to non-resident for agency services as global coordinator and lead
manager to issue of global depository receipt – Services neither rendered nor
utilised in India and income arising wholly outside India from commercial
services rendered in course of carrying on business wholly outside India – Tax
not deductible at source

The assessee was engaged in banking business. For
its need for capital, the bank decided to raise capital abroad through the
issuance of global depository receipts. The assessee engaged the A bank,
incorporated under the laws of the United Arab Emirates and carrying on
financial services, for providing services of obtaining global depository
receipts. The assessee bank raised USD 51,732,334 by way of the gross proceeds
of global depository receipts issued. The agency would be paid the agreed sum
of money which was later on renegotiated. The assessee paid a sum of USD
20,09,293 as agency charges which in terms of Indian currency came to Rs. 90.83
lakhs. The AO held that tax was deductible at source on such payment.

 

The Tribunal allowed the assessee’s claim that
there was no liability to deduct tax at source.

 

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

 

‘i)   The
assessee had engaged the A bank for certain financial services. The payment was
made for such financial services rendered by the A bank. The global depository
receipts were issued outside India. The services were rendered by the A bank
outside India for raising such funds outside India. It was, in this context,
that the Tribunal had come to the conclusion that the services rendered by the
A bank were neither rendered in India nor utilised in India and the character
of income arising out of such transaction was wholly outside India emanating
from commercial services rendered by the bank in the course of carrying on business wholly outside India.

ii)    The Tribunal
was, therefore, correctly of the opinion that such services could not be
included within the expression “technical services” in terms of
section 9(1)(vii)(b) read with Explanation to section 9. Tax was not deductible
at source from such payment.’

 

 

Sections 69, 132 and 158BC of ITA 1961 – Search and seizure – Block assessment – Undisclosed income – Search at premises of assessee’s father-in-law – Valuation of cost of construction of property called for pursuant to search – Addition to income of assessee as unexplained investment based on report of Departmental Valuer – Report available with Department prior to search of assessee’s premises – Addition unsustainable

45.  Babu
Manoharan vs. Dy. CIT; [2019] 415 ITR 83 (Mad.) Date of order: 4th
June, 2019; A.Ys.: B.P. from 1st April, 1989 to 31st March,
2000

 

Sections 69, 132 and 158BC of ITA 1961 – Search and seizure – Block
assessment – Undisclosed income – Search at premises of assessee’s
father-in-law – Valuation of cost of construction of property called for
pursuant to search – Addition to income of assessee as unexplained investment
based on report of Departmental Valuer – Report available with Department prior
to search of assessee’s premises – Addition unsustainable

 

During a search operation u/s 132 of the Income-tax
Act, 1961 conducted in the premises of the assessee’s father-in-law on 12th
August, 1999 it had been found that a house property was owned by the assessee
and his spouse equally and a valuation was called for from the assessee. After
the assessee submitted the valuation report, the Department appointed a valuer
who subsequently submitted his report in December, 1999. Thereafter, on 13th
January, 2000, a search and seizure operation was conducted in the premises of
the assessee. In the block assessment made u/s 158BC, the AO made an addition
to the income of the assessee on account of unexplained investment in the
construction of the house property.

Both the Commissioner (Appeals) and the Tribunal
upheld the addition.

 

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

 

‘i)   In the
absence of any material being found during the course of search in the premises
of the assessee with regard to the investment in the house property, the
assessee could not be penalised solely based on the valuation report provided
by the Department. The house property of the assessee was found during the
search conducted in the premises of the father-in-law of the assessee on 12th
August, 1999 and a valuation report was called for from the assessee as well as
the Departmental valuer. The valuation report was prepared much earlier to the
search conducted on 13th January, 2000 in the assessee’s premises.
Therefore, the valuation report was material which was available with the
Department before the search conducted in the assessee’s premises and it could
not have been the basis for holding that there had been an undisclosed
investment.

 

ii)    The
assessee had not been confronted with any incriminating material recovered
during the search. According to the valuation report submitted in the year
1999, it was only to determine the probable cost of construction and the valuer
in his report had stated that the construction was in progress at the time of
inspection on 12th August, 1999 on the date of search of the premises
of the assessee’s father-in-law. Therefore, the assessee could not be faulted
for not filing his return since he had time till September, 2001 to do so. The
order passed by the Tribunal holding that the investment in the house property
represented the undisclosed income of the assessee was set aside.’

 

Sections 69B, 132 and 153A of ITA 1961 – Search and seizure – Assessment – Undisclosed income – Burden of proof is on Revenue – No evidence found at search to suggest payment over and above consideration shown in registration deed – Addition solely on basis of photocopy of agreement between two other persons seized during search of other party – Not justified

44.  Principal CIT vs. Kulwinder
Singh; [2019] 415 ITR 49 (P&H) Date of order: 28th March, 2019;
A.Y.: 2009-10

 

Sections 69B, 132 and 153A of ITA 1961 – Search and seizure – Assessment
– Undisclosed income – Burden of proof is on Revenue – No evidence found at
search to suggest payment over and above consideration shown in registration
deed – Addition solely on basis of photocopy of agreement between two other
persons seized during search of other party – Not justified

 

In the A.Y. 2009-10, the assessee purchased a piece
of land for a consideration of Rs. 1 crore. Search and seizure operations u/s
132 of the Income-tax Act, 1961 were conducted at the premises of the seller
(PISCO) and the assessee. Further, during the course of the search conducted at
the residential premises of the accountant of PISCO, certain documents and an
agreement which showed the rate of the land at Rs. 11.05 crores per acre were
found. Since the land purchased by the assessee was part of the same (parcel
of) land, the AO was of the view that the assessee had understated his
investment in the land. He adopted the rate as shown in the agreement seized
during the search of the third party and made an addition to the income of the
assessee u/s 69B of the Act as undisclosed income.

 

The Commissioner (Appeals) held that the evidence
relied upon by the AO represented a photocopy of an agreement to sell between
two other persons in respect of a different piece of land on a different date,
that the AO had proceeded on an assumption without a finding that the assessee
had invested more than what was recorded in the books of accounts and deleted
the addition. The Tribunal found that the original copy of the agreement was
not seized; that the seller, buyer and the witnesses refused to identify it;
that the assessee was neither a party nor a witness to the agreement and was not
related to either party; that the assessee had purchased the land directly from
PISCO at the prevalent circle rate; and that in the purchase deed of the
assessee the rate was Rs. 4 crores per acre as against the purchase rate of Rs.
11.05 crores mentioned in the agreement seized. The Tribunal held that the
burden to prove understatement of sale consideration was not discharged by the
Department and that the presumption of the AO could not lead to a conclusion of
understatement of investment by the assessee and upheld the order passed by the
Commissioner (Appeals).

 

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

 

‘The Tribunal rightly upheld the findings recorded
by the Commissioner (Appeals). Learned Counsel for the appellant-Revenue has
not been able to point out any error or illegality therein.’

 

 

Section 40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s length price – Meaning of “specified domestic transactions” – Section 92BA applies to transactions between assessee and a person referred to in section 40A(2)(b) – Assessee having substantial interest in company with whom it has transactions – Beneficial ownership of shares does not include indirect shareholding – Amount paid to acquire asset – Not an expenditure covered by section 40A(2)(b)

6.      
HDFC Bank Ltd. vs. ACIT; 410
ITR 247 (Bom): Date of order: 20th December, 2018 A. Y.: 2014-15

 

Section
40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s
length price – Meaning of “specified domestic transactions” – Section 92BA
applies to transactions between assessee and a person referred to in section
40A(2)(b) – Assessee having substantial interest in company with whom it has
transactions – Beneficial ownership of shares does not include indirect
shareholding – Amount paid to acquire asset – Not an expenditure covered by
section 40A(2)(b)

 

By an
order dated 29/12/2016, the Assessing Officer held that three transactions were
specific domestic transactions and referred the case to the Transfer Pricing
Officer for determining arms length price. The three transactions were, loans
of Rs. 5,164 crore purchased by the assessee from the promoters (HDFC) and
loans of Rs. 27.72 crore purchased from the subsidiaries, payment of Rs. 492.50
crore by the assessee to HBL for rendering services and payment of interest of
Rs. 4.41 crore by the assessee to HDB trust. The assessee filed a writ petition
and challenged the order.

 

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

 

“i)   The assessee purchased the
loans of HDFC of more than Rs. 5,000 crore. HDFC admittedly held 16.39% of the
shareholdings in the assessee. If one were to go merely by  this figure of 16.39% then, on a plain
reading of section 40A(2)(b)(iv) read with Explanation (a) thereto, HDFC would
not be a person who would have a substantial interest in the assessee. However,
the Revenue contended that the requirement of Explanation (a) of having more
than 20% of voting power is clearly established in the case because HDFC held
100% of the shareholding  in another
company which in turn held 6.25% of shareholding in the assesee. When one
clubbed the shareholding of HDFC of 16.39% with the shareholding of the other
company of 6.25%( and which was a wholly owned subsidiary of HDFC) the
threshold of 20% as required under Explanation (a) to section 40A(2)(b) was
clearly crossed.

ii)   HDFC on its own was not the
beneficial owner of shares carrying at least 20% of the voting power as
required under Explanation (a) to section 40A(2)(b). The Revenue was incorrect
in trying to club the shareholding of the subsidiary with the shareholding of
HDFC, in the assessee, to cross the threshold of 20% as required in Explanation
(a) to section 40A(2)(b). HDFC did not have a substantial interest in the
assesee, and therefore, was not a person contemplated u/s. 40A(2)(b)(iv) for
the present transaction to fall within the meaning of a specified domestic
transaction as set out in section 92BA(i).

iii)   Moreover the assessee had
purchased the loans of HDFC. This was  a
purchase of an asset.  This transaction
of purchase of loans by the assessee from HDFC would not fall within the
meaning of a specified domestic transaction.

iv)  As far as the second
transaction was concerned, the assessee held 29% of the shares in ADFC. In
turn, ADFC held 94% of the shares in HBL. The assessee held no shares in HBL.
The assessee could not be regarded as having a substantial interest in HBL.

v)   It was not the case of the
Revenue that the assessee was entitled to at least 20% of the profits of the
trust. The trust had been set up exclusively for the welfare of its employees
and there was no question of the assessee being entitled to 20% of the profits
of such trust. This being the case, this transaction clearly would not fall
within 40A(2)(b) read with Explanation (b) thereto to be a specific domestic
transaction as understood and covered by section 92BA(i).

vi)  None of the three
transactions that formed the subject matter of this petition fell within the
meaning of a specified domestic transaction as required u/s. 92BA(i) of the
Income-tax Act. This being the case, the Assessing Officer was clearly in error
in concluding that these transactions were specified domestic transactions and
therefore required to be disclosed by the assessee by filing form 3CEB. He
therefore could not have referred these transactions to the Transfer Pricing
Officer for determining the arms length price.”

 

 

 

Sections 69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice on ground that assessee had made transactions of huge amount in national/multi commodity exchange but he had not filed his return of income and assessee filed an objection that he had earned no income out of trading in commodity exchange and he had actually suffered loss and, therefore, he had not filed return of income. Since, Assessing Officer had not looked into objections raised by assessee and proceeded ahead, impugned reassessment notice was unjustified

5.      
Mohanlal Champalal Jain vs.
ITO; [2019] 102 taxmann.com 293 (Bom): Date of order: 31st January, 2019 A.  Y.: 2011-12

 

Sections
69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice
on ground that assessee had made transactions of huge amount in national/multi
commodity exchange but he had not filed his return of income and assessee filed
an objection that he had earned no income out of trading in commodity exchange
and he had actually suffered loss and, therefore, he had not filed return of
income. Since, Assessing Officer had not looked into objections raised by
assessee and proceeded ahead, impugned reassessment notice was unjustified

 

The
assessee, an individual was engaged in trading in commodity exchange. On the
premise that he had no taxable income, the assessee had not filed return of
income for the relevant assessment year. An information was received by the
Assessing Officer that as per NMS data and its details the assessee had made
transactions of Rs. 18.82 crore in national /multi commodity exchange. Further,
it was seen that the assessee had not filed his return of income. The Assessing
Officer concluded that profit/gain on commodity exchange remained unexplained
and also the source of investment in these transactions remains unexplained.
Therefore, the income chargeable to tax had escaped assessment within the
meaning of provisions of section 147 as no return of income has been filed by
the assessee.

 

The
assessee raised an objection that he had earned no income out of trading in
commodity exchange. He pointed out that the assessee’s sales turnover was Rs.
16.82 crore (rounded off) and he actually suffered a loss of Rs. 1.61 crore.
The Assessing Officer, however, rejected the objections. With respect to the
assessee’s contention of no taxable income, he stated that the same would be
subject to verification and further inquiry.

 

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

 

“i)   The Assessing Officer has
proceeded on wrong premise that even when called upon to state why the
petitioner had not filed return of income, he had not responded to the said
query. The petitioner did communicate to the department that he had no taxable
income and therefore, there was no requirement to file the return. The
Assessing Officer did not carry out any further inquiry before issuing the
impugned notice. In the reasons, one more error pointed out by the petitioner
is that the Assessing Officer referred to the sum of Rs. 18.82 crore as total
transaction in the commodities. In the petition as well as in the objections
raised before the Assessing Officer, the petitioner pointed out that his sales
were to the tune of Rs.16.82 crore against purchases of Rs. 16.84 crore and
thereby, he had actually suffered a loss.

ii)   The Assessing Officer has not
discarded these assertions. Importantly, if the Assessing Officer had access to
the petitioner’s sales in commodities, he could as well have gathered the
information of his purchases. Either on his own or by calling upon the
petitioner to provide such details, the Assessing Officer could and ought to
have verified at least prima facie that the income in the hands of the
petitioner chargeable to tax had escaped assessment. In the present case, what
the Assessing Officer aiming to do so is to carry out fishing inquiry. In fact,
even when the assessee brought such facts and figures to his notice, the
Assessing Officer refused to look into it.

iii)   In the result, the impugned
notice is quashed and set aside.”

Sections 12AA, 147 and 148 – Charitable Trust – Cancellation of registration – Section 12AA amended in 2004 enabling cancellation of registration is not retrospective – Cancellation cannot be made with retrospective effect Reassessment – Notice u/s. 148 consequent to cancellation of registration – No allegation of fraud – Notice not valid

4.      
Auro Lab vs. ITO; 411 ITR
308 (Mad): Date of order: 23rd January, 2019 A. Ys.: 2004-05 to 2007-08

 

Sections 12AA, 147 and 148 – Charitable Trust –
Cancellation of registration –  Section
12AA amended in 2004 enabling cancellation of registration is not retrospective
– Cancellation cannot be made with retrospective effect

 

Reassessment – Notice u/s. 148 consequent to cancellation
of registration – No allegation of fraud – Notice not valid

 

The
assessee, a charitable trust, was granted registration by the Commissioner u/s.
12A of the Income-tax Act, 1961, as it stood prior to the year 1996 with
medical relief as the main object of the trust. The returns of income were
assessed periodically by the Department and assessment orders passed year after
year until the  amendment to section 12AA
was introduced to specifically to empower the proper officer to cancel the
registration granted under the erstwhile section 12A of the Act. Subsequent to
the amendment, by an order dated 30/12/2010, the registration granted to the
assessee was cancelled on the allegation that the assessee failed to fulfil the
conditions required for enjoying the exemption available to the assessee
registered u/s. 12A. The Tribunal upheld the cancellation. Assessee preferred
appeal to the High Court which was pending. In the meanwhile, the Assessing
officer issued notices u/s. 148 of the Act and reopened the assessments for the
A. Ys. 2004-05 to 2007-08. The assessee’s objections were rejected. The
assessee filed writ petitions and challenged the validity of reopening.

 

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

 

“i)   Until 2004, when section 12AA of the
Income-tax act 1961 was amended, there was no power under the Act to the
Commissioner or any other authority to revoke or cancel the registration once
granted to charitable trusts. Later, on June 1, 2010, by the Finance Act, 2010,
section 12AA(3) was further amended to include specifically registration
granted under the erstwhile section 12A of the Act also within the ambit of
revocation or cancellation as contemplated u/s. 2004 amendment.

ii)   The powers of the Commissioner u/s. 12AA are
neither legislative nor executive but are essentially quasi-judicial in nature
and, therefore, section 21 of the General Clauses Act is not applicable to
orders passed by the Commissioner u/s. 12AA. Section 12AA(3) is prospective and
not retrospective in character. The cancellation of registration will take
effect only from the date of the order or notice of cancellation of
registration.

iii)   The cancellation of the registration would
operate only from the date of the cancellation order, that is December 30,
2010. In other words, the exemption u/s. 11 could not be denied to the assessee
for and upto the A. Y. 2010-11 on the sole ground of cancellation of the
certificate of the registration.

iv)  Unless the assessee had obtained registration
by fraud, collusion or concealment of any material fact, the registration
granted could never be alleged to be a nullity. It was evident that fact of the
cancellation of the registration triggered the reassessment proceedings and
evidently formed the preamble of each of the orders. And clearly, there was no
allegation of fraud or misdeclaration on the part of the assessee and the
Department was candid in confessing that the certificate was granted
erroneously. Therefore, reopening the assessment for the past years on account
of  the cancellation order dated December
30, 2010, in the case of the assessee by the Assessing Officer  was not permissible under the law and the
proceedings relating to the A. Ys. 2004-05 to 2007-08 were liable to be
quashed. Also, the assessment order relating to the A. Y. 2010-11 disallowing
exemption on the basis of cancellation order dated December 30, 2010, was
liable to be quashed.”

 

Section 68 – Cash credits – Capital gain or business income – Profits from sale of shares – Genuineness of purchase accepted by Department – Profits from sale cannot be treated as unexplained cash credits – Profit from sale of shares to be taxed as short/long term capital gains

3.      
Principal CIT vs. Ramniwas
Ramjivan Kasat; 410 ITR 540 (Guj):Date of order: 5th June, 2017 A. Y.: 2006-07

 

Section
68 – Cash credits – Capital gain or business income – Profits from sale of
shares – Genuineness of purchase accepted by Department – Profits from sale
cannot be treated as unexplained cash credits – Profit from sale of shares to
be taxed as short/long term capital gains

 

For the A.
Y. 2006-07, the Assessing Officer made additions to the income of the assessee
u/s. 68 of the Income-tax Act, 1961 on the ground that the assessee had sold
certain shares and the purchasers were found to be bogus. The second issue
was  in respect of the treatment of the
income earned by the assesse on the sale of shares. The assesse contended that
the shares were in the nature of his investment and the income earned to be
treated as long term capital gains. The Department contended that looking to
the pattern of holding the shares, the frequency of transactions and other
relevant considerations, the assessee was trading in shares and the income was
to be taxed as business income.

 

The
Commissioner (Appeals) dismissed the appeal filed by the assessee. The Tribunal
found that the purchase of the shares was made during the month of April, 2004
and they were sold in the months of May, June and July, 2005, that the
purchases thus made during the Financial Year 2004-05 had been accepted in the
relevant A. Y. 2005-06 and that in the assessment made u/s. 143(3) r.w.s. 147
the purchases of the shares were accepted as genuine. The Tribunal therefore
held that no additions could have been made u/s. 68 when the shares were in the
later years sold and deleted the addition. On the second issue, the Tribunal
took the relevant facts into consideration and referred to the circular dated
29/02/2016, of the CBDT and held that the income was to be taxed as capital
gains, be it long term or short term, as the case might be, and not as business
income.

 

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

 

“i)   Circular dated 29/02/2016, issued by the CBDT
provides that in respect of listed shares and securities held for a period of
more than 12 months immediately preceeding the date of their transfer, if the assessee
desires to treat the income arising from the transfer thereof as capital gains
that shall not be disputed by the Assessing Officer and the Department shall
not pursue the issue if the necessary ingredients are satisfied, the only rider
being that the stand taken by the assessee in a particular year would be
followed in the subsequent years also and the assessee would not be allowed to
adopt a contrary stand in such subsequent years.

ii)   The circular dated 29/02/2016 applied to the
assessee. The Tribunal was right in deleting the addition made u/s. 68 upon
sale of shares when the Department had accepted the purchases of the shares in
question as genuine and in holding that the share transaction as investment and
directing the Assessing Officer to treat the sum as short/long term capital
gains and not business income.”

 

Bank – Valuation of closing stock – Securities held to maturity – Constitute stock-in-trade – Valuation at lower of cost or market value – Proper – Classification in accordance with Reserve Bank of India guidelines – Not relevant for purposes of income chargeable to tax

2.      
Principal CIT vs. Bank of
Maharashtra; 410 ITR 413 (Bom): Date of order: 27th February, 2018 A. Y.: 2005-06

 

Bank – Valuation
of closing stock – Securities held to maturity – Constitute stock-in-trade –
Valuation at lower of cost or market value – Proper – Classification in
accordance with Reserve Bank of India guidelines – Not relevant for purposes of
income chargeable to tax

 

The
assessee claimed that the held-to-maturity securities constituted
stock-in-trade and were to be valued at cost or market value whichever was
less. The Assessing Officer disallowed the claim on the ground that the
assessee had shown the value at cost for earlier assessment years and therefore
it could not change the valuation. The Commissioner upheld the decision of the
Assessing Officer. The Tribunal held that irrespective of the basis adopted for
valuation in earlier years, the assessee had the option to change the method of
valuation of its closing stock to the lower of cost or market value provided
the change was bonafide and followed regularly thereafter, that the
held-to-maturity securities were held by the assessee as stock-in-trade and that
the receipts therefrom were business income.

 

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

 

“The order
of the Tribunal to the effect that the securities held to maturity were
stock-in-trade and the income on sales had been offered to tax as business
income, was correct. Merely because the Reserve Bank of India guidelines
directed a particular treatment to be given to a particular asset that would
not necessarily hold good for the purposes of income chargeable to tax.”

Section 260A – Appeal to High Court – Power of High Court to condone delay in filing appeal – Delay in filing appeal by Revenue – General principles – No reasonable explanation for delay – Delay cannot be condoned

1.   CIT vs. Lata Mangeshkar
Medical Foundation; 410 ITR 347 (Bom): Date of order: 1st
March, 2018 A. Ys.: 2008-09 and 2009-10

                                         

Section
260A – Appeal to High Court – Power of High Court to condone delay in filing
appeal – Delay in filing appeal by Revenue – General principles – No reasonable
explanation for delay – Delay cannot be condoned

 

Revenue
filed notice of motion for condonation of delay of 318 days in filing appeal.
The Bombay High Court dismissed the notice of motion and held as under:

 

“i)   Section 260A(2A) of the Income-tax Act, 1961
allows the Court to admit an appeal beyond the period of limitation, if it is
satisfied that there was sufficient cause for not filing the appeal in time. It
cannot be accepted that in appeal by the Revenue, the delay has to be condoned,
if large amounts are involved, on payment of costs. Each case for condonation
of delay would have to be decided on the basis of the explanation offered for
the delay, i.e., is it bona fide or not, concocted or not or does it evidence
negligence or not. The object of the law of limitation is to bring certainty
and finality to litigation. This is based on the maxim “interest reipublicae ut
sit finis litium”, i.e., for the general benefit of the community at large,
because the object is every legal remedy must be alive for a legislatively
fixed period of time. Therefore, merely because the respondent does not appear,
it cannot follow that the applicant is bestowed with a right to the delay being
condoned. The officers of the Revenue should be well aware of the statutory
provisions and the period of limitation and should pursue its remedies
diligently.

ii)   There was no proper explanation for the delay
on the part of the applicant. In fact, the affidavit dated 16/09/2017 stated
that, the applicant handed over the papers to his subordinate, i.e., the Deputy
Commissioner. This was also put in as one of the reasons for the delay. This
even though they appeared to be a part of the same office. In any case, the
date on which it was handed over to the Deputy Commissioner was not indicated.
Further, the affidavit dated 16/09/2017 also did not explain the period of time
during which the proposal was pending before the Chief Commissioner of
Income-tax, Delhi for approval. The Chief Commissioner of Income-tax was also
an officer of the Department and there was no explanation offered by the Chief
Commissioner at Delhi or on his behalf, as to why such a long time was taken in
approving the proposal. In fact, there was no attempt to explain it. The
applicant being a senior officer of the Revenue would undoubtedly be conscious
of the fact that the time to file  the
appeal was running against the Revenue and there must be an averment in the application
of the steps he was taking to expedite the approval process. Further, there was
no proper explanation for the delay after having received the approval from the
Chief Commissioner at Delhi on May 29, 2017. No explanation was offered in the
affidavits dated 16/09/2017 and for having filed the appeal on July 20, 2017,
i.e., almost after two months. The delay could not be condoned.”

 

Special Deduction u/s 80-IA – Infrastructure facility – Transferee or contractor approved and recognised by authority and undertaking development of infrastructure facility or operating or maintaining it eligible for deduction – Assessee maintaining and operating railway siding under agreement with principal contractor who had entered into agreement with Railways and recognised by Railways as transferee – Assessee entitled to benefit of special deduction

43. CIT vs. Chettinad Lignite Transport Services Pvt. Ltd.; [2019] 415
ITR 107 (Mad.) Date of order: 12th March, 2019; A.Y.: 2006-07

 

Special Deduction u/s 80-IA – Infrastructure facility – Transferee or
contractor approved and recognised by authority and undertaking development of
infrastructure facility or operating or maintaining it eligible for deduction –
Assessee maintaining and operating railway siding under agreement with principal
contractor who had entered into agreement with Railways and recognised by
Railways as transferee – Assessee entitled to benefit of special deduction


For the A.Y. 2006-07, the AO denied the assessee
the benefit u/s 80-IA of the Income-tax Act, 1961 on the ground that the
assessee itself did not enter into a contract with the Railways or with the
Central Government and did not satisfy the requirement u/s 80-IA(4).

 

The Tribunal found that though the assessee had
only an agreement with the principal contractor who had entered into an
agreement with the Railway authorities to put up rail tracks, sidings, etc.,
the Railways had recognised the assessee as a contractor. The Tribunal held
that impliedly the Department had accepted the fact that the assessee had
provided ‘infrastructure facility’ to the specified authority, to maintain a
rail system by operating and maintaining such infrastructure facility as
defined, and that the assessee performed the contract according to the terms
agreed upon, that the services rendered by the assessee were an integral and
inseparable part of the operation and maintenance of a lignite transport
system, and that the assessee’s claim that it had complied with the requisite
condition specified under the proviso and was entitled to deduction u/s 80-IA
in terms of the proviso to sub-section (4) had to be accepted.

 

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

 

‘i)   The term
“infrastructure facility” has been defined in the Explanation to section 80-IA
and it includes a toll road, a bridge or a rail system, a highway project,
etc., which are big infrastructure facilities for which the enterprises have
entered into a contract with the Central Government or the State Government or
local authority. The proviso to section 80-IA(4) extends the benefit of such
deduction even to a transferee or a contractor who is approved and recognised
by the concerned authority and undertakes the work of development of the
infrastructure facility or only operating and maintaining it. The proviso to
sub-section (4) stipulates that subject to the fulfilment of the conditions,
the transferee will be entitled to such benefit, as if the transfer in question
had not taken place.

ii)    The
Tribunal had rightly applied the proviso to section 80-IA(4) and had held that
the assessee was recognised as a contractor for the railway sidings, which fell
under the definition of “infrastructure facility” and that it was entitled to
the benefit u/s 80-IA. It had also rightly held that the proviso did not
require that there should be a direct agreement between the transferee
enterprise and the specified authority to avail the benefit u/s 80-IA.

iii)   There
was no dispute that the assessee was duly recognised as a transferee or
assignee of the principal contractor and was duly so recognised by the Railways
to operate and maintain the railway sidings in the two railway stations. It has
been found by the AO himself that the assessee under an agreement with the
principal contractor had undertaken the work of development of the railway
sidings and had operated and maintained them.

iv)   The
findings of fact with regard to such position recorded by the Tribunal were
unassailable and that attracted the first proviso to section 80-IA(4). The
grounds on which the assessing authority had denied the benefit to the assessee
ignoring the effect of the proviso to section 80-IA(4) could not be sustained.’

 

 

Search and seizure – Assessment of third person – Sections 132, 132(4) and 153C of ITA, 1961 – Condition precedent – Amendment permitting notice where seized material pertained to assessee as against existing law that required Department to show that seized material belonged to assessee – Amendment applies prospectively – Where search took place prior to date of amendment, Department to prove seized documents belonged to assessee – Statement of search party containing information relating to assessee no document belonging to assessee – AO wrongly assumed jurisdiction u/s 153C

23. Principal
CIT vs. Dreamcity Buildwell P. Ltd.; [2019]
417 ITR 617 (Del.) Date
of order: 9th August, 2019 A.Y.:
2005-06

 

Search
and seizure – Assessment of third person – Sections 132, 132(4) and 153C of
ITA, 1961 – Condition precedent – Amendment permitting notice where seized
material pertained to assessee as against existing law that required Department
to show that seized material belonged to assessee – Amendment applies
prospectively – Where search took place prior to date of amendment, Department
to prove seized documents belonged to assessee – Statement of search party
containing information relating to assessee no document belonging to assessee –
AO wrongly assumed jurisdiction u/s 153C

 

For the
A.Y. 2005-06 the Tribunal set aside the assessment order passed by the AO u/s
153C of the Income-tax Act, 1961 holding that the assumption of jurisdiction
u/s 153C by the AO was not proper. The Tribunal found that two of the documents
referred to, viz., the licence issued to the assessee by the Director, Town and
Country Planning, and the permission granted to the assessee by him for
transferring the licence could not be said to be documents that constituted
incriminating evidence revealing any escapement of income.

 

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

 

‘(i)      Search and the issuance of notice u/s 153C
pertained to the period prior to 1st June, 2015 and section 153C as
it stood at that relevant time applied. The change brought about prospectively
w.e.f. 1st June, 2015 by the amended section 153C(1) did not apply.
Therefore, the onus was on the Department to show that the incriminating material
or documents recovered at the time of search belonged to the assessee. It was
not enough for the Department to show that the documents either pertained to
the assessee or contained information that related to the assessee.

 

(ii)      The Department had relied on three
documents to justify the assumption of jurisdiction u/s 153C against the
assessee. Two of them, viz., the licence issued to the assessee by the
Director, Town and Country Planning, and the letter issued by him permitting
the assessee to transfer such licence, had no relevance for the purpose of
determining escapement of income of the assessee for the A.Y. 2005-06.
Consequently, even if those two documents could be said to have belonged to the
assessee, they were not documents on the basis of which jurisdiction could be
assumed by the A O u/s 153C.

(iii)      The third document, the statement made by
the search party during the search and survey proceedings, was not a document
that “belonged” to the assessee. While it contained information that “related”
to the assessee, it could not be said to be a document that “belonged” to the
assessee. Therefore, the jurisdictional requirement of section 153C as it stood
at the relevant time was not met. No question of law arose.’

Revision – Section 264 of ITA, 1961 – Belated application – Merely because assessee filed application belatedly, revision application could not be rejected without considering cause of delay

 22. Aadil
Ashfaque & Co. (P) Ltd. vs. Principal CIT; [2019]
111 taxmann.com 29 (Mad.) Date
of order: 24th September, 2019 A.Y.:
2007-08

 

Revision
– Section 264 of ITA, 1961 – Belated application – Merely because assessee
filed application belatedly, revision application could not be rejected without
considering cause of delay

The
petitioner filed e-return on 29th October, 2007. Due to inadvertence
and by a mistake committed by an employee of the petitioner company, both the
gross total income and the total income were shown as Rs. 2.74 crores, instead
of total income being Rs. 56.91 lakh. Therefore, the petitioner filed its
revised return on 26th July, 2010 altering only the figures in gross
total income and total income without making any changes with respect to the
other columns and with income computation. While doing so, after five years of
filing the revised return, the petitioner company received a communication
dated 7th August, 2015 stating that there is outstanding tax demand
for the A.Y. 2007-08 of Rs. 87.26 lakhs. The petitioner was not aware of the
intimation issued u/s 143(1) till it was received by him on 23rd
September, 2015.

 

The
petitioner approached the first respondent and filed an application u/s 264 on
6th October, 2015. The same was rejected by the impugned order for
the reason that it was filed beyond the period of limitation.

 

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

 

‘(i)      The petitioner claims that gross total
income shown in the original return filed on 29th October, 2007 as
Rs. 2.74 crores is a factual mistake; and, on the other hand, it is only a sum
of Rs. 56.91 lakh as the sum to be reflected as gross total income in all the
places. In order to rectify such mistake, it is seen that the petitioner has
filed a revised return on 26th July, 2010. By that time, it seems
that the intimation under section 143(1) raising the demand was issued on 20th
October, 2008 itself.

 

(ii)      According to the petitioner, they are not
aware of such intimation. On the other hand, it is contended by the Revenue
that such intimation was readily available in the e-filing portal of the
petitioner. No doubt, the petitioner has approached the first respondent and
filed application u/s. 264 to set right the dispute. However, the fact remains
that such application was filed on 6th October, 2015 with delay. The
first respondent has specifically pointed out that the petitioner has not filed
any application to condone the delay, specifically indicating the reasons for
such delay. It is also seen that the first respondent has chosen to reject the
application only on the ground that it was filed belatedly. Therefore, the ends
of justice would be met if the matter is remitted back to the first respondent
Commissioner for reconsidering the matter afresh if the petitioner is in a
position to satisfy the first respondent that the delay in filing such
application u/s 264 was neither wilful nor intentional.’

Section 80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power – Assessee owning three units and claiming deduction in respect of one (eligible) unit – Losses of earlier years of other two units cannot be notionally brought forward and set off against profits of eligible unit – Unit entitled to deduction u/s. 80-IA to be treated as an independent unitSection 80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power – Assessee owning three units and claiming deduction in respect of one (eligible) unit – Losses of earlier years of other two units cannot be notionally brought forward and set off against profits of eligible unit – Unit entitled to deduction u/s. 80-IA to be treated as an independent unit

20

CIT vs. Bannari Amman Sugars Ltd.;
412 ITR 69 (Mad)

Date of order: 28th
January, 2019

A.Y.: 2004-05

 

Section
80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power –
Assessee owning three units and claiming deduction in respect of one (eligible)
unit – Losses of earlier years of other two units cannot be notionally brought
forward and set off against profits of eligible unit – Unit entitled to
deduction u/s. 80-IA to be treated as an independent unit

 

The
assessee manufactured and sold sugar. It operated three power generation units,
two in Karnataka and one in Tamil Nadu with a capacity of 16, 20 and 20
megawatts, respectively. For the A.Y. 2004-05, the assessee claimed deduction
u/s. 80-IA of the Income-tax Act, 1961 for the first time in respect of its 16
megawatts unit in Karnataka. The A.O. set off the losses suffered by the units
in Karnataka and Tamil Nadu against the profits earned by the eligible unit and
held that the assessee had no positive profits after such set-off and hence no
deduction was liable to be granted u/s. 80-IA.

 

The Tribunal found that independent power purchase
agreements were entered into by the assessee which contained different and
distinct terms and conditions. It held that the provisions of section 80-IA
were attracted only in the case of the specific unit which claimed deduction
and that consolidating the profit and loss of the three units of the assessee
by the lower authorities was untenable.

 

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

 

“i)   Section
80-IA(5) provides that in determining the quantum of deduction u/s. 80-IA, the
eligible business shall be treated as the only source of income of the assessee
during the previous year relevant to the initial assessment year and to every
subsequent assessment year up to and including the assessment year for which
the determination is to be made. Thus, each unit, including a captive power
plant, has to be seen independently as separate and distinct from each other
and as units for the purpose of grant of deduction u/s. 80-IA.

 

ii)   The mere
fact that a consolidated balance sheet and profit and loss account had been
prepared for the entire business would not disentitle the assessee to claim
deduction u/s. 80-IA in respect of only one undertaking of its choice. The
assessee had maintained separate statements and had filed before the
Commissioner (Appeals) detailing separate project cost and source of finance in
respect of each unit. The assessee had exercised its claim before the A.O. for
deduction u/s. 80-IA in respect of only the 16-megawatts unit at Karnataka.
Each unit, including a captive power plant, had to be seen independently as
separate and distinct from each other and as units for the purpose of grant of
deduction u/s. 80-IA.

 

iii)   In the light of the above discussion, the
questions of law are answered in favour of the assessee and against the Revenue
and the tax case (appeal) is dismissed.”

Section 119 – CBDT – Power to issue directions – Any directives by CBDT which give additional incentive for an order that Commissioner (Appeals) may pass having regard to its implication, necessarily transgresses on Commissioner’s exercise of discretionary quasi judicial powers. Interference or controlling of discretion of a statutory authority in exercise of powers from an outside agency or source, may even be superior authority, is wholly impermissible

19

Chamber of Tax Consultants vs. CBDT;
[2019] 104 taxmann.com 397 (Bom)

Date of order: 11th April,
2019

 

Section
119 – CBDT – Power to issue directions – Any directives by CBDT which give
additional incentive for an order that Commissioner (Appeals) may pass having
regard to its implication, necessarily transgresses on Commissioner’s exercise
of discretionary quasi judicial powers. Interference or controlling of
discretion of a statutory authority in exercise of powers from an outside
agency or source, may even be superior authority, is wholly impermissible

 

The
Chamber of Tax Consultants challenged a portion of the Central Action by the
CBDT which provided incentives to Commissioner (Appeals) for passing orders in
certain manner. The Bombay High Court allowed the writ petition and held as
under:

 

“i)   In terms of the provisions contained in
sub-section (1) of section 119, the Board may, from time to time, issue such
orders, instructions and directions to other income tax authorities as it may
deem fit for proper administration of the Act and such authorities shall
observe and follow the orders, instructions and directions of the Board. While
granting such wide powers to the CBDT under sub-section (1) of section 119, the
proviso thereto provides that no such orders, instructions or directions shall
be issued so as to require any income tax authority to make a particular assessment
or to dispose of a particular case in a particular manner.

ii)   When the CBDT guidelines provide greater
weightage for disposal of an appeal by the Appellate Commissioner in a
particular manner, this proviso of sub-section (1) of section 119, would surely
be breached.

 

iii)   Thus, the portion of the Central Action Plan
prepared by CBDT which gives higher weightage for disposal of appeals by
quality orders, i.e., where order passed by Commissioner (Appeals) is in favour
of Revenue, was to be set aside.”

Sections 2(47) and 45(4) – Capital gains – Where retiring partners were paid sums on reconstitution of assessee-partnership firm in proportion to their share in partnership business / asset, no transfer of assets having taken place, no capital gains would arise

18

Principal CIT vs. Electroplast
Engineers; [2019] 104 taxmann.com 444 (Bom)

Date of order: 26th March,
2019

A.Y.: 2010-11

 

Sections
2(47) and 45(4) – Capital gains – Where retiring partners were paid sums on
reconstitution of assessee-partnership firm in proportion to their share in
partnership business / asset, no transfer of assets having taken place, no
capital gains would arise

 

Under a
Deed of Retirement cum Reconstitution of the Partnership, the original two
partners retired from the firm and three new partners redistributed their
share. Goodwill was evaluated and the retiring partners were paid a certain sum
for their share of goodwill in proportion to their share in the partnership.
The assessee-partnership firm filed return of income. The A.O. was of the
opinion that the goodwill credited by the assessee-partnership firm to its
retiring partners was capital gain arising on distribution of the capital asset
by way of dissolution of the firm or otherwise. Thus, the assessee-partnership
firm had to pay short-term capital gain tax in terms of section 45(4) of the
Income-tax Act, 1961.

 

The
Commissioner (Appeals) agreed with the contention of the assessee-partnership
firm that there was neither dissolution of the firm nor was the firm
discontinued. He held that the rights and interests in the assets of the firm
were transferred to the new members and in this manner amounted to transfer of
capital asset. Thus, section 45(4) would apply. The Tribunal held that section
45(4) would apply only in a case where there has been dissolution of the firm
and, thus, the conditions required for applying section 45(4) were not
satisfied.

 

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

 

“i)   As per the provision of section 45(4),
profits or gains arising from transfer of capital asset by way of distribution
of capital asset on dissolution of firm or otherwise shall be chargeable to tax
as income of the firm. For the application of this provision, thus, transfer of
capital asset is necessary.

 

ii)   In the
case of CIT vs. Dynamic Enterprises [2014] 223 Taxman 331/[2013] 40
taxmann.com 318/359 ITR 83, the full bench of the Karnataka High Court
has held that after the retirement of the partners, the partnership continued
and the business was also carried on by the remaining partners. There was,
thus, no dissolution of the firm and there was no distribution of capital
asset. What was given to the retiring partners was money representing the value
of their share in the partnership. No capital asset was transferred on the date
of retirement. In the absence of distribution of capital asset and in the
absence of transfer of capital asset in favour of the retiring partners, no
profit or gain arose in the hands of the partnership firm.

 

iii)   In the instant case, admittedly, there was no
transfer of capital asset upon reconstitution of the firm. All that happened
was that the firm’s assets were evaluated and the retiring partners were paid
their share of the partnership asset. There was clearly no transfer of capital
asset.”

Section 37(1) – Business expenditure – Compensation paid by assessee developer to allottees of flats for surrendering their rights was to be allowed as business expenditure

17

Gopal Das Estates & Housing (P)
Ltd. vs. CIT; [2019] 103 taxmann.com 334 (Delhi)

Date of order: 20th March,
2019

 

Section
37(1) – Business expenditure – Compensation paid by assessee developer to
allottees of flats for surrendering their rights was to be allowed as business
expenditure

 

The
assessee was engaged in the business of construction and sale of commercial
space. The assessee developed a 17-storeyed building known as GDB in New Delhi.
It followed the Completed Contract Method (CCM) as compared to the Percentage
Completion Method (PCM). It booked flats to various persons after receiving
periodical amounts as advance. Some of the allottees of the flats refused to
take them for completion since the New Delhi Municipal Council (NDMC) changed
the usage of the Lower Ground Floor (LGF). The assessee then started
negotiating with the relevant flat buyers and persuaded them to surrender their
ownership and allotment letters. The assessee repaid advance money received
from these flat owners and also paid compensation in lieu of surrender
of their rights in the flats. This expenditure was claimed by the assessee as
‘revenue in nature’ and was charged to the profit and loss account (P&L
Account).

 

The A.O.
observed that the assessee had paid compensation amount ‘once and for all to
repurchase the property’ and this was ‘in fact a sale consideration and could
not be allowed as business expenditure.’ He observed further that flat owners
had shown the amount received from the assessee as capital gains in their books
of account as well as income tax returns after indexation of the cost of
acquisition. Accordingly, the payment of compensation towards ‘repurchase of
the flat’ was disallowed by holding that it was ‘a capital expenditure’. The
said amount was added back to the income of the assessee.

     

The
Commissioner (Appeals) directed that compensation paid to the allottees of the
flats for surrendering the rights therein be allowed as business expenditure of
the assessee. But the Tribunal set aside the order of the Commissioner
(Appeals) and restored the order of the A.O.

 

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

 

“i)   In the instant case, the assessee has a
plausible explanation for making such payment of compensation to protect its
‘business interests.’ While it is true that there was no ‘contractual obligation’
to make the payment, it is plain that the assessee was also looking to build
its own reputation in the real estate market.

 

ii)   Further, the mere fact that the recipients
treated the said payment as ‘capital gains’ in their hands in their returns
would not be relevant in deciding the issue whether the payment by the assessee
should be treated as ‘business expenditure.’ It is the point of view of the
payer which is relevant.

 

iii)   The payment made by the assessee to the
allottees of the flats for surrendering the rights therein should be allowed as
business expenditure of the assessee.”

Section 37(1) and Rule 9A of ITR 1962 – Business expenditure – Where assessee was engaged in business of production and distribution of films, cost of prints as well as publicity and advertisements incurred after production as well as their certification by Censor Board, the same would not be governed by Rule 9A, they would be allowable as business expenditure u/s. 37(1)

16

CIT vs. Dharma Productions Ltd.;
[2019] 104 taxmann.com 211 (Bom)

Date of order: 19th March,
2019

A.Y.s: 2006-07 and 2009-10

 

Section
37(1) and Rule 9A of ITR 1962 – Business expenditure – Where assessee was
engaged in business of production and distribution of films, cost of prints as
well as publicity and advertisements incurred after production as well as their
certification by Censor Board, the same would not be governed by Rule 9A, they
would be allowable as business expenditure u/s. 37(1)

 

The
assessee was engaged in the business of production and distribution of feature
films. The assessee claimed expenditure incurred for positive prints of feature
films and further expenditure on account of advertisements. The A.O. noticed
that these expenditures were incurred by the assessee after issuance of
certificate by the Censor Board and, hence, he disallowed the assessee’s claim
holding that such expenditure was not allowable deduction in terms of Rule 9A
and Rule 9B.

 

The Commissioner (Appeals), confirmed the
disallowance stating that any expenditure which was not allowable under Rule 9A
could not be granted in terms of section 37; thus, he held that the expenditure
on the prints and publicity expenses are neither allowable under Rule 9A nor
u/s. 37. However, 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)   Sub-rule
(1) of rule 9A provides that in computing the profits and gains of the business
of production of feature films, the deduction in respect of the cost of
production of a feature film certified for release by the Board of Film Censors
in a previous year would be allowed in accordance with the provisions of
sub-rule (2) to sub-rule (4).

 

ii)   Clause (ii) of Explanation to sub-rule
(1) explains the term ‘cost of production’ in relation to a feature film as to
mean expenditure incurred for preparation of the film but excluding (a)
expenditure incurred in preparing positive prints, and (b) expenditure
incurred in connection with advertisement of the film after it is certified for
release by the Board of Film Censors. The sub-rules (2) to (4) of rule 9A make
special provisions for deduction in respect of profits and gains of the
business of production of feature films. For example, in terms of sub-rule (2)
of rule 9A, where a feature film is certified for release by the Board of Film
Censors in any previous year and in such previous year, the film producer sells
all rights of exhibition of the film, the entire cost of production of the film
shall be allowed as a deduction in computing the profits and gains of such
previous year. However, if the film producer either himself exhibits the film
on a commercial basis or sells the rights of exhibition of the film in respect
of some of the areas, or he himself exhibits the film in certain areas and sells
the rights in the rest and the film is released for exhibition at least 90 days
before the end of such previous year, the cost of production of the feature
film will be allowed as a deduction in computing the profits and gains of such
previous year. As per sub-rule (3) of rule 9A, if the feature film is not
released for exhibition on a commercial basis at least 90 days before the end
of previous year, a different formula for allowing the cost of production would
apply. These provisions thus make a special scheme for deduction for cost of
production in relation to the business of production of feature films. One
thing to be noted is that no part of the cost of production as defined in
clause (ii) of Explanation to sub-rule (1) is to be denied to the
assessee permanently. It is only to be deferred to the next assessment year
under certain circumstances.

 

iii)   All these provisions would necessarily be
applied in relation to the cost of production of a feature film. In other
words, if a certain expenditure is claimed by the assessee by way of business
expenditure, which does not form part of cost of production of a feature film,
rule 9A would have no applicability. In such a situation, the assessee’s claim
of expenditure would be governed by the provisions of the Act. If the assessee
satisfies the requirements of section 37, there is no reason why such
expenditure should not be allowed as business expenditure. To put it
differently, the expenditure that would be governed by rule 9A of the Rules
would only be that which is in respect of the production of the feature film.

 

iv)  In the instant case, the cost of the print and
the cost of publicity and advertisement (which was incurred after the
production and certification of the film by the Censor Board) are under consideration.
These costs fail to satisfy the description ‘expenditure in respect of cost of
production of feature film’. The term ‘cost of production’ defined for the
purpose of this rule specifically excludes the expenditure for positive print
and cost of advertisement incurred after certification by the Board of Film
Censors. What would, therefore, be governed by the formula provided under rule
9A is the cost of production minus these costs. The Legislature never intended
that those costs which are in the nature of business expenditure but are not
governed by rule 9A due to the definition of cost of production are not to be
granted as business expenditure. In other words, if the cost is cost of
production of the feature film, it would be governed by rule 9A. If it is not,
it would be governed by the provisions of the Act. The Commissioner was,
therefore, wholly wrong in holding that the expenditures in question were
covered under rule 9A and therefore not allowable. The Tribunal was correct in
coming to the conclusion that such expenditure did not fall within the purview
of rule 9A and, therefore, the assessee’s claim of deduction was governed by
section 37.”

Section 37 – Business expenditure – Capital or revenue – Test to be applied – Pre-operative expenditure of new line of business abandoned subsequently – Deductible revenue expenditure

15

Chemplast Sanmar Ltd.
vs. ACIT; 412 ITR 323 (Mad)

Date of order: 7th August,
2018

A.Y.: 2000-01

 

Section
37 – Business expenditure – Capital or revenue – Test to be applied –
Pre-operative expenditure of new line of business abandoned subsequently –
Deductible revenue expenditure

 

The
assessee was engaged in the business of manufacture of polyvinyl chloride,
caustic soda and shipping. For the A.Y. 2000-01, the A.O. disallowed the
expenditure incurred by the assessee on account of a textile project which it
had later abandoned. The A.O. held that the textile project, which the assessee
intended to start, being a totally new project distinguished from the
manufacture of polyvinyl chloride and caustic soda and the business of
shipping, in which the assessee was currently engaged, the entire expenditure
had to be treated as a capital expenditure.

 

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

 

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

 

“i)   The proper test to be applied was not the
nature of the new line of business which was commenced by the assessee, but
unity of control, management and common fund. This issue was never disputed by
the A.O. or the appellate authorities.

 

ii)   The authorities had concurrently held that it
was the assessee who had commenced the business and the assessee would mean the
assessee-company as a whole and not a different entity. Therefore, when there
was commonality of control, management and fund, those would be the decisive
factors to take into consideration and not the new line of business, namely,
the textile business.

 

iii)   Before the Commissioner (Appeals) a specific
ground had been raised stating that the A.O. ought to have appreciated that the
decisive factors for allowance were unity of control, management,
interconnection, interlacing, inter-dependence, common fund, etc., and if the
above factors were fulfilled, then the expenditure should be allowed even if
the project was a new one. The Commissioner (Appeals) did not give any finding
on such a ground raised by the assessee. Therefore, it was incorrect on the
part of the department to contend that such a question was never raised before
the appellate authorities.”

Sections 2(15), 10(20), 11, 251 and 263 – Revision – Powers of Commissioner – No jurisdiction to consider matters considered by CIT(A) in appeal – Claim for exemption rejected by A.O. on ground that assessee is not a local authority u/s. 10(20) – CIT(A) granting exemption – Principle of merger – Commissioner has no jurisdiction to revise original assessment order on ground A.O. did not consider definition in section 2(15)

22

CIT vs. Slum Rehabilitation
Authority; 412 ITR 521 (Bom)

Date of order: 26th March,
2019

A.Y.: 2009-10

 

Sections
2(15), 10(20), 11, 251 and 263 – Revision – Powers of Commissioner – No
jurisdiction to consider matters considered by CIT(A) in appeal – Claim for
exemption rejected by A.O. on ground that assessee is not a local authority
u/s. 10(20) – CIT(A) granting exemption – Principle of merger – Commissioner
has no jurisdiction to revise original assessment order on ground A.O. did not
consider definition in section 2(15)

 

The assessee, the Slum Rehabilitation Authority,
claimed benefit u/s. 11 of the Income-tax Act, 1961. The A.O. disallowed the
claim and held that the assessee was not a local authority within the meaning
of section 10(20) and that in view of the nature of activities carried out by
it and its legal status, its claim could not be allowed. The Commissioner
(Appeals) allowed the assessee’s appeal and granted the benefit of exemption.
The Commissioner in suo motu revision u/s. 263 took the view that the
activities of the assessee could not be considered as for “charitable purpose”
as defined u/s. 2(15) and directed the assessment to be made afresh
accordingly.

 

The Tribunal allowed the appeal filed by the
assessee on the ground of merger as well as on the ground that the order of
assessment was not prejudicial to the interest of the Revenue.

 

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

 

“i)   The
Commissioner in exercise of revisional powers u/s. 263 could not initiate a
fresh inquiry about the same claim made by the assessee on the ground that one
of the aspects of such claim was not considered by the Assessing Officer.

 

ii)   Once
the claim of the assessee for exemption u/s. 11 was before the Commissioner
(Appeals), he had the powers and jurisdiction to examine all the aspects of
such claim. If the Department was of the opinion that the assessment order
could not have been sustained as the assessee did not fall within the ambit of
section 10(20) the ground on which the Assessing Officer had rejected the claim
and the other legal ground of section 2(15), it should have contended before
the Commissioner (Appeals) to reject the assessee’s claim on such legal ground.

iii)    The
Tribunal did not commit any error in setting aside the revision order.”

Section 40A(3) r.w.r. 6DD of ITR 1962 – Business expenditure – Disallowance u/s. 40A(3) – Payments in cash in excess of specified limit – Exceptions u/r. 6DD – Payment to producer of meat – Condition stipulated u/r. 6DD satisfied – Further condition provided in CBDT circular of certification by veterinary doctor cannot be imposed – Payment allowable as deduction

14

Principal CIT vs. GeeSquare Exports;
411 ITR 661 (Bom)

Date of order: 13th March,
2018

A.Y.: 2009-10

 

Section
40A(3) r.w.r. 6DD of ITR 1962 – Business expenditure – Disallowance u/s. 40A(3)
– Payments in cash in excess of specified limit – Exceptions u/r. 6DD – Payment
to producer of meat – Condition stipulated u/r. 6DD satisfied – Further
condition provided in CBDT circular of certification by veterinary doctor
cannot be imposed – Payment allowable as deduction

 

The
assessee exported meat. It purchased raw meat paying cash. Payments made in
cash in excess of Rs. 20,000 were disallowed u/s. 40A(3) of the Income-tax Act,
1961 on the ground that in view of Circular No. 8 of 2006 issued by the CBDT
for failure to comply with the condition for grant of benefit u/r. 6DD of the
Income-tax Rules, 1962 requiring certification from a veterinary doctor that
the person issued the certificate was a producer of meat and slaughtering was
done under his supervision.

 

The
Tribunal allowed the assessee’s appeal. It held that section 40A(3) provided
that no disallowance thereunder should be made if the payment in cash was made
in the manner prescribed u/r. 6DD. The Tribunal held that the payment made to
the producer of meat in cash satisfied such requirement and that neither the
Act nor the Rules provided that the benefit would be available only if further
conditions set out by the CBDT were complied with. The Tribunal further held
that the scope of Rule 6DD could not be restricted or fettered by the circular.

 

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

 

“i)   The assessee having satisfied the
requirements u/r. 6DD could not be subjected to the disallowance of the
deduction of expenditure on purchases in cash of meat u/s. 40A(3).

ii)     The
CBDT circular could not put in new conditions not provided either in the Act or
in the Rules.”

Section 194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) – Assessee sold property – Purchaser deducted TDS amount in terms of section 194-IA on sale consideration – Amount of TDS was not deposited with Revenue by purchaser – As provided u/s. 205, assessee could not be asked to pay same again – It was open to department to make coercive recovery of such unpaid tax from payer whose primary responsibility was to deposit same with government Revenue promptly because, if payer, after deducting tax, fails to deposit it in government Revenue, measures could always be initiated against such payers

13. Pushkar
Prabhat Chandra Jain vs. UOI; [2019] 103 taxmann.com 106 (Bom): Date
of order: 30th January, 2019

 

Section
194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) –
Assessee sold property – Purchaser deducted TDS amount in terms of section
194-IA on sale consideration – Amount of TDS was not deposited with Revenue by
purchaser – As provided u/s. 205, assessee could not be asked to pay same again
– It was open to department to make coercive recovery of such unpaid tax from
payer whose primary responsibility was to deposit same with government Revenue
promptly because, if payer, after deducting tax, fails to deposit it in
government Revenue, measures could always be initiated against such payers

 

The petitioner sold an immovable property for Rs. 9 crore. The
purchasers made a net payment of Rs. 8.91 crore to the petitioner after
deducting tax at source at 1% of the payment in terms of section 194-IA of the
Income-tax Act, 1961. The petitioner filed the return of income and claimed
credit of TDS of Rs. 10.71 lakh. The Income-tax department noticed that only an
amount of Rs. 1.71 lakh was deposited with government Revenue and, thus, gave
the petitioner credit of TDS only to the extent of such sum. In an intimation
issued by the respondent u/s. 143(1), a demand of Rs. 10.36 lakh was raised
against the petitioner. This comprised of the principal tax of Rs. 9 lakh and
interest payable thereon. Subsequently, the return of the petitioner was taken
in limited scrutiny. During the pendency of such scrutiny assessment
proceedings, the Revenue issued a notice to the branch manager of the bank
attaching the bank account of the assessee. A total of Rs. 3.68 lakh came to be
withdrawn by the department from the petitioner’s bank account for recovery of
the unpaid demand.



The
assessee objected to attachment of the bank account on the ground that the
purchasers had deducted the tax at source in terms of section 194-IA. Further,
the petitioner had already offered the entire sale consideration of Rs. 9 crore
to tax in the return filed. The petitioner referred to section 205 and
contended that in a situation like the present case, recovery could be made
only against the deductor-payer. The petitioner could not be asked to pay the
said amount again. However, the respondent did not accept the representation of
the petitioner, upon which the instant petition has been filed.

 

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

 

“i)   The purchasers paid the petitioner only Rs.
8.91 crore retaining Rs. 9 lakh towards TDS. The department does not argue that
this amount of Rs. 9 lakh so deducted is not in tune with the statutory
requirements. It appears undisputed that the deductor did not deposit such
amount in the government Revenue. Under the circumstances, the petitioner is
asked to pay the said sum again, since the department has not recognised this
TDS credit in favour of the petitioner.

ii)   Section 205 carries the caption ‘Bar against
direct demand on assessee’. The section provides that where tax is deducted at
the source under the provisions of Chapter XVII, the assessee shall not be
called upon to pay the tax himself to the extent to which tax has been deducted
from that income.

iii)   The situation arising in the present petition
is that the department does not contend that the petitioner did not suffer
deduction of tax at source at the hands of payer, but contends that the same
has not been deposited with the government/Revenue. As provided u/s. 205 and in
the circumstances of the instant case, the petitioner cannot be asked to pay
the same again. It is always open for the department, and in fact the Act
contains sufficient provisions, to make coercive recovery of such unpaid tax
from the payer whose primary responsibility is to deposit the same with the government
Revenue scrupulously and promptly. If the payer after deducting the tax fails
to deposit it in the government Revenue, measures can always be initiated
against such payers.

iv)  The Revenue is correct in pointing out that
for long after issuing notice u/s. 226(3), the petitioner has not brought this
fact to the notice of the Revenue which led the Revenue to make recoveries from
the bank account of the petitioner. In that view of the matter, at the best the
petitioner may not be entitled to claim interest on the amount to be refunded.

v)   Under the circumstances, the respondents
should lift the bank account attachment. Further, the respondent should refund
a sum of Rs. 3.68 lakhs to the assessee.”

 

 

Sections 245 and 245D – Settlement Commission – Procedure on application u/s. 245C (Opportunity of hearing) – Section 245D(2C) does not contemplate affording an opportunity of hearing to Commissioner (DR) at time of considering application for settlement for admission and, at best, Commissioner (DR) may be heard to deal with any submissions made by assessee, if called upon by Settlement Commission; however, under no circumstances can Commissioner (DR) be permitted to raise objections against admission of application at threshold and to make submissions other than on basis of report submitted by Principal Commissioner – Since, in instant case, Settlement Commission had first heard objections raised by Commissioner (DR) against admission of application for settlement based on material other than report of Principal Commissioner and thereafter had afforded an opportunity of hearing to assessee to deal with objections raised by Commissioner (DR) and had thereafter proceeded to declare appl

12. Akshar
Developers vs. IT Settlement Commission; [2019] 103 taxmann.com 76 (Guj): Date
of order: 4th February, 2019

 

Sections
245 and 245D – Settlement Commission – Procedure on application u/s. 245C
(Opportunity of hearing) – Section 245D(2C) does not contemplate affording an
opportunity of hearing to Commissioner (DR) at time of considering application
for settlement for admission and, at best, Commissioner (DR) may be heard to
deal with any submissions made by assessee, if called upon by Settlement
Commission; however, under no circumstances can Commissioner (DR) be permitted
to raise objections against admission of application at threshold and to make
submissions other than on basis of report submitted by Principal Commissioner –
Since, in instant case, Settlement Commission had first heard objections raised
by Commissioner (DR) against admission of application for settlement based on
material other than report of Principal Commissioner and thereafter had
afforded an opportunity of hearing to assessee to deal with objections raised
by Commissioner (DR) and had thereafter proceeded to declare application
invalid based on material pointed out by Commissioner (DR), Settlement
Commission had clearly violated provisions of section 245D(2C) by providing an
opportunity of hearing to Commissioner (DR) to object to admission of application
instead of rendering a decision on the basis of report of Principal
Commissioner as contemplated under said
sub-section

 

A raid
came to be carried out in the case of the assessee u/s. 132 of the Income-tax
Act, 1961 and some documents came to be seized. The assessee preferred
application u/s. 245(C)(1). The form was filled by the assessee along with
which the statement of particulars of issues to be settled, as well as the
statement showing full and true disclosure came to be submitted. The matter came
up for the purpose of admission and the Settlement Commission admitted the
application u/s. 245(D)(1). Thereafter, the Principal Commissioner submitted a
report u/s. 245D(2B). The assessee filed a rejoinder to the above report u/s.
245D(2B) meeting with the objections raised by the Principal Commissioner. The
matter was heard for the purposes of decision u/s. 245D(2C). The Commissioner
(DR) had raised objection based on several materials other than the report of
the Principal Commissioner, whereupon the Settlement Commission passed an
adverse order u/s. 245D(2C) rejecting the application of the assessee.

 

The
assessee filed a writ petition and challenged the order. The assessee contended
that the Settlement Commission, instead of passing the order on the basis of
the report of the Principal Commissioner as clearly laid down in section
245D(2C), had passed the order on the basis of what was not in the report,
which rendered such order bad in law. It was not open for the Commissioner (DR)
to raise objections and the Commissioner had gone beyond what his superior
Principal Commissioner had stated in the report, and if there was any
objection, it was for the Principal Commissioner to take such objection in the
report. There was grave error on the part of the Settlement Commission
permitting the Commissioner (DR) to raise objections to the admission of the
application and more so in permitting him to go beyond the report.

 

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

 

“i)   After amendment, section 245D
contemplates three stages for dealing with an application made u/s. 245C(1).
The scheme of admission of a case has been completely altered with effect from
01.06.2007 and now there are two stages for admission of the application. The
third stage is for deciding the application. In the first stage, on receipt of
an application u/s. 245C, the Settlement Commission is mandated to issue a
notice to the applicant within seven days from the date of receipt of the
application, requiring him to explain as to why the application made by him be
allowed to be proceeded with, and on hearing the applicant, the Settlement
Commission is further mandated to either reject the application or allow the
application to be proceeded with by an order in writing, within a period of
fourteen days from the date of the application. The proviso thereto provides
that where no order has been passed within the aforesaid period by the
Settlement Commission, the application shall be deemed to have been allowed to
be proceeded with. Thus, at the first stage, no report or communication from
the department is required for the Settlement Commission to decide whether or
not to allow an application to be proceeded with.

ii)   Thus, the Principal Commissioner has not
stated in the report that there is no full and true disclosure by the assessee,
but has raised certain doubts about the adequacy of the disclosure and has
reserved the right to comment at a later stage of the application on the basis
of the material seized.

iii)   The Settlement Commission in the impugned
order has recorded that the Commissioner (DR) has objected to the admission of
the settlement applications for the reason that the applicants have not made
full and true disclosure in the petitions. In the opinion of this court,
section 245D(2C) does not contemplate any such objection being raised by the
Commissioner (DR). Section 245D(2C) contemplates hearing to the applicant only
in case the Settlement Commission is inclined to declare the application
invalid. In case the report does not say that there is no full and true
disclosure and the Settlement Commission is inclined to accept such report, it
is not even required to hear the applicant. Therefore, when the sub-section
which requires an opportunity of being heard to be given to the applicant only
if the application is to be declared invalid, the question of Principal
Commissioner or Commissioner raising any objection to the application at this
stage, does not arise.

iv)  A perusal of the impugned order reveals that
the Settlement Commission has first heard the objections raised by the
Commissioner (DR) to the admission of the applications based on material other
than the report, and thereafter has afforded an opportunity of hearing to the
applicants to deal with the objections raised by the Commissioner (DR) and has
thereafter proceeded to declare the application invalid based on the material
pointed out by the Commissioner (DR) from the seized material. On a plain
reading of section 245D(2C) it is evident that it contemplates passing of order
by the Settlement Commission on the basis of the report of the Principal
Commissioner or Commissioner. Therefore, the scope of hearing would be limited
to the contents of the report. The applicant would, therefore, at this stage be
prepared to deal with the contents of the report and if any submission is made
outside the report, it may not be possible for the applicant to deal with the
same. On behalf of the respondents it has been contended that the Commissioner
(DR) has not relied upon any extraneous material and that the arguments are
made on the basis of the seized material and the evidence on record. In the
opinion of this Court, insofar as the record of the case and other material on
record is concerned, consideration of the same is contemplated at the third
stage of the proceedings u/s. 245D(4) and not at the stage of s/s. (2C).

v)   Sub-section (2C) of section 245D contemplates
a report by the Principal Commissioner/Commissioner and consideration of such
report by the Settlement Commission and affording an opportunity of hearing to
the applicant before declaring the application to be invalid. The sub-section
does not contemplate an incomplete report which can be supplemented at the time
of hearing. While the sub-section does not contemplate hearing the Principal
Commissioner or Commissioner at the stage of section 245D (2C), at best,
requirement of such hearing can be read into the said sub-section for the purpose
of giving an opportunity to the Commissioner (DR) to deal with the submissions
of the applicant in case the Settlement Commission hears the applicant. But the
sub-section does not contemplate giving an opportunity to the Commissioner (DR)
to raise any objection to the admission of the application and hearing him to
supplement the contents of the report. The report has to be considered as it is
and it is on the basis of the report that the Settlement Commission is required
to pass an order one way or the other at the stage of section 245D(2C). Going
beyond the report at a stage when the order is to be passed on the basis of the
report, would also amount to a breach of the principles of natural justice.
Moreover, no grave prejudice is caused to the Revenue if the application is
admitted and permitted to be proceeded with inasmuch as in the third stage, the
entire record and all material including any additional report of investigation
or inquiry if called for by the Settlement Commission would be considered and
the Principal Commissioner or Commissioner would be granted an opportunity of
hearing.

vi)  The Settlement Commission was, therefore, not
justified in permitting the Principal Commissioner to supplement the report
submitted by the Commissioner by way of oral submissions which were beyond the
contents of the report. At best, if the applicant had made submissions in
respect of the report, the Commissioner may have been permitted to deal with
the same, but under no circumstances could the Commissioner be permitted to
raise objection to the admission of the application and be heard before the
assessee and that, too, to supplement an incomplete report on the basis of the
material and evidences on record. As already discussed hereinabove, any hearing
based upon the material and evidences on record is contemplated at the stage of
section 245D(4), and insofar as sub-section (2C) of section 245D is concerned,
the same contemplates a decision solely on the basis of the report of the
Commissioner.

vii)  Section 245D(2C) does not contemplate
affording an opportunity of hearing to the Commissioner (DR), and at best, the
Commissioner (DR) may be heard to deal with any submissions made by the
assessee, if called upon by the Settlement Commission. However, under no circumstances
can the Commissioner (DR) be permitted to raise objections against the
admission of the application at the threshold and to make submissions on the
basis of material on record to supplement the report submitted by the Principal
Commissioner in the manner as had been done in this case.

viii) In the light of the above discussion, the
impugned order passed by the Settlement Commission being in breach of the
provisions of section 245D(2C) and also being in breach of the principles of
natural justice inasmuch as at the stage of section 245D(2C), the Settlement
Commission has placed reliance upon material other than the report, cannot be
sustained. The impugned order passed by the Settlement Commission is hereby
quashed and set aside.”

Sections 147 and 148 – Reassessment – Notice after four years – Validity – Transfer of assets to subsidiary company and subsequent transfer by subsidiary company to third party – Transaction disclosed and accepted during original assessment – Notice after four years on ground that transaction was not genuine – Notice not valid

10. Bharti
Infratel Ltd. vs. Dy. CIT; 411 ITR 403 (Delhi): Date
of order: 15th January, 2019 A.Y.:
2008-09

 

Sections
147 and 148 – Reassessment – Notice after four years – Validity – Transfer of
assets to subsidiary company and subsequent transfer by subsidiary company to
third party – Transaction disclosed and accepted during original assessment –
Notice after four years on ground that transaction was not genuine – Notice not
valid

 

BAL
transferred telecommunications infrastructure assets worth Rs. 5,739.60 crores
to the assessee, its subsidiary (BIL), on 31.01.2008 for Nil consideration
under a scheme of arrangement approved by the Delhi High Court. According to
the scheme of arrangement, BIL revalued the assets to Rs. 8,218.12 crore on the
assets side of the balance sheet for the year ending 31.03.2008. Within 15 days
of the approval of the scheme of arrangement, a shareholders’ agreement on
08.12.2007 was entered into by BIL whereby the passive infrastructure was
transferred by it to a third party, namely, I. The return for the A.Y. 2008-09
was taken up for scrutiny assessment by notices u/s. 143(2) and 142 of the
Income-tax Act, 1961. Questionnaires were issued to which BIL responded
furnishing details and documents. Assessment was made. Thereafter, reassessment
proceedings were initiated and notice u/s. 148 issued on 01.04.2015.

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

 

“i)   Explanation 1 to section 147 would not apply
as all the primary facts were disclosed, stated and were known and in the
knowledge of the Assessing Officer. This would be a case of ‘change of opinion’
as the assessee had disclosed and had brought on record all facts relating to
transfer of the passive infrastructure assets, their book value and fair market
value were mentioned in the scheme of arrangement, as also that the transferred
passive assets became property of I including the dates of transfer and the
factum that one-step subsidiary BIV was created for the purpose.

ii)   These facts were within the knowledge of the
Assessing Officer when he passed the original assessment order for A.Y.
2008-09. The notice of reassessment was not valid.”

 

 

Section 4 of ITA, 1961 – Income – Capital or revenue – Sale of shares upon open offer letter – Additional consideration paid in terms of letter of open offer due to delay in making offer and dispatch of letter of offer – Additional consideration part of share price of original transaction not penal interest for delayed payment – Additional consideration was capital receipt

26 CIT vs. Morgan Stanley
Mauritius Co. Ltd.; 41 ITR 332 (Bom) Date of order: 19th
March, 2019

 

Section 4 of ITA, 1961 – Income – Capital or revenue –
Sale of shares upon open offer letter – Additional consideration paid in terms
of letter of open offer due to delay in making offer and dispatch of letter of
offer – Additional consideration part of share price of original transaction
not penal interest for delayed payment – Additional consideration was capital
receipt

 

An
open offer was made by Oracle to the shareholders of I-flex at the price of Rs.
1,475 per share. The letter of open offer stated that additional consideration
per share would be paid due to delay in making the open offer and dispatch of
the letter of offer based on the time-line prescribed by the Securities and
Exchange Board of India. The consideration was revised to Rs. 2,084 per share
and the additional consideration for delay was revised to Rs. 16 per share. In
response to the open offer, the assessee tendered its holding of 13,97,879
shares in I-flex and received Rs. 2,89,77,45,900, which included additional
consideration of Rs. 2.20 crores. The Department contended that the additional
sum received was a revenue receipt and taxable in the hands of the assessee.

 

The
Tribunal held that the additional consideration received was for delayed
payment of principal and that it was part of the original consideration and
hence not taxable.

 

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

 

“i)   The additional amount received by the
assessee was part of the offer from the sale of shares made by it. The reason
to have increased the sum per share by the company Oracle to the shareholders
of I-flex might be on account of delay of issuance of the shares, but it was
part of the sale price of the share. The revised offer which the company
announced for issuance of the shares included the additional component of the
increased sum per share and was embedded in the share price. This component
could not be treated as interest on delayed payment on price of the share.

 

ii)   The additional sum was part of the sale price
and retained the same character as the original price of the share. The
additional receipt of the assessee relatable to this component was a capital
receipt.”

Section 80-IB(10) of ITA, 1961 – Housing project – Special deduction u/s. 80-IB(10) – No condition in section as it stood at relevant time restricting allotment of more than one unit to members of same family – Allottees later removing partitions and combining two flats into one – No breach of condition that each unit should not be of more than 1,000 sq. ft. – Assessee entitled to deduction

25  Prinipal CIT vs. Kores India Ltd.; 414 ITR 47 (Bom) Date of order: 24th
April, 2019 A.Y.: 2009-10

 

Section 80-IB(10) of ITA, 1961 – Housing project –
Special deduction u/s. 80-IB(10) – No condition in section as it stood at
relevant time restricting allotment of more than one unit to members of same
family – Allottees later removing partitions and combining two flats into one –
No breach of condition that each unit should not be of more than 1,000 sq. ft.
– Assessee entitled to deduction

 

The
assessee was engaged in the business of constructing residential houses. He
constructed residential houses of less than 1,000 sq. ft. and claimed deduction
u/s. 80-IB(10) of the Income-tax Act, 1961. The AO rejected the claim on the
ground that the assessee has breached the condition of 1,000 sq. ft. per flat
as several units adjacent to each other were allotted to members of the same
family.

 

The
Tribunal allowed the claim.

 

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

 

“i)   At the relevant time when the housing project
was constructed and the residential units were sold, there was no condition in
section 80-IB(10) restricting the allotment of more than one unit to the
members of the same family. The assessee was therefore free to have allotted
more than one unit to members of the same family.

 

ii)   According to the materials on record, after
such units were sold under different agreements, the allottees had desired that
the partition wall between the two units be removed. It was the decision of the
members to remove the walls and not a case where the assessee had, from the
beginning, combined two residential units and allotted such larger unit to one
member.

 

iii)   The order of the Tribunal rejecting the
objections raised by the Department was not erroneous. No question of law
arose.”

 

Section 10(23C)(iiiab) of ITA, 1961 – Educational institution – Exemption u/s. 10(23C)(iiiab) – Condition precedent – Assessee must be wholly or substantially financed by Government – Meaning of “substantially financed” – Subsequent amendment to effect that if grants constitute more than specified percentage of receipts, assessee will be deemed “substantially financed” by Government – Can be taken as indicative of Legislative intent – Assessee receiving grant from Government in excess of 50% of its total receipts – Assessee entitled to benefit of exemption for years even prior to amendment

24  DIT (Exemption) vs. Tata Institute of Social Sciences; 413 ITR 305
(Bom) Date of order: 26th
March, 2019 A.Y.s: 2004-05, 2006-07 and
2007-08

 

Section 10(23C)(iiiab) of ITA, 1961 – Educational
institution – Exemption u/s. 10(23C)(iiiab) – Condition precedent – Assessee
must be wholly or substantially financed by Government – Meaning of
“substantially financed” – Subsequent amendment to effect that if grants
constitute more than specified percentage of receipts, assessee will be deemed
“substantially financed” by Government – Can be taken as indicative of
Legislative intent – Assessee receiving grant from Government in excess of 50%
of its total receipts – Assessee entitled to benefit of exemption for years
even prior to amendment

 

The
assessee was a trust registered u/s. 12A of the Income-tax Act, 1961. For the
A.Y.s 2004-05, 2006-07 and 2007-08, it sought exemption u/s. 10(23C)(iiiab) on
the ground that it was substantially financed by the government. It was
submitted by the assessee before the AO that it was an institution solely for
educational purposes and that the grants received from the government were in
excess of 50% of the total expenditure incurred and the total receipts during
the years. The AO denied the benefit u/s. 10(23C)(iiiab) on the grounds that
the assessee was not substantially financed by the government and that the
grant received was less than 75% of the total expenditure. He referred to
section 14 of the Controller and Auditor General (Duties, Powers and Conditions
of Service) Act, 1971 and applied the measure of 75%.

 

The
Commissioner (Appeals) held that the 1971 Act was not applicable in the absence
of any reference to it and allowed the assessee’s appeal. The Tribunal found
that the grant from the government was approximately 56% of the total receipts
and upheld the order of the Commissioner (Appeals).

 

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

 

“i)   Subsequent legislation might be looked at in
order to see what was the proper interpretation to be put upon the earlier
legislation, where the earlier Act was obscure or ambiguous or readily capable
of more than one interpretation. The same principle would apply to an amendment
made to an Act to understand the meaning of an ambiguous provision, even when
the amendment was not held to be retrospective. The Explanation to section
10(23C)(iiiab) inserted w.e.f. 1st April, 2015 which provides that
where the grant from the government was in excess of 50% of the assessee’s
total receipts, it would be treated as substantially financed by the
government, could be taken as the exposition of Parliamentary intent of the
unamended section 10(23C)(iiiab). The assessee was entitled to the benefits of
exemption u/s. 10(23C)(iiiab) for the assessment years prior to the
introduction of the Explanation.

 

ii)   The vagueness attributable to the meaning of
the words ‘substantially financed’ was removed by the addition of the
Explanation to section 10(23C)(iiiab) read with rule 2BBB of the Income-tax
Rules, 1962. The Explanation to section 10(23C)(iiiab) was introduced by the Finance
(No. 2) Act, 2014 w.e.f. 1st April, 2015 to clarify the meaning of
the words ‘substantially financed by the government’. It stated that the grant
of the government should be in excess of the prescribed receipts in the context
of total receipts (including voluntary donations). Rule 2BBB provided that the
government grant should be 50% of the total receipts. The assessee admittedly
satisfied the test of ‘substantially financed’ for the A.Y.s. 2006-07 and
2007-08 as the AO had recorded a finding in his order which was not disputed.
If the Explanation was to be read retrospectively, the orders of the
authorities would be required to measure the satisfaction of the words
‘substantially financed’ in terms of Explanation, i.e., qua total
receipts and not qua total expenditure.”

Sections 37 and 43B of ITA 1961 – Business expenditure – Deduction only on actual payment – Nomination charges levied by State Government emanating from a contract of lease – Not statutory liability falling under “tax, duty, cess or fee” by whatever name called in section 43B – Provision for allowance on actual payment basis not applicable

23 Tamil Nadu Minerals Ltd. vs. JCIT; 414 ITR 196
(Mad) Date of order: 22nd
April, 2019 A.Y.: 2004-05

 

Sections 37 and 43B of ITA 1961 – Business expenditure
– Deduction only on actual payment – Nomination charges levied by State
Government emanating from a contract of lease – Not statutory liability falling
under “tax, duty, cess or fee” by whatever name called in section 43B –
Provision for allowance on actual payment basis not applicable

 

The
assessee was a State Government undertaking engaged in mining, quarrying,
manufacture and sale of granite blocks from the mines leased out to it by the
State. For the A.Y. 2004-05, the Assessing Officer (AO) disallowed u/s. 43B of
the Income-tax Act, 1961 the sum paid by the assessee as nomination charges at
the rate of 10% of the turnover to the State Government on the ground that the
payment was not made within the stipulated time allowed to file the return.

 

The
Commissioner (Appeals) and the Tribunal upheld the AO’s order.

 

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

 

“i)   The object and parameters of section 43B are
defined and do not permit transgression of ‘other levies’ made by the State
Government in the realm of contractual laws to enter the specified zone of
impost specified in it.

 

ii)   The nomination charges specified and
prescribed by the State Government through various orders were none of the four
imposts, namely, tax, duty, cess or fees, specified u/s. 43B, which had to be
paid on time. It was only a contractual payment of lease rental specified by
the State Government being the lessor for which both the lessor and the lessee
had agreed at a prior point of time to fix and pay such prescription of
nomination charges. A mere reference to rule 8C(7) of the Tamil Nadu Minor
Minerals Concession Rule, 1959 did not make it a statutory levy, in the realm
of ‘tax, duty, cess or fees’. The reasons assigned by the authorities below on an
incorrect interpretation for application of section 43B made to the levy in
question were not sustainable.

 

iii)   Since section 43B did not apply to the
payments of ‘nomination charges’ the question of applying the rigour of payment
within the time schedule would not decide the allowability or otherwise of such
payment under the section, which would then depend upon the method of
accounting followed by the assessee; and if the assessee had made a provision
for the payment in its books of accounts and had claimed it as accrued
liability in the assessment year in question, it was entitled to the deduction
in the assessment year in question without any application of section 43B.”

Section 80-IA(2A) of ITA, 1961 – Telecommunication services – Deduction u/s. 80-IA(2A) – Scope – Payment by third parties for availing of telecommunication services of assessee – Late fees and reimbursement of cheque dishonour charges received from such third parties – Income eligible for deduction u/s. 80-IA(2A)

30  Principal CIT vs. Vodafone Mobile Services Ltd.; 414 ITR 276 (Del) Date of order: 3rd
December, 2018 A.Y.: 2008-09

 

Section 80-IA(2A) of ITA, 1961 – Telecommunication
services – Deduction u/s. 80-IA(2A) – Scope – Payment by third parties for
availing of telecommunication services of assessee – Late fees and
reimbursement of cheque dishonour charges received from such third parties –
Income eligible for deduction u/s. 80-IA(2A)

 

The
assessee was engaged in the business of providing telecommunication services.
For the A.Y. 2008-09, the AO denied the benefit of section 80-IA(2A) of the
Income-tax Act, 1961 on the profits and gains earned by the assessee from
sharing of infrastructure facilities in the form of cell-sites and fibre cable
with other companies or undertakings engaged in “telecommunication services”.
This, he held, would amount to leasing of the assets to third parties and
income from the leasing would not be income derived from “telecommunication
services”. The assessee had also paid bank charges as cheques issued by some of
the customers had been dishonoured. These charges were also levied to the
customers but the entire amount could not be recovered. The AO held that late
payment charges or cheque dishonour charges were in the nature of penalty and
not income derived from telecommunication business and hence not eligible for
deduction u/s. 80-IA(2A).

 

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

 

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

 

“i)   The finding of
the Assessing Officer that income from sharing fibre cables and cell-sites was
income by way of leasing and hence not includible in revenue earned for
computing profits from ‘telecommunication service’ was far-fetched and
misconceived. The assets, i.e., cell-sites and fibre cables, were not
transferred. Third parties wanting to avail of the spare capacity were only allowed
usage of the facilities for consideration. Payments so made by the third
parties were to avail of and use the telecommunication infrastructure. They
would qualify as payments received for availing of ‘telecommunication
services’. The income from sharing of fibre cables and cell-sites qualified for
deduction u/s. 80-IA(2A).

 

ii)   The Tribunal was also justified in upholding
the reasoning and order of the Commissioner (Appeals) on cheque dishonour and
late payment charges.”

Sections 147, 148,159 and 292B of ITA, 1961 – Reassessment – Valid notice – Notice issued in name of dead person – Effect of sections 159 and 292B – Objection to notice by legal representative – Notice not valid

29  Chandreshbhai Jayantibhai Patel vs. ITO.; 413 ITR 276 (Guj) Date of order: 10th
December, 2018 A.Y.: 2011-12

 

Sections 147, 148,159 and 292B of ITA, 1961 –
Reassessment – Valid notice – Notice issued in name of dead person – Effect of
sections 159 and 292B – Objection to notice by legal representative – Notice
not valid

 

The
petitioner is the son of the late Mr. Jayantibhai Harilal Patel who passed away
on 24th June, 2015. The AO issued notice u/s. 148 of the Income-tax
Act, 1961 dated 28th March, 2018 in the name of the deceased for
reopening the assessment for the A.Y. 2011-12. In response to the said notice,
the petitioner vide communication dated 27th April, 2018 objected to the
initiation of reassessment proceedings and informed that his father had passed
away on 24th June, 2015 and urged the AO to drop the reassessment
proceedings. The petitioner maintained the objections in the subsequent
proceedings. By an order dated 14th August, 2018, the AO rejected
the objections and held that in the absence of knowledge about the death of the
petitioner’s father, it cannot be said that the notice of reassessment is bad
in law and that the reassessment proceedings may be carried out in the name of
the legal heirs of the late father of the petitioner. Being aggrieved, the petitioner
filed a writ petition before the High Court and challenged the order.

 

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

 

“i)   A notice u/s. 148 is a jurisdictional notice
and existence of a valid notice u/s. 148 is a condition precedent for exercise
of jurisdiction by the Assessing Officer to assess or reassess u/s. 147.

 

ii)   Clause (b) of sub-section (2) of section 159
of the Act provides that any proceeding which could have been taken against the
deceased if he had survived may be taken against the legal representative.
Section 292B, inter alia, provides that no notice issued in pursuance of
any of the provisions of the Act shall be invalid or shall be deemed to be
invalid merely by reason of any mistake, defect or omission in such notice if
such notice, summons is in substance and effect in conformity with or according
to the intent and purpose of the Act.

 

iii)   A notice issued u/s. 148 of the Act against a
dead person is invalid, unless the legal representative submits to the jurisdiction
of the Assessing Officer without raising any objection. Therefore, where the
legal representative does not waive his right to a notice u/s. 148, it cannot
be said that the notice issued against the dead person is in conformity with or
according to the intent and purpose of the Act which requires issuance of
notice to the assessee, whereupon the Assessing Officer assumes jurisdiction
u/s. 147 of the Act and consequently, the provisions of section 292B of the Act
would not be attracted.

 

iv)  The case fell within the ambit of section
159(2)(b) of the Act. The notice u/s. 148, which was a jurisdictional notice,
had been issued to a dead person. Upon receipt of such notice, the legal
representative had raised an objection to the validity of such notice and had
not complied with it. The legal representative not having waived the
requirement of notice u/s. 148 and not having submitted to the jurisdiction of
the Assessing Officer pursuant to the notice, the provisions of section 292B of
the Act would not be attracted and hence, the notice u/s. 148 of the Act had to
be treated as invalid.”

Section 115JB of ITA, 1961 – MAT (Banking Companies – Provisions of section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012 would not be applicable to a banking company governed by provisions of Banking Regulation Act, 1949

28  CIT vs. Union Bank of India; [2019] 105 taxmann.com 253 (Bom) Date of order: 16th
April, 2019 A.Y.: 2005-06

 

Section 115JB of ITA, 1961 – MAT
(Banking Companies – Provisions of section 115JB as it stood prior to its
amendment by virtue of Finance Act, 2012 would not be applicable to a banking
company governed by provisions of Banking Regulation Act, 1949

 

The
assessee bank filed its return for the A.Y. 2005-06 declaring certain taxable
income. The AO completed assessment u/s. 143(3) of the Income-tax Act, 1961. He
also computed the book profits u/s. 115JB for determining the assessee’s tax
liability.

 

The
Tribunal held that the provisions of section 115JB were not applicable to the
assessee bank.

 

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

 

“i)   The question
that calls for consideration is whether the machinery provision provided under
sub-section (2) of section 115JB is workable when it comes to the banking
companies and such other special companies governed by the respective Acts. In
this context, the question would also be of the legislative intent to cover
such companies within the sweep of section 115JB of the Act. These questions
arise because of the language used in sub-section (2) of section 115JB. As per
sub-section (2) of section 115JB, every assessee being a company would for the
purposes of the said section prepare its profit and loss account for the
relevant previous year in accordance with the provisions of Parts II and III of
Schedule VI of the Companies Act, 1956. It is undisputed that the assessee a
banking company is not required to prepare its accounts in accordance with the
provisions of Parts II and III of Schedule VI of the Companies Act, 1956. The
accounts of the banking company are prepared as per the provisions contained in
the Banking Regulation Act, 1949. The Department may still argue that
irrespective of such requirements, for the purposes of the said Act and special
requirements of section 115JB, a banking company is obliged to prepare its
profit and loss account as per the provisions of the Companies Act, as mandated
by sub-section (2) of section 115JB of the Act. The assessee’s contention would
be that such legislative mandate is not permissible.

 

ii)   This legal dichotomy emerging from the
provisions of sub-section (2) of section 115JB particularly having regard to
the first proviso contained therein in case of a banking company, would
convince the Court that machinery provision provided in sub-section (2) of
section 115JB of the Act would be rendered wholly unworkable in such a
situation.

 

iii)   For the completeness of the discussion, one
may note that section 211 of the Companies Act, 1956 pertains to form of
contents of balance sheet and profit and loss account, sub-section (1) of
section 211 provided that every balance sheet of a company shall give true and
fair view on the state of affairs of the company at the end of the financial
year and would be subject to the provisions of the said section and be in the
form set out in the Forms 1 and 2 of schedule VI. This sub-section contained a
proviso providing that nothing contained in said sub-section would apply to a
banking company or any company engaged in generation or supply of electricity
or to any other class of company for which a form of balance sheet shall be
specified in or under the Act governing such company. Thus, Companies Act, 1956
excluded the insurance or banking companies, companies engaged in generation or
supply of electricity or companies for which balance sheet was specified in the
governing Act, from the purview of sub-section (1) of section 211 of the
Companies Act, 1956 and as a consequence from the purview of section 115JB of
the Act.

iv)  There are certain significant legislative
changes made by the Finance Act, 2012 which must be noted before concluding
this issue. It can be seen that sub-section (2) of section 115JB has now been
bifurcated into two parts covered in the clauses (a) and (b). Clause (a) would
cover all companies other than those referred to in clause (b). Such companies
would prepare the statement of profit and loss in accordance to the provisions
of schedule III of the Companies Act, 2013 (which has now replaced the old Companies
Act, 1956). Clause (b) refers to a company to which second proviso to
sub-section (1) of section 129 of the Companies Act, 2013 is applicable. Such
companies, for the purpose of section 115JB, would prepare the statement of
profit and loss in accordance with the provisions of the Act governing the
company. Section 129 of the Companies Act, 2013 pertains to financial
statement. Under sub-section (1) of section 129 it is provided that the
financial statement shall give a true and fair view of the state of affairs of
the company, comply with the accounting standard notified under section 113 and
shall be in the form as may be provided for different classes of companies.

 

v)   Second proviso
to sub-section (1) of section 129 refers to any insurance or banking companies
or companies engaged in the generation or supply of electricity or to any other
class of company in which form of financial statement has been specified in or
under the Act governing such class of company. Combined reading of this proviso
to sub-section (1) of section 129 of the Act, 2013 and clause (b) of
sub-section (2) of section 115JB of the Act would show that in case of
insurance or banking companies or companies engaged in generation or supply of
electricity or class of companies for whom financial statement has been
specified under the Act governing such company, the requirement of preparing
the statement of accounts in terms of provisions of the Companies Act is not
made. Clause (b) of sub-section (2) provides that in case of such companies for
the purpose of section 115JB the preparation of statement of profit and loss
account would be in accordance with the provisions of the Act governing such
companies. This legislative change thus aliens class of companies who under the
governing Acts were required to prepare profit and loss accounts not in
accordance with the Companies Act, but in accordance with the provisions
contained in such governing Act. The earlier dichotomy of such companies also,
if one accepts the Revenue’s contention, having the obligation of preparing
accounts as per the provisions of the Companies Act has been removed.

vi)  These amendments in section 115JB are neither
declaratory nor classificatory but make substantive and significant legislative
changes which are admittedly applied prospectively. The memorandum explaining
the provision of the Finance Bill, 2012 while explaining the amendments under
section 115JB of the Act notes that in case of certain companies such as
insurance, banking and electricity companies, they are allowed to prepare the
profit and loss account in accordance with the sections specified in their
regulatory Acts. To align the Income-tax Act with the Companies Act, 1956 it
was decided to amend section 115JB to provide that the companies which are not
required under section 211 of the Companies Act to prepare profit and loss
account in accordance with Schedule VI of the Companies Act, profit and loss
account prepared in accordance with the provisions of their regulatory Act
shall be taken as basis for computing book profit under section 115 JB of the
Act.

 

vii)  Further, Explanation (3) below section
115JB(2) starts with the expression ‘For the removal of doubts’. It declares
that for the purpose of the said section in case of an assessee-company to
which second proviso to section 129 (1) of the Companies Act, 2013 is
applicable, would have an option for the assessment year commencing on or
before 1st April, 2012 to prepare its statement of profit and loss
either in accordance with the provisions of schedule III to the Companies Act,
2013 or in accordance with the provisions of the Act governing such company.
This is a somewhat curious provision. In the original form, sub-section (2) of
section 115JB of the Act did not offer any such option to a banking company,
insurance company or electricity company to prepare its profit and loss account
at its choice either in terms of its governing Act or as per terms of section
115JB of the Act. Secondly, by virtue of this explanation if an anomaly which
has been noticed is sought to be removed, it cannot be said that the
Legislature has achieved such purpose. In plain terms, this is not a case of
retrospective legislative amendment. It is stated to be a clarificatory
amendment for removal of doubts. When the plain language of sub-section (2) of
section 115JB did not permit any ambiguity, one cannot say that the Legislature
by introducing a clarificatory or declaratory amendment cured a defect without
resorting to retrospective amendment, which in the present case has admittedly
not been done.

 

viii) In the result, it is held that section 115JB as
it stood prior to its amendment by virtue of Finance Act, 2012 would not be
applicable to a banking company. In the result, Revenue’s appeal is dismissed.”

Section 244A(2) of ITA, 1961 – Interest on delayed refund – Where issue of refund order was not delayed for any period attributable to assessee, Tribunal was correct in allowing interest to assessee in terms of section 244A(1)(a) – Just because the assessee had raised a belated claim during the course of the assessment proceedings which resulted in delay in granting of refund, it couldn’t be said that refund had been delayed for the reasons attributable to the assessee and assessee wasn’t entitled to interest for the entire period from the first date of assessment year till the order giving effect to the appellate order was passed

27  CIT vs. Melstar Information Technologies Ltd.; [2019] 106 taxmann.com
142 (Bom) Date of order: 10th
June, 2019

 

Section 244A(2) of ITA, 1961 – Interest on delayed
refund – Where issue of refund order was not delayed for any period
attributable to assessee, Tribunal was correct in allowing interest to assessee
in terms of section 244A(1)(a) – Just because the assessee had raised a belated
claim during the course of the assessment proceedings which resulted in delay
in granting of refund, it couldn’t be said that refund had been delayed for the
reasons attributable to the assessee and assessee wasn’t entitled to interest
for the entire period from the first date of assessment year till the order
giving effect to the appellate order was passed

 

The
assessee had not claimed certain expenditure before the AO but eventually
raised such a claim before the Tribunal upon which the Tribunal remanded the proceedings
to the CIT (A). The additional benefit claimed by the assessee was granted.
This resulted in refund and the question of payment of interest on such refund
u/s. 244A of the Income-tax Act, 1961.

 

The
Tribunal came to the conclusion that the delay could not be attributed to the
assessee and therefore, directed payment of interest.

 

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

 

“i)   As is well
known, in case of refunds payable to the assessee, interest in terms of
sub-section (1) of section 244A would be payable. Sub-section (2) of section
244A, however, provides that if the proceedings resulting in the refund are
delayed for reasons attributable to the assessee whether wholly or in part, the
period of delay so attributable, would be excluded from the period for which
interest is payable under sub-section (1) of section 244A of the Act.


ii)   The Revenue does not dispute either the
assessee’s claim of refund or that ordinarily under sub-section (1) of section
244A of the Act such refund would carry interest at statutorily prescribed
rate. However, according to the Revenue, by virtue of sub-section (2) of
section 244A of the Act, since the delay in the proceedings resulting in the
refund was attributable to the assessee, the assessee would not be entitled to
such interest.

 

iii)   Sub-section
(2) of section 244A of the Act refers to the proceedings resulting in the
refund which are delayed for the reasons attributable to the assessee. There is
no allegation or material on record to suggest that any of the proceedings hit
the assessee’s appeal before the Tribunal or remanded the proceedings before
the CIT (A) whether in any manner delayed on account of the reasons
attributable to the assessee. The Tribunal, was, therefore correct in allowing
the interest to the assessee.”

Search and seizure – Assessment of third person – Section 153C of ITA, 1961 – Law applicable – Amendment to section 153C w.e.f. 1st June, 2015 – Amendment expands scope of section 153C and affects substantive rights – Amendment not retrospective – Starting point for action u/s 153C is search – Search prior to 1st June, 2015 – Section 153C as amended not applicable

29. Anilkumar Gopikishan
Agrawal vs. ACIT; [2019] 418 ITR 25
(Guj.) Date of order: 2nd
April, 2019 A.Ys.: 2008-09 to
2014-15

 

Search and seizure –
Assessment of third person – Section 153C of ITA, 1961 – Law applicable –
Amendment to section 153C w.e.f. 1st June, 2015 – Amendment expands
scope of section 153C and affects substantive rights – Amendment not
retrospective – Starting point for action u/s 153C is search – Search prior to
1st June, 2015 – Section 153C as amended not applicable


A search u/s 132 of the Income-tax Act, 1961 came to be conducted on
various premises of H.N. Safal group on 4th September, 2013, wherein
a panchnama was prepared on 7th September, 2013. On the basis
of the seized material, the AO initiated the proceedings against the petitioner
u/s 153C of the Act by issuing a notice dated 8th February, 2018. In
response to the notice the petitioner filed return of income on 1st
May, 2018. On 14th May, 2018, the AO furnished the satisfaction note
recorded by him and also attached therewith the satisfaction of the searched
person. From the satisfaction recorded, it was found that no document belonging
to the petitioner was found during the course of search.

 

However, a hard disc was seized and in the Excel sheet data taken from
the computer of the searched person, where there was reference to the
petitioner’s name. The petitioner raised objections to the proceedings u/s 153C
of the Act, inter alia contending that on the basis of the Excel sheet
data of the computer of the searched person wherein there was only reference to
the petitioner’s name, the AO could not have initiated proceedings against the
petitioner u/s 153C of the Act inasmuch as the conditions precedent for
invoking section 153C of the Act as it stood on the date of the search was not
satisfied. By an order dated 23rd July, 2018, the AO rejected the
objections filed by the petitioner. Being aggrieved, the petitioner filed a
writ petition and challenged the order.

 

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

 

‘i)   Section 153C of the
Income-tax Act, 1961 was amended w.e.f. 1st June, 2015 by virtue of
which the scope of the section was widened. By the amendment, a new class of
assessees are sought to be brought within the sweep of section 153C, which
affects the substantive rights of the assessees and cannot be said to be a mere
change in the procedure. The amendment expands the scope of section 153C by
bringing an assessee, if books of account or documents pertaining to him or
containing information relating to him have been seized during the course of
search, within the fold of that section.

 

ii)   The trigger for initiating
action whether u/s 153A or 153C is the search u/s 132 and the statutory
provisions as existing on the date of the search would be applicable. The mere
fact that there is no limitation for the Assessing Officer of the person in
respect of whom the search was conducted to record satisfaction will not change
the trigger point, namely, the date of search. The satisfaction of the
Assessing Officer of the person in respect of whom the search was conducted
would be based on the material seized during the course of search and not the
assessment made in the case of the person in respect of whom the search was
conducted, though he may notice such fact during the course of assessment
proceedings. Therefore, whether the satisfaction is recorded immediately after
the search, after initiation of proceedings u/s 153A, or after assessment u/s
153A in the case of the person in respect of whom the search was conducted, the
trigger point remains the same, viz., the search and, therefore, the statutory
provision as prevailing on that day would be applicable. While it is true that
sections 153A and 153C are machinery provisions, they cannot be made applicable
retrospectively, when the amendment has expressly been given prospective
effect.

 

iii)  The search was conducted in
all the cases on a date prior to 1st June, 2015. Therefore, on the
date of the search, the Assessing Officer of the person in respect of whom the
search was conducted could only have recorded satisfaction to the effect that
the seized material belongs or belong to the person. The hard disc containing
the information relating to the assessee admittedly did not belong to them,
therefore, as on the date of the search, the essential jurisdictional
requirement to justify assumption of jurisdiction u/s 153C in the case of the
assessees, did not exist. The notices u/s 153C were not valid.’

 

 

Sections 2(28A), 10(23G), 36(1)(viia)(c) and 36(1)(viii) – Exemption u/s. 10(23G) – Assessee providing long-term finance for infrastructure projects and facilities – Exemption of interest – Definition of “interest” – Borrowers liable to pay “liquidated damages” at 2.10% in case of default in redemption or payment of interest and other moneys on due dates, for period of default – Liquidated damages fall within purview of word “interest” – Assessee entitled to exemption

21

Infrastructure Development Finance
Co. Ltd. vs. ACIT; 412 ITR 115 (Mad)

Date of order: 1st March,
2019

A.Y.: 2002-03

 

Sections
2(28A), 10(23G), 36(1)(viia)(c) and 36(1)(viii) – Exemption u/s. 10(23G) –
Assessee providing long-term finance for infrastructure projects and facilities
– Exemption of interest – Definition of “interest” – Borrowers liable to pay
“liquidated damages” at 2.10% in case of default in redemption or payment of
interest and other moneys on due dates, for period of default – Liquidated
damages fall within purview of word “interest” – Assessee entitled to exemption

 

Business
expenditure – Provision for bad and doubtful debts – Deduction u/s. 36(1)(viii)
and section 36(1)(viia)(c) to be allowed independently

 

The
assessee provided long-term finance to enterprises which developed, maintained
and operated infrastructure projects and facilities. For the A.Y. 2002-03 the
assessee claimed exemption u/s. 10(23G) of the Income-tax Act, 1961 in respect
of the interest earned by it from the long-term finance provided and the
liquidated damages received from the borrowers on account of default on their
part in making payments according to the terms of the loan agreements. The
assessee also claimed deductions u/s. 36(1)(viia)(c) and independently u/s.
36(1)(viii) in respect of provision made for bad and doubtful debts.

 

The A.O. rejected the claim for exemption u/s.
10(23G) on the ground that the amounts earned by the assessee did not
constitute “interest” as defined u/s. 2(28A). He further held that the claim
for deduction u/s. 36(1)(viia)(c) was allowable only after reducing from the
assessee’s income, the deduction allowable u/s. 36(1)(viii) and that deduction
could not be granted independent of each provision.

 

The Commissioner (Appeals) and the Tribunal
affirmed the order of the A.O.

 

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

 

“i)   The
liquidated damages earned by the assessee were admittedly on account of
defaults committed by the borrowers. According to the terms of the agreement
with the borrowers, in case of default in redemption or payment of interest and
all other money (except liquidated damages) on their respective due dates,
liquidated damages at the rate of 2.10% per annum were levied and payable by
the borrowers for the period of default. Though the term “liquidated damages”
was used in the agreement, it actually signified the interest claimed by the
assessee. This term “interest” would come within the word “charge” as provided
under the definition of interest.

 

ii)   It was
an admitted fact that the assessee fell within the definition of a “specified
entity” and it carried on “eligible business” as provided u/s. 36(1)(viii).
Clauses (i) to (ix) of section 36(1) did not imply that those deductions
depended on one another. If an assessee was entitled to the benefit under
clause (i) of section 36(1), he could not be deprived of the benefits of the
other clauses. This is how the provision was arrayed. The computation of amount
of deduction under both these clauses had to be independently made without
reducing the total income by deduction u/s. 36(1)(viii).

 

iii)   Accordingly,
both the questions of law are answered in favour of the appellant assessee.”

Section 43D – Public financial institutions, special provisions in case of income of (Interest) – Where income on NPA was actually not credited but was shown as receivable in balance sheet of assessee co-operative bank, interest on NPA would be taxable in year when it would be actually received by assessee bank

9. Principal
CIT vs. Solapur District Central Co-op. Bank Ltd.; [2019] 102 taxmann.com 440
(Bom):Date
of order: 29th January, 2019 A.Y.:
2009-10

 

Section
43D – Public financial institutions, special provisions in case of income of
(Interest) – Where income on NPA was actually not credited but was shown as
receivable in balance sheet of assessee co-operative bank, interest on NPA
would be taxable in year when it would be actually received by assessee bank

 

During the
assessment for A.Y. 2009-10, the Assessing Officer noticed that the assessee
co-operative bank had transferred an amount of Rs. 7.80 crore to the Overdue
Interest Reserve (OIR) by debiting the interest received in profit and loss
account related to Non-Performing Assets. He was of the opinion that the
assessee-bank had to offer the interest due to tax on accrual basis. The
explanation of the assessee-bank was that the Reserve Bank of India guidelines
provide that income on Non-Performing Assets (‘NPA’) is not to be credited to
profit and loss account but instead to be shown as receivable in the balance
sheet, and it is to be taken as income in the profit and loss account only when
the interest is actually received. It was also pointed out that, as per the
Reserve Bank of India norms, interest on assets not received within 180 days is
to be taken to the OIR account. Similarly, the interest which was not received
for the earlier years was also taken into OIR account. In this manner, only the
interest received during the year was credited to profit and loss account and
offered to tax. However, the Assessing Officer discarded the explanations of
the assessee, principally on the basis of accrual of interest income and
assessed such interest to tax.

 

On the
assessee’s appeal, the Commissioner (Appeals) confirmed the decision of the
Assessing Officer. On appeal, the Tribunal reversed the decisions of the
Revenue authorities. The Tribunal broadly relied upon the principle of real
income theory and referred to the decision of the Supreme Court in case of CIT
vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).

 

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

 

“i)   The issue is squarely covered by the
judgements of Gujarat High Court and Punjab & Haryana High Courts. The
Gujarat High Court in case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank
Ltd. [2017] 395 ITR 324/[2016] 242 Taxman 60/72 taxmann.com 117 had
undertaken a detailed exercise to examine an identical situation. The Court
held that the co-operative banks were acting under the directives of the
Reserve Bank of India with regard to the prudential norms set out. The Court
was of the opinion that taxing interest on NPA cannot be justified on the real
income theory.

ii)   The Punjab & Haryana High Court in case
of Pr. CIT vs. Ludhiana Central Co-operative Bank Ltd. [2018] 99 taxmann.com
81 concluded that the Tribunal while relying upon the various
pronouncements had correctly decided the issue regarding taxability of interest
on NPA in favour of the assessee as being taxable in the year of receipt; the
Tribunal had upheld the deletion made by the CIT(A) on account of addition of
Rs. 3,02,82,000 regarding interest accrued on NPA and that there was no
illegality or perversity in the aforesaid findings recorded by the Tribunal.

iii)   The issue is thus covered by the decisions of
two High Courts. Against the judgement of the Gujarat High Court, the appeals
have been dismissed by the Supreme Court. Thus, the Supreme Court can be seen
to have approved the decision of the Gujarat High Court. Therefore, there is no
reason to entertain these appeals, since no question of law can be stated to
have arisen.

iv)  For the reference, it may also be noticed that
subsequently, legislature has amended section 43D. Section 43D essentially
provides for charging of interest on actual basis in case of certain special
circumstances, in the hands of the public financial institutions, public
companies, etc. Explanation to section 43D defines certain terms for the
purpose of the said section. Clause (g) was inserted in the said Explanation by
Finance Act, 2016 which provides that for the purpose of such section,
Co-operative Banks, Primary Agricultural Credit Society and Primary
Agricultural and Rural Development Bank shall have meanings, respectively
assigned in Explanation to sub-section 4 of section 80B. By virtue of such
insertion, the co-operative banks would get the benefit of section 43D. One way
of looking at this amendment can be that the same is curative in nature and
would, therefore, apply to pending proceedings, notwithstanding the fact that
the legislature has not made the provision retrospective.

v)   As per the Memorandum explaining the
provision, the insertion of clause (g) to the Explanation was to provide for a
level playing field to the co-operative banks. This may be one more indication
to hold a belief that the legislature, in order to address a piquant situation
and to obviate unintended hardship to the assessee, has introduced the amendment.
However, in the present case, there is no need to conclude this issue and leave
it to be judged in appropriate proceedings.”

Time limit for issuing notice u/s. 148 – Amendment to section 149 by Finance Act, 2012, which extended limitation for reopening assessment to sixteen years, could not be resorted for reopening proceedings concluded before amendment became effective

50. Brahm Datt vs. ACIT; [2018] 100 taxmann.com 324
(Delhi) Date of order: 6th December, 2018 A. Y. 1998-99 Section 149 of ITA and Finance Act, 2012

 

Time limit for issuing notice u/s. 148 – Amendment to
section 149 by Finance Act, 2012, which extended limitation for reopening
assessment to sixteen years, could not be resorted for reopening proceedings
concluded before amendment became effective

 

The assessee was a senior citizen aged about 84 years. From A. Ys.
1984-85 to 2003-04, he was a non-resident/not ordinarily resident of India. He
was previously working and residing in foreign countries, viz; Jordan and Iraq
and while so, he derived income primarily from salary and professional
receipts. The assessee during the course of search clarified that he did not
maintain any foreign bank account in his personal capacity, he, however had
contributed an amount of approximately US$ 2-3 million at the time of settling
of the offshore Trust, when he was a non-resident, out of his income earned
from sources outside India. The revenue primarily relying upon his statement,
issued impugned notice dated 24/03/2015 u/s. 148 of the Income-tax Act, 1961
seeking to initiate reassessment proceedings for A. Y. 1998-99, on the
suspicion that the, income of the assessee had escaped assessment. The
Assessing Officer rejected the assessee’s contention that limitation for
re-assessment for A. Y. 1998-99 had expired on 31/03/2005 and therefore, re-assessment
was bared by limitation. The Assessing Officer contended that the proceedings
were initiated within the extended period of 16 years from the end of the
relevant assessment year by relying on section 149(1)(c), introduced by the
Finance Act, 2012, with effect from 01/07/2012.

 

The assessee filed writ petition challenging the notice u/s. 148 on the
ground of limitation. Delhi High Court allowed the writ petition and held as
under:

 

“i)   The revenue had sought to
contend that the amendment (to section 149) is merely procedural and no one has
a vested right to procedure; and that procedural amendments can be given effect
any time, even in ongoing proceedings.

ii)   The question of revival of
the period of limitation for reopening assessment for A. Y. 1998-99 by taking
recourse to the subsequent amendment made in section 149 in the year 2012,
i.e., more than 8 years after expiration of limitation on 31/03/2005, has been
dealt with by the Supreme Court in K.M. Sharma v. ITO [2002] 122 Taxman 426/254
ITR 772(SC).

iii)  Assessment for A. Y. 1998-99
could not be reopened beyond 31/03/2005 in terms of provisions of section 149
as applicable at the relevant time. The assessees return for A.Y. 1998-99
became barred by limitation on 31/03/2005.

iv)  In view of the above
discussion, it is held that the petition has to succeed; the impugned
reassessment notice and all consequent proceedings are hereby quashed and set
aside. The writ petition is allowed.”

 

TDS – Payment to non-resident – Effect of amendment to section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change in condition precedent for application of section 195 – Income arising to non-resident must be taxable in India

49. Principal CIT vs. Motif India Infotech (P) Ltd.; 409
ITR 178 (Guj) Date of order: 16th October, 2018 A. Y. 2009-10 Sections 9(1) and 195 of ITA 1961

 

TDS – Payment to non-resident – Effect of amendment to
section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change
in condition precedent for application of section 195 – Income arising to
non-resident must be taxable in India

 

The assessee was a company engaged in software development. It provided
software related services to its overseas clients. In the course of assessment
proceedings for the A. Y. 2009-10, the Assessing Officer found that the assesse
had made payment of Rs. 5.51 crore to a foreign based company towards fees for
technical services without deducting tax at source. The assessee argued that
the payment received by the non-resident was not taxable and that therefore,
there was no requirement for deducting tax at source while making such payment.
However, the Assessing Officer disallowed the expenditure relying on section
40(a)(i) of the Act holding that the tax was deductible at source.

 

The Commissioner (Appeals) accepted the assessee’s claim and held in
favour of the assessee observing that there was no dispute that the services
were in the nature of technical services, but would be covered under the
Explanation clause contained in section 9(1)(vii)(b) of the Act. He was of the
opinion that the services were utilised outside India in a business or
profession carried outside India, or for the purpose of earning any income
outside India. This was upheld by the Tribunal.

 

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

 

“i)   In the case of GE India
Technology Centre P. Ltd. Vs. CIT; 327 ITR 456 (SC), the ratio laid down by the
Supreme Court was that mere remittance of money to a non-resident would not
give rise to the requirement of deducting tax at source, unless such remittance
contains wholly or partly taxable income. After the judgment was rendered, the
Legislature amended section 195 by inserting Explanation 2 by the Finance Act,
2012, but with retrospective effect from 01/04/1962. The Explanation provides
that for removal of doubts, it is clarified that the obligation to comply with
sub-section (1) of section 195, and to make deduction as provided therein
applies and shall be deemed to have always applied to all persons, resident or
non-resident, whether or not the non-resident person has a residence or place
of business or business connection in India; or any other presence in any
manner whatsoever in India. Mere requirement of permanent establishment in
India was thus done away with. Nevertheless, the basic principle that
requirement of deduction of tax at source would arise only in a case where the
payment made to a non-resident was taxable, still remains.

ii)   The Commissioner (Appeals)
and the Tribunal had accepted the assessee’s factual assertion that the
payments were for technical services provided by a non-resident, for providing
services to be utilised for serving the assessee’s foreign clients. Clearly,
the source of income namely the assessee’s customers were the foreign based
companies.

iii)  We are fortified in the view
by a judgment of the Karnataka High Court in the case of CIT Vs. ITC Hotels;
(2015) 233 Taxman 302 (Karn), in which it was held that where the recipient of
income of parent company is not chargeable to tax in India, then the question
of deduction of tax at source by the payer would not arise.

iv)  In the result, the tax appeal
is dismissed.”

 

Settlement of cases – Construction business – Receipt of on money – Additional disclosure of undisclosed income for one assessment year during settlement proceedings – Does not amount to untrue disclosure for other assessment years under settlement proceedings – Commission accepting disclosures made by assessees and passing orders on their settlement applications – Order of Settlement Commission not erroneous

48. Principal CIT vs. Income-Tax Settlement Commission
and another; 409 ITR 495 (Guj) Date of order: 13th June, 2017 A. Ys. 2012-13 to 2014-15 Sections 245C and 245D of ITA 1961 and Article 226 of
Constitution of India

 

Settlement of cases – Construction business – Receipt of
on money – Additional disclosure of undisclosed income for one assessment year
during settlement proceedings – Does not amount to untrue disclosure for other
assessment years under settlement proceedings – Commission accepting
disclosures made by assessees and passing orders on their settlement
applications – Order of Settlement Commission not erroneous

 

For the A. Ys. 2012-13 to 2014-15 the assesse filed applications before
the Settlement Commission for settlement of disputes that arose out of pending
assessments. In the settlement applications the assessees made additional
disclosure of undisclosed income on account of receipt of on money through sale
of constructed properties. The assessees projected 15 % profit on the turnover.
On the basis of the turnover of unaccounted receipts disclosed and 15 % profit
rate claimed by them, the assessees made disclosure of additional income in
their applications for settlements. The Department contended before the
Settlement Commission that further inquiry was necessary and that the rate of
15 % profit was on the lower side as in similar business the rate of return was
much higher. The Settlement Commission accepted the disclosure of the turnover
made by the assesse as the Department did not bring any contrary material on
record in that respect and held that the 15 % rate of profit out of the
turnover was reasonable. The Settlement Commission further recorded that during
the course of the proceedings, each of the assessees made a voluntary
disclosure of an additional sum of Rs. 2 crore, i.e., a sum of Rs. 50 lakh each
for the A. Y. 2014-15 “in a spirit of settlement and to put a quietus to the
issue”. Accordingly, the Settlement Commission passed an order u/s. 245D on
21/01/2016.

 

The Revenue filed a writ petition and challenged the validity of the
order. The Gujarat High Court dismissed the writ petition and held as under:

 

“i)   It is true that before the
Settlement Commission, the assesses indicated that the additional disclosure of
Rs. 50 lakh each may be accounted for the A. Y. 2014-15. However, we cannot
lose sight of the fact that such disclosures were made in the spirit of
settlement and to put an end to the controversy. The assessees therefore cannot
be pinned down to effect such disclosures in the A. Y. 2014-15 alone.

ii)   We cannot fragment a larger
picture and telescope the additional disclosures for a particular year and
taking into account the comparable figures for that year decide whether such
disclosures would shake the initial disclosures and to hold that the initial
disclosures were untrue projecting the additional disclosures for all the
assessment years, the assessees had sought for settlement.

iii)  We find the Commission
committed no error in accepting them (additional disclosures) and in proceeding
to pass final order on such settlement applications. In the result, the
petitions are dismissed.”

Recovery of tax – Stay of demand when assessee in appeal before Commissioner (Appeals) – Discretion of AO to grant stay – CBDT Office Memorandum cannot oust jurisdiction of AO to grant stay – Prima facie case showing high pitched assessment and financial burden on assesse – Stay on condition of deposit of 20% of amount demanded – Not justified

47.  SAMMS Juke Box
vs. ACIT; 409 ITR 33 (Mad); Date of order: 28th June, 2018 A. Y. 2015-16

Section 220(6) of ITA 1961 and Article 226 of
Constitution of India

 

Recovery of tax – Stay of demand when assessee in appeal
before Commissioner (Appeals) – Discretion of AO to grant stay – CBDT Office
Memorandum cannot oust jurisdiction of AO to grant stay – Prima facie
case showing high pitched assessment and financial burden on assesse – Stay on
condition of deposit of 20% of amount demanded – Not justified

 

For the A. Y. 2015-16, the assessee’s assessment was completed u/s.
143(3) of the Act. The assessee had receipts of Rs. 28,05,852/- from Conde Nast
(India) Limited for the year. However, by mistake, M/s. Conde Nast (India)
Limited had deducted excessive TDS and accordingly in Form 26AS the receipts
were shown to be Rs. 6,62,03,927/. The assessee did not claim the excessive
credit of TDS. The assessee also took steps to make the necessary corrections.
However, in the meanwhile, the Assessing Officer completed the assessment on
the basis of the receipts as shown in Form 26AS resulting in high pitched
assessment. The assesse preferred appeal before the Commissioner (Appeals) and
made an application to the Assessing Officer for stay of the demand u/s. 220(6)
during the pendency of the appeal before the Commissioner (Appeals). The
Assessing Officer passed order and directed the assesse to deposit 20 % of the
demand for grant of the stay as per the CBDT Office Memorandum dated
31/07/2017. The assesse filed writ petition and challenged the said order.

 

The Madras High Court allowed the writ petition, set aside the said
order and held as under:

 

“i)   Before whatever forum when an
application for interim relief is sought, the authority has to be necessarily
guided by the principles governing the exercise of jurisdiction under Order
XXXIX, rule 1 of the Civil Procedure Code 1908. Thus, the authority while
examining an application for grant of stay should consider whether the
applicant has made out a prima facie case, whether the balance of convenience
is in his favour, and if stay is not granted whether the applicant would be put
to irrepairable hardship.

 

ii)   Thus, when a statutory
authority exercises power to grant interim relief, he cannot be weighed down by
directives, which leave no room for discretion of the authority. Though the
CBDT’ Office Memorandum dated 31/07/2017 appears to fix a percentage of tax to
be paid for being entitled to an order of stay, it carves an exception in the
very same instruction and this is clear from the Office Memorandum dated
29/02/2016, in paragraph 4(B(b)). Thus, CBDT did not completely oust the
jurisdiction of the Officer, while examining a prayer for stay of the demand of
tax pending appeal.

 

iii)  The respondent could not have
passed the order without taking note of the assessee’s case and without
considering whether the assesse had made out a prima facie case for grant of
interim relief. The assesse had specifically pointed out its financial position
and the prejudice that was being caused to it on account of the high pitched
assessment. It had specifically pleaded that its income of the year was one
fourth of the tax assessed. This aspect was not dealt with by the respondent,
while passing the order. The order was not valid.

iv)  I find that the information
furnished by the Assessing Officer in the para-wise comments are not contained
in the impugned order. The respondent cannot improve upon the impugned order by
substituting fresh reasons in the form of a counter-affidavit. Thus, the
information furnished to the learned standing counsel for the Revenue would
clearly demonstrate that at the time of passing the impugned order, no such
reasons weighed in the minds of the respondent and therefore, the respondent
cannot justify his order by substituting fresh reasons, after the order is put
to challenge.

 

v)   In the result, the writ
petition is allowed, the impugned order is set aside and the matter is remanded
to the respondent for fresh consideration and to pass an order on merits and in
accordance with law after affording an opportunity of hearing to the assessee.”

 

Loss – Capital or revenue loss – Investment in shares as stock-in-trade – Loss in sale of portion of shares – Transaction in course of business – Revenue in nature – Not capital loss

46.  Calibre
Financial Services Ltd. vs. ACIT; 409 ITR 410 (Mad) Date of the order: 31st October, 2018 A. Y. 2001-02 Section 45 of ITA 1961


Loss – Capital or revenue loss – Investment in shares as
stock-in-trade – Loss in sale of portion of shares – Transaction in course of
business – Revenue in nature – Not capital loss

 

The assessee was engaged in financial advisory and syndication services
and the memorandum of association of the company authorised it to deal in
shares and stocks. For the A. Y. 2001-02, the Assessing Officer treated the
loss that arose from the transaction of sale of mutual fund units as capital
loss as against the claim of the assesee that it was revenue loss and passed an
order u/s. 143(3) of the Act accordingly.

 

The Commissioner (Appeals) allowed the appeal and held that it was a
revenue loss. The Tribunal reversed the order and held that there was no
evidence available to indicate that the intention of the assessee to treat the
holding as stock-in-trade.

 

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

 

“i)   The Tribunal erred in concluding
that there was no evidence available on record to indicate that the intention
of the assessee was to treat the holding as stock-in-trade. The Assessing
Officer had extracted the written submission made by the assesse, in which it
had stated that the assesse was a financial service company which rendered
financial advisory and syndication services and also traded in shares, units of
mutual funds, etc. The memorandum of association of the assessee authorised it
to deal in shares and services. Further, it stated that as authorized, the
assessee had purchased mutual fund units during the financial year 2000-2001
and sold the units during the same year. The trading in such units was done in
the ordinary course of its business and the loss was revenue in nature.

ii)   Further, the assessee had
stated that it had treated the transaction as revenue transaction and debited
the loss incurred to the profit and loss account as in the earlier financial
year also, in which it was allowed by the Assessing Officer. Similar
transactions had been held to be revenue in nature. For the A. Y. 2006-07, the
Assessing Officer did not agree with the assessee but the Commissioner
(Appeals), had held that the assessee had acquired equity shares, which it held
as stock-in-trade and out of which, a portion was sold incurring a loss which
was accounted as business expenditure and that the method of accounting and the
principle of accounting for loss or gains from investments or stock-in-trade
had been consistently and regularly followed by the assesse and accordingly,
the claim of the assessee with regard to loss that arose from trading in shares
was to be allowed as a business loss as claimed by the assesse.

iii)  Thus, for the above reasons,
we are of the considered view that the Tribunal fell in error in reversing the
order passed by the Commissioner (Appeals). In the result, the appeals filed by
the assessee are allowed and the orders passed by the Tribunal, which are
impugned herein, are set aside. Accordingly, the substantial questions of law
are answered in favour of the assesse and against the Revenue.”

Income Declaration Scheme 2016 – Determination of sum payable and payment of first instalment by assessee – Rejection of application pursuant to issue of notice for assessment – Tax already deposited under scheme to be adjusted by Department

45.  Sangeeta
Agrawal vs. Principal CIT; 409 ITR 254 (MP) Date of order: 3rd August, 2018 A. Y. 2014-15 Section 191 of F. A. 2016 (Income Declaration Scheme,
2016); Article 226 of Constitution of India and section 143(2) of ITA 1961

 

Income Declaration Scheme 2016 – Determination of sum
payable and payment of first instalment by assessee – Rejection of application
pursuant to issue of notice for assessment – Tax already deposited under scheme
to be adjusted by Department

 

The assessee made an application under the Income Declaration Scheme,
2016, and offered an amount as undisclosed income for the A. Y. 2014-15. The
total tax payable thereon was determined and she paid the first instalment of
tax. Thereafter, a notice u/s. 143(2) of the Act, was issued and the
application under the Scheme was rejected. Since according to section 191 of
the Finance Act, 2016, any amount paid under the Scheme was not refundable, the
assesse prayed for adjustment of the amount already paid. The Department
rejected the application for adjustment or refund of the amount paid under the
Scheme.

 

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

 

“Considering the law laid down by the Supreme Court in the case of
Hemalatha Gargya Vs. CIT; (2003) 259 ITR 1 (SC) as well as the Bombay High
Court in Sajan Enterprises Vs. CIT; (2006) 282 ITR636 (Bom), we quash the
impugned order and direct the respondent-Revenue to adjust the amount of Rs.
3,28,068 which has been deposited by the petitioner in the relevant A. Y.
2014-15.”

Charitable or religious trust – Denial of exemption – Section 13(2)(c) – In order to invoke provisions of section 13(2)(c), it is essential to prove that amount paid to person referred to in sub-section (3) of section 13 is in excess of what may be reasonably paid for services rendered

44. CIT vs. Sri Balaji Society; [2019] 101 taxmann.com 52
(Bom) Date of order: 11th December, 2018 A. Ys. 2008-09 and 2009-10 Sections 12AA and 13 of ITA, 1961

 

Charitable or religious trust – Denial of exemption –
Section 13(2)(c) – In order to invoke provisions of section 13(2)(c), it is
essential to prove that amount paid to person referred to in sub-section (3) of
section 13 is in excess of what may be reasonably paid for services rendered

 

The assessee was a charitable trust and enjoyed the registration u/s.
12AA. During relevant years, the assessee had incurred expenditure, some of
which was paid to one SBC towards advertisements in various magazines and
souvenirs. The Assessing Officer noticed that said SBC was a partnership firm
consisting of three partners who happened to be trustees of the assessee-trust.
The Assessing Officer opined that the firm i.e., SBC was a firm covered u/s.
13(3)(e) vis-a-vis trust. The Assessing Officer thereafter carried out the
analysis of the expenditure in connection with the advertisements with a
special focus on the payments made to the SBC. He thus denied the benefit u/s.
11 relying upon the provisions of section 13(2)(c).

 

The Commissioner (Appeals) allowed the appeal. He examined the material
on record at length and came to the conclusion that the Assessing Officer had
incorrectly invoked the said provision in making the disallowance. He was of
the opinion that the payments made by assessee were not in excess of what may
be reasonably paid for the services in question. The Tribunal confirmed order
passed by the Commissioner (Appeals).

 

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



“i)   Clause (c) of sub-section (2)
of section 13 can be invoked, if any amount is paid by way of salary, allowance
or otherwise to any person referred to in sub-section (3) out of resources of
the trust for services rendered to the trust and the amount so paid is in
excess of what may be reasonably paid for such services. Thus, essential
requirement for invoking the said provision is that the amount paid was in
excess of what may be reasonably paid for the services.

 

ii)   In the present case, the
Commissioner (Appeals) and the Tribunal had elaborately examined the accounts
of the assessee, the payments made to the SBC, the payments made to other
agencies for similar work, comparative rates of payments and came to the
conclusion that no excess payment was made to the related person.

 

iii)  Essentially, this is a pure
question of fact. No question of law arises.”

Business expenditure – Deduction u/s. 35AD – Specified business – Hotel Business – Commencement of new business not disputed by Department and income offered to tax accepted – Certification of hotel as three-star category hotel in subsequent year – Time taken by competent authority for certification beyond control of assesse – Assessee not to be denied deduction u/s. 35AD on the ground that the certification was in the later year

43.  CIT vs.
Ceebros Hotels Pvt. Ltd.; 409 ITR 423 (Mad) Date of order: 13th November, 2018 A Y. 2011-12 Section 35AD of ITA 1961

 

Business expenditure – Deduction u/s. 35AD – Specified
business – Hotel Business – Commencement of new business not disputed by
Department and income offered to tax accepted – Certification of hotel as
three-star category hotel in subsequent year – Time taken by competent authority
for certification beyond control of assesse – Assessee not to be denied
deduction u/s. 35AD on the ground that the certification was in the later year

 

The assessee was in the hotel business running a three-star hotel. The
assessee commenced the business in the A. Y. 2011-12 but the certification of
the three-star was received only in the subsequent year. For the A. Y. 2011-12,
the Assessing Officer denied the benefit of deduction u/s. 35AD(5)(aa) of the
Act on the ground that the assesse obtained classification as three-star
category hotel only during the subsequent year, i.e., A. Y. 2012-13.

 

The Tribunal allowed the assessee’s claim and held that once the
Department had accepted the income of the assessee offered to tax from the
hotel business, which was newly established and became fully operational in the
year 2010, the assessee was eligible for the investment allowance, that once
the application for star category classification was not rejected and after
inspection no discrepancy was found and the assessee was recommended for
classification under the three-star category the assessee could not be
penalised for the delay on the part of the Hotel and Restaurant Approval and
Classification Committee to inspect the Hotel before the end of the financial
year.

 

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

 

“i)   The reasons assigned by the
Tribunal for grant of deduction to the assessee u/s. 35AD(5)(aa) were just and
proper and the findings rendered by it were right.

 

ii)   The application filed by the
assesse for classification was made on 19/04/2010 and thereafter certain
procedures were to be followed and an inspection was required to be conducted
for such purpose. The manner in which the inspection was conducted and the time
frame taken by the competent authority were beyond the control of the assessee.
The Department had not disputed the operation of the new hotel from the F. Y.
2010-11 as it had accepted the income, which was offered to tax from the newly
established hotel which became fully operational in the year 2010.

iii)  Nowhere in the clause (aa) of
sub-section (5) of section 35AD was it mandated that the date of the
certificate was to be with effect from a particular date. Therefore, the
provision which was to encourage the establishment of hotels of a particular
category, should be read as a beneficial provision and therefore, the
interpretation given by the Tribunal were valid and justified. Therefore, the
Tribunal was right in concluding that the assesse is entitled to claim
deduction u/s. 35AD(5)(aa) for the A. Y. 2011-12.”

 

Sections 92C and 144C – Transfer pricing – Computation of arm’s length price (Reasoned order) – Order passed by DRP u/s. 144C (5) must contain discussion of facts and independent findings on those facts by DRP – Mere extraction of rival contentions will not satisfy requirement of consideration

30. Renault Nissan Automotive India (P.)
Ltd. vs. Secretary; [2018] 99 taxmann.com 4 (Mad): Date of order: 28th
September, 2018  A. Y. 2013-14


Sections 92C and 144C – Transfer pricing –
Computation of arm’s length price (Reasoned order) – Order passed by DRP u/s.
144C (5) must contain discussion of facts and independent findings on those
facts by DRP – Mere extraction of rival contentions will not satisfy
requirement of consideration


The assessee filed return
of income by computing arm’s length price of international transactions. The
TPO rejected economic adjustments claimed by the assessee and proposed certain
transfer pricing adjustments. Based on order of the TPO, the Assessing Officer
passed draft assessment order. The assessee filed objections before the DRP
u/s. 144C objecting additions made by the TPO. The DRP passed impugned order
accepting conclusion arrived at by the TPO.


Madras High Court allowed
the writ petition filed by the assessee challenging the validity of the order
of the DRP and held as under:


“i)    Perusal of the impugned order of the first respondent would
clearly indicate that apart from extracting each objection raised by the
petitioner and the relevant portion of the order passed by the Transfer Pricing
Officer dealing with such objection, the first respondent has not further
discussed anything on the said objection in detail as to how the objections
raised by the petitioner cannot be sustained or as to how the findings rendered
by the Transfer Pricing Officer on such issue have to be accepted.


ii)    It is seen from section 144C that the assessees shall file their
objections if any, to such variation made in the draft order of assessment
within 30 days to the Dispute Resolution Panel and the Assessing Officer as
contemplated u/s. 144C(2). Sub-section (5) of section 144C contemplates that
the Dispute Resolution Panel shall issue such directions as it thinks fit for
the guidance of the Assessing Officer to enable him to complete the assessment.
But such directions referred to in sub-section (5) shall be issued by the
Dispute Resolution Panel only after considering the following as provided under
sub-section (6), viz., (a) draft order; (b) objection filed by the assessee;
(c) evidence furnished by the assessee; (d) report, if any, of the Assessing
Officer, Valuation Officer or Transfer pricing Officer or any other authority;
(e) records relating to the draft order; (f) evidence collected by or cause to
be collected by, it; and (g) result of any enquiry made by or caused to be made
by it. Sub-section (7) of section 144C further contemplates that the Dispute
Resolution Panel may make such further enquiry as it thinks fit or cause any
further enquiry to be made by any Income tax authority before issuing any
directions. Perusal of the procedure contemplated under sub-section (6) and
sub-section (7), thus, would clearly indicate that issuance of such directions
as contemplated under sub-section (5), cannot be made mechanically or as an
empty formality and on the other hand, it has to be done only after considering
the above-stated materials. Therefore, the consideration of the above materials
by the Dispute Resolution Panel must be apparent on the face of the order and
such exercise would be evident only when the order contains the discussion of
facts and independent findings on those facts, by the Dispute Resolution Panel.
Certainly mere extraction of the rival contentions will not satisfy the
requirement of consideration. In the absence of any such independent reasoning
and finding, it should be construed that the Dispute Resolution Panel has not
exercised its power and issued directions by following the mandatory
requirements contemplated u/s. 144C(6) and (7). In this case, it is found that
the Dispute Resolution Panel had failed to do such exercise. Thus, it is
evident that the first respondent has passed a cryptic order, which in other
words, can be called as an order passed with non-application of mind.


iii)    Therefore, the matter has to go back to the first respondent for
consideration of the objections raised by the assessee in detail and to pass a
fresh order on merits and in accordance with law with reasons and independent
findings.”

Section 132 – Search and seizure – Block assessment – Declaration by assessee – Effect of section 132(4) – Declaration after search has no evidentiary value – Additions cannot be made on basis of such declaration

29. CIT vs. Shankarlal Bhagwatiprasad
Jalan; 407 ITR 152 (Bom): Date of order: 18th July,
2017
B. P. 1988-89 to 1998-99


Section 132 – Search and seizure – Block
assessment – Declaration by assessee – Effect of section 132(4) – Declaration
after search has no evidentiary value – Additions cannot be made on basis of
such declaration


In the case of the
assessee, there was a search and seizure operation u/s. 132 of the Act, between
27/11/1997 and 04/12/1997. On 31/12/1997, the asessee filed a declaration under
the Voluntary Disclosure of Income Scheme, 1997 declaring undisclosed income of
Rs. 1.20 crore. However, the assessee did not deposit the tax required to be
deposited before 31/03/1998 resulting in the rejection of declaration under the
Scheme. Thereafter by a letter dated 15/01/1998, the assessee addressed a
communication to the Assistant Director (Investigation) and offered a sum of
Rs. 80 lakh as an undisclosed income to tax. But on 23/11/1998, the assessee
filed a return of income declaring undisclosed income for the block period at
Rs. 55 lakh. The Assessing Officer made an addition of Rs. 65 lakh on the basis
of the declaration under the Scheme and determined the undisclosed income for
the block period at Rs. 1.20 crore.


The Commissioner (Appeals)
deleted the addition. The Commissioner (Appeals) held that communication dated
15/01/1998 to the Assistant Director (Investigation) disclosing income of Rs.
80 lakh could not be considered to be a statement u/s. 132(4) of the Act. This
was confirmed by the Tribunal.


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


“i)    A bare reading of section 132 (4) of the Income-tax Act, 1961,
indicates that an authorised officer is entitled to examine a person on oath
during the course of search and any statement made during such examination by
such person (the person being examined on oath) would have evidentiary value
u/s. 132(4).


ii)    The Tribunal was justified in law in deciding that the letter
dated 15/01/1998 of the assessee addressed to the Assistant Director about the
disclosure of Rs. 80 lakhs as income had no evidentiary value as stated u/s.
132(4). The Tribunal was justified in law in accepting the assessee’s claim of
sale of goods on various dates while deleting the addition of Rs. 65 lakhs.


iii)    The Tribunal was correct in law in deciding that the source of
the entire purchases had been explained as out of the initial capital of Rs. 31
lakhs by cash and sale proceeds of the purchased stock of timber.”

 

Sections 160, 161, 162 and 163 – Representative assessee – Non-resident – Agent – Conditions precedent for treating person as agent of non-resident – Transfer of shares in foreign country by non-resident company – No evidence that assessee was party to transfer – Notice seeking to treat assessee as agent of non-resident – Not valid

28. WABCO India Ltd. vs. Dy. CIT
(International Taxation); 407 ITR 317 (Mad): Date of order: 1st August,
2018 A. Y. 2014-15


Sections 160, 161, 162 and 163 –
Representative assessee – Non-resident – Agent – Conditions precedent for
treating person as agent of non-resident – Transfer of shares in foreign
country by non-resident company – No evidence that assessee was party to
transfer – Notice seeking to treat assessee as agent of non-resident – Not
valid


The appellant assessee was
incorporated under the Companies Act, 1956, in the year 1962, and was engaged
in the business of designing, manufacturing and marketing conventional braking
products, advance braking systems and other related air assisted products and
systems. The company was duly listed in the stock exchange and its shares were
transferable. In 2012-13, 75% of the shares of the Appellant were held by CD
and the balance 25% were held by public. In 2013-14, there was a share transfer
agreement between CD and WABCO, Singapore, in terms whereof CD transferred its
shareholding to WABCO, Singapore. The sale consideration of 1,42,25,684 shares
amounted to Rs. 29,84,97,852 Euros equivalent to Rs. 2347,23,78,600/-, for
which capital gains in the hands of CD was Rs. 2156,98,34,163/-. CD was
assessed and a draft assessment order was served on CD on 31/12/2017 in respect
of tax liability of Rs. 4,29,39,66,823/-, subject to CD availing of the option
to challenge the draft assessment order before the Dispute Resolution panel.
The Draft assessment order was finalised and a final assessment order issued
u/s. 143(3) read with section 144C of the Act. On 09/01/2018 the Department
issued a show-cause notice u/s. 163(1)(c) of the Act, to the Appellant assesee
whereby it was alleged that the capital gains had arisen directly as a result
of consideration received by CD from the Appellant and the Appellant was
proposed to be held as agent u/s. 163(1)(c) of the Act, in the event of any
demand against CD in the assessment proceedings for the A. Y. 2014-15. A writ
petition against the notice was dismissed by the Single Judge.


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


“i)    Harmonious reading of section 160 to 163 of the Income-tax Act,
1961 would show that: (i) in order to become liable as a representative
assessee, a person must be situated such as to fall within the definition of a
representative assessee;

(ii) the income must be such as is taxable u/s. 9;


(iii) the income must be such in respect of which such a person can be treated
as a representative assesee;


(iv) the representative assessee has a statutory
right to withhold sums towards a potential tax liability;


(v) since the
liability of a representative assessee is limited to the profit, there can be
multiple representative assessees in respect of a single non-resident
assessee-each being taxed on the profits and gains relatable to such representative
assessee..


ii)    The question was whether the show-cause notice was at all without
jurisdiction, whether the respondent wrongly assumed jurisdiction by
erroneously deciding jurisdictional facts, whether in the facts and
circumstances of the case, the appellant at all had any liability in respect of
the capital gains in question, and whether the appellant could be said to be an
agent u/s. 163(1)(c). The High Court had jurisdiction to consider the question
in writ proceedings.


iii)    No case was made out by the Department that in respect of
transfer of shares to a third party, that too outside India, the Indian company
could be taxed when the Indian company had no role in the transfer. Merely
because those shares related to the Indian company, that would not make the
Indian company an agent qua deemed capital gains purportedly earned by the
foreign company.


v)    The notice was not valid. The judgment and order under appeal is
set aside and consequently, the impugned show-cause notice is also set aside.”

Sections 133A, 119(2)(a), 234A, 234B and 234C – Waiver of interest u/s. 234A, 234B and 234C – Delay in furnishing return and in paying advance tax – Discretion of Chief Commissioner to waive interest – Return submitted voluntarily – Assessee genuinely believing that he had no taxable income – Interest to be waived

20. R. Mani vs. CCIT; 406 ITR
450 (Mad):

Date of order: 4th
December, 2017

A. Ys. 1997-98 and 1998-99


Sections 133A, 119(2)(a), 234A, 234B and 234C – Waiver of interest u/s. 234A,
234B and 234C – Delay in furnishing return and in paying advance tax –
Discretion of Chief Commissioner to waive interest – Return submitted
voluntarily – Assessee genuinely believing that he had no taxable income –
Interest to be waived

 

The assessee’s income was mainly
from property, sago commission income and income from a trust. For the A.Ys. 1997-98 and 1998-99, the assessee filed his returns of income on
20/12/2000 which was processed and the assessee was assessed to tax and
interest was levied u/s. 234A, 234B and 234C of the Act. The assessee
approached the Chief Commissioner u/s. 119(2)(a) of the Act for waiver of
interest u/ss. 234A, 234B and 234C so levied. The Chief Commissioner rejected
the application on the ground that the assessee failed to voluntarily file his
returns and that the returns were filed consequent upon a survey conducted on
23/01/1999 u/s. 133A and issuance of notice u/s. 148 of the Act.

 

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

 

“i)    An
income tax survey does not amount to detection of undisclosed income.

iii)    The Circular issued by the CBDT empowering the Chief Commissioner
to consider petitions for waiver of interest u/s. 234A as well as section 234B
would show that even in cases covered by section 234B, even though these
provisions are compensatory in nature, special orders for grant of relaxation
could be passed.

iv)   A
survey was conducted in the premises of the assessee on 22/01/1999. However,
the survey did not lead to any immediate issuance of notice u/s. 148. In the
interregnum, the assessee filed his return of income. Thereafter the Assessing
Officer had taken up the matter and completed the assessment u/s. 143 of the
Act and passed an order dated 30/03/2001 accepting the return filed by the
assessee with no further additions.

v)    The
assessee’s case was that he had no taxable income. This plea has not been
controverted by the Revenue and this was evident from the conduct of the
assessee in not filing returns for the earlier three years, i.e., A. Ys.
1994-95 to 1996-97. That apart, the assessee had been able to establish that
the property still remained undivided and no definite share in the property had
been allotted to any coparcener and the suit for partition was pending.

vi)   Apart
from that, the returns filed by the assessee had been accepted and assessment
had been completed with no further additions. The dispute with regard to the
division of property was a bonafide dispute which directly related to the
assessability of the assessee to tax. Therefore, if assessee were entitled to
waiver of interest u/s. 234A the question of payment of advance tax or a
portion thereof would not arise and therefore, the assessee was entitled to
waiver of interest u/s. 234B and 234C of the Act.

vii)   Accordingly, the writ petition is allowed, the impugned order is
set aside and it is held that the petitioner is entitled for waiver of interest
u/s. 234A, 234B and 234C of the Act.”

46. CIT vs. ITD Cem India JV.; 405 ITR 533 (Bom): Date of order: 4th September, 2017 A. Y.: 2008-09 Section 40(a)(ia) – Business expenditure – Disallowance – Payments liable to TDS – Reimbursement of administrative expenses to joint venture partner – Genuineness of transaction established on verification – Finding of fact – Disallowance rightly deleted by Tribunal

For the A. Y. 2008-09, the
Assessing Officer found that the assessee did not deduct tax at source from the
payments made on account of administrative expenses which was paid by the joint
venture to the Indian company. According to the Assessing Officer section
40(a)(ia) of the Income-tax Act, 1961 (hereinafter for the sake of brevity
referred to as the “Act”) was applicable and he disallowed the
expenditure.

 

The Tribunal held that it did not
find any reason to sustain the disallowance u/s. 40(a)(ia) as the payments made
by the assessee to the co-venturer were only on account of salary and related
expenses.

 

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

 

“Once the Assessing Officer had
checked the debit notes raised by the co-venturer and they were test checked
and the amount of expenditure claimed by the assessee was verified and its
genuineness had been proved, there was no reason to interfere with the findings
of fact recorded by the Tribunal in its order.”

36 Recovery of tax – Attachment of bank account and withdrawal of amount from bank during pendency of appeal – Action without due procedure – Stay of recovery proceedings granted pending appeal – Revenue directed to refund 85% of the amount recovered

Sunflower
Broking Pvt. Ltd. vs. Dy. CIT; 403 ITR 305 (Guj); Date of Order: 08th
July, 2017:

A.
Y.: 2014-15:

Sections
143(3), 156 and 221 of ITA 1961 and Art. 226 of Constitution of India



For the A. Y. 2014-15,
order of assessment was passed u/s. 143(3) of the Income-tax Act, 1961 and a
demand of Rs. 19,22,770 was raised. Against this order, the assessee filed an
appeal before the Commissioner (Appeals) which was pending. Since the assessee
did not pay the demand in response to demand notice u/s. 156, a notice u/s. 221
dated 06/02/2017 was issued for recovery of the demand. By the said notice the
assessee was required to appear before the authority latest before 15/02/2017.
The notice itself was dispatched on 16/02/2017 and was received by the assessee
on 17/02/2017. On the first working day after that, the bank account of the
assessee was attached and full recovery made.

 

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

 

“i)  When the income-tax authority had taken an
action as strong as attachment of the bank account of the assessee and withdrawing
a sizable sum of more than Rs. 19 lakh from the bank account unilaterally, the
least that was expected of him was to ascertain that the notice was duly
dispatched and received by the assessee. Thus the authority effected recovery
from the bank account of the assessee without following due process.

 

ii)   It was true that the assessee ought to have
applied to the Assessing Officer or to the appellate authority for keeping the
additional tax demand in abeyance, which the assessee did not do. Nevertheless,
this would not enable the authorities to ignore the legal requirements before
effecting the recovery. Under the circumstances, the recovery of Rs. 19,22,770
made by the authority was illegal.

 

iii)  The respondent authority had
not set up a case that the assessee was a cronic defaulter, a person who may
ultimately not be able to pay the dues if the appeal were dismissed or that
there were other assessments or appeals pending, in which sizable tax demands
were held up.

 

iv)  The assessee should get the benefit of stay
pending the appeal on depositing 15% of the disputed tax dues. The respondent
should therefore refund 85% of the sum of Rs. 19,22,770 recovered from the
assessee and retain 15% thereof by way of tax pending the outcome of the
assessee’s appeal.” 


35 Income – capital or revenue receipt – Subsidy allowed by State Government on account of power consumption which was available only to new units and units which had undergone an expansion, was to be regarded as capital subsidy not liable to tax

Principal
CIT vs. Shyam Steel Industries Ltd.; [2018] 93 taxmann.com 495 (Cal):

Date
of Order: 07th May, 2018:

Section
4 of ITA 1961


The question arose in
instant appeal was as to whether a subsidy allowed by the State Government on
account of power consumption, by its very nature, would make the subsidy a
revenue receipt and not a capital receipt, irrespective of the purpose of the
scheme under which such incentive or subsidy was made available to a business
unit.

 

The Calcutta High Court
held as under:

 

“i)  The difference may be in degrees but the words
of a scheme and the real purpose thereof have to be discerned in assessing
whether the incentive or the subsidy thereunder has to be regarded as a capital
receipt or a revenue receipt. There may be a scheme, for instance, that permits
every entity of a certain class to lower charges for consumption of power,
irrespective of the unit being a new unit or it having expanded itself. In such
a scenario, the incentive would have to be invariably regarded as a revenue
receipt. However, when the scheme itself makes the incentive applicable only to
new and expanding units, the fact that the incentive is in the form of a rebate
by way of sales tax or concessional charges on account of use of power or a
lower rate of duty being made applicable would be of little or no relevance.

 

ii)   When an entrepreneur sets up a business unit,
particularly a manufacturing unit, or embarks on an exercise for expanding an
existing unit, the entrepreneur factors in the cost of setting up the unit or
the cost of its expansion and the costs to be incurred in running the unit or
the expanded unit. It is the totality of the capital expenditure and the
expenses to run it that are taken into account by the entrepreneur. The
investment by an entrepreneur by way of capital expenditure is recovered over a
period of time and has a gestation gap. If the running expenses are made
cheaper by way of any subsidy or incentive and made applicable only to new
units or expanded units, the realisation of the capital investment is quicker
and the decision as to the quantum of capital investment is influenced thereby.
That is the exact scenario in the present case where the lower operational
costs by way of subsidy on consumption of power helps in the quicker
realisation of the capital expenditure or the servicing the debt incurred for
such purpose.

 

iii)  In view of the acceptance of the wider ambit
of the “purpose test” and the scheme in this case being available
only to new units and units which have undergone an expansion, the real purpose
of the incentive in this case has to be seen as a capital subsidy and has to be
regarded, as such, as a capital receipt and not a revenue receipt.

 

iv)  In the result, the revenue’s appeal is
dismissed.”

34 Export – Profits and gains from export oriented undertakings in special economic zones – Scope of section 10A – Meaning of “Profits and gains derived by an undertaking” – Interest on bank deposits and staff loans arise in the ordinary course of business – Entitled to exemption u/s. 10A

CIT
vs. Hewlett Packard Global Soft Ltd.; 403 ITR 453 (Karn): Date of Order: 30th
Oct., 2017:

A.
Y.: 2001-02:

Section
10A of I. T. Act, 1961



Due to conflict of opinion
of the two Division Benches, the following questions were referred to the Full
Bench of the Karnataka High Court:

 

“i)  Whether in the facts and in the circumstances
of the case, the Tribunal was justified in holding that interest from fixed
deposits, accrued interest on fixed deposits, interest received from Citibank,
Hong kong and interest of staff loans should be treated as business income of
the assessee even though the assessee is not carrying on any banking/financial
activity?

 

ii)  Whether the Assessing Officer was correct in
holding that the interest income cannot be held to be derived from eligible
business of the assessee (software development) for the purpose of claiming
deduction u/s. 10A of the Income-tax Act, 1961?”

 

The Full
Bench of the Karnataka High Court held as under:

 

“i)  Sections 10A and 10B of the Income-tax Act,
1961, are special provisions and a complete code in themselves and deal with
profits and gains derived by the assessee of a special nature and character
such as 100% export oriented units situated in special economic zones and
software technology parks of India, where the entire profits and gains of the
entire undertaking making 100% export of articles including software are given
100% deduction. The dedicated nature of the business or their special
geographical locations in software technology parks of India or special
economic zones makes them a special category of assesses entitled to the
incentive in the form of 100% deduction u/s. 10A or section 10B of the Act,
rather than it being a special character of income entitled to deduction from
gross total income under Chapter VI-A u/s. 80HH etc.

 

ii)   The computation of income entitled to
exemption u/s. 10A or section 10B of the Act is done at the prior stage of
computation of income from profits and gains of business in accordance with
sections 28 to 44 under Part D of Chapter IV before “gross total income” as
defined u/s. 80B(5) is computed and after which the consideration of various
deductions under Chapter VI-A in section 80HH etc., comes into picture.
Therefore the analogy of Chapter VI deductions cannot be telescoped or imported
in section 10A or section 10B of the Act.

 

iii)  The words “derived by the undertaking” in
section 10A or section 10B are different from “derived from” employed in
section 80HH, etc.

 

iv)  A provision intended for promoting economic
growth has to be interpreted liberally.

 

v)  The incidental activity of parking of surplus
funds with the banks or advancing of staff loans by such special category of
assesses covered u/s 10A or section 10B of the Act is an integral part of their
export business activity and a business decision taken in view of the
commercial expediency and the interest income earned incidentally cannot be
de-linked from the profits and gains derived by the undertaking engaged in the
export of articles as envisaged u/s. 10A or section 10B cannot be taxed separately
u/s. 56.

 

vi)  Gains of the undertaking including the
incidental income by way of interest on bank deposits or staff loans would be
entitled to 100% exemption or deduction u/s. 10A and section 10B. Such interest
income arises in the ordinary course of export business of the undertaking even
though not as a direct result of export but from the bank deposits, etc.,
and is therefore eligible for 100% deduction.”

33 Exemption u/s. 10(23C)(iv) – Approval by prescribed authority – Approval granted on 01/03/2016 for A.Ys. 2006-07 to 2011-12 – Approval valid for A. Y. 2012-13 and subsequent years also

CIT(Exemption)
vs. Haryana State Pollution Control Board; 403 ITR 337 (P&H);

Date
of Order: 14th July, 2017:

A.
Y.: 2012-13:

Section
10(23C)(iv) of ITA 1961


For A. Y. 2012-13, the
assessee filed return of income claiming exemption u/s. 10(23C)(iv) of the
Income-tax Act, 1961. The Assessing Officer denied exemption on the ground that
the assessee had not obtained the necessary approval from the prescribed authority
for exemption u/s. 10(23C)(iv) of the Act.

 

The Commissioner (Appeals)
allowed the exemption on the ground that the Commissioner (Exemption)’s order
dated 01/03/2016 granting exemption u/s. 10(23C)(iv) of the Act, for the A. Ys.
2006-07 to 2011-12 was also applicable for the A. Y. 2012-13. The Tribunal
upheld the order passed by the Commissioner (Appeals).

 

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

 

“i) Circular No. 7 of 2010,
dated 27/10/2010 clarifies that as in the case of approvals under sub-clauses
(iv) and (v) of section 10(23C) of the Income-tax Act, 1961, any approval
issued on or after 01/12/2006 under sub-clause (vi) and (via) of that
sub-section would also be a one time approval which would be valid till it is
withdrawn.

 

ii) It was recorded by the
Tribunal that the capital expenditure had not been charged to the profit and
loss account. The third proviso to section 10(23C) of the Act provides for
“applies its income or accumulates it for application, wholly or exclusively to
the objects for which it is established…..” Thus, the amount was spent by the
assessee towards the object. It was further recorded by the Tribunal, after
examining the matter that the amounts spent by the assessee were clearly the
application of the income to achieve the objects of the assessee.

 

iii) The assessee had been
granted approval u/s. 10(23C)(iv) of the Act and thus, there was no question of
disallowing any amount of this nature.

 

iv) No substantial question
of law arises and the appeal stands dismissed.”

32 Educational institution – Exemption u/s. 10(23C)(vi) – School run by assessee having only up to kindergarten class – Provision of Right to Education Act applicable to school imparting education from class 1 to class 8 – Provision not applicable to assesee – Assessee cannot be denied exemption for failure to comply with that Act

CIT(Exemption)
vs. Infant Jesus Education Society; 404 ITR 85 (P&H):

Date
of order: 14th July, 2017:

A.
Y.: 2013-14:

Section
10(23C)(vi) of I. T. Act 1961


The assesee was a society
registered under the Societies Registration Act, 1860. The Society was running
a school since the year 2006 and the school was from class play to kindergarten
class. For the A. Y. 2013-14, the assessee applied for grant of exemption u/s.
10(23C)(vi) of the Income-tax Act, 1961. The Principal Chief Commissioner
rejected the application primarily on the ground that the assessee had not been
complying with the provisions of Right of Children to Free and Compulsory
Education Act, 2009.

 

The Tribunal held that the
provisions of the 2009 Act were not applicable to school being run by the
assessee and directed the Principal Chief Commissioner to grant approval for
exemption to the assessee.

 

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

 

“i) The school was only up
to kindergarten class. No doubt was raised with regard to the genuineness of
the activities of the society. The provisions of the 2009 Act were applicable
to schools imparting education from class 1 to class 8 and hence the school of
the assessee was not to be governed by the 2009 Act.

 

ii) The Department failed
to show that the provisions of the 2009 Act were applicable to the assessee or
the findings recorded by the Tribunal were in any way illegal or perverse
warranting interference. No substantial question of law arose. The appeal
stands dismissed.”

31 Deduction u/s. 10A – Free trade zone – Effect of sales return – Sales return would result into reduction in profit qualifying for deduction u/s. 10A – AO has to allow corresponding reduction in total income also

CIT
vs. L.C.C. Infotech Ltd.; [2018] 94 taxmann.com 117 (Cal): Date of Order: 11th
May, 2018:

A.
Y.: 2001-02:

Sections
10A and 147 of ITA 1961


The assessee was a
corporate body engaged in computer training and software development. During
the relevant previous year the assessee made project exports to certain
parties. The assessee filed return of its income claiming exemption u/s. 10A of
the Income-tax Act, 1961 for profit from said project export. The said claim
was supported by Auditor’s certificate and was duly accepted as per intimation
issued u/s. 143(1). Based on statement made by the Auditor, that till date of
signing of Report certain amount against projects exports remained unrealised,
the Assessing Officer issued notice u/s. 148. During the course of proceeding
u/s. 147, the assessee filed supplementary Auditors report claiming profit from
software export at the reduced figure due to sales return against project
export. The Assessing Officer without accepting the claim of sales return took
the net profit at the original figure but reduced exemption u/s. 10A by the
amount in question.

 

The Commissioner (Appeals)
rejected the order of the Assessing Officer and directed for computation of net
profit by the Assessing Officer to be reconsidered. The Tribunal confirmed the
order of the Commissioner (Appeals).

 

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

 

“i) The higher total income
of Rs. 2.50 crore found by the Assessing Officer was assessed on the basis of
reduced profit resulting from sales return. Sales return was the cause, as per
the assessee, the effect of which was reduction in the profit figure qualifying
for deduction under the provisions of section 10A. The exercise that resulted
in the intimation, done on the basis of material and evidence then available,
cannot be said to have been done in a manner which allowed some income of the
assessee to have escaped assessment to tax. As such there is nothing wrong with
the directions given by the said appellate authority.

 

ii) In the premises no
substantial question of law is involved in the case. The appeal and application
are accordingly dismissed.”

45. CIT vs. Airlift (India) Pvt. Ltd.; 405 ITR 487 (Bom): Date of order: 8th June, 2018 Section 260A – Appeal to High Court – Limitation – Condonation of delay – Failure by Department to remove office objections despite extension of time being granted – Absence of any particular reason for delay – Reason of administrative difficulty – Delay cannot be condoned

Notice of motion was filed by the
Department in appeal for condonation of delay on the ground that the office
objections could not be removed within the stipulated time in view of the
administrative difficulty including shortage of staff.

 

Rejecting the notice of motion, the
Bombay High Court held as under:

 

“The application for condonation
for delay was not bonafide as the applicant failed to remove the office
objections though it had secured extension of time on three occasions and the
affidavit offered no explanation as to what steps were taken by the Department
after the last extension to remove the office objections. The only reason made
out in the affidavit in support was administrative difficulty including
shortage of staff which could not be the reason for condonation of delay in the
absence of the same being particularised.”

37 Section 80-IA – Appeal to Appellate Tribunal – Limitation – Order of revision and consequential order of assessment – Appeals from both orders – Tribunal considering appeal from order of assessment – Dismissal of appeal from order of revision on ground of limitation – Not valid Industrial undertaking – Special deduction u/s. 80-IA – Undertaking engaged in distribution of electricity – Computation of profits for purposes of deduction – Penalty recovered from suppliers for delay in execution of contracts, unclaimed balances of contractors, rebate from power generators and interest on fixed deposits for opening letter of credit to power grid corporation includible in profits – Miscellaneous recovery from employees, difference between written down value and book value of released assets, commission for collection of electricity duty and rental income not part of profit

Hubli
Electricity Supply Co. vs. Dy. CIT; 404 ITR 462 (Karn); Date of order : 9th
February, 2018

A.
Ys.: 2006-07 to 2008-09

The
assessee, a wholly owned company of the Government of Karnataka was engaged in
the business of distribution of electricity. The assessee was entitled to
deduction u/s. 80-IA of the Income-tax Act, 1961 (hereinafter for the sake of
brevity referred to as the “Act”). In the A. Y. 2006-07, it treated
as “income from profits and gains of business” penalty for delay in execution
of work by contractors, rebate from power generators, interest from fixed
deposits, the difference between the written down value and the book value of
assets, commission for collection of electricity duty, rental income, and
miscellaneous recovery from employees. The claim was accepted by the Assessing
Officer. Thereafter the Commissioner invoked the provisions of section 263 of
the Act and set aside the scrutiny assessment, without directing a fresh
assessment. A belated appeal filed against the order of revision was dismissed
by the Tribunal on the ground of limitation. Subsequently, the consequential
assessment order u/s. 143(3) read with section 263 of the Act was passed by the
Assessing Officer disallowing the said claims. The Assessee’s appeal was
dismissed by the Commissioner. The assessee filed further appeal before the
Tribunal. In the mean time, assessment orders for the A. Ys. 2007-08 and
2008-09 were concluded on the same lines, disallowing the deduction u/s.
80-IA(4)(iv)(c) and treating the items of income claimed as “other income” and charging
them to tax. Against these matters, the appeals were filed before the Tribunal.
All these appeals were clubbed together, heard and disposed of by a common
order. The Tribunal accepted some of the claims by the assessee.

 

On appeal,
the Karnataka High Court held as under:

 

“i)  The dismissal of the appeal by the Tribunal on
the ground of limitation without going into the merits of the case was
unjustifiable when the issue was considered on merits while adjudicating the
consequential orders.

 

ii)   The penalty recovered from suppliers and
contractors for delay in execution of works contract, unclaimed balances
outstanding pertaining to security deposits of contractor written back in the
books of account, rebate from power generators, interest income (fixed deposit
for opening of letter of credit to Power Grid Corporation Ltd.) had to be taken
into account while computing the deduction u/s. 80-IA(4).

 

iii)  Miscellaneous recovery from employees, the
difference between the written down value and book value of released assets,
commission from collection of electricity duty and rental income could not be
taken into account while computing the deduction u/s. 80-IA(4).”

 

38 Section 2(22)(e) – Deemed dividend (Loans and advances to shareholder) – Where transactions between shareholder and company were in nature of current account, provisions of section 2(22)(e) would not be applicable

CIT vs. Gayatri Chakraborty; [2018] 94
taxmann.com 244 (Cal); Date of Order : 3rd 
May, 2018 A.
Y.: 2009-10

The
assessee was a director in a company, BAPL in which she held 25.24 per cent
equity shares. There were transactions between the assessee and BAPL of giving
money by the assessee to BAPL as well as by BAPL to the assessee. The Assessing
Officer from the ledger account of BAPL in books of the assessee, took note
only of the transactions whereby BAPL gave money to the assessee and was of the
view that the same was ‘loan or advance’ within the meaning of section 2(22)(e)
by a company (BAPL) to a person who held substantial interest in the company
(BAPL) and had to be brought to tax as deemed dividend to the extent the
company possessed accumulated profits.

 

The
Tribunal held that the said sum received by the assessee could not constitute
loan attracting the deeming provision contained in section 2(22)(e).

 

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

 

“i)  Law on this point is clear in the event
transactions between a shareholder and a company in which the public were not
substantially interested and the former had substantial stake, create mutual
benefits and obligations, then the provision of treating any sum received by
the shareholder out of accumulated profits as deemed dividend would not apply.
The company in the instant case fits the description conceived in the aforesaid
provision to come within the ambit of section 2(22)(e). The controversy which
falls for determination is whether the sum received by the assessee formed part
of running current account giving rise to mutual obligations or the payment
formed one-way traffic, assuming the character of loan or advance out of
accumulated profit.

 

ii)   The Tribunal analysed the ledger account of
the company so far as the payment made to and received from the assessee was concerned
and found that a copy of the ledger of the assessee in the books of BAPL was
placed. A copy of the statement showing the balance after every transaction in
the assessee’s ledger in the books of BAPL was placed. A perusal of the
statement of balances of transactions between the assessee and BAPL shows that
BAPL owed assessee certain sum. BAPL paid the assessee certain sum and the
assessee owed BAPL certain sum. The amounts given in the bracket in the last
column of the enclosed balances in the running current account is the amount
which BAPL owed to the assessee. Mutual transactions go on in this fashion
throughout the previous year and as on the last date of the previous year the
account is squared i.e., neither the assessee owes BAPL nor BAPL owes assessee
any sum. The assessee was beneficiary of the sums given by BAPL at some point
of time during the previous year and BAPL was the beneficiary of the sums given
by the assessee at another point of time during the previous year. It was case
of mutual running or current account which created independent obligations on
the other and not merely transactions which created obligations on other side,
those on the other being merely complete or partial discharge of such
obligations and there were reciprocal demands between the parties and the
account was mutual.

 

iii)  In this factual and legal perspective, payment
of the aforesaid sums to the assessee cannot be treated as dividend out of
profit. No perversity has been pointed out on behalf of the revenue so far as
such a concurrent finding of fact is concerned by the two statutory appellate
fora. One is not inclined to disturb such finding of fact, which the Tribunal
has backed with detailed analysis. If one embarks on a fresh factual enquiry
into the accounts of the assessee or that of the company involved, such
exercise would entail reappreciation of evidence. Such enquiry is impermissible
at this stage. The Tribunal’s order, thus, stands confirmed and the question
formulated is answered accordingly, in favour of the assessee.”

Return of income – Delay of 1232 days in filing return – Condonation of delay – Assessee – NRI filed an application for condonation of delay of 1232 days in filing return on ground she was not in a position to file her returns on time due to severe financial crisis in United States of America and injuries sustained by her in an accident, enclosing a medical report in support of claim – Said application was rejected by CBDT on ground that medical certificate did not support case of assessee and that assessee had professional advisor available to her and, thus, required returns ought to have been filed within stipulated period – Though there was some lapse on part of assessee, that by itself would not be a factor to turn out plea for filing of return, when explanation offered was acceptable and genuine hardship was established – Delay to be condoned

26.  Smt. Dr. Sudha Krishnaswamy vs. CCIT; [2018]
92 taxmann.com 306 (Karn):

Date of order: 27th
March, 2018

A. Ys.: 2010-11 to 2012-13

Sections 119 and 139 of I. T.
Act 1961

 

Return of income – Delay of
1232 days in filing return – Condonation of delay – Assessee – NRI filed an
application for condonation of delay of 1232 days in filing return on ground
she was not in a position to file her returns on time due to severe financial
crisis in United States of America and injuries sustained by her in an
accident, enclosing a medical report in support of claim – Said application was
rejected by CBDT on ground that medical certificate did not support case of
assessee and that assessee had professional advisor available to her and, thus,
required returns ought to have been filed within stipulated period – Though there
was some lapse on part of assessee, that by itself would not be a factor to
turn out plea for filing of return, when explanation offered was acceptable and
genuine hardship was established – Delay to be condoned

 

The assessee, a non-resident,
had filed a petition for condonation of delay u/s. 119(2)(b) of the Income-tax
Act, 1961 before Commissioner of Income Tax. She contended that she sold one
vacant site and being non-resident, purchaser of property had deducted income
tax as per provisions of section 195, which had resulted in a refund for A. Y.
2012-13. As regards A. Ys. 2010-11 and 2011-12, it was submitted that she had
no taxable income and claimed that entire refund was relating to TDS from
interest and bank deposits. Accordingly, she requested to condone delay on
ground that she was not in a position to file her returns on time due to severe
financial crisis in United States of America and injuries sustained by her in
an accident, enclosing a medical report in support of the claim and direct
Assessing Officer to accept returns for aforesaid 3 years and process return of
income on merits and issue refund orders. Said application was rejected on
ground that assessee had professional advisor available to her and required returns
ought to have been filed within a stipulated period and, accordingly, rejected
the application relating to the three assessment years in question. The
assessee filed writ petitions challenging the orders of the Commissioner.

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

 

“i)  It is not the case of the assessee that she is avoiding any
scrutiny of the returns. On the other hand, it is the case of the assessee that
she is entitled for refund, being a non-resident owing to the recession at U.S.
and the accidental injuries suffered, no returns were filed within the period
prescribed. In the circumstances, it cannot be held that the
assessee-petitioner has obtained any undue advantage of the delay in filing the
income tax returns.

 

ii)   It is trite law that rendering substantial justice shall be
paramount consideration of the Courts as well as the Authorities rather than
rejecting on hyper-technicalities. It may be true that there was some lapse on
the part of assessee, that itself would not be a factor to turn out the plea
for filing of the return, when the explanation offered was acceptable and
genuine hardship was established. Sufficient cause shown by the petitioner for
condoning the delay is acceptable and the same cannot be rejected out-rightly
on technicalities.

 

iii)  Considering the overall circumstances, the delay of 1232 days in
filing the returns for the relevant assessment years in question is condoned
subject to denial of interest for the delayed period if found to be entitled
for refund.”

Recovery of tax – Provisional attachment – Certain transactions to be void – Powers of TRO – Petitioner purchased a property belonging to a deceased person through his legal representative – Same was declared void as it was under attachment proceedings for recovery of tax dues of said deceased person – Petitioner contended that he was a bona fide purchaser of property for adequate consideration and was not aware of attachment of property for recovery of tax of its owner – TRO could not declare a transaction of transfer as null and void u/s. 281 and if department wanted to have transactions of transfer nullified u/s. 281, it must go to civil court under rule 11(6) of Second Schedule to have transfer declared void u/s. 281

25.  Agasthiya Holdings (P.) Ltd. vs. CIT; [2018]
93 taxmann.com 81 (Mad):

Date of Order: 13th April,
2018

Section 281 r.w.s. 222 and
rule 11 of second schedule of I. T. Act 1961

 

Recovery of tax – Provisional
attachment – Certain transactions to be void – Powers of TRO – Petitioner
purchased a property belonging to a deceased person through his legal
representative – Same was declared void as it was under attachment proceedings
for recovery of tax dues of said deceased person – Petitioner contended that he
was a bona fide purchaser of property for adequate consideration and was
not aware of attachment of property for recovery of tax of its owner – TRO
could not declare a transaction of transfer as null and void u/s. 281 and if
department wanted to have transactions of transfer nullified u/s. 281, it must
go to civil court under rule 11(6) of Second Schedule to have transfer declared
void u/s. 281

 

The appellant/writ petitioner
company, engaged in real estate business, purchased a property through the
legal representatives of one deceased ‘PJ’. Before purchasing property the
petitioner got legal opinion from its Advocate and also by verifying the
encumbrances through encumbrance certificate which showed no encumbrance. After
a search of original assessee’s house after two years, four months and two
days, the Revenue found about the sale of the said property in favour of the
petitioner and registration on the file of the Joint Sub-Registrar, Tuticorin.
The Tax Recovery Officer, Tuticorin held that the legal representatives of the
original assessee had illegally transferred the attached property in favour of
the appellant.

 

On appeal before the
Commissioner (Appeal), the assessee contended that the Tax Recovery Officer had
acted outside his jurisdiction Madurai. The Commissioner (Appeals), noted that
on a perusal of the Assessing Officer’s and the Tax Recovery Officer’s report
and other evidence, the attachment of the said property was made on 18/12/1987
and it was duly intimated to the Sub-Registrar’s Office by the Tax Recovery
Officer on 28/09/2007 and it was served on 03/10/2007 and only after the said
information, the transfer of property had taken place and in the light of the
rule 16(1)(2) of the Second Schedule, the defaulter or his legal representative
not competent to alienate any property except with the permission of the Tax
Recovery Officer and since the Tax Recovery Officer had acted within his
jurisdiction in the light of the said rule, the representation/petition
submitted by them was to be rejected and accordingly, the same was rejected on
the ground of no merits. On appeal, the Tribunal also upheld the order of the
Commissioner (Appeals).

 

The petitioner filed appeal as
well as writ petition challenging the order. The petitioner contended that it
was for the department to move the civil court to declare the transaction in
the form of sale in their favour u/s. 281 as null and void. It further claimed
that assessee was the bona fide purchasers for value and consideration without
any notice of pre-encumbrance and therefore, the property was liable to be
released from attachment.

 

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

 

“i)  The Tax Recovery Officer, Tuticorin, had sent a communication to
the legal representatives of the original assessee by pointing out that they
had illegally transferred the attached property, which was, as per proceedings
dated 18/12/1987, attached on 06/01/1988 in favour of the appellant in writ
appeal in W.A. (MD) No. 1186 of 2017/writ petitioner and they are calling upon
to show cause as to why the illegal transaction made by them should not be
declared as null and void as per rule 16(1) of the Second Schedule.



ii)   The appellant/writ petitioner submitted a representation to the
Commissioner, Madurai, narrating the events that had happened and claimed that
they are innocent and bona fide purchasers for valid and consideration
without any notice of prior encumbrance and therefore, prayed for appropriate
direction to direct the Assessing Officer to drop any further proceedings
pertaining to the said property and raise the attachment and also enclosed the
supporting documents.

 

iii)  The Commissioner, Madurai, has taken into consideration the said
representation and noted that on a perusal of the Assessing Officer’s and the
Tax Recovery Officer’s report and other evidence, the attachment of the said
property was made on 18/12/1987 and it was duly intimated to the
Sub-Registrar’s Office by the Tax Recovery Officer on 28/09/2007 and it was
served on 03/10/2007 and only after the said information, the transfer of
property had taken place and in the light of the rule 16(1)(2) of the Second Schedule,
the defaulter or his legal representative is not competent to alienate any
property except with the permission of the Tax Recovery Officer and since the
Tax Recovery Officer has acted within his jurisdiction in the light of the said
rule, the representation/petition submitted by them is to be rejected and
accordingly, the same is rejected on the ground of no merits.

 

iv)  As already pointed out, the Tax Recovery Officer has noted that the
property has been illegally transferred by way of a registered sale deed dated
18/06/2008 and since it has been sold after service of the demand notice, it
has to be declared as null and void as per the provisions of the Income-tax
Act.

 

v)   The facts projected would also lead to the incidental question as
to whether the sale by the legal representatives of the deceased in favour of
the appellant/writ petitioner was done with a view to defraud the revenue. It
is the categorical case of the appellant/writ petitioner that before purchasing
the property, they got the legal opinion and also obtained encumbrance
certificates and any entries therein have not declared any succeeding
encumbrance including the attachment of the said property by the Income Tax
Department.

 

vi)  Now, coming to the facts of the case, the order of attachment was
made on 18/12/1987 and as per the additional affidavit of the second appellant,
dated 12/12/2011, filed in writ petition, the intimation was sent to the Joint
Sub-Registrar, Tuticorin, on 28/09/2007 and it was acknowledged by him on
03/10/2007 and notice for settling a sale proclamation u/s. 53 of the Second
Schedule of the Income-tax Act was served on the legal heirs of the original
assessee as such the sale of the property to the writ petitioner was to be held
as null and void on 09/08/2011 which was the subject matter of challenge in the
writ petition.

 

vii) In the light of the ratio laid down by the Supreme Court of India in
TRO vs. Gangadhar Vishwanath Ranade [1998] 100 Taxman 236, it is not
open to the Tax Recovery Officer to declare the said sale as null and void. The
above said decision also held that ‘the Tax Recovery Officer is required to
examine whether the possession of the third party is of a claimant in his own
right or in trust for the assessee or on account of the assessee. If he comes
to a conclusion that the transferee is in possession in his or her own right,
he will have to raise the attachment. If the department desires to have the
transaction of transfer declared void u/s. 281, the department being in the
position of a creditor, will have to file a suit for a declaration that the
transaction of transfer is void u/s. 281.’

 

viii)      In the light of the ratio laid down in the
above cited decision, it is not open to the Tax Recovery Officer to declare the
said transfer/alienation as null and void as per the provisions of the
Income-tax Act. It is also brought to the knowledge of this Court by the
appellant/writ petitioner that he also sought information under the Right to
Information Act, from the Public Information Officer – the Joint Sub-Registrar,
Tuticorin, as to the order of attachment by the Income Tax Officer in respect
of the property concerned. The said official informed that no such document is
available on file. Therefore, this Court is of the considered view that it is for
the Income Tax Department, to file a suit to hold the transaction declared as
null and void as per the ratio laid down by the Supreme Court of India
Gangadhar Vishwanath Ranade case (supra).

 

ix)  The writ petition is partly allowed and the order of the Judge in
granting liberty to the writ petitioner to move the Tax Recovery Officer under
rule 11 of the Second Schedule seeking adjudication of his claim is set aside
and the revenue is granted liberty to file a civil suit to declare the sale
transaction/sale deed in favour of the writ petitioner as null and void.”

Offences and prosecution – Principal Officer – Assessee was a Non-Executive Chairman of Board of Directors of company based in Delhi/NCR region – AO passed an order u/s. 2(35) with respect to TDS default of company treating assessee as Principal Officer of company and launched prosecution proceedings against the assessee u/s. 276B – Where there was no material to establish that assessee was in-charge of day-to-day affairs, management, and administration of his company, AO could not have named him as Principal Officer and accordingly he could not have been prosecuted u/s. 276B for TDS default committed by his company

24.  Kalanithi Maran vs.
UOI; [2018] 92 taxmann.com 308 (Mad): Date of Order:
28th March, 2018: F. Ys. 
2013-14 and 2014-15

Sections 2(35) and 276B of I.
T. Act, 1961

 

Offences and prosecution –
Principal Officer – Assessee was a Non-Executive Chairman of Board of Directors
of company based in Delhi/NCR region – AO passed an order u/s. 2(35) with
respect to TDS default of company treating assessee as Principal Officer of
company and launched prosecution proceedings against the assessee u/s. 276B –
Where there was no material to establish that assessee was in-charge of
day-to-day affairs, management, and administration of his company, AO could not
have named him as Principal Officer and accordingly he could not have been
prosecuted u/s. 276B for TDS default committed by his company

 

The assessee was a
Non-Executive Chairman of the Board of Directors of company Spice Jet Limited
based in Delhi /NCR region. The company was engaged in the business of
operation of scheduled low cost air transport services under the brand name
‘Spice Jet’. The assessee was residing and carrying on business at Chennai and
was not receiving any remuneration whatsoever from the company. The assessee
was full time Executive Chairman of Sun TV Network Ltd., which is a public
limited company, from which he drew remuneration as per the provisions of the
Companies Act. There was failure on part of Spice Jet Limited to deposit tax
deducted at source from amounts paid/payable to third parties for F.Ys. 2013-14
to 2014-15. The Assessing Officer passed an order dated 03/11/2014 u/s. 2(35)
of the Income-tax Act, 1961 with respect to TDS default of Spice Jet to the
tune of Rs. 90 crore treating the assessee as the Principal Officer of the
Company within the meaning of section 2(35). By the impugned order, while
naming the assessee as the Principal officer, the Assessing Officer also held
that the assessee was liable for prosecution u/s. 276B for the Tax Deducted at
Source default committed by the company. The assesse filed writ petition
chalanging the said order of the Assessing Officer.

 

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

 

“i)  The assessee was a Non-Executive Chairman of the Board of Directors
of the Company. Admittedly, the corporate office of the company is at Delhi. It
is not in dispute that the assessee is residing at Chennai and the impugned order
dated 03/11/2014 naming the assessee as the Principal Officer was served on the
assessee at Chennai at his residential address. It is also pertinent to note
that the show-cause notice dated 01/9/2014 was served on the assessee at his
residential address at Chennai. When the assessee had taken a stand that he is
not involved in the day-to-day affairs of the company and was also not drawing
any salary from the company, it cannot be stated that the assessee cannot file
the writ petition at the place where he received the show-cause notice as well
as the impugned order.

 

ii)   In the instant case, admittedly the assessee is challenging the
order treating him as the Principal Officer, which was received by him at
Chennai and was brought to his knowledge only at Chennai. Though the authority
is at Delhi, it is clear that part of cause of action had arisen at Chennai. As
per article 226(2) of the Constitution of India, the writ petition is
maintainable before a High Court within which the cause of action wholly or in
part, arises for the exercise of such power, notwithstanding that the seat of
such Government or authority or the residence of such person is not within
those territories. That apart, though the company’s registered corporate office
is at Delhi and the TAN number is at Delhi assessment, the assessee in this
writ petition has not challenged the assessment order, but, has challenged only
the impugned order naming him as the Principal Officer. In these circumstances,
this Court has jurisdiction to entertain the writ petition.

 

iii)  U/s. 2(35)(b), the Assessing Officer can serve notice only to
persons who are connected with the management or administration of the company
to treat them as Principal Officer. Section 278B clearly states that it shall
not render any such person liable to any punishment, if he proves that offence
was committed without his knowledge.

 

iv)  In the instant case, the assessee has stated that he was not
involved in the day-to-day affairs of the company and that he is only a
Non-Executive Chairman and not involved in the management and administration of
the company. Whereas, the Managing Director, himself has specifically stated
that he is the person in-charge of the day-to-day affairs of the company.

 

v)   The Assessing Officer, while passing the impugned order naming the
assessee as the Principal Officer, has not given any reason for rejecting the
contention of the Managing Director. When the Managing Director himself has
stated that he is the person who is in-charge of the day-to-day affairs of the
management and administration of the company and that the petitioner is not so,
the Assessing Officer without any reason has named the assessee as the
Principal Officer. Merely because the assessee is the Non-Executive Chairman,
it cannot be stated that he is in-charge of the day-to-day affairs, management
and administration of the company. The Assessing Officer should have given the
reasons for not accepting the case of the Managing Director as well as the
assessee in their respective reply. The conclusion of the Assessing Officer
that the assessee being a Chairman and major decisions are taken in the company
under his administration is not supported by any material evidence or any
legally sustainable reasons.

 

vi)  It is clear that the assessee was not involved in the management,
administration and the day-to-day affairs of the company, therefore, the
assessee cannot be treated as Principal Officer. In these circumstances, the
impugned order dated 03/11/2014 is liable to be set aside. Accordingly, the
same is set aside. The writ petition is allowed.”

Export oriented undertaking (Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and export of iron ore – It outsourced work of processing of iron ore to another company which operated plant and machinery outside custom bonded area – Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a view that mere processing of iron ore in a plant and machinery located outside customs bonded area would not disentitle assessee from claiming exemption u/s. 10B where iron ore was excavated from mining area belonging to an export oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial question of law arose

23.  Pr. CIT vs.
Lakshminarayana Mining Co.;
[2018] 93 taxmann.com 142 (Karn):

Date of Order: 6th
April, 2018

A. Ys.: 2009-10 to 2011-12

Section 10B of I. T. Act, 1961

 

Export oriented undertaking
(Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and
export of iron ore – It outsourced work of processing of iron ore to another
company which operated plant and machinery outside custom bonded area –
Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a
view that mere processing of iron ore in a plant and machinery located outside
customs bonded area would not disentitle assessee from claiming exemption u/s.
10B where iron ore was excavated from mining area belonging to an export
oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial
question of law arose

 

The assessee was a firm in the
business of mining and export of iron ore. It had entered into an operation and
maintenance agreement with NAPC Ltd., which operated the plants and machineries
installed in the Export Oriented Unit (hereinafter referred to as ‘EOU’) and
non-EOU both belonging to the assessee-firm. The EOU had started production on
23/09/2006 and accordingly deduction u/s. 10B of the Income-tax Act, 1961 on
the profits derived from the production of iron ore from the EOU was claimed.
The Assessing Officer disallowed the claim for deduction u/s. 10B with respect
to production of iron ore said to have been outsourced by the EOU to the
non-EOU and restricted the claim to the profits derived by the EOU from its
production.

 

The Commissioner (Appeals)
confirmed the order of the Assessing Authority holding that the claim for
deduction u/s.10B was not allowable in respect of production of non-EOU. The
Tribunal held that customs bonding was not a condition precedent for granting
exemption u/s. 10B. It was thus concluded that mere processing of the iron ore
in a plant and machinery located outside customs bonded area  would 
not  disentitle  the 
assessee  from  deduction u/s.10B where the iron ore was
excavated from the mining area belonging to an export oriented unit. The
Tribunal allowed the assesee’s claim.

 

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

 

“i)  In the instant appeal, primary contention advanced by the revenue
is to the effect that profits that have been derived by the assessee must be
pursuant to excavation and processing activity of the assessee in a customs
bonded area. It is further contended that as the ‘production’ has not been
carried out in the EOU and, contribution to the finished product by the
assessee being almost absent, deduction u/s. 10B cannot be permitted.

 

ii)   Insofar as factual aspects are concerned, the authorities have
clearly held that there has been outsourcing of processing of iron ore to
evidence which the profit and loss account and the ledger account for the
relevant year have been relied upon. The assertions to the contrary by the
revenue warrants no acceptance.

 

iii)  As regards the contention that the processing by ‘SESA plant’ which
is a plant situated outside the customs bonded area and disentitles the
assessee from claiming deduction u/s. 10B is concerned, the same can be
answered as follows:

 

(a) The processing of the iron ore in a plant belonging to the assessee
being in the nature of job work is not prohibited and forms an integral part of
the activity of the EOU;

 

(b) The mere fact that the ‘SESA Plant’ is situated outside the bonded
area is of no legal significance as the benefit of customs bonding is only for
the limited purpose of granting benefit as regards customs and excise duty. The
entitlement of deduction under the Act is to be looked into independently and
said benefit would stand or fall on the applicability of section 10B.

 

iv)  The judgement in the case of CIT vs. Caritor (India) (P.) Ltd.
[2015] 55 taxmann.com 473/230 Taxman 411/[2014] 369 ITR 463 though arises in
the context of deduction u/s. 10A which is different from deduction u/s. 10B
insofar as section 10A provides for the location of the unit in the ‘Special
Economic Zone’ such locational restriction is absent in case of section 10B,
however, the principle that benefit of customs and excise duty is independent
of the entitlement of deduction under the Act is applicable in the instant case
also. From the discussion above, it is held that no substantial question of law
arises for consideration.”

Educational institution – Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of imparting education and it had entered into franchise agreements with satellite schools and also used gains arising out of these agreements in form of franchisee fees for furtherance of educational purposes, it fulfilled requirements to qualify for exemption u/s. 10(23C)(vi)

22.  DIT (Exemption) vs. Delhi Public School
Society; 403 ITR 49 (Del); [2018] 92 taxmann.com 132 (Del): Date of Order: 3th
April, 2018

A. Y.: 2008-09

Sections 2(15), 10(23C) and 11
of I. T. Act, 1961

 

Educational institution –
Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of
imparting education and it had entered into franchise agreements with satellite
schools and also used gains arising out of these agreements in form of franchisee
fees for furtherance of educational purposes, it fulfilled requirements to
qualify for exemption u/s. 10(23C)(vi)

 

The assessee a society
registered with the Registrar of Societies, Delhi had established 11 schools
and had also permitted societies/organisations/trusts with similar objects to
open schools under the name of ‘Delhi Public School’, in and outside India. As
on date, 120 schools were functioning under that name in and outside India. The
main objective of assessee society was to establish progressive schools or
other educational institutions in Delhi or outside Delhi, open to all without
any distinction of race or creed or caste or special status with a view to
impart sound and liberal education to boys and girls during their impressionable
years. The assessee had been enjoying exemption, in respect of its income u/s.
10(22) of the Income-tax Act, 1961 since A. Y. 1977-78 till A. Y. 2007-08. In
view of the change in law, section 10(22) was substituted by section 10(23C)(vi)
with effect from 01/04/1999, the assessee applied in (Form 56D) requesting for
approval of exemption, u/s. 10(23C)(vi) on 16/04/2007 for A. Y. 2008-09
onwards. The Additional Director of Income Tax, by order dated 30/04/2008,
rejected the assessee’s application u/s. 10(23C)(vi) seeking exemption,
on the grounds that, inter alia, the franchisee fee received by it from
the satellite schools in lieu of its name, logo and motto amounts to a
‘business activity’ with a profit motive and no separate books of account were
maintained by assessee for business activity as required u/s. 11(4A). The
assessee filed writ petition challenging the order.

 

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

 

“i)  There is a multitude of authorities that have surveyed and analysed
the exemption permitted u/s. 10(23C)(vi), which broadly conclude that if the
educational institution merely acquires a profit surplus from running its
institution, that alone would not belie its larger education purpose. For
instance, in Queen’s Educational Society vs. CIT [2015] 372 ITR 699/231
Taxman 286/55 taxmann.com 255 (SC), the Supreme Court focused on the
requirements that were germane to qualify for exemption under the erstwhile
section 10(22) and the subsequent section 10(23C)(vi), namely that: the
activities of the educational institution should be incidental to the
attainment of its objectives and separate books of account should be maintained
by it in respect of such business; primarily to highlight that even if an
educational institution indulges in a profit making activity, that does not
necessarily subsume the larger educational/charitable purpose of the
organisation. The determining test to qualify for exemption u/s. 10(23C)(vi),
hence, lies in the final motivation on which the institution functions,
regardless of what extraneous profit it may accrue in the pursuit of the same.

 

ii)   This critical test therefore has a conspicuous qualitative value;
the objectives of the organisation are to be determined not merely by the
memorandum of objectives of the institution, but, also from the design of how
the profits are being directed and utilised and if such application of profits
uphold the ‘charitable purpose’ of the organisation (as postulated in section
2(15)) or if the objectives are marred by a profit making motive that emerges
more as a business activity rather than an educational purpose. Section
10(23C)(vi) while guiding the manner of this determination also,
provides a certain amount of discretion to the authority assessing the
compliance to these conditions for ascertaining whether the requirements of the
provision are met with. Such scrutiny is to be carried out every year,
irrespective of any preceding pattern in the assessment of the previous years.

 

iii)  As can be seen from the present income tax
appeals, the prescribed authority has examined the assessee’s application for
exemption u/s. 10(23C)(vi) in light of the recent audits of the assessee’s
accounts. Although assessee society, in the earlier years had been granted
exemption u/s. 10(23C)(vi), that itself does not cause for a res judicata
principle, as examination of the assessee’s audited accounts may be done afresh
by the prescribed authority, corresponding to the specific assessment year, as
prescribed in the second proviso to section 10(23C)(vi).

 

iv)  Despite this stipulation, the prescribed
authority will still have to apply the determinative test of assessing whether
the business is incidental to the attainment of the objectives of the entity
and whether separate books of account are being maintained in respect of such
business, even if the profits received by the assessee as such increase
exponentially, if the assessee qualifies this test, they will still be eligible
for exemption u/s. 10(23C)(vi).

 

v)   In light of the decisive test for determining eligibility for
exemption u/s. 10(23C)(vi), it is apparent that the assertion of the
DGIT that the assessee’s activities including charging a franchisee fee could
not be regarded as a charitable activity within the meaning of section 2(15),
and thus, inapplicable for exemption u/s. 10(23C)(vi), has not been
adequately substantiated, despite examination of the assessee’s audited
accounts. The DGIT asserted that the assessee is carrying out a business
activity for profit motives by entering into franchise agreements, whereby, it
has opened and is running around 120 schools, and that these charges were
received by the assessee for using the name of Delhi Public School by the
satellite schools in and outside India and no separate books of account were
maintained by the assessee for the business activity as required under section
11(4A). This is prima facie not correct, because the assessee has
maintained, accounts audited in detail for financial years 2000-2001, 2003-04,
2004-05 and 2005-06. That aspect has been found by the Tribunal for those
assessment years. Such accounts have been maintained in compliance to what is
required under the seventh proviso to section 10(23C)(vi) and section
11(4A).

 

vi)  Furthermore, the memorandum of association of assessee society, as
well as the joint venture agreements entered into by assessee society with the
satellite schools validate the motive of an educational purpose that the
assessee aims through its business activities and substantiate its contentions
in that regard. On review of the assessee’s audited accounts, it can be
observed that the surpluses accrued by assessee society are being fed back into
the maintenance and management of the assessee schools themselves. This,
reaffirms the assessee’s argument that the usage of the gains arising out of
its agreements are incidental to its educational purpose outlined by its
objective of the assessee.

 

vii) The authorities also reiterate that a mere incurrence of (surplus)
profit does not automatically presuppose a business activity that invalidates
the exemption under section 10(23C)(vi); the same has to be tested on
whether such profits are being utilised within the meaning of the larger
charitable purpose as defined in section 2(15) or not. On scrutiny, it can be
observed that the accounts
marked the heading ‘Secretary’s Account’, detail the heads of income and
expenditure that cater to the various requirements of running and maintaining
the satellite schools. Thus, arguendo if it were held that the objected
activity were indeed commercial in nature, nevertheless, the realisation of
profit by the assessee is through an activity incidental to the dominant
educational purpose that its memorandum of association sets out, and is in turn
being channelled back into the maintenance and management of the same schools,
thus, fulfilling the objectives the assessee has set out in its memorandum of
objectives.

viii)      In view of the above analysis, it is concluded that the
assessee fulfilled the requirements u/s. 10(23C)(vi) to qualify for
exemption; assessee society is maintaining its eleven schools and the 120
satellite schools in furtherance of the education joint venture agreements with
an educational purpose that also qualifies as a ‘charitable purpose’ within the
meaning of section 2(15) and is not in contravention of section 11(4A).

 

ix)  It is felt by this court that section 10(23C)(vi) ought to
be interpreted meticulously, on a case-to-case basis. This is because, the
larger objective of an educational/charitable purpose of the institution and
its manifestation can only be subjectively adjudged; for instance, in the present
situation, the balance sheets of the assessee demonstrate how the profits are
utilised for the growth and maintenance of the very schools they are accrued
from, thus, subscribing to a charitable motive. However, the educational
institutions may take more creative steps to qualify their objectives as an
‘educational purpose’ that is more universal than the individual objectives set
out in the memoranda of objectives of such institutions. For instance, a
percentage of profits earned from a business activity indulged in by such an
educational institution may be mandated towards fructifying the implementation
the provisions of the Right to Education Act, 2009, particularly, to create a
more sensitive learning environment for children with disabilities in implementation
of the provisions in the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995, or have a system to
analyse the ratio of inflow of money over progressive assessment years as
opposed to how much of this money is channelled back into the growth and
maintenance of such educational purpose, in order to put in place a visible
system of accountability. This is an observation, to ensure that the purpose
for which section 10(23C)(vi) was introduced, is adequately fulfilled and not
disadvantageously circumvented by vested parties.

 

x)   For the foregoing reasons, the writ petition has to succeed.
Accordingly, the assessee’s writ petition is allowed.”

Company – Recovery of tax from director – Notice to directors – Condition precedent – Furnishing of particulars to directors of steps taken to recover dues from company and failure thereof – Condition not satisfied – Order u/s. 179(1) set aside

21.  Madhavi Ketkar vs. ACIT; 403 ITR 157 (Bom);
Date of Order:  5th January,
2018

A. Ys.: 2006-07 to 2011-12

Section 179(1) of ITA 1961;
Art. 226 of Constitution of India

 

Company – Recovery of tax from
director – Notice to directors – Condition precedent – Furnishing of
particulars to directors of steps taken to recover dues from company and
failure thereof – Condition not satisfied – Order u/s. 179(1) set aside

 

The   petitioner  
was   a   director  
of   a   company.  
For A. Ys. 2006-07 to 2011-12, the
Assessing Officer of the company passed an order u/s. 179(1) of the Income-tax
Act, 1961 against the petitioner for recovery of the tax dues of the company.
The petitioner filed a writ petition in the High Court and challenged the
order. The petitioner contended that section 179(1) conferred jurisdiction on
the authority to proceed against the directors of a private limited company to
recover the tax dues from the directors only where the tax dues could not be
recovered from the company and that no effort was made by the authorities to
recover the tax dues from the defaulting company.

 

The Bombay High Court allowed
the writ petition, quashed the order passed u/s. 179(1) of the Act, and held as
under:

 

“i)  The notice issued u/s. 179(1) to the directors of a private limited
company must indicate, albeit briefly, the steps taken by the Department to
recover the tax dues from the company and failure thereof. Where the notice
does not indicate this and the directors raise objections of jurisdiction on
the above account, they must be informed of the basis of the Assessing Officer
exercising the jurisdiction and the directors response, if any, should be
considered in the order passed u/s. 179(1).

 

ii)   The Department acquired or got jurisdiction to proceed against the
directors of a private limited company, only after it had failed to recover the
dues from the company. It was a condition precedent for the Assessing Officer
to exercise jurisdiction u/s. 179(1) against the director of the company. The
jurisdictional requirement was not satisfied by a mere statement in the order
that recovery proceedings had been conducted against the defaulting company but
it had failed to recover its dues. Such a statement should be supported by
mentioning briefly the types of efforts made and the results.

 

iii)  The notice u/s. 179(1) did not indicate or give any particulars in
respect of the steps taken by the Department to recover the tax dues of the
defaulting company and failure thereof. In the letter sent in response to the
notice, questioning the jurisdiction of the Department, the petitioner had
sought details of the steps taken by the Department and had pointed out that
the defaulting company had assets of over Rs. 100 crores.

 

iv)  Admittedly, no particulars of steps taken to recover the dues from
the defaulting company were communicated to the petitioner nor indicated in the
order. At no time had the petitioner been given a chance to meet the
Department’s case that it had taken steps to recover the amount from the
defaulting company so as to meet the jurisdictional condition precedent before
passing an order u/s. 179(1).

 

v)   The order was set aside since the condition precedent was not
satisfied. However, the attachment order would be continued till the passing of
a final order by the Assessing Officer u/s. 179(1)”

                  

Co-operative society – Special deduction u/s. 80P – No deduction where banking business is carried on – No evidence of banking business – Mere inclusion of name originally and object in bye-laws of society not conclusive – Assessee entitled to special deduction u/s. 80P

20.  ELURU Co-operative House Mortgage Society
Ltd. vs. ITO; 403 ITR 172 (T&AP)

Date of Order: 13th
September, 2017

A. Ys.: 2007-08, 2008-09 and
2009-10

Section 80P of ITA 1961

 

Co-operative society – Special
deduction u/s. 80P – No deduction where banking business is carried on – No
evidence of banking business – Mere inclusion of name originally and object in
bye-laws of society not conclusive – Assessee entitled to special deduction u/s.
80P

 

The assessee was a
co-operative society, established in the year 1963. Originally, the assessee
was registered as the Eluru Co-operative House Mortgage Bank Ltd. But the
Reserve Bank of India as well as the Co-operative Department of the State
refused to accord permission to the assessee to carry on the business of
banking under that name. Therefore the word “Bank” was deleted from the name of
the assessee w.e.f. 19/02/2009. The assessee claimed that it was not a bank
within the meaning of section 80P(4) of the Income-tax Act, 1961.

 

For the A.Ys. 2007-08, 2008-09
and 2009-10, the assessee filed returns of income declaring “nil” income
claiming deduction u/s. 80P(2), on the ground that it was running on the
principle of mutuality, dealing only with its own members. The Assessing
Officer rejected the claim for deduction.

 

The Tribunal upheld the
disallowance.

 

On appeal by the assessee, the
Telangana and Andhra Pradesh High Court reversed the decision of the Tribunal
and held as under:

 

“i)  The entitlement of an assessee to the benefit of deduction u/s.
80P(2) does not depend upon either the name of the assessee or the objects for
which the assessee was established. The entitlement to deduction under the
provision would depend upon the actual carrying on of the business activity,
viz., banking. The fact that all co-operative banks would necessarily be
co-operative societies cannot lead to the presumption that all co-operative
societies are also co-operative banks. There are different types of co-operative
societies, many of whom may not be transacting any banking business.

 

ii)   Without reference to a single transaction that the assessee had
with any non-member, the Tribunal upheld the findings of the Assessing Officer
merely on the basis of the name of the assessee and one of the objects clauses
in the bye-laws of the assessee. Therefore, the finding of the Tribunal was
obviously perverse and such a finding could not have been recorded on the basis
of the material available on record.

 

iii)  The assessee was entitled to the special deduction u/s. 80P for the
A. Ys. 2007-08, 2008-09 and 2009-10.”

 

Business – Adventure in nature of trade – Assessee holding immovable property from 1965 – Agreement for developing property in 1994, supplementary agreement in 1997 and memorandum of understanding in 2002 – Transaction not an adventure in nature of trade – Gains from sale of flats not assessable as business income

19.  Pr. CIT vs. Rungta Properties Pvt. Ltd.; 403
ITR 234 (Cal); Date of Order: 8th May, 2017

A. Ys.: 2003-04, 2004-05 and
2006-07

Section 28 of ITA 1961

 

Business – Adventure in nature
of trade – Assessee holding immovable property from 1965 – Agreement for
developing property in 1994, supplementary agreement in 1997 and memorandum of
understanding in 2002 – Transaction not an adventure in nature of trade – Gains
from sale of flats not assessable as business income

 

The
assessee was holding immovable property since the year 1965. It entered into a
development agreement dated 28/01/1994 in relation to the property with another
company TRAL. The development agreement was followed by a supplementary
agreement dated 19/02/1997 and a memorandum of understanding dated 18/09/2002.
The arrangement between the assessee and TRAL was that a new structure was to
come up in place of the existing one at the cost of the developer and the
assessee was to get 49.29% of the developed property along with an undivided
share of the land in the same proportion, the rest going to the developer. The
Assessing Officer held that the transaction was an adventure in the nature of
trade and the income arising thereon is business income as against the claim of
the assessee that it is a capital gain.

 

The Commissioner (Appeals) and
the Tribunal reversed the decision of the Assessing Officer and allowed the
claim of the assessee.

 

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

 

“i)  The assessee’s arrangement with the developer was not a joint
venture agreement and there was no profit or loss sharing arrangement. In the
absence of any evidence that the assessee undertook the business of property
development, the object clause in the memorandum could not be treated to be the
determining factor to conclude that this was a part of the assessee’s regular
business.

 

ii)   On the same reasoning, reference to property in the corporate name
of the assessee could not make the assessee a property development company.

 

iii)  The Tribunal as well as the Commissioner (Appeals) had concurrently
found that the transactions of sale of flats did not constitute an adventure in
the nature of trade. The finding was justified.”

10 Section 69C – Unexplained expenditure (Work-in-progress)

CIT vs. B. G. Shirke Construction
Technology (P.) Ltd.; [2018] 96 taxmann.com 608 (Bom):
Date of the order: 8th August, 2018

A. Y. 2009-10


Search was conducted at
assessee-civil contractor’s premises on 18/12/2008 – Value of work-in-progress
as done by its site engineer on 30/11/2008 was done only on provisional basis –
Addition was sought to be made u/s. 69C on ground that figures indicated in
valuation report of site engineers were higher than work-in-progress recorded
in books – However, no verification was ever done by search party – Return
filed for relevant year showing closing work-in-progress as per books had been
accepted by Assessing Officer – There was no occasion to apply section 69C
since there was finding of fact that there was no excess work-in-progress than
that declared by respondent-assessee, and valuation done of work-in-progress as
on 31/11/2008 was only on provisional basis – Addition rightly deleted

The
respondent-assessee was a company engaged in the business of civil
construction. There was search and seizure operation conducted in the
respondent’s premises. During the course of search, valuation report of the
site engineers of the projects regarding Work in Progress (WIP) as on 30/11/2008
were found. It was noticed the figures indicated in the valuation report of the
site engineers were higher than the work-in-progress recorded in the books of
the respondent as on 30/11/2008. As per the provisional profit and loss
account, this difference was Rs. 9.30 crores. Thus, the respondent had agreed
to addition of Rs. 10 crores being made. However, at the end of subject
assessment year in its return of income the respondent had not offered the
additional income of Rs. 10 crores. Nevertheless, the Assessing Officer
proceeded to add Rs. 10 Crores being the additional income on account of excess
work-in-progress, which was financed out of unexplained source of income.
Resultantly, the Assessing Officer made an addition of Rs. 10 crores u/s. 69C of
the Act.

 

The
Commissioner (Appeals) deleted the addition of Rs. 10 crores holding that the
Assessing Officer did not controvert statement of the appellant that he had
correctly taken value of work-in-progress. Further, it held the Assessing
Officer had not brought on record any evidence to show that the appellant had
not recorded sales, purchase, other expenses properly in its books of account.
The Tribunal recorded the fact that the Assessing Officer had not disputed the
valuation of closing work-in-progress as on 31/03/2009. This figure had been
arrived on actual verification. There was also no disallowance of any
expenditure or suppression of income detected by the revenue. In the aforesaid
facts, the Tribunal held that in the absence of any material being brought on
record to show that the valuation done as on 31/03/2009 was incorrect, no
occasion to apply section 69C could arise. The Tribunal upheld 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)    Both the Commissioner (Appeals) as well as
the Tribunal have rendered a finding that work-in-progress as indicated in its
return of income for the year ending 31/03/2009 correctly reflects the closing
work-in-progress determined on physical verification. On facts both the
Commissioner (Appeals) as well as the Tribunal have rendered a finding that the
value of work-in-progress as done by its site engineers in November, 2008 was
only on provisional basis. No verification was ever done by the search party.
The return filed on 31/03/2009 showing its closing work-in-progress has been
accepted by the Assessing Officer. In the aforesaid facts, unless it is first
established by the revenue that there is unexplained expenditure, no occasion
to apply section 69C can arise.

 

ii)    The revenue has not challenged the
concurrent findings of the Commissioner (Appeals) as well as of the Tribunal
that the work-in-progress as disclosed during the time of search was on
provisional basis and it was taken into consideration while determining the
work-in-progress as on 31/03/2009. The proposed question that the Tribunal held
that there is a difference in the book value and the physical value of the
work-in-progress is factually not correct. The revenue was not able to
substantiate the above presumption in the question as framed.

 

iii)    In view of the above, the question as
proposed does not give rise to any substantial question of law.”

9 Section 43(5) – Speculative loss – Difference between speculation and hedging – Loss in hedging transaction – Deductible

ACIT vs. Surya International (P) Ltd.; 406
ITR 274 (All): Date of order: 6th September, 2017

A.
Y. 2009-10


The assessee was engaged in the business of production, refining and
sale of edible oil and its by-products. For the A. Y. 2009-10, the assessee
claimed that the market related to purchase of raw materials, for improvement
and manufacture of refined oil was highly volatile and it had entered into
contracts for purchase of raw materials, mainly crude oil, which was the raw
material for refined oil on “high seas sale” basis and many times, looking to
the market trend, the assessee had to cancel such contracts for sale of raw
materials (crude oil). In the relevant year, it had resulted in a loss of Rs,
1,07,88,693/- which the assessee claimed as the business loss. The Assessing
Officer disallowed the claim holding it to be speculative loss.

 

The
Tribunal allowed the claim in respect of 32 transactions.

 

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

 

“i)    Section 43(5) of the Income-tax Act, 1961,
provides that speculative transaction means a transaction in which a contract
for the purchase or sale of any commodity including stocks and shares, is
periodically and ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scrips.

 

ii)    Clause (a), however, provides that a
transaction of this nature will not be deemed to be a speculative transaction
if the contract in respect of raw material or merchandise had been entered into
by a person in the course of his manufacturing or merchanting business to guard
against loss through future price fluctuations in respect of his contracts for
actual delivery of goods manufactured by him. Such contracts entered into by a
merchant or manufacturer to safeguard against loss through future price
fluctuation are in a commercial world known as hedging contracts. This clause
contemplates contracts entered into by two classes of persons namely (a) a
person who manufactures goods from raw materials, and (b) a merchant who
carries on merchanting business. Whereas in the case of a manufacturer it is
the contract entered into by him in respect of raw materials used in the course
of his manufacturing business to guard against loss through future price fluctuations
in respect of his contracts for actual delivery of goods manufactured by him,
that are taken out of the ambit of speculative transactions, the contracts
taken out of the scope of such transactions in the case of merchants are those
which he enters into in respect of his merchandise with a view to safeguard
loss through future price fluctuation in respect of contracts for actual
delivery of merchandise sold by him.

 

iii)    It is significant to note that section 43
nowhere provides that such hedging contracts must necessarily be purchasing
contracts. It will depend upon the facts of each case whether a particular
transaction by way of forward sale, which is mutually settled otherwise than by
actual delivery of the said goods has been entered into with a view to
safeguard against loss through price fluctuation in respect of the contract for
actual delivery of the goods manufactured.

 

iv)   The Tribunal was correct in allowing the
claim of the assessee in respect of 32 transactions.”

Section 194C and 194-I – TDS – Works contract/rent – Assessee refining crude oil and selling petroleum products – Agreement with another company for transportation of goods – Agreement stipulating proper maintenance of trucks – Not conclusive – Payment covered by section 194C and not section 194-I

58. CIT(TDS) vs. Indian Oil Corporation
Ltd.; 410 ITR 106 (Uttarakhand) Date of order: 6th March, 2018

 

Section 194C and 194-I – TDS – Works
contract/rent – Assessee refining crude oil and selling petroleum products –
Agreement with another company for transportation of goods – Agreement
stipulating proper maintenance of trucks – Not conclusive – Payment covered by
section 194C and not section 194-I

 

The assessee-company was engaged in refining
crude oil and storing, distributing and selling the petroleum products and for
this purpose required tank trucks for road transportation of bulk petroleum
products from its various storage points to customers or other storage points.
For this purpose, it entered in to an agreement with another company which was
operating trucks. The assesse deducted tax at source u/s. 194C of the Act in
respect of payments to the said company.

 

The Commissioner (Appeals) held that the tax
was deductible u/s. 194C and not u/s. 194-I. The Tribunal upheld this. On
appeal by the Revenue, the Uttarakhand High Court upheld the decision of the
Tribunal and held as under:

 

“i)   Modern transportation contracts are fairly
complex having regard to various requirements, which fall to be fulfilled by
the contracting parties. Conditions like maintaining the tank trucks in sound
mechanical condition and having all the fittings up to the standards laid down
by the company from time to time would not make it a contract for use.

ii)   The tenor of the contract showed that the
parties to the contract understood the agreement as one where the carrier would
be paid transport charges and that too for the shortest route travelled by it
in the course of transporting the goods of the assessee from one point to
another. It unambiguously ruled out payment of idle charges. It also made it
clear that there was no entitlement in the carrier to any payment dehors the
actual transporting of the goods.

iii)   The carrier under the contract was
undoubtedly obliged to maintain the requisite number of trucks of a particular
type subject to various restrictions and conditions, but it was under the
obligation to operate the trucks for the purpose of transporting the goods
belonging to the assesse. Therefore, use of the words “exclusive right to use
the truck” found in clause 1 and also in clause 6(e) would not by itself be
decisive of the matter. Even after the amendment to the Explanation u/s. 194-I,
the case would not fall within its scope as it was a case of a contract for
transport of goods and, therefore, a contract of work within the meaning of
section 194C and not one which fell within the Explanation to section 194-I,
namely use of plant by the assessee.”

 

Sections 9, 147 and 148 of ITA 1961 and Article 11 of DTAA between India and Mauritius – Reassessment – Income – Deemed to accrue or arise in India (Interest) – Where Assessing Officer, during assessment had accepted claim of assessee that it was entitled to benefit of India Mauritius DTAA, assessment could not have been reopened on ground that assessee did not carry out bona fide banking activities in Mauritius

57. HSBC Bank (Mauritius) Ltd. vs. Dy. CIT;
[2019] 101 taxmann.com 206 (Bom) Date of order: 14th January, 2019 A. Y. 2011-12

 

Sections 9, 147 and 148 of ITA 1961 and
Article 11 of DTAA between India and Mauritius – Reassessment – Income – Deemed
to accrue or arise in India (Interest) – Where Assessing Officer, during
assessment had accepted claim of assessee that it was entitled to benefit of
India Mauritius DTAA, assessment could not have been reopened on ground that
assessee did not carry out bona fide banking activities in Mauritius

 

The assessee was a Banking Company
registered under the laws of Mauritius. For the A. Y. 2011-12, the assessee
filed its return of income declaring nil income. In the return, the assessee
had shown interest income of Rs. 238.01 crores and claimed the same to be
exempt from tax in India. This amount comprised of income on securities of Rs.
94.57 crore and interest income on External Commercial Borrowings (ECB) of Rs.
143.43 crore. According to the assessee, such income was not taxable in India
by virtue of DTAA between India and Mauritius. The Assessing Officer on
scrutiny, passed order u/s. 143(3) in which he added a sum of Rs.94.57 crore to
the total income of the assessee by rejecting the assessee’s claim of such
income on securities not being taxable in India. He however did not disturb the
assessee’s claim of interest income on ECB being not taxable. After four years,
the Assessing Officer issued notice to reopen assessment in case of assessee on
ground that banking activities carried out by assessee locally in Mauritius
were for namesake and assessee had failed to make true and full disclosure
regarding its beneficial ownership status. The assessee on being supplied
reasons for reopening assessment raised objections to the notice of reopening
of assessment. The Assessing Officer, however, rejected said objections.

 

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

“i)   The perusal of the reasons recorded by the
Assessing Officer would show that the only ground on which the notice of
reopening of assessment is issued was the assessee’s claim of exemption of
interest income which in turn was based on DTAA between India and Mauritius.
According to the Assessing Officer, the assessee had attempted to misuse the
DTAA since according to him, the assessee did not carry out banking business in
the said country.

ii)    In this context, it is noted that the entire
claim had come up for consideration before the Assessing Officer during the
original scrutiny assessment. During such assessment, the Assessing Officer had
noted the assessee’s claim of exemption of interest on ECB made in the return
filed. In written query dated 21/10/2013, the Assessing Officer had asked the
assessee to explain several issues and called for documents.

iii)   It was after detailed examination that the
Assessing Officer passed the order of assessment on 28/01/2016 in which he
disallowed the assessee’s claim of exempt interest of Rs. 94.57 crore which
related to interest on securities. He, however, did not tamper with the
assessee’s claim of exempt interest of Rs. 143.43 crore which was interest on ECB.
Thus, the entire issue was minutely examined by the Assessing Officer during
the original scrutiny assessment. To the extent, the Assessing Officer was not
satisfied with the assessee’s claim of exempt interest, the same was
disallowed. However, in the context of assessee’s claim of exempt interest of
Rs. 143.43 crore, by virtue of DTAA between India and Mauritius, the Assessing
Officer accepted the same.

iv)   This very issue now the Assessing Officer
wants to re-examine during the process of reassessment. For multiple reasons,
same would be wholly impermissible. Firstly, as noted, the entire issue is a
scrutinised issue. This would be based on mere change of opinion and would be
impressible as held by series of judgments of the various Courts.

v)   Quite apart, the impugned notice has been
issued beyond the period of four years from the end of relevant assessment
year. There is nothing in the reasons recorded to suggest that there was any
failure on the part of the assessee to disclose truly and fully all material
facts which led to the income chargeable to tax escaping assessment. In fact,
the perusal of the reasons would show that the Assessing Officer was merely
proceeding on the material already on record. Even on this ground, the impugned
notice should be set aside.

vi)   In the result, the impugned notice is set
aside. Petition is allowed and disposed of accordingly.”

Section 144, 147 and 148 – Reassessment – Service of notice u/s. 148 – Notice sent to old address – Assessee’s returns for earlier years already on file and reflecting new address – Issue of notice at old address mechanically – Notice and order of reassessment and consequential attachment of bank accounts – Liable to be quashed

56. Veena Devi Karnani vs. ITO; 410 ITR 23
(Del) Date of order: 14th September,
2018 A. Y. 2010-11

 

Section 144, 147 and 148 – Reassessment –
Service of notice u/s. 148 – Notice sent to old address – Assessee’s returns
for earlier years already on file and reflecting new address – Issue of notice
at old address mechanically – Notice and order of reassessment and
consequential attachment of bank accounts – Liable to be quashed

 

In the F. Y. 2010-11, the assessee shifted
her residence and filed returns of income under the same permanent account
number and e-mail ID. The returns disclosed the changed address. For the A. Y.
2010-11, the Assessing Officer sent a series of notices u/s. 148 of the Act for
reopening the assessment to the assessee’s old address. As there was no
response, the reassessment was completed on best judgment basis and an ex-parte
order was passed u/s. 144 read with 147. Upon issuance of an attachment order
to satisfy the demand raised in the reassessment order, the assessee filed a
writ petition contending that the reassessment proceedings were a nullity
because the notice was never served upon her and that the Assessing Officer did
not comply with the provisions of Rule 127 of the Income-tax Rules, 1962 which
stipulated examining the permanent account number database or the subsequent
years returns to ascertain the correct address of the assessee.

 

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

 

“i)    Rule 127(2) states that the addresses to
which a notice or summons or requisition or order or any other communication
may be delivered or transmitted shall be either available in the permanent
account number database of the assesse or the address available in the
income-tax return to which the communication relates or the address available
in the last income-tax return filed by the assesse. All these options have to
be resorted to by the concerned authority, in this case the Assessing Officer.

ii)    When the Assessing Officer issued the
reassessment notice on December 13, 2013, he was under a duty to access the
available permanent account number database of the addressee or the address
available in the income-tax return to which the communication related or the
address available in the last return filed by the addressee. The return for the
A. Ys. 2011-12 and 2012-13 had already been filed on 22/02/2012 and 13/12/2012
respectively, reflecting the changed address but with the same permanent
account number and before the same Assessing Officer.



iii)    The Assessing Officer had omitted to access
the changed permanent account number database and had mechanically sent notices
to the old address of the assessee. The subsequent notices u/s. 142(1) were
also sent to the old address and the reassessment proceedings were completed on
best judgment basis. The Assessing Officer had mechanically proceeded on the
information supplied to him by the bank without following the correct procedure
in law and had failed to ensure that the reassessment notice was issued
properly and served at the correct address in the manner known to law.

iv)   The reassessment notice issued u/s. 148, the
subsequent order u/s. 144 r.w.s. 147 and the consequential action of attachment
of the assessee’s bank accounts were quashed.”

Section 5 – Income – Accrual of income – Telecommunication service provider – Payments received on prepaid cards – Liability to be discharged at future date – To the extent of unutilised talk time payment did not accrue as income in year of sale – Unutilised amount is revenue receipt when talk time is actually used or in case of cards that lapsed on date when cards lapsed

55. CIT vs. Shyam Telelink Ltd.; 410 ITR 31
(Del) Date of order: 15th November,
2018 A. Ys. 2003-04, 20004-05 and 2009-10

 

Section 5 – Income – Accrual of income –
Telecommunication service provider – Payments received on prepaid cards –
Liability to be discharged at future date – To the extent of unutilised talk
time payment did not accrue as income in year of sale – Unutilised amount is
revenue receipt when talk time is actually used or in case of cards that lapsed
on date when cards lapsed

 

The assessee provides basic
telecommunication services and had both prepaid and post paid subscribers. The
prepaid subscribers were billed on the basis of actual talk time. According to
the Department, in respect of the prepaid cards, the assessee was to account
for and include the entire amount paid on the date of purchase of the prepaid
cards by the subscribers and the date of purchase of the prepaid card was the
date when the income accrued to the assessee.

 

However, the assesse recognised the revenue
on prepaid cards on the basis of the actual usage and carried forward the
unutilised amount outstanding on the prepaid cards, if any, at the end of the
financial year to the next year. The unutilised amount was treated as advance
in the balance sheet and recognised as revenue in the subsequent year, when the
talk time was actually used or was exhausted when the cards lapsed on expiry of
stipulated time.

 

The Tribunal held that the amount received
on the sale of prepaid cards to the extent of unutilised talk time did not
accrue as income in the year of sale. On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

 

“i)   The payments made on account of the prepaid
cards by the subscribers was an advance subject to the assesse providing basic
telecommunication services as promised, failing which the unutilised amount was
required to be refunded to the prepaid subscribers. The apportionment of the
prepaid amount was contingent upon the assessee performing its obligation and
rendering services to the prepaid customers as per the terms. If the assesse
failed to perform the services as promised, it was under an obligation to
refund the advance payment received under the ordinary law of contract or
special enactments, such as Consumer Protection Act, 1986.

ii)    The Tribunal was right in
holding that the amount received on the sale of prepaid cards to the extent of
unutilised talk time did not accrue as income in the year of sale. In the case
of prepaid cards that lapsed, the unutilised amount had to be treated as income
or receipt of the assessee on the date when the cards had lapsed. The Assessing
Officer was to compute the assessees income accordingly while he gave effect to
the order of the Tribunal.”

Section 80P(1), (2)(a)(i) – Co-operative society – Co-operative bank – Deduction u/s. 80P(1), (2)(a)(i) – Income from sale of goods for public distribution system of State Government – Ancillary activity of credit society – Entitled to deduction

54. Kodumudi Growers Co-operative Bank Ltd.
vs. ITO; 410 ITR 218 (Mad) Date of order: 31st October, 2018 A. Y. 2005-06: Ss. 80P(1), (2)(a)(i) of ITA 1961:

 

Section
80P(1), (2)(a)(i) – Co-operative
society – Co-operative bank – Deduction u/s. 80P(1), (2)(a)(i) – Income from
sale of goods for public distribution system of State Government – Ancillary
activity of credit society – Entitled to deduction

 

The assessee-society was in the business of
banking and provided credit facilities to its members. For the A. Y. 2005-06 it
filed Nil return. The Assessing Officer computed the assessee’s income at Rs.
22,16,211/- of which a sum of Rs. 2,55,118/- represented income on account of sale
of goods for the public distribution system of the Government of Tamil Nadu.
The Assessing Officer was of the view that such activity was not related to the
assessee’s banking activity and held that the income that arise therefrom was
not allowable as deduction u/s. 80P(2)(a) of the Income-tax Act, 1961
(hereinafter for the sake of brevity referred to as the “Act”) but
included such income for consideration in the overall deduction allowable u/s.
80P(2)(c)(ii) which amounted to Rs. 50,000/-.

 

The Commissioner (Appeals) and the Tribunal
upheld the decision of the Assessing Officer.

 

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

“i)   The activity undertaken by the assesse was
not one which it was not authorized to do. The assessee was entitled to
distribute the items under the public distribution system. The bye-laws
themselves provided for such an activity as an ancillary activity by the
assesse. Furthermore, the assesse was bound by the directives issued by the
Government as well as the Registrar of Co-operative Societies. The fair price
shops were opened based on the directions opened by the Government as
communicated by the Registrar of Co-operative Societies and the District
Collector. Therefore, the activity done by the assesse could not be truncated
from the activity as a credit society and the authorities below had committed
an error in denying the special deduction.

ii)    The assessee was entitled to the benefit of
deduction u/s. 80P(1) r.w.s. 80P(2)(a)(i).

iii)   The tax appeal is allowed. The orders passed
by the authorities below are set aside and the substantial question of law is
answered in favour of the assessee. The Assessing Officer is directed to extend
the benefit of deduction u/s. 80P(1) r.w.s. 80P(2)(a)(i) to the
appellant/assessee.”

Business income or long-term capital gain – Income from shares and securities held for period beyond 12 months – Investments whether made from borrowed funds or own funds of assessee – No distinction made in circular issued by CBDT – Department bound by circular – Profit is long term capital gain

53. Principal CIT vs. Hardik Bharat Patel;
410 ITR 202 (Bom): Date of order: 19th November,
2018 A. Y. 2008-09

 

Business income or long-term capital gain –
Income from shares and securities held for period beyond 12 months –
Investments whether made from borrowed funds or own funds of assessee – No
distinction made in circular issued by CBDT – Department bound by circular –
Profit is long term capital gain

 

For the A. Y. 2008-09, the Tribunal directed
the Assessing Officer to treat the profit of the assessee that arose out of the
frequent and voluminous transactions initiated with borrowed funds in shares as
“long term capital gains” instead of as business income following its order for
the earlier assessment year. The Department filed appeal before the High Court
and contended that the amount invested in shares by the assessee was out of
borrowed funds and therefore, the profit was to be treated as business income
and not as long-term capital gains. The Bombay High Court upheld the decision
of the Tribunal and held as under:

“i)   According to Circular No. 6 of 2016 dated
February 29, 2016, issued by the CBDT, with regard to the taxability of surplus
on sale of shares and securities, whether as capital gains or business income
in the case of long term holding of shares and securities beyond 12 months, the
assessee has an option to treat the income from sale of listed shares and
securities as income arising under the head “Long-term capital gains”. However,
the stand once taken by the assessee would not be subject to change and
consistently the income on the sale of securities which are held as investment
would continue to be taxed as long-term capital gains or business income as
opted by the assessee. The circular makes no distinction whether the
investments made in shares were out of borrowed funds or out of its own funds.

ii)    The Department was bound by Circular No. 6
of 2016 dated February 29, 2016 issued by the CBDT and the distinction which
had been sought to be made by the Department could not override the circular
which made no distinction whether the investments made in shares were out of
borrowed funds or out of the assessee’s own funds. No substantial question of
law. Hence not entertained.”

Section 37 (1) and 41 (1) – A. Business expenditure – Allowability of (Illegal payment) – Where assessee had purchased oil from Iraq and payments were made by an agent, there being no evidence to suggest that assessee had made any illegal commission payment to Oil Market Organisation of Iraqi Government as alleged in Volckar Committee Report, Tribunal’s order allowing payment for purchase of oil was to be upheld

52. CIT-LTU vs. Reliance Industries Ltd.;
[2019] 102 taxmann.com 142 (Bom) Date of order: 15th January, 2019

 

Section 37 (1) and 41 (1) – A.  Business expenditure – Allowability of
(Illegal payment) – Where assessee had purchased oil from Iraq and payments
were made by an agent, there being no evidence to suggest that assessee had
made any illegal commission payment to Oil Market Organisation of Iraqi
Government as alleged in Volckar Committee Report, Tribunal’s order allowing
payment for purchase of oil was to be upheld



The assessee claimed deduction towards the
payment for purchase of oil. The Assessing Officer’s case was that assessee had
paid illegal commission for purchase of such oil to State Oil Marketing
Organisation and therefore, such expenditure was not allowable.

 

The Commissioner (Appeals), while reversing
the disallowance made by the Assessing Officer, observed that there was no
evidence that the assessee had paid any such illegal commission. He noted that
except for the Volcker Committee Report, there was no other evidence for making
such addition. He noted that even in the said report, there was no finding that
the assessee had made illegal payment and it appeared that the payments were
made by an agent and there was no evidence to suggest that the assessee had
made any illegal commission payment to Iraq Government. The Tribunal confirmed
the view of Commissioner (Appeals).

 

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

 

“The entire issue is based on appreciation
of materials on record and is a factual issue. No question of law arises.”

 

B. Deemed income u/s. 41(1) – Remission or
cessation of trading liability (Claim for deduction) – Where on account of
attack on World Trade Centre, financial market, collapsed and market value of
bonds issued by assessee was brought down below their face value and, hence,
assessee purchased its own bonds and extinguished them, profit gained in
buy-back process could not be taxable u/s. 41(1) as assessee had not claimed
deduction of trading liability in any earlier year

 

The assessee had issued foreign currency
bonds in the years 1996 and 1997. On account of the attack on World Trade
Centre at USA on 11/09/2001, 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 a value
less than the face value. The assessee purchased such bonds and extinguished
them. In the process of buy back, the assessee gained a sum of Rs. 38.80 crore.
The Assessing Officer treated such amount assessable to tax in terms of section
41(1).


The Commissioner (Appeals) and the Tribunal,
however, deleted the same. The Tribunal in its detail discussion came to the
conclusion that the liability arising out of the issuance of bonds was not a
trading liability and therefore, section 41(1) would have no applicability.


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

“i)         There
is no error in the view taken by the Tribunal. Sub-section (1) of section 41 provides
that where an allowance or deduction has been made in the assessment for any
year in respect of loss, expenditure or trading liability incurred by the
assessee and subsequently, during any previous year, such liability ceases, the
same would be treated as the assessee’s income chargeable to tax as income for
previous year under which subject extinguishment took place. The foremost
requirement for applicability of sub-section (1) of section 41, therefore, is
that the assessee has claimed any allowance or deduction which has been granted
in any year in respect of any loss, expenditure or trading liability. In the
present case, the revenue has not established these basic facts. In other
words, it is not even 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) to section 41.

ii)          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 by the assessee.
Then, subsequently, during any previous year, if the creditor remits or waives
any such liability, then the assessee is liable to pay tax under section 41.
This question, therefore, does not require any consideration.”