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

8 Sections 179(1), 220, 222, 281 and Schedule II, rr 2, 16 – Recovery of tax – Attachment and sale of property – Private alienation to be void in certain cases – Condition precedent for declaring transfer void – Issuance of notice to defaulter – Failure by Department to bring on record service of notice under Rule 2 –Charge registered by Sub-Registrar six and a half years after sale deed registered in favour of purchaser – Order declaring transfer null and void and notice for auction of property set aside

Rekhadevi
Omprakash Dhariwal vs. TRO; 406 ITR 368 (Guj): Date of order: 2nd
July, 2018

A.
Y. 1998-99


The
petitioner acquired the property in question under a sale deed dated 11/12/2008
for consideration through the power of attorney of the original owner VCT. The
transaction was carried out after due diligence like public advertisement and
title clear certificate. The property had been attached on 28/09/2006, towards
the outstanding tax dues of VCT, the original owner but the petitioner had no
knowledge of such attachment and came to know about the attachment subsequently
on 29/09/2011. Thereafter the petitioner made efforts to find out the details
with regard to such attachment, but ultimately, an order dated 26/05/2015 was
passed by the Tax Recovery Officer under rule 16 of Schedule II to the Act
declaring the sale to the petitioner null and void. The petitioner communicated
with the Department on various occasions with a request to withdraw the order
declaring the sale null and void. On the basis of the order dated 26/05/2015,
which was affixed on the property along with information that the charge of the
Department had been registered on 08/12/2017, on 19/12/2017, a notice of
auction was issued to satisfy the outstanding demand of the original owner VCT.

 

The
petitioner filed writ petition challenging the said action by the Department.
The petitioner submitted that the order declaring the sale null and void after
a delay of six and half years and not within a reasonable period was arbitrary
and illegal and without jurisdiction and that therefore, the subsequent
communication for auction of the property was also illegal. Criminal
proceedings u/s. 276B of the Act were initiated against a company for
non-payment of tax deducted at source. Notice was issued to the petitioner who
was the non-executive chairman of the company treating him as the principal
officer of the company and an order was also passed.

 

The
Department contended that the property in question originally belonged to VCT,
that the order u/s. 144/147 for the A. Y. 1998-99 was passed on 23/03/2006,
that the demand was certified by the Assessing Officer on 22/08/2006 and the
tax recovery certificate was issued on 06/09/2006, and that on account of
default by the assessee VCT, the original owner of the immovable property, it
was attached by the Tax Recovery Officer on 28/09/2006 and copies were sent to
the Sub-Registrar. The notice of demand, the certificate, the order of
attachment of the property as well the panchnama by which the property was attached
were produced. The Sub-Registrar submitted that the order of attachment was
received on 26/06/2015 and subsequent thereto the charge was registered.

 

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

 

“i)    The petitioner being a bonafide purchaser
for consideration after due diligence could not be made to suffer on account of
the tax dues that ran in the name of the original owner. The sale deed was for
a consideration and the index copy was also issued in connection with the
transaction. The public notice for executing the sale deed was issued in
vernacular newspaper on 26/10/2007 and thereafter, a search was carried out.
The search report dated 01/10/2008 was also on record along with the title
clearance certificate of the advocate. It was evident from the documents that
the property in question was free from all encumbrances having clear title and
was available for transaction.

 

ii)    The documents produced along with the additional affidavit being
order u/s. 179(1), the certificate u/s. 222, the order of attachment and
panchnama drawn were all against the defaulting assesee VCT, and the petitioner
was not in the picture. The proviso to section 281 provided that such transfer
or charge might not be declared void if such a transfer or charge was made for
adequate consideration and without notice of pendency or completion of such
proceeding or without the notice of any tax liability or other sum payable by
the assessee.

According to the procedure for recovery of tax, Rule 16 of Schedule II to the
Act provides for issuance of notice for recovery of arrears by the Tax Recovery
Officer upon the defaulter requiring the defaulter to pay the amount specified
in the certificate within fifteen days from the date of the service of the
notice and intimating that in default, steps would be taken to realise the
amount.

 

iii)    Rule 16 of Schedule II to the Act provides
for private alienation to be considered void in certain cases and requires
service of notice on the defaulter under Rule 2. In the affidavit as well as in
the additional affidavit the Department had not brought on record service of
notice under Rule 2 of Schedule II.

 

iv)   Moreover, it was evident from the affidavit
filed on behalf of the Sub-Registrar that for the first time the order of
attachment was given effect to by him only on 26/06/2015, when the charge was
registered which was six and a half years after the sale deed was registered in
favour of the petitioner.

 

v)    The order of the Tax Recovery Officer
declaring the transfer null and void and the subsequent communication for
auction of the property were to be set aside.”

Section 194H – TDS – Commission – Definition – Manufacture and sale of woolen articles – Trade discounts allowed to agents who procured orders and sold goods on behalf of assessee – Not commission – Consistent trade practice followed by assessee – Concurrent finding by appellate authorities – No liability to deduct tax at source

40. CIT vs. OCM India Ltd.; 408 ITR 369
(P&H): Date of order: 9th May, 2018 A. Y. 2008-09

 

Section 194H – TDS – Commission –
Definition – Manufacture and sale of woolen articles – Trade discounts allowed
to agents who procured orders and sold goods on behalf of assessee – Not
commission – Consistent trade practice followed by assessee – Concurrent
finding by appellate authorities – No liability to deduct tax at source

 

The assessee
manufactured and sold woolen articles. During inspection of the office records
of the assesee it was found that the assessee debited an amount of Rs.
4,57,52,494, to the account of trade turnover discounts which had been netted
out from the gross turnover and did not appear as an item of expense in the
profit and loss account. The assessee submitted before the Assessing Officer
that the commission or brokerage arose on account of agency transactions which
did not attract deduction of tax at source for the services rendered by the
third party. The Assessing officer held that the amount being turnover discount
was directly or indirectly for the services rendered according to the inclusive
definition of the Explanation to section 194H of the Act and that the assessee
was liable to deduct the tax at source. A demand of Rs. 47,12,507 on account of
TDS and a further amount of Rs. 6,59,751 on account of interest charged u/s.
201(1A) was raised.

 

The Commissioner
(Appeals) held that the assessee had been debiting commission which amounted to
Rs. 1.84 crore to its commission agents appointed territory-wise who acted and procured
orders or effected sales of the assessee’s products for and on its behalf and
got commission which varied from place to place and quality of the product to
product and therefore, the Assessing officer was not justified in invoking the
provisions of section 194H read with its Explanation to the trade discount
allowed by the assessee to its buyers, customers and direct trade dealers
without involvement of any intermediator or commission agents. Accordingly, he
held that the assessee was not liable under the provisions of section 194H read
with its Explanation and deleted the demand of Rs. 53,72,258. The findings were
affirmed by the Tribunal which held that there was no material on record before
the Assessing officer that such discount offer was a commission within the
meaning of section 194H.

 

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

 

“i)    On a plain reading of section 194H, it is
clear that tax at source is to be deducted by a person responsible for paying
any income by way of “commission or brokerage”. The expression “commission or
brokerage” referred to in this section derives its meaning from the explanation
appended thereto. According to it, “commission or brokerage” includes any
payment received or receivable directly or indirectly by a person acting on
behalf of another person (a) for services rendered (not being professional
services), or (b) for any services in the course of buying or selling of goods,
or (c) in relation to any transaction relating to any asset, valuable article
or thing, not being securities. In order to examine whether Explanation (i) to
section 194H of the Act is attracted, necessarily, it is to be seen whether the
assessee has made any payment and, in case it is so, whether it is for services
rendered by the payee to the assessee.


ii)    Since concurrent findings had been recorded
by the Commissioner (Appeals) and the Tribunal that the assessee had been
debiting trade discount allowed to its commission agents who were acting and
procuring orders or effecting sales of its products for and on its behalf, the
Assessing Officer was not justified to have invoked the provisions of the
Explanation to section 194H. The Department had not been able to show any error
or illegality therein.”

30 Depreciation – Condition precedent – User of plant and machinery – Machinery utilised for trial runs – Depreciation allowable

Princ. CIT vs. Larsen and Toubro Ltd.; 403 ITR 248 (Bom); Date of Order: 06th November, 2017:
A. Y.: 1997-98:
Section 32 of ITA 1961

For the A. Y. 1997-98, the
assessee claimed depreciation in respect of machinery installed and put to use
in the production of cement. A trial run was conducted for one day and the
quantity produced was small. The assessee was unable to establish that after
the trial run, commercial production of clinker was initiated within a
reasonable time. According to the Assessing Officer, trial runs continued till
October, 1997 before a reasonable quantity of cement was produced. According to
the Assessing Officer, use of machinery for trial production was not for the
purpose of business and, therefore, depreciation could not be allowed. The
Assessing Officer therefore disallowed the claim for depreciation on the ground
that the plant was only used for trial runs.

 

The Commissioner (Appeals)
confirmed the disallowance finding that there was a long gap between the first
trial run, subsequent trial runs and commercial production and that the user of
the assets during the year should be actual, effective and real user in the
commercial sense. The Tribunal held that once the plant commenced operations
and a reasonable quantity of product was produced, the business was set up even
if the product was substandard and not marketable. It directed the Assessing
Officer to verify the period of use and restrict depreciation to 50% if the
Assessing Officer found that the machinery was used for less than 180 days
during the year under consideration.

 

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

 

“i) Once a plant commences
operation, even if the product is substandard and not marketable, the business
can be said to have been set up. Mere breakdown of machinery or technical snags
that may have developed after the trial run which had interrupted the
continuation of further production for a period of time cannot be held to be a
ground to deprive the assessee of the benefit of depreciation.

ii) The assessee was
entitled to depreciation.

 

iii) The appeal is not
entertained. The appeal is accordingly dismissed.”

Sections 194L, 194J and 260A – TDS – Acquisition of capital asset – Compensation payment (Encroached land) – Section 194L – Where land belonging to State was encroached upon, and such encroachment was removed by assessee, and encroaching squatters/hutment dwellers were rehabilitated, there was no question of land being acquired by assessee and, therefore, provisions of section 194L would not be applicable

19. CIT(TDS) vs. Mumbai
Metropolitan Regional Development Authority; [2018] 97 taxmann.com 461 (Bom):

Date of the order: 6th
September, 2018

A. Ys. 2008-09 and 2009-10

 

Sections 194L, 194J and 260A – TDS – Acquisition of capital asset
– Compensation payment (Encroached land) – Section 194L – Where land belonging
to State was encroached upon, and such encroachment was removed by assessee,
and encroaching squatters/hutment dwellers were rehabilitated, there was no
question of land being acquired by assessee and, therefore, provisions of
section 194L would not be applicable

 

TDS – Fees for professional or technical services (Maintenance
services) – Section 194J – Where assessee made payments in respect of
maintenance contracts which related to minor repairs, replacement of some spare
parts, greasing of machinery etc., since, these services did not required any
technical expertise, same could not be categorised as ‘technical services’ as
contemplated u/s. 194J

 

For the purpose of implementing
scheme of Government relating to road widening near railway track, assessee
evacuated illegal/unauthorised persons who were squatters/hutment dwellers –
Since, possession of these persons was unauthorised and illegal and they were
not owners of land on which they had squatted/built their illegal hutments the
Assessing Officer was of the firm opinion that there had been acquisition of
immovable property, for which the affected persons were compensated as per the
Land Acquisition Act, 1894. Since, the assessee had not deducted Tax at Source
as per the provisions of section 194L/194LA of the Act, the Assessing Officer
treated the assessee as an assessee in default and computed the payment of tax
u/s. 201(1) and that for interest u/s. 201(1A). Additionally, for A. Ys.
2008-09 and 2009-10 the Assessing Officer noticed that the assessee had made
payment towards Annual Maintenance Contracts (AMCs) for Air Conditioners and
Lifts on which TDS was deducted u/s. 194C when, according to the Assessing
Officer, the same ought to have been deducted u/s. 194J. Since, the assessee
had deducted TDS u/s. 194C, the Assessing Officer proceeded by levying the
liability u/s. 201(1) and also held the assessee liable to pay interest u/s.
201(1A). In relation to section 194L/194LA,
the Commissioner (Appeals) accepted that there was no payment of compensation
for acquisition of any land or immovable property, and therefore, the said
sections had no application to the facts of the present case. Accordingly, he
deleted the demand raised by the Assessing Officer u/s. 201(1) and 201(1A).
Similarly, the Commissioner (Appeals) observed that the Annual Maintenance
Contracts were contracts for periodical inspection and routine maintenance work
along with supply of several parts. He was, therefore, of the view that such
services did not constitute technical services, and therefore, section 194J had
no application to the facts and circumstances of the present case. In these
circumstances, the Commissioner (Appeals) held that the assessee had correctly
deducted the TDS u/s. 194C and was not required to deduct TDS as per the
provisions of section 194J thereof. He, therefore, deleted the demand of
tax/interest u/s. 201(1) and section 201(1A). The Tribunal upheld the order of
the Commissioner (Appeals) and dismissed the appeals filed by the revenue.

 

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

 

“i)    Section194LA inter alia deals with payment
of compensation on acquisition of certain immovable property. Section 194LA was
brought into force with effect from 01/10/2004. Section 194L, deals with
payment of compensation on acquisition of a capital asset and was omitted with
effect from 01/06/2016. Basically, what both these provisions provide is that
any person responsible for paying to a resident any sum in the nature of
compensation or enhanced compensation or consideration or enhanced
consideration on account of compulsory acquisition, under any law for the time
being in force of any capital asset, at the time of payment of such sum in cash
or by issue of a cheque or draft or by any other mode, whichever is earlier, is
liable to deduct an amount equal to 10 per cent of such sum as TDS on the
income comprised therein. The provisos to said sections are not really relevant
or germane for our purpose. What can be seen from the aforesaid provisions is
that TDS is to be deducted when compensation is paid on account of compulsory
acquisition under any law for the time being in force. In the facts of the
present case, as correctly recorded by the Tribunal, for the purpose of
implementing the scheme of the Government relating to road widening near the
railway track, the assessee evacuated the illegal/unauthorised persons who were
squatters/hutment dwellers.

ii)    The
fact of the matter was that the possession of these persons was unauthorised
and illegal and they were not the owners of the land on which they had
squatted/built their illegal hutments. In fact, they were trespassers. This
being the case, there was no question of the land being acquired by the
assessee. In fact the Tribunal, came to the conclusion that the land always
belonged to the State; it was encroached upon, which encroachment was removed
by the assessee; and the encroaching squatters/hutment dwellers were rehabilitated.
This being the case, section 194L or section 194LA had absolutely no
application to the facts and circumstances of the present case. The revenue has
totally misunderstood the law when it assumes that the squatters/hutment
dwellers are deemed owners of the land on which they squat or encroach upon.
The squatters/hutment dwellers have absolutely no title in the land on which
they squat or build their illegal and unauthorised hutments. This being the
case, there is no question of there being any compulsory acquisition from them
under any law either under the Land Acquisition Act, 1894 or any other
enactments which permit compulsory acquisition of land. This being the case,
section 194L or section 194LA has absolutely no application to the facts and
circumstances of the present case.

iii)    In this regard the Tribunal correctly held that the assessee had
made payments only in respect of maintenance contracts which relate to minor
repairs, replacement of some spare parts, greasing of machinery etc. These
services do not require any technical expertise, and therefore, could not be
categorized as ‘technical services’ as contemplated u/s. 194J. Section 194J,
deals with fees for professional or technical services. In contrast, section
194C deals with payments to contractors. In the facts and circumstances of the
present case, the assessee had correctly deducted TDS under the provisions of
section 194C and not as per the provisions of section 194J thereof. This being
the case, even the additional question of law (for the A. Ys. 2008-09 and
2009-10 does not give rise to any substantial question of law which would
require to admit the present appeals.

iv)   They
are all, accordingly, dismissed.”

29 Cash credits – Burden of proof – Change of law – Assessee discharging onus by filing confirmation letters, affidavits, full addresses and PAN of creditors – Amendment requiring assessee to explain source of source – Not to be given retrospective effect – Cash credit not to be taxed

Princ.
CIT vs. Veedhata Tower P. Ltd.; 403 ITR 415 (Bom): Date of Order: 17th
April, 2018:

A.
Y.: 2010-11:

Section
68 of I. T. Act, 1961


The assessee obtained a
loan from LFPL. For the A. Y. 2010-11, the Assessing Officer held that the
assessee was unable to establish the genuineness of the loan transactions
received in the name of LFPL nor prove the credit worthiness or the real source
of the funds and made an addition of the loan of Rs. 1.65 crore as unexplained
cash credit u/s. 68 of the Income-tax Act, 1961.

 

The Tribunal held that the
assesse had discharged the onus placed upon it u/s. 68 of the Act by filing
confirmation letters, affidavits, the full addresses and PAN of creditors, that
therefore, the Department had all the details available with it to proceed
against the persons whose source of funds were alleged to be not genuine and
deleted the addition made by the Assessing Officer.

 

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

 

“i)  The proviso to section 68 of the Act was
introduced by the Finance Act, 2012 w.e.f 01/04/2013 and therefore, it would be
effective only from the A. Y. 2013-14 onwards and not for earlier assessment
years.

 

ii)  The Tribunal found that the assessee had discharged
the onus which was cast upon it in terms of the pre-amended section 68 of the
Act by filing the necessary confirmation letters of the creditors, their
affidavits, their full addresses and their PANs. The finding of fact was not
shown to be perverse.

 

iii) Since there was no obligation to explain the
source of the source prior to 01/04/2013, i.e. A. Y. 2013-14, no substantial
question of law arose from the order of the Tribunal.”

28 Bad debts (Computation of) – U/s.36(1)(viia) read with rule 6ABA aggregate average advance made by rural branches of scheduled bank would be computed by taking amount of advances made by each rural branch as outstanding at end of last day of each month comprised in previous year which had to be aggregated separately

Principal CIT vs. Uttarbanga Kshetriya Gramin Bank.; [2018] 94 taxmann.com 90 (Cal):
Date of Order:  07th May, 2018:
A. Y.: 2009-10:
Section 36(1)(viia) of ITA 1961 r.w.r. 6ABA of ITRules 1962

The assessee was a regional
rural bank and its main business was banking activity. The assessee claimed
deduction u/s. 36(1)(viia)(a) from its total income. The case of the assessee
was that it had 71 rural branches. 10 per cent of aggregate monthly average
advance u/s. 36(1)(viia) read with Rule 6ABA, 1962 Rules came to Rs. 22.25
crore. The Assessing Officer, however calculated the sum at Rs. 81.88 lakh on
the basis of aggregate of monthly average advances of Rs. 8.18 crore being the
sum total of advances made during the financial year relevant to A. Y. 2009-10.

 

The Appellate Authority
confirmed the action of the ITO. The Tribunal allowed assessee’s appeal holding
that as per Rule 6ABA of 1962 Rules, for the purpose of section 36(1)(viia),
the aggregate average advance made by the rural branches of scheduled bank
would be computed by taking amount of advances made by each rural branch as outstanding
at the end of the last day of each month comprised in the previous year which
had to be aggregated separately.

 

The Tribunal thus directed
the Assessing Officer to compute 10 per cent of the aggregate monthly average
advances made by the rural branch of such Bank by taking the amount of advances
by each rural branch of such Bank by taking the amount of advances by each
rural branch as outstanding at the end of the last day of each month comprised
in the previous year and aggregate the same separately as given under Rule
6ABA.

 

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

 

“The amended direction made
by the Tribunal is in terms of Rule 6ABA. The ITO had made the computation of
aggregate monthly advances taking loans and advances made during only the
previous year relevant to assessment year 2009-10 as confirmed by CIT (A). The
Tribunal amended such direction, correctly applying the rule.”

 


27 Assessment – Jurisdiction of AO – AO not having jurisdiction – Effect of transfer of case u/s. 127 – Waiver by assessee and assessee taking part in assessment proceedings – Waiver will not confer jurisdiction on AO – Order passed by AO not valid

CIT vs. Lalitkumar Bardia; 404 ITR 63 (Bom):
Date of Order: 11th July, 2017:

F.
Ys.: 1989-90 to 1999-2000:

Sections
124, 127 and 158BC of I. T. Act, 1961



Search and seizure – Block
assessment – Notice – Jurisdiction of AO – Objection to jurisdiction u/s.
124(3) – Limitation – Limitation not applicable to return filed u/s. 158BC

 

Search was carried out u/s.
132 of the Income-tax Act, 1961 in the case of assessee in February 1999. At
that time, the assessee was being assessed at Rajnandgaon (MP). On  06/07/1999, the Commissioner, Raipur, in
exercise of powers u/s. 127 of the Act, transferred the assessee’s assessment
proceedings (case) from ITO Rajnandgaon to the Dy. Commissioner, Nagpur. The
assessee challenged the order dated 06/07/1999 before Madhya Pradesh High
Court. On 17/09/1999, the Madhya Pradesh High Court quashed the order dated
06/07/1999 and directed the Commissioner to hear the assessee and pass a reasoned
order in support of the transfer of the case. On 22/09/1999, the Dy.
Commissioner Nagpur issued a show cause notice u/s. 158BC of the Act calling
upon the assessee to file his return of income. In response to the notice, on
05/05/2000, the assessee filed his return of income declaring undisclosed
income at Rs. “Nil”. In the mean time, the Commissioner passed a fresh order
u/s. 127 dated 18/01/2000 maintaining the order dated 06/07/1999. On
12/08/2000, the Dy. Commissioner, Nagpur issued notices u/ss. 142(1) and 143(2)
of the Act. The assessee participated in the proceedings and consequent thereto
an order of assessment dated 28/02/2001 was passed u/s. 143(3) r.w.s. 158BC of
the Act by the Dy. Commissioner , Nagpur.

 

The Commissioner (Appeals)
partly allowed the appeal filed by the assessee. Before the Tribunal, the
assessee raised an additional ground that the assessment order dated 28/02/2001
passed by the Dy. Commissioner, Nagpur, was without jurisdiction. Holding that
on 22/09/1999 when the notice u/s. 158BC of the Act was issued, the Dy.
Commissioner, Nagpur did not have jurisdiction, the Tribunal allowed the
assessee’s appeal.

 

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

 

“i) The issue of notice
u/s. 158BC of the Act, consequent to search is mandatory, as it is the very
foundation for jurisdiction. Therefore, the notice u/s. 158BC of the Act has
necessarily to be issued by a person who is the Assessing Officer and not by
any officer of the Income-tax Department.

 

ii) A
waiver would mean a case where a party decides not to exercise its right to a
particular privilege, available under the law. However, non-exercise of the
right or privilege will not bestow jurisdiction on a person who inherently
lacks jurisdiction. Therefore, the principle of waiver cannot be invoked so as
to confer jurisdiction on an officer who is acting under the Act when he does
not have jurisdiction. The Act itself prohibits an officer of income-tax from
exercising jurisdiction u/s. 158BC, unless he is an Assessing Officer. This
limit in the power of the Income-tax Officer in exercise of jurisdiction is
independent of the conduct of any party. Waiver can only be of irregular
exercise of jurisdiction and not of lack of jurisdiction.

 

iii) Transfer of
proceedings u/s. 127 of the Act cannot be retrospective so as to confer
jurisdiction on a person who does not have it. Section 127 of the Act does not
empower the authorities under the Act to confer jurisdiction on a person who does
not have jurisdiction with retrospective effect. Section 127 does not validate
notices or orders issued without jurisdiction, even if they are transferred to
a new officer by an order u/s. 127.

 

iv) The amendment by the
Finance Act, 2016 w.e.f. 01/06/2016 brings cases within the ambit of section
124(3) of the Act when notice is issued consequent to search u/s. 153A or
section 153C of the Act prohibiting an assessee from raising the issue of
jurisdiction. It does not include notices issued u/s. 158BC. Hence the time bar
u/s. 124(3) to question the jurisdiction of the Income-tax Officer would not
apply to the cases where return has been filed consequent to notice u/s. 158BC.

 

v) It was an undisputed
position that the return of income was filed declaring undisclosed income at
“nil” on 05/05/2000 in response to the notice dated 22/09/1999 issued u/s.
158BC of the Act and not consequent to notice u/s. 142(1)(i) of the Act which
was issued on 12/08/2000. The bar of section 124(3) of the Act, would not
prohibit the assessee from calling in question the jurisdiction of the Dy.
Commissioner, Nagpur in passing the assessment order beyond the period provided
therein.

 

vi) On 22/09/1999, when the
notice u/s. 158BC was issued by the Dy. Commissioner, Nagpur, he was not the
Assessing Officer of the assessee. The notice and the consequent assessment
were not valid.”

54. Dimension Data Asia Pacific PTE Ltd. vs. Dy. CIT; [2018] 96 taxmann.com 182 (Bom): Date of order: 6th July, 2018: A. Y.: 2011-12 Section 144C r.w.s. 143(3) – Transfer pricing – Reference to DRP (Draft assessment order) – Where in case of foreign assessee, Assessing Officer passed final assessment order u/s. 144C(13), read with section 143(3) without passing a draft assessment order u/s. 144C(1), said order being violative of provisions of section 144C(1), deserved to be set aside

The assessee was a foreign company
entitled to the procedure provided u/s. 144C. For relevant year assessee filed
its return declaring nil income. The Assessing Officer passed assessment order
u/s. 143(3) r.w.s. 144C(13) making certain addition to assessee’s income. The
assessee filed writ petition raising a contention that it was entitled to a
draft assessment order being passed u/s. 144C(1) before the final assessment
order as passed in this case u/s. 143(3) r.w.s. 144C(13) since the impugned
order ignored the mandate of section 144C same deserved be set aside.

 

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

 

“i)  It
is an undisputed position that the assessee is a foreign company and an
eligible assessee as defined in section 144C(15)(b)(ii) of the Act. A foreign
company is entitled to being assessed in accordance with section 144C of the
Act. It is the section 144C, which provides a separate scheme for the manner in
which the Assessing Officer would pass assessment orders under the Act and a
separate procedure to challenge a draft order i.e. before an assessment order
which is subject to appeal under the Act is passed.

 

ii) The
entire object is to ensure that the disputes of Foreign Companies are resolved
expeditiously and final assessment orders are not passed without a re-look to
the proposed order (draft order), if so desired by the Foreign Company. In
essence, it obliges the Assessing Officer to first pass a draft of the proposed
assessment order indicating the proposed variation in the income returned. This
draft Assessment Order is to be passed u/s. 144C(1) of the Act, which entitles
an eligible assessee such as a Foreign Company to approach the DRP with its
objection to the draft assessment order. This is so provided, so that an
eligible assessee can have his grievance addressed before the final assessment
order is passed. In case, an assessee does not object to the draft assessment
order, then a final assessment order is passed in terms of the draft assessment
order by the Assessing Officer. It is only on passing of the final assessment
order that the assessee, if aggrieved by it, would be able to approach the
appellate authorities under the Act. These special rights are made available
u/s. 144C to an eligible assessee such as the assessee. Therefore, it cannot be
ignored by passing a final order u/s. 144(13) of the Act without preceding it
with a draft assessment order as required therein.

 

iii) The contention of the revenue that the requirement of passing a
draft assessment order u/s. 144C of the Act would only extend to the orders
passed in the first round of proceedings or in respect of an order passed by
the Assessing Officer in remand proceedings by the Tribunal which has entirely
set aside the original assessment order. This distinction which is sought to be
drawn by the revenue is not borne out by section 144C of the Act. In fact, even
in partial remand proceedings from the Tribunal, the Assessing Officer is
obliged to pass a draft assessment order u/s. 144C(1) of the Act. The Assessing
Officer, is obliged to, in terms of section 144C to pass a draft assessment
order in all cases where he proposes to assess the Foreign Company under the
Act by making a variation in the returned income.

 

iv) In
this case, the impugned order has been passed in terms of section 143(3) read
with section 144C read with section 254 of the Act and it certainly makes a
variation to the returned income filed by the assessee. This even if, one
proceeds on the basis that the returned income stands varied by the order of
the Tribunal in the first round, to the extent the petitioner accepts it.
Therefore, the Assessing Officer correctly invokes section 144C of the Act in
the impugned order. Once having invoked section 144C, the Assessing Officer is
obliged to comply with it in full and not partly. This impugned order was
passed consequent to the order of the Tribunal restoring some of the issues before
it to the Assessing Officer for fresh adjudication.

 

v) This
‘fresh adjudication’ itself would imply that it would be an order which would
decide the lis between the parties, may not be entire lis, but
the dispute which has been restored to the Assessing Officer. The impugned
order is not an order merely giving an effect to the order of the Tribunal, but
it is an assessment order which has invoked section 143(3) of the Act and also
section 144C of the Act. This invocation of section 144C of the Act has taken
place as the Assessing Officer is of the view that it applies, then the
requirement of section 144C(1) of the Act has to be complied with before he can
pass the impugned order invoking section 144C(13) of the Act.

 

vi) In
fact, section 144C(13) of the Act can only be invoked in cases where the
assessee has approached the DRP in terms of s/s. 144C(2)(b) of the Act and the
DRP gives direction in terms of section 144C(5) of the Act. In this case, the
assessment order has invoked section 144C(13) of the Act without having passed
the necessary draft assessment order u/s. 144C(1) of the Act, which alone would
make a direction u/s. 144C(5) of the Act by the DRP possible. Thus, the
impugned order is completely without jurisdiction.

 

vii) Moreover, so far as a foreign company is concerned, the
Parliament has provided a special procedure for its assessment and appeal in
cases where the Assessing Officer does not accept the returned income. In this
case, in the working out of the order of the Tribunal results in the returned
income being varied, then the procedure of passing a draft assessment order
u/s. 144C(1) of the Act is mandatory and has to be complied with, which has not
been done.

 

viii)  In the above view, the impugned order has
been passed without complying with the mandatory requirements of section 144C
of the Act which is applicable to a foreign company such as the assessee.
Therefore, the impugned order is quashed and set aside.”

53. CIT vs. Shark Roadways Pvt. Ltd.; 405 ITR 78 (All): Date of order: 1st May, 2017: A. Y.: 2008-09 Sections 40(a)(ia) and 194C – TDS – Payments to contractors – Payment of hire charges – No contract between assessee and parties of hired vehicles on freight basis for transportation on behalf of principal – Transporters not contractors or sub-contractors – No liability to deduct tax at source

For the A. Y. 2008-09, the
Assessing Officer made additions to the assessee’s income on the ground that
the assessee was a transporter and not trader, and therefore, provisions of
section 194C of the Act were applicable to the hire charges paid by it to the
parties whom the lorries or trucks were hired.

 

The Commissioner (Appeals) called
upon the assessee to produce copies of challans and after verifying them found
that section 194C was not attracted. He found that for the fulfillment of its
transportation commitment to its principals, the assessee, besides using its
own trucks and lorries was also hiring trucks and lorries from other owners or
directly from the drivers available in the market through brokers on a random
basis as and when required on freight basis. He further found that the payments
of hire charges were made directly by the assessee to those transporters without
there being any written or oral contract, vis-à-vis its principal. He held that
the payment of lorry hire charges to individual transporters was part of the
direct costs attributable to the receipts of the assessee, computable u/s. 28
and that in the absence of any evidence, it could not be said that the
individual truck owners or drivers of transporters were contractors or
sub-contractors of the assessee. Consequently, he held that the payments made
to such transporters hired by the assessee were not in the nature of payments
to contractors or sub-contractors within the meaning of section 194C. The
Tribunal affirmed the findings of the Commissioner (Appeals) and held that the
provisions of section 194C did not apply.

 

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

 

“i)  The
learned counsel for the appellant (Department) could not show that the
Assessing Officer while taking the view against the assessee by reference to
section 194C recorded his findings based on any evidence whatsoever and we find
that it was only on assumption.

 

ii)  It
is for this reason the findings of the Assessing Officer have been reversed by
the Commissioner (Appeals) and the Tribunal. These are concurrent findings of
fact and when vouchers otherwise were verifiable, we find no reason to take an
otherwise view in the matter.

 

iii)  The question is answered against the appellant, i.e., the Revenue.
The appeal lacks merit.”

52. Banco Products (India) Ltd. vs. Dy. CIT; 405 ITR 318 (Guj): Date of order: 26th March, 2018: A. Y.: 2008-09 Section 35(2AB) – Scientific research expenditure – Weight deduction – Condition precedent for weighted deduction u/s. 35(2AB) – Date of approval not relevant – Application for approval in December 2006 and approval granted in October 2008 – Assessee entitled to weighted deduction in A. Y. 2008-09

The assessee claimed weighted
deduction u/s. 35(2AB) of the Act on the expenditure incurred for setting up
research and development facility. This was supported by the approval granted
by the concerned authority with respect to such facility. The Assessing Officer
was of the opinion that such deduction could not be granted for the period
prior to the effective date
of approval.

 

The Commissioner (Appeals) upheld
the decision of the Assessing Officer. The Tribunal took the view that the
facts were somewhat contradictory. It was not clear when the application for
approval was made and when actually approval was granted. The Tribunal
therefore, remanded the proceedings for fresh consideration by the Assessing
Officer.

 

On appeal by the assessee, the
Gujarat High Court held as under:

 

“i) Section 35(2AB) of the Act is
aimed at promoting development of in-house research and development facility
which necessarily would require substantial expenditure which immediately may
not yield desired results or be correlated to generation of additional revenue.
By very nature of things, research and development is a hit and miss exercise.
Much of the efforts, capital as well as human investment may go waste if the
research is not successful. The Legislature therefore, having granted special
deduction for such expenditure, it should be seen in the light of the purpose
for which it has been recognised. Research and development facility can be set
up only after incurring substantial expenditure. The application for approval
of such facility can be made only after setting up of such facility. Once an
application is filed by the assessee to the prescribed authority, the assessee
would have no control over when such application is processed and decided. Even
if therefore, the application is complete in all respects and the assessee is
otherwise eligible for grant of such approval, approval may take some time to
come by.  

 

ii)    The
claim for deduction cannot be defeated on the ground that such approval was
granted in the year subsequent to the financial year in which the expenditure
was incurred. In order to avail of the deduction u/s. 35(2AB) what is relevant
is not the date of recognition or the cut off date mentioned in the certificate
of the prescribed authority or even the date of approval, but the existence of
recognition.

 

iii)   The Assessing Officer was not right in restricting the deduction
to expenditure incurred prior to April 1, 2008. He had to recomputed such
deduction and give its effect to the assessee for the relevant assessment year.

 

iv)   In
the result, the appeal is allowed. The question is answered in favour of the
assessee. Decision of the Assessing Officer to restrict the assessee’s claim
for deduction on the expenditure which was incurred prior to April 1, 2008 is
set aside. The Assessing Officer shall recomputed such deduction and give its
effect to the assesee for the relevant assessment year.”

51. Ashokbhai Jagubhai Kheni vs. Dy. CIT (Appeals); 405 ITR 179 (Guj); Date of order: 12th March, 2018: A. Ys.: 2011-12, 2013-14 and 2014-15 Section 220(6) and CBDT Circulars – Recovery of tax – Stay of recovery pending appeal – Circular by CBDT that 15% of disputed demand to be deposited for stay – Permits decrease or even increase in percentage of disputed tax demand to be deposited – Requirement reduced to 7.5% on further condition of security for remaining 7.5% to satisfaction of Assessing Authority

For A. Ys. 2011-12, 2013-14 and
2014-15, the Assessing Officer raised a total demand of Rs. 30 crore. The
Assessee filed appeals before the Commissioner (Appeals) and requested for stay
of the demand pending appeals u/s. 220(6) of the Act. The Assessing Officer
required the assessee to deposit 15% of the disputed tax demand, upon which,
the recovery of the remaining amount would be stayed. The assessee approached
the Principal Commissioner, who refused to grant any further relief to the
assessee.

 

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

 

“i)  The
issue of granting stay of pending appeals is governed principally by two
circulars issued by the CBDT. The first circular was issued on 02/02/1993 being
Instruction No. 1914.

 

The circular contained guidelines
for staying the demand pending appeal, stating that the demand would be stayed
if there are valid reasons for doing so and mere filing of appeal against the
order of assessment would not be sufficient reason to stay the recovery of
demand. The instructions issued under office memorandum dated 29/02/2016 are
not in supersession of Instruction of Instruction No. 1914 but are in partial
modification thereof. This circular thus lays down 15% of the disputed demand to
be deposited for stay, by way of a general condition.

 

The circular does not prohibit or
envisage that there can be no deviation from this standard formula. In other
words, it is inbuilt in the circular itself that the percentage of the disputed
tax to be deposited could be either decreased or even increased for an assessee
to enjoy stay pending appeal. The circular provides the guidelines to enable
Assessing Officers and Commissioners to exercise such discretionary powers more
uniformly.

 

ii)   The
total tax demand was quite high. Even 15% of the disputed tax dues would run
into several crores of rupees. Considering such facts and circumstances, the
requirement of depositing the disputed tax dues was to be reduced to 7.5% in
order to enable the assessee to enjoy stay of pending appeals before the
Commissioner. This would however be on a further condition that he should offer
immovable security for the remaining 7.5% to the satisfaction of the assessing
authority.

 

iii)  The order passed by the Principal Commissioner was to be modified
accordingly. Both these conditions should be satisfied by April 30, 2018.”

50. Principal CIT vs. Geetaben Chandulal Prajapati; [2018] 96 taxmann.com 100 (Guj) : Date of order: 10th July, 2018: A. Y.: 2006-07 Section 271(1)(c) and 275(1A) – Penalty – Concealment of income – Where penalty proceeding initiated against assessee were dropped after considering reply submitted by assessee, Assessing Officer was not justified in initiating fresh penalty proceedings on same set of facts

The assessee did not file the
return of income for the year under consideration, though she received a total
sum of Rs. 62 lakh out of the sale consideration for sale of the land and
thereafter she filed the return of income only after notice u/s. 148 of the Act
and offered the aforesaid amount to tax. The income was assessed at Rs. 62
lakh. However, the Assessing Officer also initiated the penalty proceedings to
which the assessee filed the reply. The Assessing Officer dropped the penalty
proceedings considering the reply submitted by the assessee. Against the
assessment order the assessee filed appeal before the Commissioner (Appeals).
The said appeal came to be dismissed by the Commissioner (Appeals). Thereafter,
the Assessing Officer issued the fresh notice to the assessee for imposing the
penalty u/s. 271(1)(c) and passed the order imposing the penalty u/s.
271(1)(c).

 

On appeal, the Commissioner (Appeals)
cancelled the penalty levied u/s. 271(1)(c). The Tribunal confirmed the order
of the Commissioner (Appeals).

 

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

 

“i) 
It can be said that fresh penalty proceedings are permissible only with
a view to give effect to the order of the higher Forum revising the assessment
and a fresh penalty order can be passed and/or penalty can be imposed,
enhancing, reducing or canceling the penalty or dropping the proceedings for
the imposition of the penalty on the basis of the assessment as revised by
giving effect to such order of the Commissioner (Appeals) …. etc.

 

ii) 
Therefore, in a case where the assessment was not required to be revised
pursuant to the order passed by the Commissioner (Appeals) or the Appellate
Tribunal or the High Court or the Supreme Court, as the case may be, the power
u/s. 275(1A) cannot be exercised and the fresh penalty proceedings cannot be
initiated once earlier the penalty proceedings were dropped after considering
the reply submitted by the assessee, as there is no revised assessment which is
required to be giving effect to. Therefore, it is to be noted that the
Commissioner (Appeals) as well as the Tribunal are justified in deleting the
penalty imposed u/s. 271(1)(c) faced with a situation that earlier the penalty
proceedings were dropped after considering the reply submitted by the assessee
and that thereafter the assessment was not required to be revised giving effect
to the order passed by the learned Commissioner (Appeals) as the Commissioner
(Appeals) simply confirmed the assessment order determining the income at Rs.
62 lakh. In the facts and circumstances of the case narrated herein above, the
order passed by the Tribunal deleting the penalty u/s. 271(1)(c) is to be
confirmed.

 

iii)  No substantial question of law arises and
hence, present Tax Appeal deserves to be dismissed.”

49. Kalanithi Maran vs. Union of India; 405 ITR 356 (Mad): Date of order: 28th March, 2018 Sections 2(35)(b) and 276B – Offences and prosecution – TDS – Failure to pay tax deducted at source to Revenue – Company – Principal officer – Non-executive chairman not involved in day-to-day affairs of company – Managing director admitting liability and entering into negotiations with Revenue – Prosecution of non-executive chairman – Not valid

Criminal proceedings u/s. 276B of
the Act were initiated against a company for non-payment of tax deducted at
source. Notice was issued to the petitioner who was the non-executive chairman
of the company treating him as the principal officer of the company and an
order was also passed.

 

The non-executive chairman filed a
writ petition and challenged the said action against him. The Madras High Court
allowed the writ petition and held as under:

 

“i)  U/s.
2(35)(b) of the Act, 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 states that it shall not render any
such person liable to any punishment, if he proves that offence was committed
without his knowledge.

 

ii)  The
assessee had stated that he was not involved in the day-to-day affairs of the
company and that he was only a non-executive chairman and not involved in the
management and administration of the company. The managing director himself had
specifically stated that he was the person in charge of the day-to-day affairs
of the company.

 

iii)  The second respondent, while passing the order naming the assessee
as the principal officer had not given any reason for rejecting the contention
of the managing director. The second respondent without any reason had named
the assessee as the principal officer. Merely because the assessee was the
non-executive chairman, it could not be stated that he was in charge of the
day-to-day affairs, management and administration of the company.

 

The second respondent should have
given the reasons for not accepting the case of the managing director as well
as the petitioner in their respective reply. The conclusion of the second
respondent that the assessee being a chairman and major decisions were taken in
the company under his administration was not supported by any material evidence
or any legally sustainable reasons. The second respondent had not produced any
material to establish that the petitioner was responsible for the day-to-day
affairs of the company.

 

iv) In
the absence of any material, the second respondent should not have come to the
conclusion that the assessee was the principal officer. The order which held
the assessee as the principal officer of the company and therefore, liable to
be prosecuted for the alleged default of the company u/s. 276B was not valid.”

48. CIT vs. Bhatia General Hospital; 405 ITR 24 (Bom): Date of order: 26th February, 2018: A. Y.: 2007-08 Sections 11, 32(1)(iii) and 37 – Charitable purpose – Hospital – Equipment – Equipment which had outlived its useful life – Depreciation – Government rules prohibiting sale as scrap – Additional depreciation allowable – Computation of income – On commercial principles

The assessee was a charitable
trust, running a hospital. For the A. Y. 2007-08, the Assessing Officer
disallowed the assessee’s claim to additional depreciation on the hospital
equipment, which had completed their usefulness of 10 years. It was submitted
by the assessee that the claim was only for the purpose of writing off the
value of the assets. However, the Assessing Officer held that in a case where the
assets had outlived their useful life, they should have been sold as scrap and
in the absence of such evidence, disallowed the claim of additional
depreciation.

 

The Commissioner (Appeals) held
that the income of the trust was required to be computed on commercial
principles and allowed the assessee’s claim to additional depreciation. The
Tribunal recorded that the additional depreciation had been claimed by the
assessee in respect of hospital equipment which had outlived its life and that
according to the Government rules the assessee was prohibited from selling such
hospital equipment as scrap and upheld the order of the Commissioner (Appeals)
and reiterated the fact that the income of the trust had to be computed on
commercial principles.

 

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

 

“i)  According
to the provisions of section 32(1)(iii) of the Income-tax Act, 1961, where a
plant and machinery was discarded or destroyed in the previous year, the amount
of money received on sale as such or as scrap or any insurance amount received
to the extent it fell short of the written down value was allowed as
depreciation, provided the same was written off in the books of account.

 

ii)   The
assessee could not sell the hospital equipment as scrap nor it could use the
hospital equipment. Therefore, the written down value of the hospital
equipment, was to be allowed as depreciation, as the asset had been written off
from its books of account. Thus, the nomenclature, as additional depreciation
rather than depreciation, was the only objection of the Department and the
nomenclature could not decide a claim.

 

iii)  It was also allowable as business u/s. 37 as it was an expenditure
incurred wholly and exclusively for carrying out its activity as hospital.(on
commercial principles).”

47. Jayantilal Investments vs. ACIT; [2018] 96 taxmann.com 38 (Bom): Date of order: 4th July, 2018 A. Y.: 1988-89 Section 36(1)(iii) – Business expenditure – Interest on borrowed capital – Where assessee, engaged in construction business, purchased plot of land out of borrowed funds for implementation of a project, since plot of land was purchased in course of business of assessee, same formed part of its stock-in-trade, and, therefore, interest paid on borrowings for purchase of said land was to be allowed as revenue expenditure

The assessee partnership firm was
engaged in construction activity. The assessee had taken a loan to purchase
open plot of land for its project named, ‘LS’. The assessee had claimed an
amount paid as interest on said loan as revenue expenditure. The Assessing
Officer held that purchase of plot of land was capital in nature. Hence,
interest must also be capitalised. Thus, he disallowed the deduction on amount
being interest paid on loan for acquisition of land.

 

On appeal, the Commissioner
(Appeals) found that interest paid on borrowings for purchase of land was
allowed as revenue expenditure in the earlier assessment years and it was only
in the subject assessment year that the Assessing Officer for the first time
treated the same as work-in-progress and capitalised the same. He held that the
interest paid on the loan taken for the purpose of its stock-in-trade, i.e.,
plot of land for the ‘LS’ project had to be allowed as expenditure to determine
its income. Consequently, he deleted the disallowance made by the Assessing
Officer. The Tribunal held that crucial question to be decided was whether the
assessee could be said to have commenced work on project ‘LS’ during the
previous year relevant to subject assessment year. On facts it held that the
assessee had not shown any work had commenced on LS project plot of land during
the previous year relevant to the subject assessment year. Thus, the Tribunal
concluded that the Assessing Officer was justified in coming to conclusion that
interest expenditure in respect to ‘LS’ project (plot of land) could not be
allowed as revenue expenditure.

 

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

 

“i)  In
view of section 36(1)(iii) as existing prior to amendment with effect from
1-4-2004 all interest paid in respect of capital borrowed for the purpose of
business or profession has to be allowed as deduction while computing income
under head ‘income from business’. Prior to amendment made on 1-4-2004, there
was no distinction based on whether the borrowing is for purchase of capital
asset or otherwise, interest was allowable as deduction in determining the
taxable income. It was only after introduction of proviso to section 36(1)(iii)
with effect from 1-4-2004 that the purpose of borrowing, i.e., acquisition of
assets then interest paid would be capitalised. In this case, concern is with
the A. Y. 1988-89, i.e., prior to amendment by addition of proviso to section
36(1)(iii). Therefore, the interest paid on the borrowings to purchase the plot
of land for LS project is allowable as a deduction u/s. 36(1)(iii) as it was
incurred for the purposes of its business.

 

ii)   The
revenue’s submission is that the deduction u/s. 36(1)(iii) will not be
available as no income has been earned in respect of LS project. This cannot be
appreciated. It is an undisputed position that the appellant-assessee has filed
return of income declaring income under the head income from business. The
assessee has various projects executing construction projects and, therefore,
interest expenditure is to be allowed as deduction to arrive at profits and
gains of business or profession of builders carried out by the assessee. It is
not a case where the only project of the assessee was the LS project.
Admittedly, in this case the business of the assessee as developer had already
commenced and income offered to tax.

 

iii)  In the above view, substantial question of law is answered in
negative, i.e., in favour of the appellant-assessee and against the
respondent-revenue.”

Section 222 and Rule 68B of Second Schedule – Recovery of tax – Where TRO had issued on assessee a notice dated 18/11/2004 for auction of its attached property and SC vide order dated 16/01/2001 had dismissed SLP of assessee filed against assessment order, period of three years enacted in Rule 68B(1) of Second Schedule to the Act would begin to run from 01/04/2001 and notice dated 18/11/2004 was, therefore, barred by limitation

27. Rambilas Gulabdas (HUF) vs. TRO;
[2018] 98 taxmann.com 309 (Bom); Date of order: 27th
September, 2018


Section 222 and Rule 68B of Second Schedule
–  Recovery of tax – Where TRO had issued
on assessee a notice dated 18/11/2004 for auction of its attached property and
SC vide order dated 16/01/2001 had dismissed SLP of assessee filed against
assessment order, period of three years enacted in Rule 68B(1) of Second
Schedule to the Act would begin to run from 01/04/2001 and notice dated
18/11/2004 was, therefore, barred by limitation


The Tax Recovery officer
had issued on the assessee a notice dated 18/11/2004 for auction of its
attached property. The assessee filed a writ petition praying to quash the
above notice. It submitted that the notice was barred by limitation because of
rule 68B of Second Schedule of the Act. The assessee had challenged the
relevant assessment order upto Supreme Court and the Supreme Court vide order
dated 16/01/2001 had dismissed the SLP of the assessee.


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


“i)    Perusal of memo of writ petition does not show any effort made by
revenue after 16/01/2001 till 18/11/2004 for auction of attached property. The
only effort appears to be on 18/11/2004. It, therefore, is not a case of resale
but first or initial sale or auction only.


ii)    Perusal of the judgment of the Andhra Pradesh High Court rendered
in the case of S.V. Gopala Rao v. CIT [2005] 144 Taxman 395/[2004] 270 ITR 433
shows that the CBDT does not have power to issue Notification to amend a
provision enacted by Parliament. Notification dated 01/03/1996 enhancing period
of limitation of three years stipulated in rule 68B(1) to four years is,
therefore, found to be bad. This judgment of Andhra Pradesh High Court was challenged
by department before the Apex Court. The Apex Court has endorsed the findings
of Andhra Pradesh High Court. With the result, it follows that period of
limitation of three years enacted by Parliament in rule 68B(1) could not have
been altered by the CBDT. The period, therefore, was always three years.


iii)    Here the SLP of assessee is also dismissed on 16/01/2001 by the
Apex Court. The period of limitation, therefore, begins to run from 01/04/2001.
The period of three years expired on 31/03/2004 and period of four years
expired on 31-03-2005.


iv)   The steps are initiated by the department in present matter on
18/11/2004, i.e., after expiry of period of three years but before expiry of
period of four years. The judgment of Apex Court endorses reasoning of Andhra
Pradesh High Court on lack of authority in CBDT to increase the period from
three years to four years. The incompetent authority, therefore, cannot
prejudice legal rights of the assessee flowing from statutory provisions or
eclipse the same in any manner. Notice dated 18/11/2004 is, therefore, beyond
period of three years and, therefore, hit by rule 68B(1).


v)    In view of the aforesaid, the notice dated 18/11/2004 is
unsustainable and deserved to be quashed. Consequently, in view of mandate of
rule 68B(4), attachment of property which formed subject matter of notice dated
18/11/2004 is also set aside.”

Sections 147 and 148 – Reassessment – Validity of notice – No action taken on notice u/s. 148 dated 23/03/2015 for A. Y. 2008-09 – Another notice u/s. 148 issued on 18/01/2016 for A. Y. 2008-09 by new AO – Notice not mentioned that it was in continuation of earlier notice – Notice barred by limitation – No reasons given – Notices and consequent reassessment not valid

26. Mastech Technologies P. Ltd. vs. Dy.
CIT; 407 ITR 242 (Del): Date of order: 13th July,
2017

A. Y. 2008-09


Sections 147 and 148 – Reassessment –
Validity of notice – No action taken on notice u/s. 148 dated 23/03/2015 for A.
Y. 2008-09 – Another notice u/s. 148 issued on 18/01/2016 for A. Y. 2008-09 by
new AO – Notice not mentioned that it was in continuation of earlier notice –
Notice barred by limitation – No reasons given – Notices and consequent
reassessment not valid


The assessee filed writ
petition and challenged the validity of two notices dated 23/03/2015 and
18/01/2016 issued u/s. 148 of the Act by the Assessing Officer for the A. Y.
2008-09. During the pendency of the writ petition, the Assessing officer passed
the reassessment order making additions but did not give effect to the order in
terms of the interim order passed by the High Court.


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


“i)    The Revenue did not pursue the notice dated 23/03/2015 issued to
the assessee u/s. 148 of the Income-tax Act, 1961. The notice dated 18/01/2016
did not state anywhere that it was in continuation of the earlier notice dated
23/03/2015. There was no noting even on the file made by the Assessing Officer
that while issuing the notice he was proposing to continue the proceedings that
already commenced with the notice dated 23/03/2015. The entire proceedings u/s.
148 stood vitiated since even according to the Assessing Officer, he initiated
proceedings on 18/01/2016 on which date such initiation was clearly time
barred.


ii)    Secondly, the fresh initiation did not have
the approval of the Additional Commissioner, as required by law. The Assessing
Officer had followed a very strange procedure. The reasons that he furnished
the assessee by the letter dated 23/02/2016 contained only one sentence. For
some reasons, the Assessing officer did not provide the assessee the reasons
recorded in annexure A to the pro forma which contained the approval of the
Additional Commissioner dated 19/03/2015. Also, clearly, these were not the
reasons for reopening of the assessment on 18/01/2016. There was no
satisfactory explanation as to why the notice dated 23/03/2015 was not carried
to its logical end. The mere fact that the Assessing Officer who issued that
notice was replaced by another Assessing Officer could hardly be the
justification for not proceeding in the matter. On the other hand, the
Assessing Officer did not seek to proceed u/s. 129 of the Act but to proceed de
novo u/s. 148 of the Act.


iii)   This was a serious error which could not be accepted to be a mere
irregularity. As regards the non-communication of the reasons as contained in
annexure A to the pro forma on which the approval dated 19/03/2015 was granted
by the Additional Commissioner, there was again no satisfactory explanation.
The fact remained that what was communicated to the assessee on 23/02/2016 was
only one line without any supporting material.


iv)   Consequently, there were numerous legal infirmities which led to
the inevitable invalidation of all the proceedings that took place pursuant to
the notice issued to the assessee first on 23/03/2015 and then again on
18/01/2016 – both u/s. 148 and all consequential proceedings including the
assessment order dated 30/03/2016 was to be set aside.”

Section 80-IB(10) – Housing project – Deduction u/s. 80-IB(10) – TDS – Amendment w.e.f. 01/04/2010 barring deduction where units in same project sold to related persons – Prospective in nature – Flats sold to husband and wife exceeding prescribed area in 2008 – Assessee entitled to deduction

25. CIT vs. Elegant Estates; 407 ITR 425
(Mad): Date of order: 19th June, 2018

A. Ys. 2010-11 to 2012-13


Section 80-IB(10) – Housing project –
Deduction u/s. 80-IB(10) – TDS – Amendment w.e.f. 01/04/2010 barring deduction
where units in same project sold to related persons – Prospective in nature –
Flats sold to husband and wife exceeding prescribed area in 2008 – Assessee
entitled to deduction


The assessee was in the
business of real estate development. For the A. Ys. 2011-12 and 2012-13 the
assessee claimed deduction u/s. 80-IB(10) of the Act. The Assessing Officer
disallowed the claim on the grounds that two adjacent flats were sold to
husband and wife, that the total super built-up area was 3225 sq. ft. and that
the sale of the flats was recognised on 31/03/2010, during the previous year
2009-10, relevant to the A. Y. 2010-11. He was of the view that the provisions
of section 80-IB(10) were not attracted, since two flats had been sold to
related persons thereby contravening clause (f) of section 80-IB(10).


The Commissioner (Appeals)
allowed the appeals and held, inter alia, that the flats in question
were sold on 14/04/2008 and 16/07/2008 respectively and that the amendment of
section 80-IB which was prospective w.e.f. 01/04/2010 had no application. The
Tribunal dismissed the appeal filed by the Department.


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


“The Appellate Commissioner
and the Tribunal based on their concurrent factual finding that the actual sale
of the flats in question took place on 14/01/2008 and 16/07/2008 respectively
before the amendment of section 80-IB(10) had rightly held that the amendment
was prospective w.e.f. 01/04/2010 and that the assessee was entitled to
deduction. No question of law arose.”

Section 10B – Export oriented undertaking (Date of commencement of production) – Deduction u/s. 10B – Where in order to determine admissibility of assessee’s claim u/s. 10B, date of commencement of manufacture or production could be ascertained from relevant documents such as certificate of registration by competent authority, mere wrong mentioning of said date in Form No. 56G filed in support of claim of deduction, could not be a ground to reopen assessment

24. MBI Kits International vs. ITO;
[2018] 98 taxmann.com 473 (Mad):

Date of order: 4th October,
2018 A. Y. 2010-11


Section 10B – Export oriented undertaking
(Date of commencement of production) – Deduction u/s. 10B – Where in order to
determine admissibility of assessee’s claim u/s. 10B, date of commencement of
manufacture or production could be ascertained from relevant documents such as
certificate of registration by competent authority, mere wrong mentioning of
said date in Form No. 56G filed in support of claim of deduction, could not be
a ground to reopen assessment


The assessee firm was
formed with an object to carry on the business of manufacturing and testing
chemicals. The Madras Export Processing Zone issued a letter of permission
dated 28/03/2000. The Government of India, Ministry of Commerce by letter dated
29/03/2000, granted permission to the petitioner to carry on its business of
manufacturing of test kits used for checking iodized salt. The assessee filed
its return of income for A. Y. 2010-11, claiming deduction u/s. 10B of the Act.
An order of assessment u/s. 143(3) was passed on accepting the claim of
deduction u/s. 10B. Subsequently, the Assessing Officer noticed that in Column
No. 7 to Form No. 56G, filed in support of claim of deduction u/s. 10B, date of
Commencement of manufacture or products was mentioned as 28/03/2000. According
to the Assessing Officer if the date of commencement of manufacture or
production referred to in the Column No. 7 in Form No. 56G as 28/03/2000 was
taken as true, the deduction claimed was at the eleventh year and not at the
tenth year which was not permissible. Thus, Assessing Officer took a view that
on account of assessee’s failure to disclose all material facts truly and fully
at time of assessment, deduction u/s. 10B was wrongly allowed. He thus relying
upon proviso to section 147, initiated reassessment proceedings.


The assessee raised an
objection to initiation of reassessment proceedings by contending that actual
date of commencement of manufacturing was only on 25-5-2000 and, thus,
deduction was claimed in tenth year itself. The Assessing Officer rejected the
assessee’s objection.

On a writ petition
challenging the validity of the notice the Madras High Court allowed the writ
petition and held as under:


“i) The assessee is engaged in manufacturing of test chemicals. They
got approval from the Development Commissioner, Export Processing Zone on
29/03/2000. It is claimed by the assessee that they commenced the manufacturing
activities only on 25/05/2000 and not on 28/03/2000, as has been wrongly stated
in Form 56G, an Auditor’s Report filed for claiming deduction u/s. 10B of the
Act.


ii)  Admittedly, the assessee has furnished the details in Columns 7
and 8 of Form 56G. According to the revenue, if the date of commencement of manufacture
or production referred to in the Column No.7 in Form No.56G as 28/03/2000 is
taken as true, the deduction claimed was at the eleventh year and not at the
tenth year. The assessee seeks to explain that the entry made in Column No.7 of
Form 56G was by mistake and on the other hand, the actual date of commencement
of manufacture was only on 25/05/2000. At the same time, Column No.8, which
deals with number of consecutive year for which the deduction claimed, relevant
year was rightly stated as tenth year. Therefore, the question that arises for
consideration, under the above stated circumstances, is as to whether these
contradictory statement made by the assessee can be brought under the purview
of non-disclosure of fully and truly all material facts necessary for his
assessment, to attract the extended period of limitation.


iii) No doubt, Column Nos.7 and 8 contradict each
other with regard to the commencement of manufacture. However, when one of such
column has specifically referred the number of consecutive year as the tenth
year to claim section 10B deduction and when the Assessing Officer has also
considered and allowed such deduction, it has to be construed that such
deduction was granted by the Assessing Officer by forming his opinion based on the
conjoined consideration of materials already placed. In other words, it cannot
be stated that the assessee has availed the benefit u/s. 10B by giving false
details. If the date of manufacture as referred to in Form 56G is taken as the
right date, the Assessing Officer ought not to have allowed the deduction.
Likewise, if the number of consecutive year referred to in Form 56G as tenth
year is taken as the true statement, the Assessing Officer was right in
allowing the deduction. Therefore, it is evident that by furnishing the wrong
date of manufacture as 28/03/2000, the assessee has not either deceived or
suppressed any material fact before the Assessing Officer to claim deduction
u/s. 10B. If the exact date of manufacturing/production could be ascertained or
gathered from the conjoined consideration of other material documents, such as
relevant certificates of registration by the competent authority, mere wrong
mentioning of the date in Column 7 could not be construed as non-disclosure of
true and material facts, especially when column 8 of statement supported the
claim. One can understand and appreciate the stand of the revenue for reopening
the assessment, if the assessee, by giving a false information regarding the
date of commencement of manufacture as 28/03/2000 alone, had obtained deduction
u/s. 10B. Thus, it is seen that the Assessing Officer, who has originally
chosen to allow the deduction based on the materials filed already, has now
changed his opinion and has chosen to reopen the assessment, which cannot be
done after a period of four years.


iv) Accordingly, the writ petition is allowed and the impugned
proceedings of the respondent in reopening the assessment for the A. Y. 2010-11
are set aside.”

Sections 253 and 260 – A Appeal to High Court – Power of High Court to review – High Court has power to review its decision Appeal to Appellate Tribunal – Decision of Commissioner (Appeals) based on report on remand by AO – Tribunal not considering report – Decision of Tribunal erroneous – Decision of High Court upholding order of Tribunal – High Court can recall its order – Matter remanded to Tribunal

22. B. Jayalakshmi
vs. ACIT; 407 ITR 212 (Mad) : Date of order: 30th July,
2018: A. Ys. 1995-96 to 1997-98


Sections 253 and 260 – A Appeal to High Court
– Power of High Court to review – High Court has power to review its decision

Appeal to Appellate Tribunal – Decision of
Commissioner (Appeals) based on report on remand by AO – Tribunal not
considering report – Decision of Tribunal erroneous – Decision of High Court
upholding order of Tribunal – High Court can recall its order – Matter remanded
to Tribunal


A search u/s. 132 of the
Act was conducted in the residential premises of the assesee. In consequent
reassessment proceedings the Assessing Officer added an amount as unaccounted
income of the assessee holding the same represented undisclosed income of her
husband, which had been brought in the name of the assessee in the guise of
agricultural income.


Before the Commissioner
(Appeals), apart from furnishing other details, the assessee produced a copy of
the decree passed by the civil court granting a decree of permanent injunction
in her favour, when an attempt was made to evict her from the leased property.
Since fresh evidence in the form of court orders and other details were placed
before the Commissioner (Appeals), a report was called for from the Assessing
Officer on the stand taken by the assessee in the appeal proceedings.
Accordingly, the Assessing Officer submitted a report, dated 25/11/2002. The
report was wholly in favour of the assessee. Thus taking note of the report of
the Assessing officer, as well as the report of the Inspector of Income-tax,
the Commissioner (Appeals) held that the action of the Assessing Officer
treating the sum of Rs. 4,08,841/- as “non-agricultural income” was incorrect.
In appeal by the Revenue, the Tribunal upheld the assessment order and the
addition and reversed the decision of the Commissioner (Appeals).


The Madras High Court
dismissed the appeals of the assessee by order dated 30/09/2013. The assessee
preferred a review petition. The High Court allowed the writ petition and held
as under:


“i)    In VIP Industries Ltd. vs. CCE (2003) 5SCC
507, it was held that all provisions, which bestow the High Court with
appellate power, were framed in such a way that it would include the power of
review and in these circumstances, sub-section (7) of section 260A of the
Income-tax Act, 1961 cannot be construed in a narrow and restricted manner. In
the case of M. M. Thomas, the Supreme Court held that the High Court, as a
court of record, has a duty to itself to keep all its records correctly in
accordance with law and if any apparent error is noticed by the High Court in
respect of any orders passed that the High Court has not only the power but
also a duty to correct it.


ii)    The Tribunal repeated verbatim the order passed by the Assessing
officer dated 29/03/2001, and ignored the remand report dated 25/11/2002 and
the findings rendered by the Commissioner (Appeals) based on such remand
report. Thus, if such is the situation, the appeal itself would have been
incompetent. Hence, this question, which touches upon the jurisdiction of the
Tribunal, has not been considered by the Tribunal, we are inclined to review
the judgment and remand the matter to the Tribunal for fresh consideration.


iii)    In the result, the review petitions are allowed and the judgment
dated 30/09/2013 is reviewed and recalled and the appeals stand disposed of, by
remanding the matter to the Tribunal to decide the question of its jurisdiction
to entertain the appeals by the Revenue against the orders of the Commissioner
(Appeals). In the event, the Tribunal decides the question in favour of the
Revenue, it shall reconsider the other issues after opportunity to the Revenue
and assessee.”

 

Sections 68, 69A and 254(1) – Appeal to Appellate Tribunal – Jurisdiction and power – Cannot go beyond question in dispute – Subject matter of appeal in regard to addition made u/s. 68 – Tribunal holding addition u/s. 68 unjustifiable – Tribunal cannot travel beyond issue raised in appeal and make addition u/s. 69A – Order vitiated

21. Smt. Sarika Jain vs. CIT; 407 ITR
254 (All); Date of order: 18th July,
2017 A. Y. 2001-02


Sections 68, 69A and 254(1) – Appeal to
Appellate Tribunal – Jurisdiction and power – Cannot go beyond question in
dispute – Subject matter of appeal in regard to addition made u/s. 68 –
Tribunal holding addition u/s. 68 unjustifiable – Tribunal cannot travel beyond
issue raised in appeal and make addition u/s. 69A – Order vitiated


In the A. Y. 2001-02, the
assessee had inducted capital in the firm in which she was a partner. During
reassessment proceedings u/s. 147 of the Income-tax Act, 1961, (hereinafter for
the sake of brevity referred to as the “Act”), the assessee explained
the source of the amounts received as gifts through banking channels and also
produced the gift deeds. The statements of the two donors were also recorded
u/s. 131. However, the Assessing Officer held that the gifts were not genuine
and added the amounts u/s. 68 of the Act as undisclosed income.


The Commissioner (Appeals)
affirmed the order and recorded findings that the documentation in respect of
the gifts was complete and that the assessee had established the identity of
the donors and their creditworthiness to make the gifts, but did not
acknowledge the gifts as genuine. The Tribunal held that the additions made by
the Assessing Officer u/s. 68 and sustained by the Commissioner (Appeals) could
not be sustained. Thereafter the Tribunal added the said amount as the income
of the assessee u/s. 69A.


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


“i)    The use of the word “thereon” in section 254(1) of the Income-tax
Act, 1961 is important and it reflects that the Tribunal has to confine itself
to the questions which arise or are subject matter in the appeal and it cannot
travel beyond that. The power to pass such order as the Tribunal thinks fit can
be exercised only in relation to the matter that arises in the appeal and it is
not open to the Tribunal to adjudicate any other question or issue, which is
not in dispute and which is not the subject matter of the dispute in appeal.


ii)    The Tribunal travelled beyond the scope of the appeal in making
the addition of the amounts of the gifts as income u/s. 69A. The subject matter
of the dispute all through before the Tribunal in the appeal was only with
respect to the addition, made u/s. 68, of the amounts received by the assessee
and not whether such addition could have been made u/s. 69A.


iii)    The Tribunal had recorded a categorical finding that it was clear
that under the provisions of section 68, the addition made by the Assessing
Officer and sustained by the Commissioner (Appeals) could not be sustained
meaning thereby that the Tribunal was of the opinion that the Assessing Officer
and the Commissioner (Appeals) had committed an error in adding the amounts
u/s. 68 to the income of the assessee.


iv)   When the amounts could not have been added u/s. 68, the Tribunal was
not competent to make the addition u/s. 69A. Therefore, the order of the
Tribunal was vitiated in law. Matter remanded to the Tribunal.”

7 Section 263 – Revision – Validity – Merger of assessee-company with another entity – Assessee-company non-existant on date of issue of notice and order u/s. 263 – Notice and order void ab initio

Principal
CIT vs. Kaizen Products (P) Ltd.; 406 ITR 311 (Del): Date of order: 25th
July, 2017

A.
Y. 2009-10


There was
merger of the assessee with an entity V by an order of the Court dated
08/10/2010 and the merged entity was named A. For the A. Y. 2009-10, the
assessee filed the return of income on 19/09/2009. The Assessing Officer issued
a notice dated 09/04/2013 u/s. 148 of the Act and passed assessment order u/s.
147 on 23/07/2014 accepting the return filed by the assessee. The Principal
Commissioner issued a notice dated 23/03/2016 u/s. 263 and consequent thereto,
passed an order on 31/03/2016.

 

The
asessee contended before the Tribunal that the order u/s. 263 had been passed
against an entity which did not exist in the eye of law and therefore, the
proceedings were vitiated. The Department’s contention was that during the
proceedings u/s. 147, the assessee did not raise any objection on that ground
and therefore, it should not be permitted to raise the objection before the
Tribunal. The Tribunal held that the notice and order were both in the name of
a non-existent entity and therefore, void ab initio.

 

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

 

“The
assessee had ceased to exist as a result of the order of the Court approving
its merger with another company and the issuance of the notice u/s. 263 and the
consequent order were in respect of a non-existent entity and void ab initio.”

6 Section 263 – Revision – Powers of Commissioner u/s. 263 – Commissioner (Appeal) passed order in appeal – Assessment order merges in appellate order – Commissioner has no jurisdiction to set aside such order – Order passed by AO and Commissioner (Appeals) after due consideration – Commissioner cannot set aside such order

Principal
CIT vs. H. Nagraj; 406 ITR 242 (Karn): Date of order: 29th May, 2018

A.
Y. 2008-09 and 2009-10

 

The
assessee firm was in the business of purchasing agricultural lands, converting
them for non-agricultural purposes and selling them. In the relevant years, the
assessee had claimed expenditure for developing lands. The assessee had
furnished names and addresses of parties to whom the amounts had been paid
along with permanent account numbers, bills and vouchers. Considering the
details furnished in support of the development expenses, the Assessing Officer
made addition of Rs. 2,38,16,700/- and Rs. 4,25,72,383/- for the A. Ys. 2008-09
and 2009-10 respectively. The Commissioner (Appeals) confirmed the additions to
the extent of Rs. 12,50,000/- for A. Y. 2008-09 and allowed the appeal in
respect of the balance. As regards A. Y. 2009-10, an addition of Rs. 2 crores
was confirmed and balance of Rs. 1,92,72,383/- was deleted.

 

By
exercising his powers of revision u/s. 263 of the Act, the Commissioner
proceeded to hold that the properties purchased by the assessee and the
subsequent sale made in favour of B did not tally in respect of both the
assessment orders and therefore, directed reconsideration of the entire
material. The Commissioner further found that the development expenses
consisting of labour charges and work-in-progress had to be added for the A. Y.
2008-09. Similarly, in respect of payment towards commission, the Commissioner
found that the cheque payments and the tax deducted at source made for claiming
expenditure had to be verified. The Tribunal set aside the order of the
Commissioner. 

 

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

 

“i)    The revisional authority cannot, by acting
u/s. 263, interfere and upset the order passed by the Appellate Commissioner.

 

ii)    When the development expense as considered
by the Assessing Officer were the subject matter of appeal and the Commissioner
(Appeals) had found that for both the assessment years, the expenses incurred
had to be accepted disallowing the claim of Rs. 50 lakhs for the A. Y. 2008-09
and Rs. 2 crores for the A. Y. 2009-10, the question of the Commissioner
(Administration) exercising revisional jurisdiction u/s. 263 to once again
examine the very same issue so as to disallow the labour charges and
work-in-progress did not arise, as the order of assessment made by the
Assessing Officer merged with the order of the Appellate Commissioner.

 

iii)    When the Assessing Officer scrutinised the
returns for the A. Ys. 2008-09 and 2009-10, he considered the purchase of lands
from villagers and thereafter sale of the same to B. He had dealt with the same
in the assessment order and had proceeded to arrive at a conclusion that for
the A. Y. 2008-09, there was unexplained income of Rs. 1,25,66,700/- and for
the A. Y. 2009-10, there was unexplained income in a sum of Rs. 1,92,72,383. He
had thus proceeded to treat these two items as undisclosed profit for the
respective years.

 

iv)   The order passed by the Assessing Officer
merged with that of the Appellate Commissioner for both the assessment years.
Therefore, there was no scope for the Commissioner to exercise jurisdiction
u/s. 263 to reexamine the purchase made by the assessee in respect of the lands
in question. Similar was the factual matrix involved in respect of commission
expenses claimed by the assessee for the two assessment years. The assessee had
submitted full details regarding payment of commission. After considering the
material, the Assessing Officer chose not to make any addition on the item
pertaining to commission.

 

v)    The Tribunal was right in holding that the
Commissioner was not justified in exercising the revisional powers u/s. 263 to
upset the order passed by the Assessing Officer which stood merged with the
order passed by the Commissioner (Appeals).”

5 Sections 10AA and 144C – Draft assessment order – Section 144C – Power of AO – Additions not proposed in draft assessment order cannot be made by AO in final order – AO making disallowance of deduction u/s. 10AA in final order not proposed in draft order – Breach of provisions of section 144C – Not permissible

Pr. CIT vs. WOCO Motherson Advanced
Rubber Technologies Ltd.; 406 ITR 375 (Guj):
Date of order: 20th February, 2017

A. Y. 2011-12


The
assessee was a joint venture company of a company in Germany and another in
India. For the A. Y. 2011-12, in the draft assessment order issued by the
Assessing Officer u/s. 143(3) read with section 144C of the Act, the Assessing
Officer proposed only an arm’s length price adjustment of Rs. 1,48,43,000/- and
did not propose any disallowance in the draft assessment order. The draft
assessment order was carried before the Dispute Resolution Panel (DRP) but the
assessee did not succeed. Thereafter, while passing the final assessment order
the Assessing Officer not only made addition of the arm’s length price
adjustment of Rs. 1,48,43,000/-, but also disallowed 50% of the deduction
allowed u/s. 10AA on the ground that it was claimed in excess by the assessee.

 

The
Tribunal held that the disallowance made u/s. 10AA was in breach of section
144C and set aside the disallowance.

 

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

 

“i)    Considering the entire scheme of section
144C, in conformity with the principals of natural justice, the assessee is
required to be given an opportunity to submit objections with respect to the
variations proposed in the income or loss returned. Therefore, while passing
the final assessment order, the Assessing Officer cannot go beyond what is
proposed in the draft assessment order.

 

ii)    When the Assessing Officer forwarded a draft
of the proposed assessment order to the assessee, he had not proposed to make a
disallowance of Rs. 7,64,15,421/- u/s. 10AA of the Act. The Tribunal was right
in deleting the disallowance made by the Assessing Officer in respect of the
claim made by the assessee u/s. 10AA on the ground that the disallowance was in
breach of section 144C in as much as it was not proposed by the Assessing
officer in the draft assessment order.”

4 Section 32 – Depreciation – Rate of depreciation – Computer – Printer part of computer – entitled to depreciation at 60%

CIT vs. Cactus Imaging India Pvt. Ltd.;
406 ITR 406 (Mad); Date of order: 16th April, 2018

A. Ys. 2003-04 and 2004-05


For A. Ys.
2003-04 and 2004-05, the assessee had claimed depreciation at the rate of 60%
on its computers. The computers included printers. The Assessing Officer held
that the printers were not normal printers, but high value printers used for
printing banners and advertisement materials of large sizes and could not be
treated as a peripheral to a computer and the printer purchased by the assessee
could not perform any other function as performed by a normal computer.
Accordingly, the claim for depreciation at 60% was denied.

 

Before the
Commissioner (Appeals), a video demonstration was conducted and upon going
through the technical manual of the printers, he found that the printer could
not be used without the computer and concluded that it was a part of the
computer system. Accordingly, the appeals filed by the assessee were allowed.
These orders were affirmed by the Tribunal.

 

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

 

“i)    Item III(5) of the old Appendix I to the
Income-tax Rules, 1962 stated “computers including computer software” and the
notes under the Appendix defined “computer software” in clause 7 to mean any
computer programme recorded in disc, tape, perforated media or other
information storage device. In the notes contained in the Appendix, the term
“computer” has not been defined.

 

ii)    A printer cannot be used without a computer
and should be treated as part of the computer and an accessory to the computer.

 

iii)    Since in respect of the very same machinery,
depreciation at the rate claimed had been permitted for the earlier years and
affirmed by the Division Bench, depreciation at the rate of 60% was allowable
on the printers.”

3 Section 32 – Depreciation – Additional depreciation – Condition precedent – Manufacture of article – Assessee need not be principally engaged in manufacture – Assessee entitled to additional depreciation on plant and machinery used in manufacture of ready mix concrete

Cherian Varkey Construction Co. (P) Ltd.
vs. UOI; 406 ITR 262 (Ker): Date of order:
19th December, 2017

A.
Y. 2006-07


For the A.
Y. 2006-07, the assessee procured three vehicles, specifically for the
transport of ready mix concrete for use in the construction site, from its own
manufacturing unit. The procurement of the vehicles was in the relevant year.
The assessee claimed additional depreciation u/s. 32(1)(iia) of the Act to the
extent of 20% of the actual cost of such vehicles which, according to the
assessee qualified as plant and machinery used in manufacture. The claim was allowed
by the Assessing Officer, but later disallowed in reassessment u/s. 147/148 of
the Act.

The
Tribunal held that there was no manufacture involved in the making of ready mix
concrete and upheld the disallowance.

 

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

 

“i)    It cannot be held on a reading of section
32(1)(iia) of the Act, that the additional depreciation permissible to the
extent of 20% of the actual cost of plant and machinery, would be permissible
only in the case of an assessee engaged principally in the business of
manufacturing or production. This would be doing violence to the provision
since then it would amount to introducing the word “principally” to read “ an
assessee engaged in the business principally of manufacture and production of
any article or thing; then a claim u/s. 32(1)(iia) would be permissible to the
extent allowed as depreciation.

 

ii)    Considering the high degree of precision and
stringent quality control observed in the selection and processing of
ingredients as also the specific entry in the Central Excise Tariff First
Schedule, heading 3824 50 10 which deals with “Concrete ready to use known as
“Ready mix concrete”, though the ready mix concrete did not have a shelf-life,
the final mixture of stone, sand, cement and water in a semi-fluid state,
transported to the construction site to be poured into the structure and
allowed to set and harden into concrete was a thing or article manufactured.

 

iii)    The assessee, though engaged principally in
the business of construction, was entitled to additional depreciation u/s.
32(1)(iia) for the plant and machinery used in the manufacturing activity being
the production of ready mix concrete.”

2 Section 68 – Cash credit (Shares, allotment of) – Where assessee allotted shares to a company in settlement of pre-existing liability of assessee to said company, since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credits u/s. 68

V. R. Global Energy (P) Ltd. vs. ITO;
[2018] 96 taxmann.com 647 (Mad): Date of order:
6th August, 2018 A. Y. 2012-13


The
assessee-company allotted 1,19,000 shares with face value of Rs. 10 at a
premium of Rs. 5400 to one VR and the allotment of shares by the assessee to VR
was in settlement of the pre-existing liability of the assessee to said VR. The
Assessing Officer added the share premium and the share capital for the fresh
allotment of shares and treated the same as unexplained cash credits u/s. 68 of
the Act, while holding that the method of valuation was not acceptable and that
the share premium of Rs. 5400 was unreasonable.

 

In appeal,
the Commissioner (Appeals) and the Tribunal upheld the decision of the
Assessing Officer.

 

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

 

“i)    The cash credits towards share capital were
admittedly only by way of book adjustment and not actual receipts which could
not be substantiated as receipts towards share subscription money.

 

ii)    The appeal is, thus, allowed and the
judgment and order of the Tribunal is set aside, for the reasons discussed
above. Additions u/s. 68 are also set aside.”

1. Section 2(28A) and 40 (a)(i) – Business expenditure – TDS – Disallowance u/s. 40(a)(i)

Principal CIT vs. West Bengal Housing
Infrastructure Development Corpn. Ltd.; [2018] 96 taxmann.com 610 (Cal):
Date of order: 9th August, 2018

A. Y. 2005-06

Interest
(Compensation for belated allotment of plot) – As per agreement, under Housing
Scheme, for failure to make plots available to allottees within stipulated
time, assessee housing/infrastructure development corporation paid
damage/compensation on amount allottees paid at rate equivalent to SBI interest
rate of FDs – Payments so made would not make payment on interest as defined
u/s. 2(28A) since there was neither any borrowing of money nor was there
incurring of debt on part of assessee – Tax not deductible – No disallowance
u/s. 40(a)(i)

 

The
assessee, was engaged in development of land, housing and infrastructural
facilities. A sum of Rs. 9.71 crore was found debited in the profit and loss
account of the assessee. This sum was claimed as deduction in computing the
income of the assessee under the head ‘income from business‘. The nature
of this expenditure was explained by the assessee before the Assessing Officer
as ‘compensation for delay, delivery of plots‘. The explanation given
was that as per the offer of allotment of plot of land developed by the
assessee, the assessee was under an obligation to hand over physical possession
of the plot to the allottees on payment of the entire cost of the land. If
possession of handing over of the plot was delayed for more than six months
from the scheduled date of possession, the assessee had to pay interest on
installments already paid by the allottee during such extended period at the
prevailing fixed term deposit rates for similar period offered by the State
Bank of India. According to the assessee, the actual nature of payment was in
the nature of damages for delayed allotment of a plot and thus, the assessee
had no TDS obligation. The Assessing Officer viewed the payment to be in the
nature of payment of interest and held that by reason thereof, the assessee
should have deducted tax at source u/s. 194A of the Income tax Act, 1961
(hereinafter for the sake of brevity referred to as the “Act”) at the
time of payment or credit. The Assessing Officer further held that since the
assessee failed to deduct tax at source on the amount, the claim of the
assessee for deduction of the said sum cannot be allowed by reason of section
40(a)(ia).

 

The
Tribunal held that the amount in question cannot be characterised as interest
within the meaning of section 194A and hence, there was no obligation on the
part of the assessee to deduct tax at source and 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)    From the definition of interest as occurring
in section 2(28A), it appears that the term ‘interest’ has been made entirely
relatable to money borrowed or debt incurred and various gradations of rights
and obligations arising from either of the two. The parenthesis in the section
is in the nature of a qualification of the borrowing of money/incurring of debt
and what it includes.

 

ii)    In CIT vs. H.P. Housing Board [2012] 18
taxmann.com 129/205 Taxman 1/340 ITR 388 (HP) the High Court held that the
money was paid on account of damages suffered by the allottee for delay in
completion of the flats.


iii)    Reference may be made to the Apex
Court in Central India Spg. & Wvg. & Mfg. Co. Ltd. vs. Municipal
Committee, Wardha AIR 1958 SC 341. Besides agreeing with the reasons given
by the Himachal Pradesh High Court for holding that payment for delayed
allotment of flats cannot be brought u/s. 2(28A) the said decision is of a
co-ordinate Bench.

 

iv)   The payment made by the assessee to the
allottee was in terms of the agreement entered between them where the liability
of the assessee would arise only if it failed to make the plots available
within the stipulated time. Hence, the payment made under the relevant clause
was purely contractual and as rightly held by the Tribunal, in the nature of
compensation or damages for the loss caused to the allottee in the interregnum
for being unable to utilise or possess the flat: The Flavour of compensation
becomes evident from the words used in the particular clause. The expression
‘interest’ used in the relevant clause of the Housing Scheme may be seen merely
as a quantification of the liability of the assessee in terms of the percentage
of interest payable by the State Bank of India. Since there is neither any
borrowing of money nor incurring of debt on the part of the assessee, in the
present factual scenario, interest as defined u/s. 2(28A) can have no application
to such payments. Consequently, there was no obligation on the part of the
assessee to deduct tax at source and consequently no disallowance could have
been made u/s. 40(a)(ia).

 

v)    In view of the above, the decision of the
Tribunal is to be confirmed.”

Business expenditure – Disallowance u/s. 40(a)(ia) – Payments liable to TDS – Effect of insertion of second proviso to section 40(a)(ia) – Declaratory and curative and applicable retrospectively w.e.f. 01/04/2005 – Payee offering to tax sum received in its return – Disallowance not attracted

42.  Principal CIT
vs. Shivpal Singh Chaudhary; 409 ITR 87 (P&H) Date of order: 5th July, 2018 A. Y. 2012-13 Sections 37, 40(a)(ia) and 201(1) of ITA 1961

 

Business expenditure – Disallowance u/s. 40(a)(ia) –
Payments liable to TDS – Effect of insertion of second proviso to section
40(a)(ia) – Declaratory and curative and applicable retrospectively w.e.f.
01/04/2005 – Payee offering to tax sum received in its return – Disallowance
not attracted

 

For the A. Y. 2012-13, the Assessing Officer had made certain
disallowance u/s. 40(a)(ia) of the Act being amount paid to a construction
company for job work on the ground that tax was not deducted at source. The
assessee had filed confirmation from the payee that the payment made by the
assesse to it had been shown in its return.

 

The Commissioner appeals held that the second proviso to section
40(a)(ia) is clarificatory and retrospective and deleted the addition. The
Tribunal upheld the decision of 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)   The second proviso to section
40(a)(ia) of the Act was inserted by the Finance Act, 2012 w.e.f. 01/04/2013.
According to the proviso, a fiction has been introduced where an assessee who
had failed to deduct tax in accordance with the provisions of Chapter XVII-B,
but is not deemed to be an assessee in default in terms of the first proviso to
sub-section (1) of section 201 it shall be deemed to have deducted and paid the
tax on such sum on the date of furnishing of return of income by the resident
payee referred to in the proviso.

 

ii)   From the first proviso to
section 201(1) and the second proviso to section 40(a)(ia) it is discernible
that according to both the provisos, where the payee has filed the return
disclosing the payment received or receivable, and has also paid the tax on
such income, the assessee would not be treated to be a person in default and a
presumption would arise in his favour.

iii)  The rationale behind the
insertion of the second proviso to section 40(a)(ia) was declaratory and
curative and thus, applicable retrospectively w.e.f. 01/04.2005. However, under
the first proviso to section 201(1) inserted w.e.f. 01/07/2012, an exception
had been carved out which showed the intention of the Legislature not to treat
the assessee as a person in default subject to fulfilment of the conditions as
stipulated thereunder. No different view could be taken regarding the
introduction of the second proviso to section 40(a)(ia), which was intended to
benefit the assessee, w.e.f. 01/04/2013 by creating a legal fiction in the
assessee’s favour and not to treat him in default of deducting tax at source
under certain contingencies and that it should be presumed that the assessee
had deducted and paid tax on such sum on the date of furnishing of the return
by the resident payee.

iv)  In view of the above,
substantial question of law stands answered against the Revenue and in favour
of the assessee.”

44 Sections 9(1)vii), Expln 2 and 194J – TDS – Fees for technical services – Transmission of electricity – Payment made only for facility to use and maintenance of transmission lines – Not technical services – Mere involvement of technology does not bring something within ambit of technical services – Provisions of section 194J not applicable

The assessee was a licensee for
distribution and sale of electricity under the provisions of the Electricity
Act, 2003, by the Uttar Pradesh Electricity Regulatory Commission. The assessee
purchased power from Uttar Pradesh Power Corporation. For the A. Y. 2008-09,
the assessee made payments in terms of tariff issued by the Commission which
was bifurcated in two parts: (a) power supply tariff and (b) power transmission
tariff. The transmission charges were paid to the Uttar Pradesh Power
Transmission Company Ltd. (UPPTCL) and power supply charges were payable to the
Corporation. The Assessing Officer observed that payment made to the company
was not a payment of purchase or supply of power but payment of technical
charges for rendering “technical service” on monthly basis and consequently
held that the assessee was liable to deduct tax at source on charges paid for
transmission to the company and since it failed to do so, the amount of Rs.
1,65,32,88,040 was to be disallowed u/s. 40(a)(ia) of the Act.

 

The Commissioner (Appeals) and the
Tribunal accepted the assessee’s claim and cancelled the disallowance.

 

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

 

“i)  Since
electricity was a commodity which could not be carried from one place to
another like other commodities, it had to flow through metal conductors which
were called “transmission lines” and therefore, transmission lines constituted
a facility for travelling of electricity from the point of generation to the
point of distribution. This flow of electricity in a conductor could not be
said to be any specialized, exclusive individual service rendered by the
company to the assessee because the grid was common and transmission lines were
used in general by respective distributor licensees. Only for the purpose of
facility to use and maintenance of transmission lines, charges were paid and
there was no “technical service”, as such, rendered by the company to the
assessee.

 

ii)   Mere
involvement of technology would not bring something within the ambit of
“technical services” as defined in Explanation 2 to section 9(1)(vii) because
under the Act, the term “technical services” was defined in a different manner,
i.e., along with terms “managerial and consultancy services”. “Managerial and
consultancy services” by themselves did not include any technology but still
would be covered by the definition of “fees for technical services” in the Act.
Therefore, the term “technical services” was not dependent solely on whether or
not use of technology was involved.

 

iii)  Moreover, the term “technical” had to be read applying the principle
of noscitur a sociis in the term “managerial and consultancy”. That
takes away normal and common meaning of “technical services” as was known in
common parlance and makes it totally different. Therefore, in transmission of
electricity, there was no human touch or effort and if the term “technical was
read applying the principle of noscitur a sociis with the term
“managerial or consultancy”, the provisions of section 194J were not
applicable.

 

iv)  The
questions formulated are answered against the Revenue and in favour of the
assessee.”

43 Sections 10(38), 45 and 271(1)(c) – Penalty – Concealment of income – Capital gain – Exemption – Assessee claiming exemption u/s. 10(38) with a note that it reserved its right to carry forward loss – Bona fide belief of assessee that loss not required to be considered u/s. 10(38) – Penalty rightly cancelled by Tribunal

DIT
(International Taxation) vs. Nomura India Investment Fund Mother Fund.; 404 ITR
636 (Bom); Date of order : 15th June, 2017 A. Y.: 2008-09

 

The
assessee earned long-term capital gain as well as long-term capital loss on
purchase and sale of shares. For the A. Y. 2008-09, while computing the total
income, it did not set off the long-term capital loss of Rs. 80.64 crores
against the long-term capital gain of Rs. 697.70 crores, which was exempted
u/s. 10(38) of the Act and in its return had put a note reserving the right to
carry forward the long-term capital loss. The Assessing Officer rejected the
claim of the assessee to carry forward the long-term capital loss and held that
it was not admissible and also levied penalty u/s. 271(1)(c) for concealment of income.

 

The
Tribunal cancelled the penalty.

 

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

 

“i)  The provisions of section 271(1)(c) could only
be invoked upon satisfaction of the conditions laid down therein. The assessee
had claimed exemption u/s. 10(38) with a note that it reserved its right to
carry forward the loss of Rs. 80.64 crores, under the bona fide belief
that u/s. 10(38) the loss was not required to be considered. It could not be
stated that the act of the assessee in giving the note was with some ulterior
intention or concealment of income or giving inaccurate particulars.

 

ii)   Therefore, the penalty was rightly cancelled
by the Tribunal. No question of law arose.”

42 Section 4 – Income – revenue or capital receipt – Where Government gave grant-in-aid to a company wholly-owned by Government, facing acute cash crunch, to keep company floating, even though large part of funds were applied by company for salary and provident funds, grant received was capital receipt

Pr.
CIT vs. State Fisheries Development Corporation Ltd.; [2018] 94 taxmann.com 466
(Cal); Date of order : 14th May, 2018A. Y.: 2006-07:

 

The
assessee was a company wholly-owned by the State Government. The assessee was
engaged in business of pisciculture. The assessee received an amount as
grants-in-aid. Out of that, certain sum was received for payment of salary to
its employees, certain sum for payment of Provident Fund dues and certain sum
for the purpose of flood relief. The assessee claimed deduction of said sum
from its income on plea that same constituted capital receipt. The Assessing
Officer found that the fund was applied for items which were revenue in nature.
He recorded that such receipts were consistently treated in the past by the
assessee as revenue receipt. Thus, same could not be allowed for deduction as
capital receipt.

 

The
Tribunal did not solely rely on the nature of application of the funds received
through grant-in-aid. The Tribunal examined the character of the assessee as a
Government company as well as the character of grantor, being the State
Government itself, the financial status of the assessee and certain other
factors. The Tribunal accepted the assessee’s claim that grant-in-aid towards
provident fund dues constituted capital receipts.

 

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

 

“i)  The fundamental principle for distinguishing
capital receipt from revenue receipt in relation to Government grant has been
laid down by the Supreme Court in the case of Sahney Steel & Press Works
Ltd. vs. CIT [1997] 94 Taxman 368/228 ITR 253. That was a case involving
government subsidy in the form of certain time bound incentives and facilities.
These incentives and facilities included refund of sales tax on raw materials,
machineries and finished goods. The Supreme Court found that the incentives and
facilities under a subsidy scheme to enable the assessee to acquire new plant
or machinery for expansion of manufacturing capacity or set up new industrial
undertaking could constitute capital receipt. In that case, however, the scheme
contemplated for refund of sales tax on purchase of machinery and raw
materials, subsidy or power consumption and certain other exemptions on
utilities consumed. The Supreme Court rejected the plea of the assessee for
treating such facilities and incentives as capital receipt on the reasoning
that such subsidy could only be treated as assistance given for the purpose of
carrying on the business of the assessee.

 

ii)   So far as assessee’s case in this appeal is
concerned, Rs. 3.60 crores was received as grant-in-aid in the relevant
previous year towards salary and provident fund dues. On surface test, receipt
under these heads no doubt has the attributes of revenue receipt. But there are
two factors which distinguish the character of the grant-in-aid which the
assessee wants to be treated as capital receipt. Said sum was not on account of
any general subsidy scheme. Secondly, the sum was given by the State to a
wholly-owned company which was facing acute cash crunch. Financial status of
the company appears from the submission of the assessee’s representative
recorded in the order of the first Appellate Authority and there is no denial
of this fact in any of the materials placed.

 

iii)  In the case of the assessee, though it is not
a grant from a parent company to a subsidiary company, the grant is from the
State Government, which was in effect, hundred per cent shareholder of the
assessee. Rs. 3.60 crores was meant for payment of staff salaries and provident
fund dues. As already observed, these item heads may bear the label of revenue
receipt on the surface, it is apparent that the actual intention of the State
was to keep the company, facing acute cash crunch, floating and protecting
employment in a public sector organization. There is no separate business
consideration on record between the grantor, that is the State Government and
the recipient thereof being the assessee. The principle of law as laid down in
the case of Siemens Public Communication Network (P.) Ltd. vs. CIT [2017] 77
taxmann.com 22/244 Taxman 188/390 ITR 1 (SC) is that voluntary payments
made by the parent company to its loss making Indian subsidiary can also be
understood to be payments made in order to protect the capital investment of
the assessee-company. Though the grant-in-aid in this case was received from
public funds, the State Government being 100 per cent shareholder, its position
would be similar to that of, or at par with a parent company making voluntary
payments to its loss making undertaking. No other specific business
consideration on the part of the State has been demonstrated in this appeal.
The assistance extended appears to be measures to keep the assessee-company
floating, the assessee being, for all practical purposes an extended arm of the
State. Though large part of the funds were applied for salary and provident
fund dues, the object of extension of assistance, to ensure survival of the
company.

 

iv)  As regards the funds extended for flood
relief, the same cannot constitute revenue receipt. Flood relief does not
constitute part of business of the assessee.

 

v)  Accordingly, the question is answered in
favour of the assessee and confirm the finding of the Tribunal.”

41 Section 4 – Income – Capital or revenue receipt – Real estate business – Seller of land not performing commitment under agreement to sell – Purpose of ultimate use of assessee’s land when acquired rendered irrelevant – Compensation received under arbitration award considered as capital receipt

Pr.
CIT vs. Aeren R Infrastructure Ltd.; 404 ITR 318 (Del): Date of Order : 25th
April, 2018

The
assessee, engaged in the business of real estate, entered into a consortium
agreement with its associates which defined the role, rights and
responsibilities of the parties thereto. This consortium entered into an
agreement to sell with JMA, the seller, for purchase of 10 acres of land for a
consideration of Rs. 15 crores. The seller, JMA, defaulted in its commitment
within the prescribed and extended time limit. Ultimately, upon the parties
resorting to the arbitration, a settlement was arrived at and an award was made
based upon the parties eventual settlement. The amount received by the assessee
as a part of its entitlement as consortium was credited in its books of account
as a capital receipt. The Assessing Officer held that the amounts were revenue
in nature as the land would have been part of the stock-in-trade.

 

The
Tribunal held that the amount which was intended to be ultimately used as
stock-in-trade purposes was immobile and sterilized, rendered non-offerable and
therefore when received as part of the arbitration award, fell into the capital
stream. The Tribunal held that the only inference that can be drawn is that the
compensation received by way of reward due to non-supply of land by JMA under
the agreement was capital receipt.

 

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

 

“The
purpose of the ultimate use of the assessee’s land when acquired was rendered
irrelevant on account of the seller defaulting in its commitment. This rendered
the amount expended by the assessee immobile. The eventual receipt of the
amounts determined as compensation or damages, therefore, fell into the capital
stream and not revenue as was contended by the Revenue/appellant in this case.”

40 Section 43A – Foreign exchange fluctuation – Where assessee constructed a residential house and rental income earned therefrom was offered to tax as income from house property and not as business income, provisions of section 43A would not apply to apparent gain made by assessee as a consequence of foreign exchange fluctuation in respect of lift imported from abroad

CIT
vs. Bengal Intelligent Parks (P.) Ltd.; [2018] 94 taxmann.com 399 (Cal);

Date
of order: 10th May, 2018

The
assessee was engaged in construction of houses for the purpose of letting them
out. The rental income was claimed as income from house property without the
expenses for constructing the house being claimed by way of deduction or the
individual items therefore being subjected to depreciation. In respect of a
particular elevator imported by the assessee for installation at one of its
buildings, the rise of the rupee compared to the relevant foreign currency
resulted in the cost of the equipment being effectively lowered by a sum in
excess of Rs. 6 lakh. The Assessing Officer added said amount to assessee’s
income.

 

The
assessee filed appeal contending that since the elevator was not used for the
purpose of its business and no deduction or depreciation or the like had been
claimed in respect thereof, the perceived additional income on account of
foreign exchange fluctuation could not be added back as an income in the hands
of the assessee. The Tribunal having accepted assessee’s contention, deleted
the addition made by the Assessing Officer.

 

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

 

“i)  Section 43A deals with the variation of
expenses on account of the change in the rate of exchange of currency. Such
provision takes into account the additional expenses that may be incurred by an
assessee as a result of the fluctuation of foreign exchange rates or the gain
that may be made by an assessee on such account. However, such provision is
confined to assets acquired from a country outside India for the purpose of the
assessee’s business or profession. The Tribunal held in this case that since
the construction of the relevant house was not a part of the business of the
assessee, section 43A would not apply to the apparent gain made by the assessee
as a consequence of the foreign exchange fluctuation.

 

ii)   On a plain reading of section 43A and the
fact that the assessee had not claimed any deduction or depreciation on account
of the lift or other construction material, it cannot be said that the Tribunal
committed any error or that there is any significant question of law that needs
to be looked into. In the result, revenue’s appeal is dismissed.”

Section 194L and 194LA – TDS – State Metropolitan Development Authority – Acquisition of land for projects paying sums to illegal squatters for their rehabilitation – Not a case of compulsory acquisition from owners of land for which compensation paid – No liability to deduct tax at source on payments to illegal squatters

39. 
CIT vs. MMRDA; 408 ITR 111(Bom):  Date of order: 6th September,
2018 A. Ys. 2000-01 to 2009-10

 

Section 194L and  194LA – TDS – State Metropolitan Development
Authority – Acquisition of land for projects paying sums to illegal squatters
for their rehabilitation – Not a case of compulsory acquisition from owners of
land for which compensation paid – No liability to deduct tax at source on
payments to illegal squatters

 

For the purpose of
implementing the scheme of the Government relating to road widening near the
railway track, the assessee, the Mumbai Metropolitan Regional Development
Authority, evacuated illegal and unauthorised persons who were squatters and
hutment dwellers. The Assessing Officer was of the opinion that there was
acquisition of immovable property for various projects by the assessee, for
which the project affected persons were compensated under the Land Acquisition
Act, 1894, He treated the assessee as the assessee-in-default u/s. 201(1) of
the Act and liable to pay interest u/s. 201(1A) since the assessee had not
deducted tax at source u/s. 194L/194LA. Accordingly, he computed the payment of
tax u/s. 201(1) and interest u/s. 201(1A)

 

The Commissioner
(Appeals) allowed the appeal and deleted the demand. The Tribunal 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)    The possession of those persons was
unauthorized and illegal and they were not the owners of the land on which they
had squatted or built their illegal hutments and were trespassers. Therefore,
there was no question of the land being acquired by the assessee.


ii)    The Tribunal correctly came to the
conclusion that the land had always belonged to the State and it was encroached
upon, which encroachment was removed by the assessee and the encroaching
squatters or hutment dwellers were rehabilitated. There was no question of
there being any compulsory acquisition from them under any law either under the
1894 Act or any other enactments which permitted compulsory acquisition of
land. Hence section 194L or section 194LA had no application.”

 

Sections 115JB and 254 Rectification of mistake – Tribunal accepting that assessee’s book profits to be computed after giving effect to deduction u/s. 54EC – AO passing order giving effect to directions issued by Tribunal – Notice of rectification issued thereafter on ground that deduction u/s. 54EC wrongly allowed – Not permissible Notice quashed

38. 
Meteor Satellite Pvt. Ltd. vs. ITO; 408 ITR 99 (Guj): Date of order: 16th April, 2018 A. Y. 2010-11

 

Sections 115JB and 254 Rectification of
mistake – Tribunal accepting that assessee’s book profits to be computed after
giving effect to deduction u/s. 54EC – AO passing order giving effect to
directions issued by Tribunal – Notice of rectification issued thereafter on
ground that deduction u/s. 54EC wrongly allowed – Not permissible Notice
quashed

 

For the A. Y.
2010-11, the Tribunal accepted the assessee’s contention and held that the
assessee’s profits ought to be computed u/s. 115JB of the Act after carrying
out deduction u/s. 54EC. The Assessing Officer gave effect to the order and
recomputed the assessee’s book profits according to the directions of the
Tribunal and passed an order. Subsequently, he issued a notice u/s. 154 of the Act
to rectify the order passed by him for giving effect to the order of the
Tribunal on the ground that the book profits of the assessee had been wrongly
computed by allowing deduction u/s. 54EC in contravention of the law for
determining the book profits and that rectification of the order was to be
carried out.

 

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

 

“i)    There was no error in the Assessing
Officer’s order implementing the Tribunal’s directions. The Tribunal had
directed the Assessing Officer to compute the assessee’s book profits in a
particular manner which was correctly understood and given effect by him.


ii)    He had proposed to rectify his order giving
effect to the Tribunal’s decision on the ground that there had been  an apparent error. However, as long as the
order of the Tribunal stood, the assessment order was required to be
implemented. Further, having implemented the order, it was not open for him to
exercise power of rectification which was meant for correcting any error
apparent on record.”

 

Section 4 – Income – Chargeable as (Compensation) – Compensation awarded under Motor Vehicles Act or Employees’ Compensation Act in lieu of death of a person or bodily injury suffered in a vehicular accident, is a damage and not an income and cannot be treated as taxable income

37. 
National Insurance Company Ltd. vs. Indra Devi; [2018] 100 taxmann.com
60 (HP): Date of order: 25th October, 2018

 

Section 4 – Income – Chargeable as
(Compensation) – Compensation awarded under Motor Vehicles Act or Employees’
Compensation Act in lieu of death of a person or bodily injury suffered in a
vehicular accident, is a damage and not an income and cannot be treated as
taxable income

 

The respondent Nos.
1 and 2 had filed a claim petition being u/s. 3 of the Workmen Compensation Act
for compensation on account of death of ‘R’, who, while working as a
cleaner/conductor, died in an accident. The Commissioner allowed the petition
by awarding a sum of Rs. 3,94,135 along with 12 per cent interest. In pursuance
to the award, the petitioner-insurance company deposited a sum of Rs. 5,32,007,
in the Court of the Commissioner after deducting TDS on interest component
payable on the compensation amount, which was deducted by the
petitioner-insurance company in compliance of section 194A. The tax was
deposited with the respondent No. 3- ITO (TDS). In execution petition preferred
by the claimants/respondents for payment of balance amount of compensation, the
Commissioner, directed to attach movable property of petitioner-insurance
company herein for realisation of balance amount. The petitioner insurance
company filed a writ petition and challenged the said order. The Himachal
Pradesh High Court held as under:

 

“i)    Section 194A clearly provides
that any person, not being an individual or a Hindu Undivided Family,
responsible for paying to a ‘resident’ any income by way of interest, other
than income by way of interest on securities, shall deduct tax on such income
at the time of payment thereof in cash or by issue of cheque or by any other
mode. Compensation awarded under Motor Vehicles Act or Employees’ Compensation
Act in lieu of death of a person or bodily injury suffered in a vehicular
accident, is a damage and not an income and cannot be treated as taxable
income.


ii)    It is well settled that
interest awarded by the Motor Accident Claims Tribunal on a compensation is
also a part of compensation upon which tax is not chargeable.


iii)    Therefore, in view of abovesaid
decision, deduction of tax by petitioner/Insurance Company on the awarded
compensation and interest accrued thereon is illegal and is contrary to the law
of land.


iv)   In view of above discussion,
this petition is disposed of directing respondent No. 3 to refund the TDS to
the petitioner/Insurance Company.


v)    The amount deposited with the
department after deduction at source is Rs. 34,468, whereas the impugned order
of realization passed by the Commissioner is Rs. 66,900. Therefore, it is made
clear that for payment of balance amount claimed in the execution petition
filed by the respondents No. 1 and 2, the petitioner/Insurance Company has to
satisfy the Court of Commissioner and in case any amount beyond Rs. 34,468 is
found payable to the D.H./Claimants/respondents, the Commissioner/Executing
Court shall be entitled to pass any order in accordance with law for failure of
the petitioner company to satisfy the award.”


Section 9 of the Act w.r.t. Article 12 of DTAA between India and Austria – Income – Deemed to accrue or arise in India (Royalty/Fees for technical services) – Assessee-company entered into a technical assistance agreement with a non-resident company in Austria for design of new 75CC, 3-valve cylinder head for moped application – Assessing Officer treated payment to Austrian company as royalty – Since engine had already been developed by assessee and scope of technical services agreement was only to design a new 3-valve cylinder head with a specified combustion system for considerable improvement of fuel efficiency, performance and meeting Indian emission standards and moreover all products, design of engines and vehicles were supplied by assessee, payment did not constitute royalty

36. 
DIT vs. TVS Motors Co. Ltd.; [2018] 99 taxmann.com 40 (Mad): Date of the order: 24th October,
2018 A. Y. 2002-03

 

Section 9 of
the Act w.r.t. Article 12 of DTAA between India and Austria – Income – Deemed to accrue or
arise in India (Royalty/Fees for technical services) – Assessee-company entered
into a technical assistance agreement with a non-resident company in Austria
for design of new 75CC, 3-valve cylinder head for moped application – Assessing
Officer treated payment to Austrian company as royalty – Since engine had
already been developed by assessee and scope of technical services agreement
was only to design a new 3-valve cylinder head with a specified combustion
system for considerable improvement of fuel efficiency, performance and meeting
Indian emission standards and moreover all products, design of engines and
vehicles were supplied by assessee, payment did not constitute royalty

 

The assessee
entered into a technical assistance agreement with a non-resident company in
Austria for design of new 75CC, 3-valve Cylinder head, the project which
commenced in January 2001 and was completed in October 2001. The assessee
during the assessment proceedings contended that the fees paid by them to the
Austrian company was only for technical services, as the entire work was done
in Austria and no part of the work was done in India and the entire income was
taxable only in Austria in terms of provision of the DTAA with Austria. The
Assessing Officer, on going through the technical assistance agreement held
that the Austrian company was providing the design of newly developed engine
for being used by the assessee and thus payment was taxable as ‘royalty’.

 

The Commissioner
(Appeals) allowed the assessee’s appeal and held that the payment did not
constitute royalty. The Tribunal dismissed the appeal filed by the revenue.

 

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

 

“i)    The scope of the work was for design of a
new 3-valve cylinder head with AVL CCBR combustion system. This would have
considerable improvement of fuel efficiency, improved performance and Meeting
India 2004 Emission Limits under IDC test conditions. The agreement states that
the assessee has recently developed a new 75CC 4-stroke 2-valve air cooled
engine with single speed transmission for moped application. As the local
market, (India), is asking for better fuel economy, the Austrian company was
asked to design a new 3-valve cylinder head with a lean burn combustion system
with charge motion for rapid combustion. The whole work under the said
agreement was to be carried out in Austria. The assessee was to supply the
material with all design documentation, engines and components as required for
the project. The total price for the project work deliverables and services was
agreed at EURO 349.522.


ii)    The engine has already been developed by the
assessee and scope of the technical services agreement was only to design a new
3-valve cylinder head with a specified combustion system for considerable
improvement of fuel efficiency, performance and meeting the Indian emission
standards. All products, design of the engines and vehicles are supplied by the
assessee. On completion all the drawings are also delivered by the Austrian
company to the assessee. The entire project was carried out in Austria and no
part of the project was performed in India. Thus, the Commissioner (Appeals)
rightly held that the payment does not constitute royalty.”

Section 10B – Export oriented undertaking – 10B(9)/(9A)) – Assessee firm was engaged in production and export of iron ore – It claimed deduction u/s. 10B – Assessing officer rejected assessee’s claim on ground that assessee’s sister concern got merged with assessee – assessee’s sister concern was also an EOU – Impugned order rejecting assessee’s claim was to be set aside

35. 
CIT vs. Trident Minerals; [2018] 100 taxmann.com 161 (Karn): Date of order: 10th October, 2018 A Y. 2009-10

 

Section 10B – Export oriented undertaking –
10B(9)/(9A)) – Assessee firm was engaged in production and export of iron ore –
It claimed deduction u/s. 10B – Assessing officer rejected assessee’s claim on
ground that assessee’s sister concern got merged with assessee – assessee’s
sister concern was also an EOU – Impugned order rejecting assessee’s claim was
to be set aside

 

The assessee-firm
was engaged in business of production, manufacture and export of iron ore. On
02/05/2008 the assessee’s sister concern namely KMMI Exports merged with
assessee. On 22/09/2009, return of income was filed u/s. 139(1) of the Act and
deduction u/s. 10B was claimed in respect of export income. The Assessing
Officer held that deduction u/s. 10B was not allowable on the ground that two
partnership firms had been merged and that assets of KMMI Exports had been
taken over by assessee.

 

The Commissioner
(Appeals) allowed the claim of the assessee.

 

The Tribunal upheld
the decision of the Commissioner (Appeals).

 

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

 

“i)    The Commissioner (Appeals) recorded a
finding that the Circular of the Board issued u/s. 84 was not withdrawn and was
still in force. It is the Rule and also the practice of the Board to withdraw
the Circular once it is not relevant. Therefore, the Circular No. 15/5/63-IT(A1),
dated 13/12/1962 is in force and relevant in the present context, when the
clauses u/s. 80J and 10B are similar. It was also recorded by the appellate
authority that the observation made by the Assessing Officer, as per section
10B(7), only Indian company is eligible for amalgamation is not appropriate.


ii)    As mentioned by the assessee in the written
submission that ‘the sub-sections (9) and (9A) which were omitted with effect
from 01/04/2004 clearly suggests that the transfer by any means will not entitle
the deduction under this section only up to 31/03/2003. In other words, the
transfer by any means is allowed with effect from 01/04/2004 by implication,
moreover, the firms merged are family concerns with same partners, with the
same sharing ratio and doing the same business and two firms are having 100 per
cent EOU recognised by the SEZ Authorities. Hence, the Commissioner held that
the claim of the assessee was justifiable and the same was allowed.


iii)    On appeal filed by the revenue, Tribunal
recorded a finding that the unit of the assessee firm is a 100 per cent EOU
unit entitled for deduction u/s. 10B of the Act. It is also seen that Assessing
Officer has not disputed the EOU status of the unit KMMI Exports also. The
issue for consideration is after the merger of the firm KMMI exports with the
assessee-firm, whether the assessee-firm is entitled for deduction u/s. 10B of
the Act. Earlier, there was sub-section (9) to section 10B, which specifically
provided that the deduction cannot be allowed, if there was a transfer of
ownership or beneficial interest in the undertaking. The sub-section (9A) of
section 10B was omitted with effect from 01/04/2004. In this view of the
matter, the inevitable and appropriate conclusion is that the limitations
specified in sub-sections (9) and (9A) of section 10B Act do not exist from
01/04/2004 and, therefore, the conclusion of the Assessing Officer that
deduction u/s. 10B cannot be granted on the merger of firms is not correct.


iv)   The Tribunal after considering a finding that
in view of the CBDT Circular No. 1 of 2013, dated 17/01/2013, it is clear that
deduction is granted to the undertaking. Therefore, it follows as long as the
undertakings remain eligible for deduction u/s. 10B, the deduction cannot be
denied merely on the ground that there has been a merger of the firms which own
the undertakings. The Assessing Officer has not rendered any finding that
either on the units, belonging to the assessee and the other belonging to the
firm that got merged, i.e., KMMI Exports, is not eligible for deduction u/s.
10B of the Act. The only reason adduced is that due to the merger of the two
units, the assessee is deploying assets already put to use by the merged firm
and hence the assessee cannot claim deduction u/s. 10B of the Act.


v)    The Tribunal further recorded a finding that
both the units/undertakings of the assessee-firm and KMMI Exports are otherwise
eligible for deduction u/s. 10B and the deduction is towards undertaking as
long as undertakings are agreeable that section 10B which is not been disputed
by the Assessing Officer merger of the firm and KMMI Exports which is not
undertaking. In view of the above, the Tribunal upheld the order passed by the
Appellate Court allowing the deduction u/s. 10B.


vii)   It is undisputed fact that the claim made by
the assessee for deduction u/s. 10B for the assessment year 2009-10 after the
merger of two firms with effect from 26/12/2011. It is also undisputed that in
view of the deletion of the provision of sub-section (9) of section 10B from
the statute with effect from 01/04/2004 the impugned order passed by the
Tribunal allowing the assessee’s claim for deduction u/s. 10B was to be
upheld.”


Section 10(23C)(iiiad) – Educational institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established predominantly with an object of providing education to all sections of society – Mere fact that it spent a meagre amount of its total income on some allied charitable activities such as providing food and clothing to relatives of poor students, would not stand in way of AO to deny benefit to it u/s. 10(23C)(iiiad)

34. 
Sri Sai Educational Trust vs. CIT; [2018] 100 taxmann.com 50 (Mad): Date of order: 10th October, 2018 A. Y. 2014-15

 

Section 10(23C)(iiiad) – Educational
institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established
predominantly with an object of providing education to all sections of society
– Mere fact that it spent a meagre amount of its total income on some allied
charitable activities such as providing food and clothing to relatives of poor
students, would not stand in way of AO to deny benefit to it u/s.
10(23C)(iiiad)

 

The assessee trust
was established predominantly with an object of providing school education to
all sections of society. The only activity of the assessee-trust was running of
an educational institution. The assessee-trust was granted registration u/s.
12A on 30/05/2016. The assessee filed its return for relevant year i.e. A. Y.
2014-15 claiming exemption of income. The assessee’s claim was based on plea
that in view of the registration granted u/s. 12AA of the Act, with effect from
01/04/2015 and in view of the first proviso to section 12A(2), effect of such
registration had to be applied retrospectively in respect of the subject year
i.e. A. Y. 2014-15 also and consequently, the Assessing Officer ought not to
have assessed the income to tax. The assessee’s alternative plea was that if
the exemption was not allowed with retrospective application of the
registration as contemplated u/s. 12A(2), it should have been granted the
benefit of exemption by applying section 10(23C)(iiiad). The Assessing Officer
rejected assessee’s claim of granting benefit of section 12A with retrospective
effect. He further held that since assessee was not existing solely for
educational purpose as it was carrying on some other charitable activities
also, exemption u/s. 10(23C)(iiiad) was also not allowable.

 

The assesee filed a
writ petition and challenged the order of the Assessing Officer. The Madras
High Court upheld the order of the Assessing Officer as regards section 12A.
The High Court allowed the writ petition and held that the assessee is entitled
to exemption u/s. 10(23C)(iiiad) and held as under:

 

“i)    Perusal of the provision of section
10(23C)(iiiad) would show that any income received by any University or
educational institution existing solely for educational purposes and not for
purposes of profit, shall not be included in total income. In other words, such
income is not taxable and on the other hand, gets exempted from levy of tax. It
is the contention of the assessee that since the trust is existing solely for
educational purposes without having any purpose of profit, the respondent is
not entitled to bring the disputed income to tax.


ii)    There is no dispute to the fact that the
assessee trust is running an educational institution for providing elementary
school education without distinction of caste and creed, from 1997. Though the
Trust Deed refers few other charitable activities such as providing medical
relief to the poor, relief to orphans, etc., the predominant object of the
trust is evidently seen as administering, establishing and maintaining schools
and other educational institutions to impart education to poor students without
any restriction as to caste, community or religion. This noble object of the
assessee trust cannot be looked into with magnifying glass to find out as to
whether any meagre expenditure spent by them on any allied charitable purpose,
so as to project, as though by doing such activity, the assessee-trust is not
existing solely for educational purposes. In this case, the objection of the
revenue relates to a sum of Rs.54,300/- spent by the petitioner for providing
sarees to mothers and grandmothers of the children studying in the school. This
free distribution of clothes to the mothers and grandmothers of the children is
considered by the revenue as the one not related to educational purposes.


iii)    On the other hand, it is contended by the
assessee that such distribution was made only to encourage those mothers and
grandmothers to send their ward to the school without discontinuation. This
purpose is not doubted by the Revenue. Nor any contra material is available
before the Assessing Officer to draw adverse inference. Therefore, the main
object behind the distribution of the sarees to those persons is evidently for
ensuring the continuance of study at the petitioner School and not solely for
providing clothes to needy persons totally unconnected with the school.


iv)   At this juncture, it is better to understand
the scope of Section 10(23C)(iiiad). The term “any university or
educational institution existing solely for educational purpose” used
under the above provision is heavily relied on by the Revenue to deny the
benefit of exemption to the petitioner on the sole ground that a portion of the
income spent on other charitable purpose, viz., distribution of sarees to the
mothers and grandmothers of the children studying in the school was not for
educational purpose. There is no dispute to the fact that the sum spent on such
purpose is very minimal, compared to the total income.


v)    While the nature of existence of the
institution is to be derived only by considering the predominant activity of
the institution, the nature of spending the money so received by such
institution to its various activities, has to be ascertained and adjudged going
by the ultimate purpose for which it was spent. If the event of spending and
the purpose for which such event took place, have some nexus to achieve the
main object viz., the predominant activity of the institution, then such
spending on an allied activity cannot be looked in isolation from the main
object.


vi)   An institution solely existing for
educational purposes, if indulges in certain allied charitable activities, such
as feeding and clothing poor, giving some medical aid to those people, etc.,
certainly, such activities cannot alter the predominant object of such
institution. While ‘the imparting education’ is like the water flowing in the
main channel, certain incidental other charitable activities done by such
institution, here and there, cannot be considered as major breach of the
channel, but as the reach of the ‘over flown’ water from the main channel to
the adjacent lands. So long as the desired destination of the channel (the
institution) is evidently existing and being achieved to reach the predominant
object and not disputed, the nature or character of the institution run by the
trust cannot be doubted, as it will always fit into the above term
“institution existing solely for educational purposes” and consequently,
is entitled to protection u/s. 10(23C)(iiiad).


vii)   Further, strictly speaking, Section 10(23C)
contemplates and excludes any income “received by” and not “the
spending” of such money received u/s. 10(23C). At the same time, if the
spending is totally on a deviated object or an object, which is totally
opposite or opposed to the main object for which the trust is created,
certainly such spending cannot have any protection u/s.10(23C)(iiiad). Thus, the sole purpose of existence is to be gathered, derived
and construed based on overall predominant activity and not from certain
isolated activity, especially when such activity also happens to be charitable
in nature, more particularly, when a meagre sum is spent on such activity. At
the same time, proportionality of the money spent on such activity, other than
the predominant activity, also plays a major role in deciding the nature of
existence of the institution. If major portions of the money received by the
trust is spent on certain objects other than the predominant object, certainly
the sole purpose of the Trust for which it was created, can be doubted. On the
other hand, if such spending is meagre and does not shake the conscience of the
Assessing Officer, being the quasi judicial authority, is at liberty to bring
such expenditure also under the exemption clause.


viii)  It is not established by the revenue that the
assessee is carrying on any other activities for profit other than running the
school. Therefore, when the only predominant activity is being carried on by
the assessee-trust, viz., the running of the school mere spending a meagre
amount, out of the total income derived by the trust, towards the distribution
of sarees to mothers and grandmothers of children studying in the school, could
not stand in the way of the Assessing Officer to deny the benefit u/s.
10(23C)(iiiad). Thus the respondents are not justified in rejecting the claim
of the petitioner u/s. 10(23C)(iiiad) of the Act.


ix)   Accordingly, the writ petition is allowed and
the impugned order is set aside.”

Section 12A – Charitable or religious trust – Registration of (Cancellation of) – Where assessee educational society, set up with various aims and objects including improvement in standard of education of backward students of rural areas, was running a school and Commissioner had not doubted genuineness of aims and objects of assessee, application u/s. 12A could not be rejected merely on ground that secretary of society was getting lease rent for land given to society for running school or his wife who had requisite qualification was teaching in school and was being paid salary

33. 
CIT (Exemption) vs. Ambala Public Educational Society; [2018] 100
taxmann.com 131 (P&H): Date of order: 29th October, 2018

 

Section 12A – Charitable or religious trust
– Registration of (Cancellation of) – Where assessee educational society, set
up with various aims and objects including improvement in standard of education
of backward students of rural areas, was running a school and Commissioner had
not doubted genuineness of aims and objects of assessee, application u/s. 12A
could not be rejected merely on ground that secretary of society was getting
lease rent for land given to society for running school or his wife who had
requisite qualification was teaching in school and was being paid salary

 

The
assessee-society was a trust registered with the Registrar of Societies,
Haryana. The assessee-society was set up with various aims and objects
including improvement in the standard of education of the backward students of
rural areas. The assessee-society was running a school. It made an application
for registration u/s. 12A of the Act. During the proceedings, the Commissioner
was swayed by the fact that the secretary of the assessee-society was getting
lease rent of certain amount per annum for land given to society for running
school and wife of the secretary was teaching in school and getting salary from
the school. It was further stated that the assessee-society was not registered
under the New Haryana Registration & Regulation of Societies Registration
Act, 2012. Accordingly, the application was rejected.

 

On appeal, the
Tribunal ordered granting registration u/s. 12A to the society.

 

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

 

“i)    The contentions raised by the revenue lacks
merit. There is no requirement u/s. 12A that the assessee-society is required
to be registered under the 2012 Act. Moreover, the assessee-society explained
before Tribunal that it had applied for registration under the 2012 Act but due
to back log, grant of registration was delayed. The certificate regarding
registration under 2012 Act was produced before the Tribunal.


ii)    The application u/s. 12A cannot be rejected
merely on the ground that the secretary of the society was getting lease rent
for the land given to the society for running the school or his wife who had
requisite qualification was teaching in the school and was being paid the
salary. It is not the case set up by the revenue that the exorbitant amounts
had been paid by the assessee-society to the secretary or to his wife. No
dispute has been raised to the fact that the assessee-society is running a
school as per its aims and objects.


iii)    The Commissioner while rejecting the
application has not doubted the genuineness of aims and objectives of the
assessee-society. On the other hand the Assessing Officer while finalising the
assessment for A. Y. 2010-11 u/s. 143(3) has specifically recorded the finding
that the income earned by the society has been utilised for educational
purposes.


iv)   The order of the ITAT warrants no
interference. No error has been pointed out in the findings recorded by the
ITAT much less shown to be perverse. No substantial question of law arises. The
appeal is, accordingly, dismissed.”

Sections 40(a)(ia) and 194J – Business expenditure – Disallowance u/s. 40(a)(ia) – Payments liable to TDS – Third party administrator for insurance companies – Payments merely routed through assessee – Disallowance u/s. 40(a)(ia) not warranted

32. 
CIT vs. Dedicated Healthcare Services (TPA) India Pvt. Ltd.; 408 ITR 36
(Bom): Date of order: 17th September,
2018 A. Y. 2008-09

 

Sections
40(a)(ia) and 194J – Business expenditure – Disallowance u/s. 40(a)(ia) –
Payments liable to TDS – Third party administrator for insurance companies –
Payments merely routed through assessee – Disallowance u/s. 40(a)(ia) not
warranted




The assessee
carried on business as a third party administrator for insurance companies.
According to the Department, the insurance companies issued policies that were
serviced by the third party administrator who acted as a facilitator and
charged fees, provided services, such as hospitalisation, cashless access,
billing and call centre services, and all the claims payable by the insurance
companies for these services were routed through the third party administrator.

 

It was further
stated, that the receipts and disbursements were routed the bank account of the
assessee for which the assessee passed certain book entries, that on receipt of
the amount, the bank account was debited and the account of the insurance
company was credited and that on payment of claims to the hospital/insured, the
account of the insurance company was debited and the bank account was credited.

 

For the A. Y.
2008-09 it was found that the assessee had made payments to various hospitals
during the year without deducting the tax at source u/s. 194J of the Income-tax
Act, 1961 (hereinafter for the sake of brevity referred to as the
“Act”) which called for disallowance u/s. 40(a)(ia) of the Act.
Relying on the CBDT circular No. 8 of 2009, dated 24/11/2009, the Assessing
Officer held that the third party administrator was required to deduct tax at
source u/s. 194J from all such payments made to hospitals, etc.

 

The Commissioner
(Appeals) allowed the appeal filed by the assessee. The Tribunal upheld the
decision of the Commissioner (Appeals).

 

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

 

“i)    The Tribunal had found that the assessee
only facilitated the payments by the insurer to the insured for availing of the
medical facilities. The assessee did not render any professional services to
the insurer or the insured and only collected the amount from the insurer and
passed it on to various hospitals which provided medical services to the
insured. It had found that for transactions there was no claim of expenses by
the assessee which was disallowed.


ii)    The Department could not be permitted to
raise the same questions as had been earlier dealt with in the Division Bench
judgments and orders of the Court.”

Section 37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and allowed against professional income in earlier years and subsequent years – Allocation of expenditure between capital gains and professional business income in year in question – Not proper

It
started in January, 1971 as “High Court News”. Dinesh Vyas, Advocate, started
it and it contained unreported decisions of Bombay High Court only. Between
January, 1976 and April, 1984, it was contributed by V H Patil, Advocate as “In
the Courts”. The baton was passed to Keshav B Bhujle in May, 1984 and he
carries it even today – and that’s 35 years of month on month contribution.
Ajay Singh joined in 2016-17 by penning Part B – Unreported Decisions.

51.  Principal CIT vs. Quest Investment Advisors
Pvt. Ltd.; 409 ITR 545 (Bom) Date of order: 28th
June, 2018 A. Y. 2008-10

 

Section
37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and
allowed against professional income in earlier years and subsequent years –
Allocation of expenditure between capital gains and professional business
income in year in question – Not proper

 

For
the A. Y. 2008-09, the assesse filed return of income declaring professional
income of Rs. 1.31 crore and short term capital gains of Rs. 6 crore. As was
the practice for the earlier years and accepted by the Department, all the
expenses were set off against the professional business income. However, for
the relevant year, the Assessing Officer allocated the expenditure between
earnings of capital gains and professional income and disallowed an expenditure
of Rs. 88.05 lakh claimed by the assesse against professional income. The
Tribunal found that the authorities had consistently over the years for 10
years prior to the A. Ys. 2007-08 and 2008-09 and for the four subsequent
years, accepted the principle that all the expenses which had been incurred
were attributable entirely to earning professional income without allocation of
any amount to capital gains, and applying the principle of consistency the
Tribunal allowed the appeal filed by the assessee.

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

“i)        For the earlier 10 years and 4
subsequent years the entire expenditure had been allowed against the business
income and no expenditure was allocated to capital gains. Once the principle
was accepted and consistently applied and followed, the Department was bound by
it. The basis for the change in practice should have been mentioned by the
Department, if it had wanted to change the practice without any change in law
or facts therein, either in its order or pointed out when the Tribunal passed
the order.

ii)         Therefore, the Tribunal’s allowing the
assessee’s appeal on the principle of consistency could not be faulted as it
was in accord with the Supreme Court decision.”

 

Sections 226(3), 276B and 276BB – Recovery of tax – Garnishee proceedings – Assessee holding lease for settlement of sand ghats – Surrender of lease accepted by Government – Attachment of bank account of assessee thereafter for failure by Mining Office to collect tax from other settlees – No determination that settlement amount to Mines Department due against assessee – Liability was that of Mines Department – Attachment of assessee’s bank account not sustainable and revoked

18. Sainik Food Pvt. Ltd. vs.
Principal CCIT; 406 ITR 596 (Patna);

Date of order: 8th
February, 2018

 

Sections 226(3), 276B and 276BB – Recovery of tax – Garnishee
proceedings – Assessee holding lease for settlement of sand ghats – Surrender
of lease accepted by Government – Attachment of bank account of assessee
thereafter for failure by Mining Office to collect tax from other settlees – No
determination that settlement amount to Mines Department due against assessee –
Liability was that of Mines Department – Attachment of assessee’s bank account
not sustainable and revoked

 

The assessee was the highest bidder
of the tender for settlement of sand ghats located in different districts in
the State of Bihar for the period of 2015-19. According to the notice inviting
tender the assessee was required to pay settlement amount in three instalments
with simultaneous payment of the required amount of tax to the Sales Tax
Department of the State, Income Tax Department and other statutory charges. The
assessee deposited the entire settlement amount with the Department of Mines
and Geology for the years 2015 and 2016. The assessee was required to deposit
the third and the last instalment of settlement amount in the month of
September, 2017.

 

In the mean while, the assessee
received a notice of demand dated 26/07/2017, issued by the ITO in purported
exercise of power u/s. 226(3) of the Income-tax Act, 1961 calling upon the
assessee to deposit the tax liability of the District Mining Office, Bhagalpur.
The assessee requested for grant of time so that the third instalment was paid
to the Department instead of to the District Mining Officer with settlement of
sand ghat. On 19/12/2017 the amount was deducted from the bank account of the
assessee by the Department which treated it to be an assesee u/s. 226(3)(x) and
dues payable by the District Mining Officer, Bhagalpur on account of default in
deducting tax collected at source from various brick kiln owners. The assessee
surrendered the lease on 14/10/2017 and was accepted by the State Government on
20/10/2017. The ITO (TDS) passed the order of recovery u/s. 226(3)(x) on
23/10/2017.

 

The assessee filed a writ petition
contending that the assessee was not a debtor of the Mines and Geology
Department after surrender of lease and its acceptance, that the action of the
Department in releasing the bank account of the Mining Department and
thereafter attaching the bank account of the assessee and recovery of tax
liability of the Mining Department from the bank account of the assessee was
not justified, and that not taking action against the Mining Department u/s.
276B and 276BB and attaching and recovering from the bank account of the
assessee was arbitrary exercise of power. The Patna High Court allowed the writ
petition and held as under:

 

“i)    The
Department had not carried out any factual enquiry to examine whether or not
there was any liability to be paid by the assessee in connection with the
settlement of sand ghat. In the absence of factual enquiry, proceeding against
the assessee and treating it as debtor was not justified. The action of the
Department in treating the assesse as debtor and attaching its bank account and
recovering the tax liability of the Mines and the Geology Department from the
bank account of the assessee, without noticing the surrender of lease and its
acceptance by the State Government, was not proper.

ii)    For
the lapse of the Mines Department the assessee could not be fastened with any
liability if no tax was due to be payable by the assessee against any head to
the Mines Department. In the absence of exclusive determination that the
settlement amount to the Mines Department was only due against the assessee, it
could not have been declared exclusive debtor. The counter-affidavit filed by
the Mines Department acknowledged the lapse of its officers. There was no
statement that the settlement or tax liability was exclusively due against the assessee
and not other settlees which was noticed from the fact that the assessee kept
on requesting the authorities in the matter of payment of tax u/s. 226(3)(x).

iii)    The provisions of section 226(3)(x) did not confer such arbitrary
power to the Department to recover the amount from an innocent assessee after
surrender of settlement. The tax was the liability of the Mines and Geology
Department and instead of taking coercive action and adopting the means
available under the provisions of sections 276B and 276BB for recovery of the
liability from the Mines Department, attaching the bank account and directing
the tax due to be recovered from the account of the assessee was unreasonable
and unjustified. The attachment of the bank account was revoked.”

Sections 147, 148 and 151(2) – Reassessment – Notice u/s. 148 – Sanction for issuance of notice – Designated authority Additional Commissioner – Sanction by Commissioner – Notice not valid – Order of reassessment without jurisdiction and invalid

17. CIT vs. Aquatic Remedies
P. Ltd.; 406 ITR 545 (Bom):

Date of order: 25th
July, 2018

A. Y. 2004-05

 

Sections 147, 148 and 151(2) – Reassessment – Notice u/s. 148 –
Sanction for issuance of notice – Designated authority Additional Commissioner
– Sanction by Commissioner – Notice not valid – Order of reassessment without
jurisdiction and invalid

 

The assessee was in the business of
trading in pharmaceutical product. The Assessing Officer issued a notice u/s.
148 of the Income-tax Act, 1961 to reopen the assessment for the A. Y. 2004-05.
The assessee contended that the issuance of the notice for reopening of the
assessment was without jurisdiction since the sanction for issuing the notice
had to be obtained from the Additional Commissioner according to section 151(2)
but the sanction had been obtained from the Commissioner which was in breach of
the sanction and therefore without jurisdiction. The Assessing Officer rejected
the claim and passed the assessment order u/s. 147.

 

The Tribunal allowed the appeal and
quashed the reassessment order passed by the Assessing Officer.

 

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

 

“i)    U/s.
151(2) sanction to issue notice u/s. 148 has to be issued by the Additional
Commissioner. The Assessing Officer had not sought the approval of the
designated officer but the Commissioner which was evident from the form used to
obtain the sanction and the Additional Commissioner had not granted permission
to initiate reassessment proceedings against the assessee.

ii)    The
view of the Additional Commissioner was subject to the approval of his superior
– the Commissioner. Thus, there was no final sanction granted by the Additional
Commissioner for issuing the notice u/s. 148 to reopen assessment. Further, it
was the Commissioner who had directed the issuance of the notice u/s. 148 to
the Assessing Officer.

 

iii)    The order of the Tribunal in quashing the order u/s. 143(3)
r.w.s. 147 was correct. No question of law arose.”

Chapter X and Section 260A – International transactions – Determination of arm’s length price – Appeal to High Court – Power of High Court to interfere with such determination – Interference only if finding of Appellate Tribunal is perverse – Selection of comparables, short-listing them, applying of filters, fact finding exercises and final orders passed by the Tribunal binding on Department and High Court

16. Principal CIT vs.
Softbrands India P. Ltd.; 406 ITR 513 (Karn):

Date of order: 25th
June, 2018

A. Y. 2006-07

 

Chapter X and Section 260A – International transactions –
Determination of arm’s length price – Appeal to High Court – Power of High
Court to interfere with such determination – Interference only if finding of
Appellate Tribunal is perverse – Selection of comparables, short-listing them,
applying of filters, fact finding exercises and final orders passed by the
Tribunal binding on Department and High Court

 

In the appeal filed by the Revenue
before the High Court against the order of the Tribunal the following questions
were raised:

 

“i)    Whether
on the facts and in the circumstances of the case the Tribunal is right in law
in rejecting the comparables, namely, Kals Information Systems Ltd., Tata Elxsi
Ltd., M/s. Accel Information Systems Ltd., M/s. Bodhtree Consulting by
following its earlier order and without appreciating that the reasonings of the
Transfer Pricing Officer (TPO)/Assessing Officer (AO) for adopting the said
comparables which have been brought out in the TPO’s order and without
appreciating that TPO has chosen the same after application of mind and
materials on record?

ii)    Whether
the Tribunal was justified in fixing the related party transaction (RPT) at 15
percent of total revenue and deleting Geomatric Software Ltd. (Seg) and
Megasoft Ltd. as comparables without going into specific facts in the case of
taxpayer and without adducing the basis for arriving at 15 percent cut off RPT
filter, in the case of taxpayer?”

 

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

 

“i)    Income-tax
Act, 1961 contains special provisions relating to avoidance of tax in Chapter X
of the Act comprising sections 92 to 94B with regard to assessment to be done
for computation of income from international transactions on the principle of
“arm’s length price” and the relevant Rules for computation of such income
under the provisions of Chapter X are enacted in the form of rules 10A to 10E
in the Income-tax Rules 1962. The procedure for assessment under Chapter X
relating to international transactions is a lengthy one and involves multiple
authorities of the Department. A huge, cumbersome and tenacious exercise of
transfer pricing analysis has to be undertaken by corporate entities who have
to comply with the various provisions of the Act and Rules with huge data bank
and in the first instance they have to satisfy that the profits or the income
from transactions declared by them are at “arm’s length” which analysis is
invariably put to test and inquiry by the authorities of the Department through
the process of Transfer Pricing Officer and Dispute Resolution Penal and the
Tribunal at various stages, the assessee has a cumbersome task of compliance
and it has to satisfy the authorities that what has been declared by it is a
true and fair disclosure.

ii)    The
pick of comparables, short-listing of them, applying of filters, etc., are all
fact finding exercises and therefore the final orders passed by the Tribunal
are binding on the lower authorities of the Department as well as the High
Court.

iii)    The scheme of both section 260A in the Income-tax Act, 1961 and
section 100 read with section 103 of the Code of Civil Procedure, 1908 are in
pari materia and in the same terms. The existence of a substantial question of
law is a sine qua non for maintaining an appeal before the High Court. The High
Court may determine any issue which (a) has not been determined by the Tribunal
or (b) has been wrongly determined by the Tribunal, only if the High Court
comes to the conclusion that “by reason of the decision on substantial question
of law rendered by it”, such a determination of an issue of fact also would be
necessary and incidental to the answer given by it to the substantial question
of law arising and formulated by it.

iv)   Sub-section
(6) of section 260A does not give any extended power, beyond the parameters of
the substantial question of law to the High Court to disturb the findings of
fact given by the Tribunal below. The insertion of sub-section (7) of section
260A does not give any new or extended powers to the High Court and the
pre-existing provisions from sub-section (1) to sub-section (6) in section 260A
of the Act already had all the trappings of section 100 and 103 of the Civil
Procedure Code.

v)    The
Tribunal is expected to act fairly, reasonably and rationally and should
scrupulously avoid perversity in its orders. It should reflect due application
of mind when it assigns reasons for returning particular findings. The very
word “comparable” means that the group of entities should be in a homogeneous
group. They should not be wildly dissimilar or unlike or poles apart.

 

ii)    From the perusal of the Tribunal’s order, it
was apparent that individual cases of such comparables had been considered,
analysed and discussed by the Tribunal and while some comparables were found to
be appropriate and really comparable to the facts of the assessee, some were
not. The Tribunal had given cogent reasons and detailed findings upon
discussing each case of comparable corporate properly. Whether or not the
comparables had been rightly picked up or filters for arriving at the correct
list of comparables had been rightly applied, did not give rise to any
substantial question of law.”

Sections 9 and 195 – Non-resident – Income deemed to accrue or arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to tax only on incomes attributable to operations in India – Commission paid for procuring abroad – Non-resident not liable to tax on commission – Tax not deductible at source on commission

15. Evolv Clothing Company Pvt.
Ltd. vs. ACIT; 407 ITR 72 (Mad):

Date of order: 14th
June, 2018

A. Y. 2009-10

 

Sections 9 and 195 – Non-resident – Income deemed to accrue or
arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to
tax only on incomes attributable to operations in India – Commission paid for
procuring abroad – Non-resident not liable to tax on commission – Tax not
deductible at source on commission

 

The assessee carried on business of
export of garments and claimed to have entered into agency agreements with a
non-resident Italian agent for procuring export orders for the assessee at a
commission. In the A. Y. 2009-10, the assessee paid a sum of Rs. 3,74,09,773/-
as commission to the foreign agent. According to the assessee, since no amount
of agency commission was chargeable to tax in India, the assessee did not
deduct tax at source before payment of commission to the foreign agent.
According to the assessee, the foreign agent rendered service akin to the
service of a broker to the assessee, procuring orders upon market survey with
regard to demand for the products of the assessee in the foreign country. The
Assessing Officer passed the assessment order disallowing the entire commission
u/s. 40(a)(i), because tax had not been deducted at source. This was upheld by
the Tribunal.

 

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

 

“i)    Explanation
1 to section 9(1)(i) of the Income-tax Act, 1961, would attract liability to
Indian tax for a non-resident with business connection in India, only in
respect of income attributable to his operations in India. The amendment with
retrospective effect from June 1, 1976, by insertion of Explanation to section
9(2) can only apply to income by way of interest, royalty and fees for
technical services and not to brokerage or job-wise commission on activities
incidental to procurement of orders.

ii)    Section
195 attracts tax only on chargeable income, if any, paid to non-residents.
Where there is no liability, the question of tax deduction does not arise.
Where no part of income is chargeable in India, even clearance u/s. 195(2) or
(3) of the Act is not necessary. In Toshoku’s case (1980) 125 ITR 525, the
Supreme Court held that payments to agents for performance of services outside
India are not liable to be taxed in India.

iii)    From the service agreements with the agents abroad, it was clear
that the service rendered was essentially brokerage service. The very first
clause of the agreement stated “to procure orders”. The reference to market
research abroad or co-ordination with the supplier or to ensure timely payment
or making available its office space for visit by the suppliers, were
ordinarily things which any agent or broker undertook incidental to brokerage
service. There was no finding that any of the commission agents had any place
of business in India.

iv)   The
Assessing officer had in the assessment order, accepted that the assessee had
paid commission charges to oversees agents. It was not the case of the
Assessing Officer that any lump sum consideration had been paid for any
specific managerial, technical or consultancy services. The commission was not
taxable in India. The assessee was liable to deduct tax on such payment.

v)    The
appeal is allowed and the questions framed are answered in favour of the
assessee and against the revenue”

Section 9 of the Act and Article 5 of DTAA–Income – Deemed to accrue or arise in India (Permanent establishment) – Where there were all relevant documentary evidence available on record to render finding whether assessee, a Netherland based company, had a permanent establishment in India and the Tribunal having referred to same in its order could not have remanded back matter to Assessing Officer for consideration afresh? – The Tribunal having referred to all factual details and crystallised issues could not have remanded back matter to Assessing officer for consideration afresh

14. Co-operative Centrale
Reiffeisen Boerenleenbank B. A. vs. Dy. DIT, (International Taxation);  [2018] 97 taxmann.com 24 (Bom);

Date of order: 29th
August, 2018:

A. Ys. 2002-03, 2003-04 and
2005-06

 

Section 9 of the Act and Article 5 of DTAA–Income – Deemed to
accrue or arise in India (Permanent establishment) – Where there were all
relevant documentary evidence available on record to render finding whether
assessee, a Netherland based company, had a permanent establishment in India
and the Tribunal having referred to same in its order could not have remanded
back matter to Assessing Officer for consideration afresh? – The Tribunal
having referred to all factual details and crystallised issues could not have
remanded back matter to Assessing officer for consideration afresh

 

The assessee was a tax resident of
Netherlands and was entitled to claim the benefit of the DTAA between India and
Netherlands. In fact the assessee was part and parcel of the Rabo bank group.
An Indian company, the Rabo India Finance Private Limited (RIFPL) was
registered as a non-banking financial company with the RBI. It provided wide
range of financial services such as credit facilities, investment banking,
strategic, financial and project advisory services. This company also belonged
to the Rabo group. It was claimed that both, the assessee and the said Indian
Company were independent entities but worked together on select assignments as
and when required. In the relevant years, the assessee claimed to have provided
assistance on principle to principle basis to the Indian company on a few
transactions and received fees and guarantee commission.

 

However, the amounts received under
the aforesaid category were not offered to tax in India on the ground that the
assessee did not have a permanent establishment in India within the meaning of
Article (5) of the DTAA. The Assessing Officer passed an order holding that the
Indian Company RIFPL was a permanent establishment of the assessee within the
meaning of Article 5 (5) of the DTAA. Hence, certain percentage of the sums
referred above were taken as profits attributable to the permanent
establishment. A further percentage from that was taken as profits chargeable
to tax in India. This resulted in the return depicting total income to Rs.
31.25 lakh.

 

On appeal, the
Commissioner(Appeals) came to the conclusion that the assessee neither had a
fixed place of business nor agency or any other form of permanent establishment
in India and consequently the income of the assessee was not taxable in India.
The Tribunal restored the matter back to the file of the Assessing Officer to
determine the issue afresh.

 

Thereafter, an application was
filed seeking rectification of order initially passed by the Tribunal. However,
the Tribunal concluded that the issue was rightly remitted to the Assessing
Officer by inter alia observing that the quantum of work done, services
rendered, the contract undertaken for outsiders would have to be examined to
determine whether RIFPL was an agent having independent status or was merely
working on behalf of assessee.

 

On appeal, the Bombay High Court
held as under:

 

“i)    The
First Appellate Authority while deciding the Appeals of the assessee has passed
a fairly detailed order. The facts and the submissions have been noted in his
order. In fact, under separate heads, the details have been noted and
considered. The Appellate Authority concludes that all the agreements placed on
record would indicate that the RIFPL had procured the contract of provision of
services to the two parties.

 

However, with a view to meeting its
obligations, the RIFPL further entered into an agreement with the assessee
requiring the assessee to provide advisory services in Italy for a
consideration paid by the RIFPL. Based on these two contracts, the First
Appellate Authority concluded that it cannot be said that RIFPL is acting as an
agent of the assessee. On the contrary, the agreements point towards the said
Indian company obtaining independent contracts and subcontracting the part of
the work thereunder to the assessee. On each of the counts, namely, guarantee
commission and other services, the First Appellate Authority has held that the
Assessing Officer committed a mistake. The clear conclusion in this order is
that the business profits of the assessee are not taxable in India in absence
of any permanent establishment in India within the meaning of article 5 of the
DTAA.

ii)    These
very materials could have been examined by the Tribunal and it would have
arrived at the satisfaction whether the Assessing Officer was correct or
whether the First Appellate Authority was right in reversing the order of the
Assessing Officer and holding as above in favour of the assessee. One does not
see why, when the Tribunal refers to all the factual matters in its order and
has in earlier paragraphs crystallised the issues, then, what was the occasion
for a remand. In the order under Appeal, the Tribunal notes that the assessee
preferred an Appeal before the First Appellate Authority and argued that the
concept of fixed place, permanent establishment requires the enterprises to
have their business or a place of management/branch in India or office in India
and the assessee had neither.

iii)    The activities of the Indian company did not result in
constitution of any agency or permanent establishment of the assessee and that
the Indian company did not have any authority to conclude the contract on
behalf of the assesee, that it did not maintain any stock of any goods or
merchandise of the assessee nor did it secure any orders from the assessee that
it was economically and legally independent, that it was acting in ordinary
course of its business not dependent on the assessee. During the year under
Appeal, the Indian company had income from various sources amounting to Rs.
1386.70 Million. The assessee received professional income and guarantee
commission. There was also certain reimbursement of expenses by the Indian
company.

iv)   In
the backdrop of all this, and further facts noted, a cryptic order has been
passed by the Tribunal. In fact, in the order under challenge in reference to
the Income Tax Appeal No. 4632 of 2006 for Assessment year 2002-2003, the
Tribunal says that the Indian company had made payment to the assessee for
providing the advisory services to it and under the Head ‘Guarantee Commission’
and that the Indian company was paying the assesee more than 30 per cent of its
income. That the basic issues are, as to whether the assesee had permanent
establishment in India or not and as to whether the services rendered by the
Indian company could be treated as the activities carried out by the assessee.
Yet, it says that there is nothing on record to prove that the provisions of
article 5(1) of the Agreement are applicable. That stipulates that the
permanent establishment for the purpose of convention meant a fixed business
through which the business of the enterprise was wholly or partly carried on.
The conclusion is that the assessee was not having fixed place of business in
India. Hence, the First Appellate Authority rightly held that the provisions of
article 5 (1) were inapplicable. It is in these circumstances, it is surprising
that the Tribunal still deems it fit and proper to remand the case. If there
was indeed no material on record, then, the above conclusion was impossible to
be reached.

v)    Judicial
decisions have to be consistent and all the more there should be no confusion.
There ought to be some predictability and when given facts and circumstances
give rise to certain legal principles which parties assert are applicable,
then, as a last fact finding authority, the Tribunal could have summoned all
records and thereafter should have arrived at a categorical conclusion whether
the First Appellate Authority was right or the Assessing Officer. This having
admittedly not been done, it is opined that the Tribunal failed to act as a
last fact finding authority. It failed to discharge its duty and function
expected of it by the law.

vi)   Thus,
the order of the Tribunal is set aside and revenue’s appeal is restored to the
file of the Tribunal for a decision afresh on merits and in accordance with
law.”

Sections 45 and 54(1) – Capital gain – Exemption u/s. 54 – Construction of residential house within stipulated time – Exemption in respect of cost of new residential house – Scope of section 54 – Does not exclude cost of land from cost of residential house

13. C.
Aryama Sundaram vs. CIT; 407 ITR 1 (Mad) :

Date of order: 6th
August, 2018

A. Y. 2010-11

 

Sections 45 and 54(1) – Capital gain – Exemption u/s. 54  – 
Construction of residential house within stipulated time – Exemption in
respect of cost of new residential house – Scope of section 54 – Does not
exclude cost of land from cost of residential house

 

The assessee
had sold a residential house property on 15/01/2010 for a total consideration
of Rs. 12,50,00,000/- and the total long term capital gains was Rs.
10,47,95,925/. On 14/05/2007, the assessee had purchased a property with a
superstructure thereon for a total consideration of Rs. 15,96,46,446/- and
after demolishing the existing structure, the assessee constructed a
residential house at a cost of Rs. 18,73,85,491/-. For the A. Y. 2010-11, the
assessee had claimed the entire long term capital gains as exempt from tax u/s.
54 of Act. The Assessing Officer held that only that part of the construction
expenditure that was incurred after the sale of the original asset was eligible
for exemption u/s. 54 and based on records held that the cost of construction
incurred after the sale of the original asset was Rs. 1,14,81,067/- and
accordingly allowed exemption of the same amount.


The Commissioner (Appeals) upheld the decision of the Assessing Officer. The
Tribunal held that section 54 was a beneficial provision and had to be
construed liberally on compliance with the conditions. It held that the
assessee had complied with the conditions of section 54 and remitted the matter
to the Assessing Officer to consider the deduction u/s. 54 for the construction
cost incurred by the assessee.

 

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

 

“i)    Section
54(1) did not exclude the cost of land from the cost of the residential house.
According to the section the capital gains had to be adjusted against the cost
of the new residential house. What had to be adjusted or set off against the
capital gains was the cost of the residential house that was purchased or
constructed. Section 54(1) was specific and clear. It was the cost of the new
residential house and not just the cost of construction of the new residential
house, which was to be adjusted.

ii)    The
cost of the new residential house would necessarily include the cost of the
land, material used in the construction, labour and any other cost relatable to
the acquisition or construction of the residential house. The condition
precedent for such adjustment was that the new residential house should have
been purchased within one year before or two years after the transfer of the
residential house, which resulted in the capital gains or alternatively, a new
residential house had been constructed in India, within three years from the
date of the transfer, which resulted in the capital gains.

iii)    The new residential house had been
constructed within the time stipulated in section 54(1). It was not requisite
of section 54 that construction could not have been commenced prior to the date
of transfer of the asset that resulted in capital gains. If the amount of
capital gain is equal to or less than the cost of the new residential house,
including the land on which the residential house was constructed, the capital
gains were not to be charged u/s. 45.”

Sections 12A and 12AA(3)– Charitable purpose – Registration of trust – Cancellation of registration – Grounds for – Difference between objects of trust and management of trust – No change in objects of trust – Amendment in respect of appointment of chief trustee and manner of managing the trust – Not ground for cancelling registration of trust

12. CIT(Exemption) vs. Sadguru
Narendra Maharaj Sansthan; 407 ITR 12 (Bom):

Date of order: 28th
February, 2018

 

Sections 12A and 12AA(3)– Charitable purpose – Registration of
trust – Cancellation of registration – Grounds for – Difference between objects
of trust and management of trust – No change in objects of trust – Amendment in
respect of appointment of chief trustee and manner of managing the trust – Not
ground for cancelling registration of trust

 

The assessee-trust amended its
trust deed. The Commissioner recorded that the amendment to the trust deed
devised a system by which the chief trustee would alone define his heir for the
post of the chief trustee and “adhishtata” and that the heir could not
take part in the management of the trust during the lifetime of the chief
trustee. The Commissioner exercised his power u/s. 12AA(3) of the Income tax
Act, 1961 (hereinafter for the sake of brevity referred to as the
“Act”) and cancelled the registration of the assessee on the ground
that the amendment violated the provisions of section 13(1)(c).

 

The Tribunal held that the
Commissioner had not appreciated the difference between the objects of the
trust and the powers/management of the trust; the amendment of the trust deed
dealt with the powers of the management of the trust rather than the objects of
the trust. The Tribunal set aside the order of the Commissioner cancelling the
registration of the trust. 

 

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

 

“i)    The
cancellation of registration u/s. 12AA(3) is only in two contingencies, one the
activities of the trust not being genuine or the activities of the trust not
being carried out in accordance with its objects.

ii)    Cancellation
of the registration of the assessee-trust was not justified. The cancellation
was not on above two grounds. Section 13 applied while applying section 11. It
was in the domain of the Assessing Officer during the assessment proceedings
and not a basis for cancellation of registration.

iii)    Besides, the amendment of the trust deed not being in the spirit
of charitable trust, could not be the basis of cancellation u/s. 12AA(3). The
term “spirit of a charitable trust” was not defined in the Act nor elaborated
in the order of the Commissioner. The amendment made in the trust deed did not
suggest any change or addition to the objects of the trust. It was only in
respect of the appointment of the chief trustee and the manner of managing the
trust. The Tribunal rightly held that the Commissioner had focused on change in
the future management of the trust rather than the objects of the trust to
cancel the registration. The appeal is dismissed.”

Section 37(1) – Business expenditure – Where assessee company had furnished names and PAN numbers of all vendors to whom it had paid repair and maintenance charges for their services, the Tribunal was justified in allowing expenditure on account of such repair and maintainence charges

11. Principal CIT vs. Rambagh
Palace Hotels (P.) Ltd.; [2018] 98 taxmann.com 167 (Delhi):

Date of order: 17th
September, 2018

A. Y. 2005-06

 

Section 37(1) – Business expenditure – Where assessee company had
furnished names and PAN numbers of all vendors to whom it had paid repair and
maintenance charges for their services, the Tribunal was justified in allowing
expenditure on account of such repair and maintainence charges

 

During the year, i.e. A. Y.
2005-06, the assessee had claimed expenditure on account of repair and
maintenance charges paid by it to several parties. The Assessing Officer had
allowed repair and maintenance charges paid to four parties, who had appeared
before him and whose statements were recorded on oath. However, the balance
repair and maintenance expenditure was disallowed to the extent of 50 per cent,
on the ground of absence of supporting documents.

 

On appeal, the Commissioner
(Appeals) reduced the disallowance to 5 per cent. The Tribunal recorded that
the assessee had produced details of all vendors, including their PAN numbers,
invoices raised by them, etc., and held that the Commissioner (Appeals) was not
right in making disallowance of 5 per cent on the ground of mere suspicion and
accordingly allowed the full claim.

 

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

 

“i)    The
finding of the Tribunal deleting disallowance of 50 per cent by the Assessing Officer
is primarily factual. One has quoted the reply filed by the respondent/assessee
before the first appellate authority. These documents and papers were relied
upon by the Tribunal and the Commissioner (Appeals). However, copies of the
said documents/papers have not been filed. There is nothing to show and
establish that the findings of the Commissioner (Appeals) and the Tribunal are
perverse and factually incorrect.

ii)    Given
the aforesaid facts, there is no any substantial question of law arises for consideration.
The appeal is accordingly dismissed.”

Appeal to Commissioner (Appeals) – Revision – Power of Commissioner(Appeals) – Application for revision and withdrawal of appeal to Commissioner(Appeals) – Order passed in revision granting relief – Commissioner(Appeals) has no power to decide appeal

41.  Assessing
Officer vs. Dharmendra Vishnubhai Patel; 409 ITR 276 (Guj) Date of order: 5th February, 2018 Sections 246A and 264 of ITA 1961

 

Appeal to Commissioner (Appeals) – Revision – Power of
Commissioner(Appeals) – Application for revision and withdrawal of appeal to
Commissioner(Appeals) – Order passed in revision granting relief –
Commissioner(Appeals) has no power to decide appeal

 

In this case assessment was made and penalty was levied on the assesse.
On 24/09/2016, the assesse filed an appeal against the order of penalty before
the Commissioner(Appeals). On 16/02/2017, the assessee filed a revision
petition u/s. 264 of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”)  against the
order of penalty before the Commissioner. On the same day he also made a
communication to the Commissioner (Appeals) before whom his appeal was pending,
in which, he conveyed his intention to withdraw the appeal. In exercise of his
revisional powers u/s. 264, the Commissioner set aside the order of penalty.
Despite this the Commissioner (Appeals) proceeded to decide the appeal on the
merits and by an order dated 25/09/2017 dismissed the appeal. The assesse filed
writ petition and challenged the validity of the order of the Commissioner
(Appeals).

 

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

 

“i)   In terms of clause (a) of
sub-section (4) of section 264, revisional powers would not be exercised, inter
alia, in a case where the period of limitation for filing appeals has not
expired and the assesse has not waived the right of appeal. This is essentially
to ensure that in the case of the same assesse a single issue does not receive
consideration at the hands of the two separate and independent authorities, one
exercising appellate jurisdiction and the other revisional jurisdiction.

ii)   The assessee had clearly made
a choice to persuade the Commissioner to exercise his revisional powers u/s.
264 and not pursue his appeal before the Appellate Commissioner. The revisional
authority therefore correctly proceeded to decide the revision petition of the
assesse and on the facts correctly allowed it. It was thereafter not open for
the Commissioner (Appeals) to still examine the merits of such an order.”

39 Section 10B – Export oriented undertaking – Exemption u/s. 10B – Export from specified area of Iron ore excavated from specified area – Processing done outside specified area – Not relevant – Assessee entitled to exemption

Pr.
CIT(Appeals) vs. Lakshminarayan Mining Company.; 404 ITR 522 (Karn);

Date
of Order : 6th April, 2018

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


The
assessee was a firm in the business of mining and export of iron ore and was
granted a mining lease for an area of 105.2 hectors in Siddapura Village in
Bellary district. The assessee had entered into an operation and maintenance
agreement with NAPC, which operated the plant and machinery installed in the
export oriented unit and non-export oriented unit both belonging to the
assessee firm. The export oriented unit had started production on 23/09/2006
and accordingly the assessee claimed deduction u/s. 10B of the Act on the
profits derived from the production of iron ore from the export oriented unit
for the A. Ys. 2009-10 to 2011-12. The Assessing Officer disallowed the claim
with respect to production of iron ore said to have been outsourced by the
export oriented unit to the non-export oriented unit and restricted the claim
to the profits derived by the export oriented unit from its production.

 

The
Tribunal allowed the assessee’s claim.

 

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

 

“i)  The processing of the iron ore
in a plant belonging to the assessee being in the nature of job work was not
prohibited and formed an integral part of the activity of the export oriented
unit; the mere fact that the plant was situated outside the bonded area was 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.

 

ii)   The entitlement to deduction under the Act is
to be looked into independently and the benefit would stand or fall on the
applicability of section 10B. Hence the mere location of the plant outside the
export oriented unit and customs bonded area was not a disqualification to
claim deduction u/s. 10B. The assessee was entitled to exemption u/s. 10B.”

 

TDS- Technical services- S. 194J of I. T. Act, 1961- A. Ys. 2007-08 to 2010-11- Transmission of electricity- No technical services- Tax not deductible on payment for such transmission

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CIT Vs. Hubli Electricity Supply Co. Ltd.; 386 ITR 271 (Karn)

The assessee, an electricity supply company, was a state owned company engaged in the business of buying and selling electricity. Power was transmitted from the generation point to consumers through the transmission network of the Karnataka Power Transport Corporation Ltd. The Assessing Officer found that the assessee had not deducted tax at source on charges paid to Karnataka Power Transport Corporation Ltd. for transportation of electricity. He therefore treated the assessee as an assessee in default and raised demand u/s. 201(1) and (1A) of the Income-tax Act, 1961. Commissioner(Appeals) found that the assessee had successfully demonstrated that the taxes were already paid by the payee and accordingly cancelled the demand. This was upheld by the Tribunal.

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

“i)    There was neither an offer nor an acceptance of any “technical service”, inter se between the parties. Admittedly, the Karnataka Power Transport Corporation Ltd. was a State owned company and the only power transmitting agency. There was neither transfer of any technology nor any service attributable to a technical service offered by the Karnataka Power Transport Corporation Ltd and accepted by the assessee.

ii)    Therefore, section 194J was not applicable. Moreover, it was not in dispute that the payee the Karnataka Power Transport Corporation Ltd had offered the income to tax and paid it. In the circumstances, there was no loss of revenue.

iii)    In the result, the appeals fail and accordingly stand dismissed.”

TDS: Ss. 10(23C)(iv), 194A, 194H, 201(1),(1A) of I. T. Act, 1961- A. Y. 2012-13- Payment of interest to entities exempted from tax- No tax need be deducted at source

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CIT Vs. Canara Bank; 386 ITR 229 (P&H)

The assessee had paid interest without deduction of tax at source to Punjab Infrastructure Development Board whose income was exempt u/s. 10(23C)(iv) of the Income-tax Act, 1961. The Assessing Officer held that the assessee should have deducted tax at source and since tax was not deducted the assessee was treated as an assessee in default and raised demand u/ss. 201(1) and (1A) of the Act. The Commissioner(Appeals) deleted the demand and the same was upheld by the Tribunal.

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

“i)    The Commissioner(Appeals) and the Tribunal, on appreciation of material on record had concurrently recorded that if an organization was exempted from payment of tax there was no need for deduction of tax at source by the assessee.

ii)    The Department was not able to demonstrate that the approach of the Commissioner(Appeals) and the Tribunal was erroneous or perverse or that the findings of fact recorded were based on misreading or misappreciation of evidence on record. No question of law arose.”

Shipping Company- S. 172 of I. T. Act, 1961- DTAA between India and Singapore- Where freight receipts in question derived by assessee, a Singaporean shipping company, was taxable at Singapore on basis of accrual and not on basis of remittance, benefit of article 8 of DTAA between India and Singapore could not be denied to assessee on ground that fright receipts were remitted to London and not to Singapore

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M.T. Maersk Mikage & 4 Vs. DIT; [2016] 72 taxmann.com 359 (Guj):

The assessee, a Singapore shipping company, had through ships owned or chartered by it, undertaken voyages from various Indian ports and earned income from exporters and out of other such business. The assessee, through present petitioner, filed a return of income u/s. 172(3) of the Income-tax Act, 1961, declaring the gross profit calculations, but claiming Nil income by relying on Article 8 of DTAA between India and Singapore. The Assessing officer denied benefit under article 8 to the assessee on the ground that freight receipts were remitted to London and not to Singapore. In his opinion, as per Article 24 of DTAA, the funds have to be remitted where the residents of the country is claiming benefit of the agreement which conditions in the present case was not satisfied. Revision application u/s. 264 of the Act made by the petitioner was dismissed by the CIT.

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

“i)    The certificate dated 09.01.2013 issued by the Inland Revenue Authority of Singapore certified that the income in question derived by ST Shipping(assessee) would be considered as income accruing in or derived from the business carried on in Singapore and such income therefore, would be assessable in Singapore on accrual basis. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance.

ii)    This clause1 of Article 24 does not provide that in every case of non-remittance of income to the contracting state, Article 8 would not apply irrespective of tax treatment such income is given.

iii)    When in the present case, we hold that the income in question was not taxable at Singapore on the basis of remittance but on the basis of accrual, the very basis for applying clause1of Article 24 would not survive.

iv)    In the result, petition is allowed. Impugned order dated 25.03.2014 passed by the Commissioner is set aside. Resultantly, order of assessment dated 26.12.2011 is also quashed. Petition disposed of accordingly.”

Transfer pricing- Reference to TPO (Opportunity of hearing)- Section 92CA of I. T. Act, 1961- A. Y. 2010-11- Assessing Officer is obliged to give assessee an opportunity of being heard prior to making reference where an objection as to jurisdiction is raised by assessee in relation to making a reference-

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Indorama Synthetics (India) Ltd. vs. Addl. CIT; [2016] 71 taxmann.com 349 (Delhi):

The assessee-company entered into transactions of import of raw material amounting from ‘TPL’, a company incorporated in Thailand. It filed return of income declaring ‘Nil’ income. During pendency of assessment proceedings, the Assessing Officer referred the assessee’s case to TPO for determination of ALP in relation to the international transactions undertaken by the assessee with AE

The assessee filed writ petition contending that Assessing Officer could not have referred the matter to TPO without giving it an opportunity of being heard. The Delhi High Court allowed the assessee’s writ petition and held as under:

“i) The main issue is whether it was incumbent on the Assessing Officer to have given the assessee an opportunity of being heard before making a reference to the TPO u/s. 92CA(1). Section 92CA reveals that there are certain jurisdictional prerequisites for the making of a reference by the Assessing Officer to the TPO. In the first place, the Assessing Officer has to be satisfied that the assessee has entered into an international transaction or a specified domestic transaction. Whereas in the present case, the assessee raises a threshold objection that it has not entered into any international transaction within the meaning of section 92B, it is imperative for the Assessing Officer to deal with such an objection. If the Assessing Officer decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO.

ii) What is referred to the TPO is the determination of the ALP of the said international transaction or specified domestic transaction. Therefore, the satisfaction to be arrived at by the Assessing Officer regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO. Where such an accountant’s report is submitted by the assessee in Form 3CEB, then there should be no difficulty for the Assessing Officer to form an opinion, even a prima facie one, that it is necessary and expedient to make a reference to the TPO on the question of the determination of the ALP of such international transaction involving the assessee.

iii) CBDT’s Instruction No. 3 of 2003 categorically states that in order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the assessee has entered into an international transaction with its AE. One of the sources from which the factual information regarding the international transaction can be gathered is Form No. 3 CEB filed with the return which is in the nature of an accountant’s report containing the details of the international transaction entered into by the taxpayer during the assessment year in question. Where no such report in Form 3 CEB is filed by the assessee, what will be the basis for the Assessing Officer to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? Where the Assessing Officer is of the view that a transaction reflected in the filed return partakes of the character of an international transaction, he will put the assessee on notice of his proposal to make a reference to the TPO u/s. 92CA (1) of the Act. Before making a reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Therefore, all transactions have to be explicitly mentioned in the letter of reference. The very nature of this exercise is such that the Assessing Officer will first put the assessee on notice of his proposing to make a reference to the TPO and seek information and clarification from the assessee. If at this stage, the assessee raises an objection as to the very jurisdiction of the Assessing Officer to make the reference, then it will be incumbent on the Assessing Officer to deal with such objection on merits.

iv) While section 92CA (1) does not itself talk about a hearing having to be given to the assessee upon the latter raising an objection as to the jurisdiction of the Assessing Officer to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to be followed by the Assessing Officer. As already noticed, the Assessing Officer has to record that he considers it necessary and expedient to make a reference. The Assessing Officer has to deal with the objections raised by the assessee. It is only thereafter that the Assessing Officer can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference

v) As far as the present case is concerned, the assessee has not filed the accountant’s report u/s. 92E yet the Assessing Officer has to proceed to determine the ALP u/s. 92C (3) or refer the matter to the TPO to determine the ALP u/s. 92CA (1) in case the assessee has not declared one or more international transactions in the report filed u/s. 92E of the Act. As explained above, the Assessing Officer must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise

vi) For all the aforesaid reasons, it is opined that the references made by the Assessing Officer to the TPO on the question of determination of ALP of the alleged international transactions involving the petitioner and its AE have been made without affording the petitioner an opportunity of being heard as was required by law. Accordingly, the said reference made by the Assessing Officer to the TPO is hereby set aside.

vii) The question of whether or not a reference should be made to the TPO, has to be determined by the Assessing Officer afresh after giving the assessee an opportunity of being heard.”

TDS- Interest- Section 194A of I. T. Act, 1961- Motor Vehicles Act- Compensation to victims of motor accident- Tax not deductible from compensation or interest thereon-

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MD Tamil Nadu State Transport Corporation (Salem) Ltd. vs. Chinnadurai; 385 ITR 656 (Mad):

Dealing with the scope of the provisions of TDS on compensation and interest thereon payable to victims of motor accidents, the Madras High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation legislation, then, the social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicles Act, 1988 is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income-tax Act which is primarily intended for tax collection by the state cannot spoke in the effective and efficacious enforcement of the Motor Vehicles Act.

ii) The Income-tax Department had issued a circular dated October 4, 2011 whereby deduction of incometax has been ordered on the award amount and the interest accrued on the deposits made under the order of the court in motor accident cases. Taking a serious view of this circular, the Division Bench of the Himachal Pradesh High Court took suomoto cognizance of the matter and considered it as public interest litigation in the Judgment reported in Court on its Motion vs. H. P. Co-operative Bank Ltd. 2014 SCC Online HP 4273 and quashed the circular.

iii) The compensation awarded by the Motor Accident Claims Tribunal or other interest accruing thereon cannot be subjected to deduction of tax at source and since the compensation and the interest awarded therein do not fall under the term “income” as defined under the Income-tax Act.”

Speculation business- Section 73 of I. T. Act, 1961- A. Y. 2004-05- Trading in units of mutual funds or bonds- Not trading in shares- Not speculation business-

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CIT vs. Hertz Chemicals Ltd.; 386 ITR 39 (Bom):

In the A. Y. 2004-05, the Assessing Officer found that the assessee had offered its profits and loss from share trading as profit and loss of speculation business for the purpose of section 73 of the Income-tax Act, 1961 and amounts received from mutual funds/bonds as business income. For the year ending on March 31, 2003, the assessee had offered profit and loss from share trading as well as from mutual funds as income from speculation business showing the closing stock of shares at Rs. 6.69 crore while the opening stock as on April 1, 2003 for the assessment year in question was shown as Rs. 1.01 crores and the balance of Rs. 5.67 crore was shown as opening stock of mutual funds and bonds. The Assessing Officer held that bifurcation was not permissible and considered the activity of dealing in mutual funds and bonds to be an activity of dealing in shares as speculation business. The Tribunal allowed the assessee’s claim and deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “i) Units were not shares and trading in units was not speculation business. The Tribunal was justified in confirming the deletion of the addition made by the Assessing Officer on account of the assesee’s trading activities in mutual funds and bonds. ii) No question of law arose.”

Search and seizure- Cash seized from third person- Third person stating that cash belonged to asessee and assessee admitting it- Amount included in return filed by assessee- Request to adjust tax dues and return balance to assessee- Request cannot be refused on ground that cash had been seized from third person-

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Hemal Dilipbhai Shah vs. ACIT; 386 ITR 91 (Guj):

In February 2012, Rs. 26 lakhs in cash were seized by the Department from one VS. VS stated that the cash did not belong to him but to the assessee. Such statement of VS was also confirmed by the assessee. The assessee filed his return for the A. Y. 2012-13 declaring total income of Rs. 27,52,100 including the income declared of Rs. 21,73,000 on account of unexplained cash. The assessee filed an application to the Assessing Officer to adjust the tax liability from the seized amount. Thereafter the asessee filed an application for release of the balance of the seized amount along with interest after adjusting the demand. By a communication, the Assessing Officer informed the assessee that the Department is not in a position to issue the refund until completion of assessment of the VS.

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

“i) The fact as emerging from the record clearly revealed that in proceedings u/s. 132A of the Income-tax Act, 1961, VS from whom the cash had been seized had clearly stated that it belonged to the assessee and the assessee had also in proceedings u/s. 153C admitted this.

ii) The Department had treated the cash as belonging to the assessee. There was no dispute as regards the title to the seized assets (cash). The Department was, therefore, not justified in not releasing the balance amount to the assessee on the ground that the cash had been seized from VS.

iii) The Department is directed to forthwith refund the balance amount after adjusting the tax dues of the petitioner with interest.”

Income or capital- A. Y. 2009-10- Income from sale of carbon credits- Carbon credits not a by-product of business but an offshoot of environmental concerns- Is capital receipt and not income-

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CIT vs. Subhash Kabini Power Corporation Ltd.; 385 ITR 592 (Karn):

Tribunal held that the receipts on sale of carbon credits is capital receipt and not chargeable to tax.

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

“(i) In order to find out whether the particular amount received is a capital receipt or income out of business, there cannot be any standard yardstick or a straight jacket formula.

ii) Carbon credit is not an offshoot of business, but an offshoot of environmental concerns. Income received by sale of carbon credits is a capital receipt.”

Revision- Sections. 143, 145 and 163 of I. T. Act, 1961- A. Y. 2005-06- Solicitor following cash system of accounting- Advance deposits received from clients treated as liabilities in accounts and adjusted towards fees for expenditure incurred on behalf of clients in subsequent years- No loss of revenue- Revision to bring deposits shown in balance sheet to tax not proper-

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CIT vs. Bijoy Kumar Jain; 385 ITR 339 (Cal):

The assessee was a solicitor and followed the cash method of accounting. He received advance deposits from his clients which he treated in his books as his liability. In subsequent years when expenses were incurred both out of pocket and on account of his fees the liability was adjusted. The advances were not treated as his income in his assessment. The Commissioner passed an order of revision u/s. 263 of the Income-tax Act, 1961 holding that the order of assessment was erroneous and prejudicial to the interest of the Revenue because the deposits had not been included in the assessee’s income despite the assessee’s following cash system of accounting. The Appellate Tribunal set aside the order passed by the Commissioner u/s. 263 interalia holding that the assessee had established that all the advances as on March 31, 2005 had been adjusted in the subsequent assessment years and the Department could not contradict the case of the assessee and that there was no justification for invoking the provisions of section 263.

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

“The deposits were treated by the assessee as a capital receipt and the deposits were adjusted in the subsequent years against the expenditure incurred for or on behalf of the client from whom the deposit was received. Such expenditure also included the fees of the assessee himself. It was at that stage that the money was earned by him. Before that, he was holding the money as a agent or as a fiduciary of his client. The Appellate Tribunal was right in taking the view that it did.”

Charitable purpose- Registration of trusts- Application for registration- Audited accounts submitted subsequently- Registration to be allowed from the date of filing application and not from date on which defects in application cured-

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CIT vs. Garment Exporters Association of Rajasthan; 386 ITR 20 (Raj):

The assessee, a charitable trust had filed an application u/s. 12AA(1)(b)(ii) of the Income-tax Act, 1961 for registration without submitting the audited accounts while filing the application. The audited accounts were subsequently filed. The Commissioner granted registration from the date of filing the audited accounts and refused to grant it from the date of application. The Tribunal found that the filing of the audited accounts along with the application was not mandatory and allowed the registration from the date of submission of the application.

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

“i) The application was filed without any defect and the audited accounts were submitted later on because submission of audited accounts along with the application was not mandatory.

ii) There was no error in the order of the Tribunal which allowed the registration from the date of submission of the application by the assessee. The Tribunal and the Department had not pointed out any defect in the application other than non filing of the audited accounts with the application, which was not mandatory.

iii) We find no error in the order passed by the Tribunal.”

Business expenditure- Disallowance u/s. 43B of I. T. Act, 1961- Provident fund- Employers and employees contribution- Although technical reading of section 43B and the provisions of subsection (2) of section 24 (x) read with section 36 (1) (va) creates the impression that the employees’ contribution would continue to be treated differently under a different head of deduction, as the head of deduction is separate u/s. 43B and section 36 but on a broader reading of the amendments made to section 43B repeatedly and the intention of Parliament, there appears to be sufficient justification for taking the view that the employees’ and the employer’s contribution ought to be treated in the same manner-

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Bihar State Warehousing Corporation Ltd. vs. CIT; [2016] 71 taxmann.com 247 (Patna):

The assessee was a Public Sector Undertaking of the Government of Bihar and was carrying on the business of warehousing. During assessment, the Assessing Officer after considering the fact that the contribution had been made after due date statutorily prescribed disallowed the payment of employer’s contribution to EPF u/s. 43B and also disallowed the employees’ contribution to Provident Fund treating the same as income from other sources as per the provision of sub-section (2) of section 24 read with section 36(1)(va). On appeal, the Commissioner(Appeals) allowed the appeal so far as the delayed payment of employer’s contribution to EPF u/s. 43B was concerned and deleted said addition. So far as the delayed payment of the employees’ contribution to EPF is concerned, the addition of the same was confirmed holding that no relief was allowable on the ground of section 43B as the omission of second proviso to the said section with effect from 1-4-2004 does not apply to delayed payment of employees’ contribution to any Provident Fund or any fund mentioned in sub-section (2) of section 24. The same was confirmed by the Tribunal.

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

“Both the Bombay High Court in CIT vs. Ghatge Patil Transports Ltd. [2014] 368 ITR 749 (Bom) and Punjab and Haryana High Court in the case of CIT vs. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167 (P. & H.)) have deallt with the issue as to whether a distinction can be made between the employees’ contribution and employer’s contribution with regard to applicability of section 43B and held that both the employees’ and employer’s contributions are covered by the amendment of section 43B. Thus following same both contributions were to be treated on the same footing.”

Business expenditure- TDS- Disallowance- Section 40(a)(ia) of I. T. Act, 1961- A. Y. 2006- 07- Freight charges- Supplier making payments to transporters- Assessee, buyer, reimbursing transportation expenses- Liability to deduct TDS on supplier under agreement- No liability on assessee to deduct tax and disallowance u/s. 40(a) (ia) not attracted-

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Hightension Switchgear Pvt. Ltd. vs. CIT; 385 ITR 575 (Cal):

For the A. Y. 2006-07, the Assessing Officer disallowed the payments made by the assessee on account of freight charges on the ground that it had failed to deduct tax at source u/s. 194C of the Income-tax Act, 1961. In its appeal before CIT(A) and the Tribunal the assesee submitted that its supplier, IPCL, had reimbursed the total freight charges in its invoices and had paid them to the transporter, RLL after deducting tax at source which had been deposited by the supplier with the Department. The Commissioner (Appeals) and the Tribunal upheld the disallowance.

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

“i) Under the contract of sale, the seller was bound to send the goods to the buyer. The relevant part of the price list had showed that the seller was bound to pay the transportation charges to the transport agency and was entitled to recover it from the buyer. The assessee had merely reimbursed the cost of transportation incurred by the seller. The liability to deduct and pay the tax was that of the seller who have admitted to have done that. In case the seller was unable to show that he had made the deduction, section 40(a)(ia) might be applied to his case but not to the case of the assessee who was the buyer.

ii) Even if it was assumed that the supplier, when it had transported the goods to the assessee, had acted as an agent of the assessee and the assessee had reimbursed the freight charges to the supplier, who in turn had paid to the transporters as the Tribunal had held, it was conceptually correct and no other conclusion was possible. The agent being the supplier had admittedly paid to the transporters and had also deducted tax at source. When the agent had complied with the provision, the principal could not have been visited with penal consequences. For one payment there could not have been two deductions. Moreover, when a person acted through another, in law, he acted himself.

iii) The Tribunal was wrong in holding that the assessee was liable to deduct tax at source in respect of the freight component. When the assessee was not liable to make any deduction u/s. 194C the rigours of section 40(a)(ia) could not have been applied to it. The question is answered in favour of the assessee.”

TDS – Fees for technical services- Section 194J – Assessee purchasing and selling electricity – Transmission of electricity by State Power Transmission Corporation – Not technical services – Tax not deductible u/s. 194J on amount paid for such transmission –

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ACIT vs. Gulbarga Electricity Supply Co. Ltd.- 387 ITR 484
(Karn):

The
assessee was in the business of buying and selling of electricity. The assessee
purchased electricity from the generators of the Karnataka Power Corporation
etc. and sold it to different categories of consumers in its jurisdiction. The
power from the generation point to the customers was  transmitted 
through  the  transmission 
network  of the Corporation. The
Assessing Officer found that the assessee had made payment of transmission charges
to the Corporation, without deducting tax at source thereon. He held that the
assessee was an assessee in default u/s. 201(1) of the income-tax act, 1961 in
respect of payment of transmission charges u/s. 194J. The Commissioner
(appeals) and the tribunal set aside the order.

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

“i)
 The 
provisions of section 194J  of the
act, was not attracted in the present case and the assessee was not liable to
deduct the tax at source from the payment of transmission charges made to the
Corporation and the order of the Assessing Officer was rightly set aside by the
tribunal.

ii)  Accordingly, appeal of the revenue is
dismissed.”

TDS – Commission- Sections 194H and 201(1) – A. Ys. 2008-09 to 2010-11- Assessee paying incentive under trade discount scheme to retail dealers through del creder agents – Transactions between assessee and retail dealers on principal to principal basis- No principal agent relationship – No services rendered by retail dealers to assesse – Incentive given only to promote sales – not commission – Tax not deductible

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CIT vs. United Breweries Ltd.; 387 ITR 150 (T&AP):

The
assessee was engaged in the manufacture and sale of beer to the andhra Pradesh
Beverage Corporation. The Corporation, in turn, sold beer purchased from the
assessee, to retail dealers. The assessee paid incentives under the trade
discount scheme to the retail dealers through del creder agents. The Assessing
Officer held that for the payment made to the retail dealers, section 194H of
the income-tax act, 1961 was applicable and the assessee had committed default
in terms of section 201(1) in not having deducted tax at source on the payments
and levied interest u/s. 201(1A) of the act in respect of the amounts paid
under the trade scheme and discounts. The tribunal held the payments
constituted sales promotion expenses and did not fall in the category of
“commission” attracting 194H of the act.

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

“i)  It was evident that beer was sold by the
assessee to the Corporation, and the Corporation, in turn, sold the beer
purchased from the assessee, to retail dealers. The two transactions were
independent of each other, and were on a principal to principal basis. No
services rendered by the retail dealers to the assessee, and the incentive
given by the assessee to the retailers as trade discount was only to promote
their sales.

ii)
The tribunal rightly held that in the absence of a relationship of principal
and agent, and as there was no direct relationship between the assessee and the
retailer, the discount offered by the assessee to the retailers could only be
treated as sales promotion expenses, and not as commission, as no services were
rendered by the retailers to the assessee.”

Search and seizure – Block assessment – Notice u/s158BC – Where condition precedent to issue notice u/s. 158BC, viz. undisclosed income found during search proceedings was not satisfied, no notice u/s. 158BC could have been be issued to petitioner

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Dr. Gautam Sen vs. CCIT; [2016] 74 taxmann.com 128 (Bom):

Revenue carried out the search on
16th january, 1999 u/s. 132 of the income-tax act, 1961 on the Petitioner and
his premises. During the course of the search, an amount of Rs.20,000/- in cash
was found in his house which was explained to the satisfaction of the revenue. Nothing
incriminating was found during the course of search.  However, a notice dated 16th May 2000 was
issued u/s. 158BC of the Act to the Petitioner to file his return of income for
the block period covered by the search.

The petitioner filed a writ
petition before the Bombay High Court challenging the validity of the notice on
the ground that during course of search, nothing was found with the Petitioner,
so as to infer that he was in possession of any undisclosed income either at
the time of search or at any time prior thereto. Consequently, in the absence
of there being undisclosed income, the Assessing Officer would not have any
justification to issue the impugned notice u/s. 158BC of the act.

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

“i) Action of the revenue in
issuing section 158BC notice despite the appraisal report clearly stating that
no incriminating material was found against petitioner was highly deplorable as
it amounted to harassment of the taxpayer. The Officers of the income tax
department  are obliged to proceed
in   accordance   with  
the   statutory   provisions and cannot act on their whim and
fancy. The department should adopt a standard operating procedure to provide
adequate safeguards before issuing notices under Chapter XVIB.

ii)  In the above facts, the impugned notice is
quashed and set aside.

iii) This is the fit case where
costs should be awarded to the Petitioner. The Respondents-revenue i.e. the jurisdictional Chief Commissioner of income
tax (respondent no.1) is directed to pay the costs of Rs.20,000/- to the
Petitioner within four weeks from today.”

Search and seizure- Assessment of third person- Section 153C – A. Ys. 2003-04 to 2008-09- Condition precedent – Cheque book pertaining to assessee reflecting issue of cheques only document seized during search – No other evidence of undisclosed income – Proceedings u/s. 153C not valid

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CIT vs. Refam Management Services P. Ltd.; 386 ITR 693 (Del)

Pursuant to a search and seizure
operation undertaken u/s. 132 of the income-tax act, 1961 in the case of a
third party, cheque books of the assessee reflecting issue of cheques were
found. Assessments were made for the assessment years 2003-04 to 2008-09 u/s.
153C of the act. Certain additions u/s. 69C and certain disallowances were
made. The CIT(a) and the tribunal deleted the additions and disallowances. In
view of such deletion assesee’s ground that assessments were illegal and
invalid were not decided.

On appeal by the revenue, the
assessee raised the ground that the assessments u/s. 153C were illegal and
invalid.

The Delhi High Court held as
under:

“The  only document seized during the search was a
cheque book pertaining to the assessee which reflected the  issue 
of  cheques  during 
the  period august  2008 to october  2008, relevant to the A. Y. 2009-10. Since there was no other evidence
of undisclosed income, the proceedings u/s. 153C were not valid.”

Search and seizure- Limitation for assessment- Period reckoned from date of conclusion of search- Restraint order not extended and no action taken pursuant to search after three months- Search to be taken to have been concluded on expiry of restraint order- Visit of officers to assessee’s premises two years later to record conclusion of search not material- Period of limitation to pass assessment order not to be reckoned from such date- Assessment barred by limitation

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CIT vs. Ritika Ltd.; 284 ITR 434 (Cal):

Pursuant to a search and seizure in the premises of the assessee, a restraint order was issued on October 15, 1998 for a period of sixty days which was later extended for another thirty days upto January 15, 1999. Thereafter it was not extended. On November 21 2000, the Department called on the assessee at his premises for the purpose of recording that the search was at an end. Thereafter assessment order was passed after January 2001. The Department took the view that the period of limitation of two years commenced from November 21, 2000 and therefore the assessment order is passed within the period of limitation. The Tribunal held that the period of limitation of two years for passing assessment order was to be reckoned from 15th January 1999 and not from 21st November 2000 and accordingly the assessment order was passed beyond the period of limitation.

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

“i) The Tribunal’s order was unimpeachable. The restraint order was not extended by the Department after January 15, 1999, which meant that the search was also abandoned and had ended. The search did not stand revived when the officers of the Department called at the house of the assessee merely for the purpose of recording that the search was at an end almost after two years.

ii) The order of assessment was passed beyond the limitation period of two years after conclusion of the search and hence was invalid.”

Return of loss- Section 139(1), (3) of I. T. Act, 1961- A. Y. 2010-11- Delay of one day in filing return satisfactorily explained by assessee- Assessee not to be denied carry forward of loss- direction to CBDT to accept return of assessee-

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Regen Infrastructure and Services Pvt. Ltd. vs. CBDT; 384 ITR 407 (Mad):

For the A. Y. 2010-11, the last date for filing returns was extended to October 15, 2010.The assessee filed return of loss on the last day i.e. October 15, 2010. The uploading was delayed by a few hours due to a technical snag. The Assessing Officer took the date of filing as October 16, 2010 but did not treat it as a belated return and passed an assessment order u/s. 143(3) of the Income-tax Act, 1961, allowing the claim to carry forward loss. The Commissioner issued a show cause notice u/s. 263 of the Act stating that the benefit of carry forward of losses allowed to the assessee was erroneous and prejudicial to the Revenue due to the assessee’s delay in filing the return. The assessee filed an application to the CBDT for condonation of delay of two hours due to which the date of filing was reckoned as October 16, 2010. CBDT rejected the application on the ground that there was no justifiable reason to condone the delay.

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

“i) When the assesee was entitled to claim the carry forward of loss u/s. 139(3) of the Act, it could not have been stated that the delay in filing the return had occurred deliberately on account of culpable negligence or on account of mala fides. Mere delay ought not to have defeated the claim of the assessee. When the delay was satisfactorily explained by the assessee, the approach of the CBDT should have been justice oriented so as to have advanced the cause of justice and the delay should have been condoned.

ii) The CBDT is directed to accept the return filed by the petitioner company for the A. Y. 2010-11 u/s. 139(1) of the Act.”

Recovery of tax pending stay application – Ss. 220(6) and 226(3) – A. Y. 2009-10 – Notice of demand – Attachment of bank accounts – No recovery permissible till stay application is disposed of – Pending stay application withdrawal of part of attached amount from banks is without jurisdiction and unlawful – Garnishee notice quashed – Direction issued to deposit withdrawn amount and dispose of stay application –

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Khandelwal Laboratories P. Ltd. vs. Dy. CIT; 383 ITR 485 (Bom):

For the A. Y. 2009-10, the assessee had filed an appeal against the order u/s. 143(3) of the Income-tax Act, 1961 and had also made an application for stay of the demand u/s. 220(6) of the Act, inter alia on the ground that the issue arising in this case had been concluded in its favour by the decision of the Tribunal in its own case for the A. Y. 2000-01. The Assessing Officer attached the bank accounts of the assessee u/s. 226(3) of the Act and later withdrew amounts of Rs. 7,59,185/- and Rs. 34,265/- from the assessee’s bank accounts.

The Bombay High Court allowed the assessee’s writ petition and held as under:
“i) The right to file an application u/s. 220(6) of the Act is a statutory right available to an assessee. Any action to recover taxes adopting coercive means is not permissible till the assessee’s application for stay u/s. 220(6) of the Act is disposed of. An order disposing of the stay application must give some prima facie reasons in the context of the submission for stay made by the assessee.

ii) The Assessing Officer had only dealt with the assessee’s rectification application and not with the assessee’s application for stay. The third paragraph in that order calling upon the assessee to pay the entire demand within five days, could not be read as a communication rejecting the stay application filed by the assessee.

iii) In any case, the order was bereft of any consideration of the assessee’s primary contention that the issue in appeal is concluded in its favour by virtue of a Tribunal’s order for A. Y. 2000-01 in the assessee’s own case. Thus, the application for stay filed had not yet been disposed of by the Assessing Officer.

iv) Therefore, the action of the Assessing Officer in attaching the assessee’s bank accounts was without jurisdiction and bad in law. The notices u/s. 226(3) of the Act, issued by the Assessing Officer to the assessee’s bankers were to be quashed and set aside. The Assessing Officer was to deposit the amounts of Rs. 7,59,185 and Rs. 34,265 respectively in the assessee’s bank accounts and dispose of the assessee’s pending stay application in accordance with law.”

Income from house property vs. income from other sources – Section 22, 28(i) & 56 – A. Y. 2008-09 – Income from licensing of terrace floor for telecom antenna, constructing room for its personnel and storage – receipts are income from house property –

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Naigara Hotels and Builders (P) Ltd. vs. CIT; 286 CTR 94 (Del):

The assessee had let out the terrace floor for raising telecom antenna and constructing a room for its personnel and storage. The Assessee offered the license fees as income from house property. The Assessing Officer assessed it as business income. The Tribunal held that it is income from other sources.

On appeal the Delhi High Court allowed the assessee’s claim and held that the income is to be assed under the head “Income from house property.”

Inland port – Deduction u/s. 80-IA – A. Y. 2009- 10 – Container freight stations are inland ports within the meaning of section 80IA(4)(i) – Assessee entitled to benefit u/s. 80IA –

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CIT vs. Kailash Shipping Services P. Ltd.; 283 ITR 630 (Mad):

The assessee is a clearing and forwarding agent. For the A. Y. 2009-10 the assessee claimed deduction u/s. 80IA of the Income-tax Act, 1961, on the container freight station. The Assessing Officer disallowed the claim holding that the container freight station could not be classified as an inland port for the purpose of section 80IA(4)(i) of the Act. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The office memorandum of Ministry of Commerce and Industry dated May 21, 2009 clarified the status of the container freight stations as inland ports and the Chennai Port Trust had issued a certificate stating that the container freight station of the assessee might be considered an extended arm of the port in accordance with the CBDT Circular No. 793 dated 23/06/2000 read with Circular No. 133 of 1995 dated 22/12/1995 of CBEC.

ii) The assessee was entitled to the benefit u/s. 80IA of the Act.”

Charitable purpose – Depreciation – Disallowance u/s. 11(6) – A. Y. 2005-06 – Section 11(6) barring allowance of depreciation on such assets is prospective in nature operating w.e.f. 01/04/2015 – Depreciation on assets allowable for earlier period –

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DIT vs. Al-Ameen Charitable Fund Trust; 283 ITR 517 (Karn):

The assessee is a charitable institution registered u/ss. 12AA and 10(23C) . For the A. Y. 2005-06, the Assessing Officer completed the assessment u/s. 144 of the Act denying exemption u/s. 10(23C) of the Act. The Assessing Officer disallowed the claim for depreciation on the ground that the assets were acquired out of the exempt income. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The argument advanced by the Department apprehending double deduction was misconceived. While in the year of acquiring the capital asset, what is allowed as exemption is income out of which such acquisition is made, when depreciation is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital incurred, and if it is not allowed there is no way to preserve the corpus for deriving its income. The Appellate Tribunal was right in holding that depreciation was allowable u/s. 11 of the Act and there was no double claim of the capital expenditure.

ii) Section 11(6) of the Act, which provides for disallowance of the depreciation is prospective in nature and operates w.e.f. April 1, 2015.”

Disallowance of expenditure in respect of exempt income – Section 14A – A. Y. 2009-10 – Investment from common pool – Non-interest bearing funds more than investment in tax free securities No interest disallowance can be made u/s. 14A –

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CIT vs. Microlabs; 383 ITR 490 (Karn):

Dealing with the scope of section 14A read with Rule 8D the Karnataka High Court held as under:

“When investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure can be made u/s. 14A of the Incometax Act, 1961.”

Reassessment – Validity – Section 147 – A. Y. 1993 -94 – Non-supply by the AO of reasons recorded for reopening the assessment (even where the 14 reopening is prior to GKN Driveshafts 259 ITR 19 (SC)) renders the reassessment order bad as being without jurisdiction

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CIT vs. IDBI (Bom); ITA No. 494 of 2014 dated 19/09/2016; www.itatonline.org:

For the A. Y. 1993-94, the
assessment of the assessee was reopened by issuing notice u/s. 148 of the
income­ tax Act, 1961. The assessee filed return in response to the notice and
requested the reasons for reopening. In spite of the repeated request the
reasons were not furnished but the reassessment was completed. The assesee
challenged the reassessment order on the ground that the reassessment made
without furnishing the reasons for reopening is invalid. The tribunal accepted
the assessee’s claim and held that the reassessment order is invalid.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i) The   question as framed proceeds on the basis
that the respondent assessee was aware of the reasons for reassessment.
the  only basis for the aforesaid
submission is the submission made by the revenue before the tribunal that the
respondent assessee is a public sector institution who was aware that search
action has been initiated on certain lessees in respect of transactions with
idBi i.e. assessee. On the basis of the above, it is to be inferred that the
reason for reassessment was known to the respondent assessee.

ii) The supply of reason in
support of the notice for reopening of an assessment is a jurisdictional
requirement. The reasons recorded form the basis to examine whether the
Assessing Officer had at all applied his mind to the facts and had reasons to
believe that taxable income has escaped reassessment. It is these reasons,
which have to be made available to the assessee and it could give rise to a
challenge to the reopening notice. It is undisputed that the reasons recorded
for issuing reopening notice were never communicated to the respondent assessee
in spite of its repeated requests. Thus, the grievance of the revenue on the
above count is unsustainable.

iii) An  alternative submission is made on behalf of
the revenue that the obligation to supply reasons on the Assessing Officer was
consequent to the decision of the apex Court that GKN Driveshafts (India) Ltd.
vs. Income-tax Officer (2003) 259 ITR 19 (SC) rendered in 2003 while, in the
present case, the reopening notice is dated 9th 
December 1996. Thus it submitted at the time when the notice u/s. 148 of
the act was issued and the time when assessment was completed, there was no
such requirement to furnish  to the  assessee 
a  copy of the reasons recorded. This
submission is not correct. We find that the impugned order relies upon the
decision of this Court in Seista Steel Construction (P.) ltd.  [1984] 17 taxman 122(Bom.) when it is held
that in the absence of supply of reasons recorded for issue of reopening notice
the assessment order would be without jurisdiction and needs to be quashed. The
above view as taken by the tribunal has also been taken by this Court in CIT
vs. Videsh Sanchar Nigam Ltd. [2012] 21 Taxmann 53 (Bombay) viz. non-supply of
reasons recorded to issue a reopening notice would make the order of assessment
passed thereon bad as being without jurisdiction.

iv) In view of the above, the
appeal is dismissed”

Search and seizure- Assessment- Ss. 132, 153A of I. T. Act, 1961: A. Y. 2005-06: No assessment pending at time of initiation of search proceedings- Finding by Tribunal that no incriminating evidence found during course of search- Finalised assessment or reassessment shall not abate

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CIT Vs. Gurinder Singh Bawa; 386 ITR 483 (Bom):

For the A. Y. 2005-06, the assesee’s return was processed u/s. 143(1) of the Income-tax Act, 1961 and no notice u/s. 143(2) was issued. Thereafter on January 5, 2007 a search was conducted in the case of the assessee but no incriminating material was found. However, proceedings u/s. 153A were initiated for the A. Y. 2005-06 and the Assessing Officer added an amount of Rs. 93.72 lakhs u/s. 68 and Rs. 43.67 u/s. 2(22)(e) of the Act. The assesee challenged the validity of the assessment made u/s. 153A, on the ground that no assessment in respect of the six assessment years was pending so as to have abated. The Tribunal accepted the assessee’s submission and held that no incriminating material having been found during the course of search, the entire proceeding u/s. 153A were without jurisdiction and therefore, the addition made had to be deleted.   

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

“Once an assessment was not pending but had attained finality for a particular year, it could not be subject to proceedings u/s. 153A of the Act, if no incriminating materials were gathered in the course of the search or during the proceedings u/s. 153A, which were contrary to and were not disclosed during the regular assessment proceedings.”

Reassessment- Ss. 147, 148, 152 of I. T. Act, 1961- A. Y. 2011-12- Effect of section 152- Reassessment not resulting in assessment of higher income

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Notice not valid- Motto Tiles P. Ltd.; 386 ITR 280 (Guj):

For the A. Y. 2011-12, the assessee had filed return of income computing a loss of Rs. 77,51,810/- and a book profit of Rs. 35,96,518/- and the same was processed u/s. 143(1) of the Income-tax Act, 1961. The assessment was reopened by issuing notice u/s. 148 proposing to make an addition of Rs. 81,18,000/- to the normal income. The objections filed by the assessee were rejected.

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

“i)    The learned counsel for the petitioner has drawn the attention of the court to the provisions of section 152(2) of the Act, which provides that where an assessment is reopened u/s. 147, the assessee may, if he has not impugned any part of the original assessment order for that year either u/ss 246 to 248 or u/s. 264, claim that the proceedings u/s. 147 shall be dropped on his showing that he had been assessed on an amount or to a sum not lower than what he would be rightly liable for if the income alleged to have escaped assessment had been taken into account, or the assessment or computation had been properly made. It was submitted that in view of the above provision, the proceedings are required to be dropped because even if the income which is alleged to have escaped assessment is taken into account, the petitioner would not be assessed at a higher amount.

ii)    The controversy stands squarely concluded by the decision of this court in the case of India Gelatine and Chemicals Ltd. Vs. ACIT; 364 ITR 649 (Guj), wherein the court in a case where the assessee had declared a loss of Rs. 1.44 crores under the normal computation and the assessment was framed on book profits of Rs. 2.89 crores, had held that even if the expenditure of Rs. 116.86 lakhs is disallowed, there would no change in the resultant change in the petitioner’s tax liability since the petitioner had already paid much higher tax and had allowed the petition.

iii)    It appears that the Revenue had accepted the said decision and had not challenged the same before the higher forum. The learned counsel for the Respondent has urged that the decision requires reconsideration. Having regard to the facts and circumstances of the case, as well as the fact that the Revenue had accepted the said decision, the court does not find any reason to refer the matter for consideration to a larger bench.

iv)    For the foregoing reasons, the petition succeeds and is accordingly allowed.”

Penalty- Concealment of income- S. 271(1)(c) of I. T. Act, 1961: A. Y. 2005-06- Compensation paid for mining ores claimed as deduction in year of payment but allowed over five year period of mining- Assessee accepting order and revising subsequent returns- Levy of penalty u/s. 271(1)(c) not warranted

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CIT Vs. Thakur Prasad Sao and Sons (P) Ltd.; 386 ITR 448 (Cal):

The assessee had paid Rs. 2.75 crores on account of compensation for mining ores for a period of five years which claimed as revenue expenditure in the A. Y. 2005-06. The Assessing Officer was of the view that the expenditure was allowable over a period of five years which was the period during which the mining was to be conducted. The assessee accepted that order and accordingly revised the subsequent returns. The Assessing Officer levied penalty u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal held that it was not possible to hold that the assessee furnished inaccurate particulars or concealed its income and accordingly deleted the penalty.

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

“The assessee did not accept the disallowance; that there was no disallowance as such. The imposition of penalty was not warranted.”

Export- Hotel business- Deduction u/ss. 80HHC and 80HHD of I. T. Act, 1961- A. Y. 2004-05- Computation- Deduction for export earnings not to be affected by computation of deduction for hotel business- Assessee entitled to deduction on both- Total turnover for computation of deduction of profits from export to be taken excluding foreign exchange receipts from hotel business

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CIT Vs. ITC Ltd.; 386 ITR 487 (Cal):

Assessee was engaged in the business of hotel and export of goods with receipts in foreign exchange. For the A. Y. 2004-05, the Assessing Officer allowed the deduction u/s. 80HHD of the Income-tax Act, 1961 on the income of the hotel business and in arriving at the income earned by the assessee from export business for computing the deduction u/s. 80HHC, he was of opinion that the turnover of the hotel business had to be taken into account, i.e., he included it in the total turnover, thus reducing the percentage of profit available for deduction. The Tribunal held in favour of the assessee following its own earlier judgment wherein it had held that the turnover has to be restricted to such receipts which had an element of profit derived from the export of goods and that the total turnover had to be reduced by the amount of gross receipts from the hotel business in order to keep the parity between the numerator and the denominator.

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

“i)    The assessee was entitled to deductions both u/s. 80HHC and s. 80HHD of the Act. The assessee had income from convertible foreign exchange which arose from its hotel business in India and income from its export business. It was not the legislative intent that the benefit u/s. 80HHC was to be regulated by the turnover of the hotel business to which section 80HHD was applicable.  

ii)    The reasons advanced by the Tribunal in its earlier judgments were proper.”

Business expenditure- S. 37 of I. T. Act, 1961- A. Y. 2003-04- Fines and penalties- Penalty charges paid to Pollution Control Board for failure to install pollution control equipment at factory premises- Is expenditure incurred for compensating damage caused to environment- Payment according to “polluter pays” principle- Compensation for purpose of business

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Expenditure allowable- Shyam Sel Ltd. Vs. Dy. CIT; 386 ITR 492 (Cal):

For the A. Y. 2003-04, the assessee debited in the profit and loss account the penalty charges paid to the Pollution Control Board for non installation of pollution control equipment at the factory premises. The Assessing Officer disallowed the expenditure which was upheld by the Tribunal.

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

“i) The payment made by the assessee was for the purpose of compensating the damage to the environment and this compensation was recovered on the “polluter pays” principle adopted by the Organization for Economic Co-operation and Development, which was judicially recognised.
ii)      It was not the case that the business pursued by the assessee was illegal. The compensation was paid because the assessee had failed to install the pollution control device within the time prescribed. Therefore, the penalty payment made by the assessee was not hit by Explanation 1 to section 37 of the Income-tax Act, 1961. The payment was undoubtedly for the purpose of business or was in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. The question is answered in favour of the assessee.”

TDS – Perquisite – A. Y. 1993-94 – Free interairline tickets provided to the employees of the assessee by other airlines – Cannot be considered as perquisite provided by assessee – No tax deductible at source –

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CIT vs. Air France; 384 ITR 142 (Del):

The assessee is in the business of air transport. The Assessing Officer treated as perquisite the free interairline tickets provided to the employees of the assessee by other airlines. He held the assessee liable for short deduction of tax at source. The CIT(Appeals) and the Tribunal allowed the assessee’s claim that there is no perquisite.

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

“The Tribunal did not commit any error in deleting the addition. The Department was unable to explain how the free air ticket provided to the employees of the assessee by some other airlines could be treated as perquisites provided by the assessee.”

TDS – Compensation or interest accruing from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term income –

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Managing Director, Tamil Nadu State Transport Corpn. (Salem) Ltd. vs. Chinnadurai; [2016] 70 taxmann.com 53 (Mad)

In this case the Madras High Court considered the question as to whether it would be appropriate to insist the victim who is awarded compensation in motor accident cases to part with it or the interest that accrued on it towards payment as Tax Deduction at Source (TDS) ?

The High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income Tax Act which is primarily intended for Tax collection by the State cannot put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.

ii) This Court arrives at the conclusion that the compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.

iii) Therefore, this Court directs that the Petitioner Corporation cannot deduct any amount towards TDS and the same shall also be deposited in addition to the amount that has already been deposited to the credit of M.CO.P.No.879 of 2006, on the file of the Motor Accident Claims Tribunal, Additional District Judge, Fast Track Court, Dharmapuri, within a period of four weeks from the date of receipt of a copy of this order and the Respondent is entitled to take appropriate steps in a manner known to law to withdraw the amount.”

Search and seizure – Retention of seized assets – Section 132B – Application for release of seized articles within time and explanation furnished regarding the articles – Department has no authority to retain seized articles if no dispute raised within 120 days – Direction to authorities to immediately release seized articles –

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Mul Chand Malu (HUF) vs. ACIT; 384 ITR 46 (Gau):

The assessee’s were members of a HUF. Under searches conducted in different premises of the assesses, jewellery ornaments and bullion amounting to Rs. 13,44,70,018 were seized. The assesses filed application under first proviso to section 132B(1)(i) on 26/11/2014 for release of the assets. Without taking any decision on the application within the stipulated period of 120 days from the date on which the last authorization for search was executed, the assesses were informed that by an order dated 28/01/2015 centralisation of their cases has been done and therefore jurisdiction of the office of the Assistant Commissioner of Income- Tax, Gauhati had ceased and that the application dated 26/11/2014 was treated as disposed of in the light of the order dated 28/01/2015.

The Gauhati High Court allowed the writ petition filed by the assesses for release of the assets and held as under:

“i) When an application is made for the release of the assets under the first proviso to section 132B(1)(i) of the Act explaining the nature and source of the seized assets and if no dispute was raised by the Department during the permissible time of 120 days, it had no authority to retain the seized assets in view of the mandate contained in second proviso to section 132B(1)(ii) of the Act.

ii) The authorities are directed to release the seized assets of the assesses immediately.”

TDS: Credit for TDS – A. Y. 2009-10 – TDS belonging to sister concern credited to Form 26AS of assessee – TDS deducted from payment to REPL, sister concern of assessee – Deductor mistakenly mentioned PAN of assessee and hence TDS amount appeared in Form 26AS of assessee – REPL paid taxes without claiming adjustment of said TDS and also not objecting to grant of credit of the same to the assessee –

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Assessee is entitled to credit of the said amount of TDS: CIT vs. RELCOM; 286 CTR 102 (Del):

In the A.Y. 2009-10, one of the customers, in its TDS return mentioned the PAN of the assessee in respect of the TDS from payment to the sister concern REPL. REPL did not claim the credit of the said TDS and paid tax on its income. REPL did not have objection in giving credit of the said TDS in favour of the asessee. The said TDS reflected in Form 26AS in the case of the assessee and the assessee claimed credit of the same. The Assessing Officer refused to give credit of the said amount to the assessee. 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 Revenue relies on the phrase “shall be treated as a payment of tax on behalf of the person from whose income the deduction was made” in section 199 to contend that the assessee’s TDS claim cannot be based on the receipts of REPL.. However, the assessee fairly admitted throughout the proceedings for its TDS claim of Rs. 1,20,73,097 that the benefit of such claim has not been availed by REPL. Therefore, the Revenue, having assessed, REPL’s income in respect to such TDS claim cannot now deny the assessee’s claim on the mere technical ground that the income in respect of such TDS claim was not that of the assessee, given that the assessee and REPL are sister concerns and REPL has not raised any objection with regard to the assessee’s TDS claim.

ii) Procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice. Therefore, the Revenue’s contention that the assesse, instead of claiming the entire TDS amount, ought to have sought a correction of the vendors mistake, would unnecessarily prolong the entire process of seeking refund based on TDS credit.

iii) The question of law is answered against the Revenue and the appeal is dismissed.”

Search and seizure – Release of seized assets – Ss. 132A and 132B(1)(i) – Time limit for disposing application – If no decision taken within time department cannot wait for outcome of assessment but bound to release asset –

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Nadim Dilipbhai Panjvani vs. ITO; 383 ITR 375 (Guj):

The Department seized cash from the petitioner while he was travelling on March 25, 2014. The petitioner applied for release of cash under petition dated April 14, 2014 which was filed on April 17, 2014. The application was rejected on 20/07/2015 on the ground that the cash could be released only when its source was explained to the satisfaction of the Assessing Officer and release of seized assets could be considered only after the final assessment of the tax and penalty proceedings. The contention of the petitioner that this decision should have been taken within the time envisaged under further proviso to clause (i) of sub-section (10) of section 132B of the Income-tax Act, 1961 was rejected by the Assessing Officer.

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

“i) The second proviso to clause (i) of sub-section (1) of section 132B puts a time limit within which a seized asset must be released. The question of not releasing the asset would arise only upon the decision on an application that may have been made by the person concerned being taken by the Assessing Officer. If no decision is taken, necessarily, the option of the Assessing Officer to adjust such seized assets would be confined to the existing liabilities.

ii) It is in this context the legislature requires the Assessing Officer to follow the time limit scrupulously. In other words if the person concerned has made an application for release of the assets within the prescribed time, the authority can refuse such request on the ground of not being satisfied about the source of acquisition. But if no such decision is taken within the time envisaged in the further proviso, releasing of the asset becomes imminent.

iii) The action of the Assessing Officer was not sustainable. The impugned order dated July 20,2015 is set aside. The seized cash shall be released in favour of the petitioner with interest as per the statute.”

Non-resident: Fees for technical services- Section 9(1)(vii) Expl. 2 and 44BB(1)- A. Y. 2008-09- Geophysical services- Activity of two dimensional and three dimensional seismic survey carried on in connection with exploration of oil on land and off-shore- Consideration for services rendered cannot be construed as ”fees for technical services” Assessee was assessable u/s. 44BB(1) of the Act-

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PGS Exploration (Norway)AS; 383 ITR 178 (Del):

The assessee a company incorporated under the laws of Norway, was principally engaged in the business of providing geophysical services world wide. These services included the services of acquiring and processing two dimensional and three dimensional seismic data both on land and offshore. In the A. Y. 2008-09, the assessee opted to be taxed on presumptive basis u/s. 44BB(1) of the Act at the rate of 10% of the gross revenue. The Assessing Officer rejected the contention of the assessee that its income was liable to be taxed u/s. 44BB(1) of the Act and held that the services provided by the assessee were technical in nature and the consideration payable to the assessee for rendering services in terms of the contract was ”fees for technical services” within the scope of section 9(1)(vii) of the Act and that the tax on such income was to be computed u/s. 115A of the Act and not u/s. 44BB(1). The Tribunal upheld the decision of the Assessing Officer.

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

“i) The Tribunal was not justified in holding that the activity of two dimensional and three dimensional seismic survey carried on by the assessee in connection with the exploration of oil was in the nature of “fees for technical services” in terms of Explanation 2 to section 9(1)(vii) of the Act.

ii) Since the A. Y. 2008-09 fell within the period from April 1, 2004 to April 1, 2011, the Income of the assessee to the extent it fell within the scope of section 44DA(1) of the Act and excluded from section 115A(1)(b) of the Act, would be computed in accordance with section 44BB(1) of the Act.”

Non-compete fees- Income or capital- Discontinuation of business pursuant to noncompete agreement- A. Y. 2000-01- Section 28(va) inserted w.e.f. 01/04/2003 is not retrospective- Amount received pursuant to negative covenant is capital receipt-

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CIT vs. TTK Healthcare Ltd.; 385 ITR 326 (Mad):

The assessee was manufacturing condoms and gloves and the LI group was in the business of manufacturing rubber contraceptives all over the world on its own and through its subsidiaries. Assessee entered into a non compete agreement with the LI group for discontinuing its condom business. LI group paid 4,99,000 pounds as noncompete fees to assessee. The assessee claimed the noncompete fees to be capital receipt. The Assessing Officer treated the amount as revenue receipt. The Tribunal held that the amount was capital receipt.

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

“i) The litmus test whether a compensation received by the assessee towards a negative covenant of noncompete clause is whether or not the impairment is one of the assessee’s sources of income and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process a capital receipt. At any rate, w.e.f. April 1, 2003, by virtue of introduction of section 28(va) in the Income-tax Act, 1961 all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then.

ii) The amount of 4,99,000 pounds paid by LI group was liable to be treated as a measure of compensation towards the negative covenant between the assessee and the LI group. It was not necessary that the assessee shelves all its other sources of income as well, for the receipt of compensation to amount to capital receipt.”

Charitable purpose- Cancellation of registration- Section 2(15) and 12AA(3) of I. T. Act, 1961- A. Y. 2009-10- Disqualification for exemption where receipts from commercial activities exceed Rs. 25 lakhs- No change in nature of activities- Assessee entitled to continued registration-

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DIT(Exem) vs. Khar Gymkhana; 385 ITR 162 (Bom):

The assessee is a charitable trust covered by the last limb in the definition u/s. 2(15) of the Income-tax Act, 1961 “general public utility”. In the A. Y. 2009-10, the assessee was not eligible for the exemption in view of the fact that receipts from commercial activities exceeded Rs. 25 lakh. There was no change in the nature of activities. DIT(Exemption) cancelled the registration on this ground. The Tribunal restored the registration.

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

“i) CBDT circular No. 21 of 2016 dated 27/05/2016 clarified that it shall not be mandatory to cancel the registration already granted u/s. 12AA to a charitable institution merely on the ground that the cut off specified in proviso to section 2(15) is exceeded in a particular year without there being any change in the nature of activities of the institution.

ii) The Tribunal was right in law in holding that the assessee was entitled to continued registration u/s. 12A of the Act and in setting aside the cancellation of its registration on the ground that its receipts from commercial activities exceeded Rs. 25 lakh in the year.”

Business expenditure: Section 37(1) of I. T. Act, 1961- A. Y. 2003-04- Assessee paid stamp duty for a contract executed with State Road Transport corporation in course of business- Since stamp duty paid by appellant during year under consideration was a compulsory statutory levy and it would not restrict profits of future years and was incurred wholly and exclusively for purpose of business- It must be allowed in its entirety in year in which it was incurred and it could not be spread over a number of years-

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Prithvi Associates vs. ACIT; [2016] 71 taxmann.com 163 (Guj):

The assessee paid stamp duty in relation to contract executed with Maharashtra State Road Transport corporation. The Assessing Officer disallowed the claim for deduction of the said expenditure. CIT(A) allowed the claim but the Tribunal upheld the order of the Assessing Officer.

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

“i) The payment of stamp duty is not for business expediency but it is in the nature of a compulsory levy under the Bombay Stamp Act. It is legally settled that accounting practice cannot over ride the provisions of the Income-tax Act, 1961. Stamp duty paid by the appellant during the year under consideration is a compulsory statutory levy and would not restrict the profits of the future years and ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years.

ii) If any statutory expense is required to be paid, in view of decision of the Apex Court in India Cements Ltd. vs. CIT [1966] 60 ITR 52, such expense is required to be allowed in the same year. The Apex Court in the case of Taparia Tools Ltd. vs. Jt. CIT [2015] 372 ITR 605/231 Taxman 5/55 taxmann.com 361 also observed that as per the ordinary rule revenue expenditure incurred in a particular year is to be allowed in that year.

iii) Thus, if the assessee claims that expenditure in that year, the department cannot deny it. However, in a case where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘matching concept’ is satisfied, which upto now has been restricted to cases of debentures. Therefore, it is rightly observed by the Commissioner (Appeals) that the expense is required to be allowed in the same year.

iv) In view of above, the Tribunal has committed an error in law in confirming the disallowance of Rs. 12,28,560 towards stamp duty expenses actually incurred by the appellant for executing contract with Maharashtra State Road Transport Corporation. Accordingly, this appeal is allowed.”

Cash credit- Section 68 of I. T. Act, 1961- A. Y. 1983-84- The assessee is bound to be provided with the material used against him apart from being permitted to cross examine the deponents- The denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable-

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H. R. Mehta vs. ACIT(Bom); ITA No. 58 of 2001 dated 30/06/2016 (www.itatonline.org)

In the A. Y. 1983-84, the assessee had taken loan of Rs. 1,45,000/- which the Assessing Officer treated as non genuine and made addition of the amount as unexplained cash credit u/s. 68 of the Income-tax Act, 1961. The Tribunal upheld the addition.

On appeal by the assessee, the Bombay High Court held as under:

“i) On a very fundamental aspect, the revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Quite apart from denial of an opportunity of cross examination, the revenue did not even provide the material on the basis of which the department sought to conclude that the loan was a bogus transaction.

ii) In the light of the fact that the monies were advanced apparently by the account payee cheque and was repaid vide account payee cheque the least that the revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against assessee in arriving before passing the order of reassessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the reassessment and therefore renders the orders passed by the CIT (A) and the Tribunal vulnerable.

iii) In our view the assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents. Despite the request dated 15th February, 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statement and disclose material, these were denied to him. In this view of the matter we are inclined to allow the appeal.”

Book profits- Section 115JB of I. T. Act, 1961- A. Y. 2008-09- Mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as “book profits” u/s 115JB- As the department has implicitly accepted Narang Overseas vs. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assesses-

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CIT vs. Goodwill Theatres Pvt. Ltd. (Bom); ITA No. 2356 of 2013 dated 06/06/2016 (www.itatonline.org)

The Bombay High Court had to consider two questions in an appeal filed by the Department:

(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits are capital receipts in the hands of the assessee and not revenue receipts chargeable to tax?

(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits, can not be part of book profit u/s. 115JB, as it was held as capital assets?”.

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

“(i) The Tribunal has held that the mesne profits received by the Assessee for the unauthorized occupation of its premises from Central Bank of India is a receipt of capital nature and thus not taxable. To reach the above conclusion, the impugned order placed reliance upon the decision of Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., vs. ACIT 100 ITD (Mum) S.B. The issue before the Special Bench in Narang Overseas Pvt. Ltd. (supra) was whether the mesne profits received by an assessee is revenue or capital in nature. The Special Bench, in its order placed reliance upon the definition of mesne profits in Section 2(12) of the Code of Civil Procedure, 1908 which reads as under: “Mesne profits of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”

ii) On the basis of above, it held that any amount received from a person in wrongful possession of its property, would be mesne profits and it is capital in nature.

iii) We find that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd held that the same is capital in nature. There is no doubt that the issue arising herein is also with regard to the character of mesne profits received by the Assessee. In this case also, the amounts are received by the Assessee from a person in wrongful possession of its property i.e. after the relationship of landlord and tenant has come to an end. Once the Special Bench order of the Tribunal in Narang Overseas Pvt. Ltd has taken a view on the character of mesne profits, then unless the Revenue challenges the order of the Special Bench of the Tribunal it would be unfair of the Revenue to pick and choose assessees where it would follow the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. The least that is expected of the State which prides itself on Rule of Law is that it would equally apply the law to all assessees’s.

(iv) We make it clear that we have not examined the merits of the question raised for our consideration. We are not entertaining the present appeal on the limited ground that the Revenue must adopt an uniform stand in respect of all assessees. This is more so as the issue of law is settled by the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra). The fact that even after the dismissal of its Appeal (L) No.1791 of 2008 for non-removal of office objections on 25th June, 2009, no steps have been taken by the Revenue to have the appeal restored, is evidence enough of the Revenue having accepted the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. Thus, the question as framed in the present facts does not give rise to any substantial question of law.”

Business Expenditure- Capital or revenue- A. Y. 1997-98- Test of enduring benefit not to be mechanically applied- Expenses incurred for software development- Rapid advancement and changes in software industry- Difficult to attribute endurability- Expenditure to be treated as revenue

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Indian Aluminium Co. Ltd. vs. CIT; 384 ITR 386 (Cal):

The assessee was engaged in the manufacture and production of aluminium and related products. Bauxite was a basic raw material for manufacturing aluminium. The assessee claimed deduction of expenditure incurred on development of application software to help the assessee in planning the production and bauxite grade control in mines treating it as differed revenue expenditure and amortised a part of it debiting it to the profit and loss account. The Assessing Officer disallowed the deduction on the ground that the expenditure was capital in nature incurred with a view to obtain an asset or advantage of a permanent nature. The Tribunal upheld the disallowance.

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

“The software industry was one such field where advancements and changes happened at a lightening pace and it was difficult to attribute any degree of endurability. The software used by the assesee was a application software which needed to be updated due to the rapid advancements in technology and increasing complexity of the features. Disallowance of the expenditure incurred on software development was erroneous.”

Advance ruling- Application for advance ruling- A. Y. 2012-13- Bar of application where matter is pending consideration before Income-tax Authorities- Mere notice u/s. 143(2) without any specific queries would not mean matter was pending before Income-tax Authorities- Such notice would not bar an application for advance ruling-

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LS Cable and System Ltd vs. CIT; 385 ITR 99 (Del):

Assessee’s application for advance Ruling for the A. Y. 2012-13, was rejected on the ground that the matter was pending before the Assessing Officer at the time of application in view of the fact that the notice u/s. 143(2)(ii) was issued by the Assessing Officer.

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

“i) Mere issuance of a notice u/s. 143(2) of the Act, by merely stating that “there are certain points in connection with the return of income on which I would like some other information” did not amount to the issues raised in the application filed by the assessee before the Authority for Advance Ruling being already pending before the Assessing Officer.

ii) There was no statutory bar to the Authority for Advance Rulings considering the application.”

Appeal to High Court- Section 260A of I. T. Act, 1961- A. Y. 1996-97- Plea urged for first time in appeal before High Court- Not permissible- Capital vs. revenue receipt- Income from other sources- Casual and non-recurring receipts- Auction sale of property mortgaged with bank set aside by Supreme Court- Auction purchasers and judgment debtors compromising in execution proceedings- Amount received by auction purchaser not casual and non-recurring receipt but capital receipt not taxable-

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Girish Bansal vs. UOI; 284 ITR 161 (Del):

Auction sale of property mortgaged with bank was set side by the Supreme Court. Auction purchaser(assessee) and judgment debtors compromised the execution proceedings wherein the assessee purchaser received Rs. 10 lakhs as a settlement amount. For the A. Y. 1996-97, the assessee claimed the amount as the non-taxable capital receipt. The Assessing Officer treated the amount as the casual and non-recurring receipt u/s. 10(3) of the Income-tax Act, 1961 and assessed it as income. The Tribunal upheld the order of the Assessing Officer.

On appeal by the assessee before the Delhi High Court the Department sought consideration of the amount received by the assessee as revenue receipt. The High Court reversed the decision of the Tribunal and held as under:

“i) The Department could not be permitted to shift its stand from one forum to another. The consistent case of the Department was to be tested at various levels for its correctness. It was possible that in the interregnum there might be decisions of the Supreme Court which might support or negate the case of the Department. That would then have to be taken to its logical end. Under these circumstances the Court was not prepared to permit the Department to urge a new plea for the first time in the High Court.

ii) The Assessing Officer was in error in proceeding on the basis that a sum of Rs. 10 lakhs received by the assessee was in the nature of a casual and nonrecurring receipt which could be brought to tax u/s. 10(3) of the Act. The Assessing Officer having held that it could not be in the nature of capital gains it was not open to the Department to seek to bring it to tax under the heading revenue receipt. What was in the nature of a capital receipt could not be sought to be brought to tax resorting to section 10(3) read with section 56 of the Act.

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

Business loss/speculation loss – 37(1)/43(5) – A. Y. 2009-10 – Loss suffered in foreign exchange transactions entered into for hedging business transactions cannot be disallowed as being “notional” or “speculative” in nature. S. Vinodkumar Diamonds is not good law as it lost sight of Badridas Gauridas 261 ITR 256 (Bom)

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CIT vs. M/s. D. Chetan & Co. (Bom); ITA No. 278 of 2014 dated 01/10/2016:
www.itatonline.org:

The assessee is engaged in the
business of import and export of diamonds. during the assessment proceedings,
the Officer found that Respondent assessee explained that the amount of
rs.78.10 lakhs claimed as loss was on account of having entered into hedging
transactions to safeguard variation in exchange rates affecting its
transactions of import and export by entering into forward contracts. The
Assessing Officer by order of assessment dated 27th december 2011 disallowed the
claim on the ground that it is a notional loss of a contingent liability debited
to Profit and Loss Account.  Resultantly,
the same was added to the assessee’s total income. The Cit (appeals) allowed
the assessee’s appeal inter alia relying upon the decisions of tribunal in
Bhavani Gems vs. ACIT (ITA No.2855/Mum/2010 dt.30.3.2011) and the Special Bench
decision in the case of DCIT vs. Bank of Bahrain and Kuwait ((2010) 132 TTJ
(Mumbai) (SB) 505). The Cit (appeals) on facts found that the transaction of forward
contract was entered into during the course of its business. It held that it
was not speculative in nature nor was it the case of the Assessing Officer that
it was so. Thus the loss incurred as forward contract was allowed as a business
loss. The Tribunal upheld the finding of the Cit (appeals). The tribunal found
that the transaction of forward contract had been entered into for the purpose
of hedging in the course of its normal business activities of import and export
of diamonds.

On appeal by the revenue, the
high Bombay Court upheld the decision of the tribunal and held as under:

“i) The Tribunal has, while
upholding the finding of the Cit (appeals), independently come to the
conclusion  that  the 
transaction  entered  into 
by the assessee is not in the nature of speculative activities. Further,  the hedging transactions were entered into so
as to cover variation in foreign exchange rate which would impact its business
of import and export of diamonds. These concurrent finding of facts are not
shown to be perverse in any manner. In fact, the Assessing Officer also in the
Assessment Order does not find that the transaction entered into by the
assessee was speculative in nature.

 ii) The reliance placed on the decision in S.
Vinodkumar Diamonds Pvt. Ltd. vs. Addl.CIT ITA 506/MUM/2013 rendered on 3rd may
2013 in the revenue’s favour would not by itself govern the issues arising
herein. This is so as every decision is rendered in the context of the facts
which arise before the authority for adjudication. Mere conclusion in favour of
the revenue in another case by itself would not entitle a party to have an
identical relief in this case. In fact, if the revenue was of the view that the
facts in S. vinodkumar are identical/similar to the present facts, then
reliance would have been placed by the revenue upon it at the hearing before
the tribunal. The impugned order does not indicate any such reliance. It
appears that in S. vinodkumar, the tribunal held the forward contract on facts
before it to be speculative in nature in view of section 43(5) of the act. However,
it appears that the decision of this court in CIT vs. Badridas Gauridas (P) Ltd.
261 ITR 256 (Bom) was not brought to the notice of the tribunal when it
rendered its decision in S. vinodkumar (supra). in the above case, this court
has held that forward contract in foreign exchange when incidental to carrying
on business of cotton exporter and done to cover up losses on account of
differences in foreign exchange valuations, would not be speculative activity
but a business activity.”

Business expenditure – TDS – Disallowance u/s. 40(a)(ia) – A. Y. 2006-07 – Professional services- Subscription to e-magazines – No rendering of professional services – Tax not deductible at source on subscription – Disallowance of subscription not justified

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CIT vs. India Capital Markets P. Ltd.; 387 ITR 510 (Bom):

For the A. Y. 2006-07, the
Assessing Officer disallowed the payment made to Bloomberg being data services
charges of Rs. 4.74 lakh on account of non-deduction of tax at source u/s
40(a)(ia) of the income-tax act, 1961. The Assessing Officer was of the view
that the payment made by the assessee to Bloomberg was in the nature of
consultative services and so the assessee was liable to deduct tax at source. The
Commissioner (appeals) found that the payment made to Bloomberg was essentially
a subscription for a financial e-magazine and was not liable to deduction of
tax at source and accordingly there would be no occasion to invoke section
40(a)(ia) of the act. He therefore deleted the addition. 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)  The 
Commissioner (appeals) and the tribunal had reached a concurrent finding
of fact that payments made  to  Bloomberg 
were  for  subscription 
to e-magazines and therefore, there was no occasion to deduct tax under
the act. Thus,  section 40(a)(ia) could
not have been invoked.

ii)  The  
submission on behalf of the revenue that B’s magazines/information was
backed by solid research carried out by its employees and made available on the
website would not by itself result in B rendering any consultative services. It
was not the case of the Revenue that specific queries raised by the asessee
were answered by B as part of the consideration of rs. 4.34 lakh. The
information was made available to all subscribers to e-magazines/journal of B.
therefore, in no way could the payments made to B be considered to be in the
nature of any consultative/professional services rendered by B to the assessee.

iii) The Tribunal was justified
in deleting the disallowance made by the Assessing Officer u/s. 40(a)(ia) of
the act.”

Business expenditure – A. Y. 1985-86 – Accrued or contingent liability – Mercantile system of accounting- Customs duty – Seller challenging increase in payment of customs duty before Supreme Court – Mere challenge to demand would not by itself lead to cessation of liability- Assessee cannot be denied deduction of amounts paid for purchase of goods

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CIT vs. Monica India (No. 1); 386 ITR 608 (Bom):

The assessee was following
mercantile system of accounting. For the A. Y. 1985-86, the assessee had
claimed expenditure on accrual basis which included customs duty of Rs. 1.78
crore. The same was allowed by the Assessing Officer. The Commissioner in
exercise of his powers u/s. 263 of the income-tax act, 1961 held that the
amount of rs. 1.78 crore was a contingent liability as the assessee had
challenged it in the Supreme Court and the payment of it to the customs
department was postponed and thus could not be allowed as an expenditure for the  subject 
assessment  year.  The   tribunal
held that the assessee was following the mercantile system of accounting and
therefore, the liability was to be allowed as deduction on accrual basis and
further held that the liability to pay the customs duty by the assesee was a
part of the sale price to the two sellers, and consequently, ought to be
allowed as an expenditure for purchase of goods.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i)  The  
agreements  between  the 
parties  provided that the consideration
payable for the purchase of goods included within it, the duty of customspayable
on the imported goods as a part of the cost incurred by  the 
seller. Therefore,   the cost of
purchase of goods was not only the expenses incurred by the seller from the
opening of the letter of credit but continued to run till the execution of the
contract. The mere fact that the seller of the goods had obtained a stay, would
not by itself result in an unascertained or unqualified liability.

ii) Moreover, since the assessee was following
the mercantile system of accounting mere challenge to the demand by the seller
might not by itself lead to the liability ceasing. Although the seller of the
goods might not be able to claim deduction since it was paid in terms of
section 43B of the act, this would not deprive the assessee of the deduction of
amounts paid by it for purchase of goods. Thus, the assessee would be entitled
to deduct the amount of rs 1.78 crore 
as  consideration paid  for the goods in the assessment year.”

Appellate Tribunal – Power to admit additional grounds/evidence – Section 254, read with Rules 11 and 29 of Income-tax (Appellate Tribunal) Rules, 1963 – A. Y. 2007-08 – In terms of section 254(1), Tribunal while exercising its appellate jurisdiction, has discretion to allow to be raised before it new or additional questions of law arising out of record after giving a reasonable opportunity of being heard to other party

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VMT Spinning Co. Ltd. Vs. CIT; [2016] 74 taxmann.com 33
(P&H):

For
the A. Y. 2007-08, the assessee challenged assessment order before the
Commissioner (appeals) which was partly allowed. This led to filing of cross-
appeals before the tribunal i.e., one by the revenue and the other by the
assessee. In the memorandum of appeal filed before the Tribunal, the assessee
raised an additional ground with regard to calculation of minimum alternate tax
to be carried forward to the subsequent year. According to the assessee, in the
assessment order, the same had not been correctly calculated. As said ground
had not been raised before the Commissioner, the tribunal refused to adjudicate
upon the same as according to the tribunal prior leave of the tribunal through
an application in writing should have been obtained before raising the
additional ground. An oral request made by the assessee to raise said
additional ground was not considered enough.

On
appeal by the assessee, the Punjab and Harayana High Court held as under:

“i)
Appeals to the tribunal are preferred u/s. 254(1) which provides that after hearing
the contesting parties, the tribunal  may
pass such orders that it thinks fit. In section 254(1) the usage of the words
‘pass such orders thereon as it thinks fit’ gives very wide powers to the
tribunal and such powers are not limited to adjudicate upon only the issues
arising from the order appealed from. Any interpretation to the contrary would
go against the basic purpose for which the appellate powers are given to the
tribunal u/s. 254 which is to determine the correct tax liability of the assessee.

 ii)
Rules 11 and 29 of the income-tax (appellate tribunal) rules, 1963 are  also 
indicative  that the powers of the
tribunal,  while considering an appeal
u/s. 254(1) are not restricted only to the issues raised before it. Rule 11 of
the 1963 rules provides that the appellant, with the leave of the tribunal can
urge before it any ground not taken in the memorandum of appeal and that the
tribunal while deciding the appeal is not confined only to the grounds taken in
the memorandum of appeal or taken by leave of the tribunal under rule 11.

iii)
Rule 29, is to the effect that though parties to the appeal before the
tribunal  shall not be entitled to
produce additional evidence but if the tribunal desires the production of any
document or examination of any witness or any affidavit to be filed, it can,
for reasons to be recorded, do so.

iv)
A harmonious reading of section 254(1) of the act and rules 11 and 29 of the
rules coupled with basic purpose underlying the appellate powers of the
tribunal which is to ascertain the correct tax liability of the assessee leaves
no manner of doubt that the tribunal while exercising its appellate
jurisdiction, has discretion to allow to be raised before it knew or additional
questions of law arising out of the record before it. What cannot be done, is
examination of new sources of income for which separate remedies are provided
to the revenue under the act.

v)
Rule 11 in fact confers wide powers on the tribunal, although it requires a
party to seek the leave of the tribunal. It does not require the same to be in
writing. It merely states that the appellant shall not, except by leave of the
tribunal, urge or be heard in support of any ground not set forth in the
memorandum of appeal. In a fit case it is always open to the tribunal to permit
an appellant to raise an additional ground not set forth in the memorandum  of 
appeal.  The   safeguard 
is  in the proviso to rule 11
itself. The proviso states that the tribunal 
shall not rest its decision on any other ground unless the party who may
be affected thereby has had a sufficient opportunity of being heard on that
ground. Thus,  even if it is a pure
question of law, the tribunal cannot consider an additional ground without
affording the other side an opportunity of being heard. even in the absence of
the proviso, it would be incumbent upon the tribunal to afford a party an
opportunity of meeting an additional point raised before it.

vi)
Moreover,  even  though 
rule  11  requires 
an appellant to seek the leave of the tribunal,  it does not confine the Tribunal to a
consideration of the grounds set forth in the memorandum of appeal or even the
grounds taken by the leave of the tribunal. In other words, the tribunal can
decide the appeal on a ground neither taken in the  memorandum 
of  appeal  nor 
by  its  leave. The only requirement is that the
tribunal cannot rest its decision on any other ground unless the party who may
be affected has had sufficient opportunity of being heard on that ground.

vii) in the present case, the tribunal ought to have exercised its
discretion especially in view of the fact 
that  the  assessee 
intends  raising  only  a
legal argument without reference to any disputed questions  of 
fact. The   matter is  remanded 
to the tribunal for adjudicating upon the additional ground on merits.”