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

19. Appellate Tribunal – Power to consider new ground etc. – Sections 142(2A) and (2C) – A. Y. 2005-06 – Tribunal has power to consider the question of validity of extension of time u/s. 142(2C) of the Act – Amendment by Finance Act, 2008 is prospective and not retrospective

Principal CIT vs. Nilkanth Concast P.
Ltd.; 387 ITR 568 (Del):

The relevant year is the A. Y. 2005-06. In
the appeal filed by the Revenue before the Delhi High Court, the following
questions were raised:

“i)  Whether the ITAT is
competent to adjudicate the order of the AO under proviso to section
142(2C), which is not provided u/s. 146A 
or 153?

ii)  Whether the ITAT is
competent to admit an issue for the first time where there is no material in
the assessment order or in the order of the Commissioner of Income-tax
(Appeals) on the basis of quite the issue of validity of the order of the
Assessing Officer under the proviso to section 142(2C) could be raised
and considered?”

iii)  Whether the AO is
competent to extend the period of filing the audit report on the express
request of the nominated auditor under proviso to section 142(2C) r.w.s.
142(2A) ?”

The High Court held as under:

“i)  The powers of the Tribunal
are wide enough to consider a point which may not have been urged before the
Commissioner(Appeals) as long as the question requires to be examined in the
interest
of justice.

ii)  The Tribunal had not
exceeded its jurisdiction in examining the question whether the Assessing
Officer was justified in extending the time for the auditor nominated u/s.
142(2C), to submit the audit report.

iii)  Under proviso to
section 142(2C) of the Act, there was no power with the Assessing Officer to suo
moto extend the time for filing audit report prior to April 1, 2008. The
power was subsequently provided by amending the proviso by the Finance
Act, 2008 and the amendment was prospective in nature.

iv) The Assessing Officer was
not competent to extend the period for filing the audit report on the request
of the nominated auditor. It could be done only on the request made on behalf
of the assessee.”

22. Revision – Section 263 – A. Y. 2007-08 – Assessee changing method of accounting in accordance with accounting standard 7 – Known and recognised method of accounting and approved as proper – Not erroneous and prejudicial to Revenue – Revision not warranted

Princ. CIT vs. A2Z Maintenance and Engineering Services
Ltd.; 392 ITR 273(Del):

The assessee was engaged in the construction business. For
the A. Y. 2007-08, the transactions in its return were accepted in the scrutiny
assessment u/s. 143(3) of the Act. The Assessing Officer noted that the
assessee provided maintenance services such as housekeeping and security
services and accepted the returned income without any disallowance. The
Commissioner issued notice u/s. 263 of the Act taking the view that Rs. 11.98
crore shown as deferred revenue income by changing the method of accounting in
accordance with Accounting Standard (AS)-7 resulted in lowering of profit. The
Commissioner finally made the order revising the assessment as erroneous and
prejudicial to the Revenue and remitted the matter for consideration to the
Assessing Officer. The Tribunal set aside the order of the Commissioner.

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

“i)  The ruling of the Tribunal is largely based
upon the recognition of Accounting Standard-7 in the given facts and
circumstances of the case and that in fact the matter had received scrutiny by
the Assessing Officer at the stage of original assessment. Besides this method
was a known and recognised method of accounting and approved as a proper one.

ii)   Therefore,
the Tribunal was right in holding that the exercise of power u/s. 263 of the
Act was not warranted.”

21. Transfer pricing – A. Y. 2006-07 – International transaction – Arm’s length price – Selection of comparables – Company outsourcing major parts of its business cannot be taken as comparable for company not outsourcing major part of its business

Princ. CIT vs. IHG IT Services (India) P. Ltd.; 392 ITR 77
(P&H):

For the A. Y.  2006-07,
the Tribunal excluded the companies N and G from the list of comparables on the
ground that a substantial part of their business was outsourced and outsourcing
exceeded 40%, which was not so in the case of the assessee. In the case of N,
the Tribunal held that it was not a valid comparable also on the ground that
another company had been merged into it.

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

“i)  Both the companies were not appropriate
comparables, since a major part of their business was outsourced, whereas the
major part of the assessee’s business was not outsourced.

ii)  Moreover, the company V had a low employee
cost of Rs. 1.25% of operating revenue. The assessee’s wages to sales was 53%
which was not comparable to V. Thus the exclusion of N and V was justified.”

20. Return – Belated revised return for claiming exemption in terms of Supreme Court decision and CBDT circular – High Court has power to direct condonation of delay and granting of exemption

S. Sevugan Chettiar vs. Princ. CIT; 392 ITR 63 (Mad):

The assessee, an employee of ICICI Bank, retired under the
Early Retirement Option Scheme, 2003. For the year of retirement the assesee
filed the return of income and the assessment was finalised. Subsequently, the
assessee came to know that the Supreme Court, in the case of S. Palaniappan
vs. ITO (2015) 5 ITR-OL 275 (SC) held that a person, who has opted
for voluntary retirement under the Early Retirement Option Scheme shall be
entitled to exemption u/s. 10(10C) of the Act. Following the decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Supreme
Court be brought to the notice of all officials in the respective jurisdiction
so that relief may be granted to such retirees of the ICICI Bank under Early
Retirement Option Scheme 2003. On coming to know of this, the assessee filed a
revised return claiming the benefit u/s. 10(10C) of the Act, referring to the
said decision and the circular. The Assessing Officer rejected the claim on the
ground that the revised return was filed beyond the time stipulated u/s. 139(5)
of the Act.

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

“i)  Clause (c) of sub-section (2) of section 119
of the Income-tax Act, 1961 states that the CBDT may, if it considers as
desirable or expedient so to do for avoiding genuine hardship in any case or
class of cases, by general or special order, relax any requirement contained in
any of the provisions contained in Chapter IV or Chapter VI-A of the Act. Thus
if the default in complying with the requirement was due to circumstances
beyond the control of the assessee, the Board is entitled to exercise its power
and relax the requirement contained in Chapter IV or Chapter VI-A. If such a
power is conferred upon the Board, this Court, while exercising jurisdiction
u/s. 226 of the Constitution of India, would also be entitled to consider
whether the assessee’s case would fall within one of the conditions stipulated
u/s. 119(2)(c).

ii)  The Board issued a circular on 13/04/2016 with
a view to grant relief to retirees of the ICICI Bank under the Early Retirement
Option Scheme. The circular issued by the CBDT was in exercise of powers
conferred u/s. 119.

iii)  The assesee being a senior citizen could not
be denied the benefit of exemption u/s. 10(10C) of the Act and the financial
benefit that had accrued to him, which would be more than a lakh of rupees. The
Respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order.”

19. Penalty – Concealment of income – Sections 92CA and 271(1)(c) – Recomputation of arm’s length price of specified domestic transaction not carried out at arm’s length – Transactional net margin method or comparable uncontrolled price method – difference in method leading to rejection of loss claimed in respect of genuine new line of business – Penalty cannot be imposed –

CIT vs. Mitsui Prime Advanced Composites India Pvt. Ltd.;
392 ITR 280 (Del):

Based upon the Transfer Pricing Officer’s Determination of
the arm’s length price, the Assessing Officer rejected the assessee’s claim
that the transactional net margin method was applicable and adopted the
comparable uncontrolled price method u/s. 92CA of the Act, where the difference
in the method led to the rejection by the Assessing Officer of the losses
claimed by the Assessee. The assessee did not appeal as it had consistently
incurred losses. The Assessing Officer initiated penalty proceedings on the
ground that an adverse order u/s. 92C attracted the Explanation 7 to section
271(1)(c). The Assessing Officer was of the opinion that the explanation
offered by the assessee was not satisfactory and did not display good faith,
which was a prerequisite under Explanation 7. He therefore imposed penalty u/s.
271(1)(c) of the Act. The Tribunal found that the assessee had acquired
business from one GSC for supply of products as well as availing the
engineering services to set up a plant for manufacturing the designated
products which included the manufacturing facility and resulted in the sale of
goods and which indicated the benefit derived by the assessee from the three
international transactions with its associate enterprises. The Appellate
Tribunal held that to say that the assessee did not avail of any services at
all was incorrect. It also held that the assessee had not only acquired the new
business but also had availed of the services to set up a plant, the details of
which were disclosed to the Transfer Pricing Officer by a letter, which was
sufficient elaboration of the nature of services availed of by the assessee
under the three international transactions. It also held that since no
manufacturing activity was done by the assessee, in the past as it was simply a
trader, acquiring of “business” and availing of the services under the three
agreements with its associated enterprises could not be characterised as
duplication of services. The Tribunal deleted the penalty.

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

“i)  The Appellate Tribunal did not in any manner
deviate from Explanation 7 to section 271(1)(c) of the Act. Furthermore having
regard to the fact that the assessee’s claim was in respect of a new line of
business of manufacturing introduced for the first time in the given year, its
failure per se could not have trigged the automatic presumptive
application of Explanation 7 of section 271(1)(c) as perceived by the
authorities.

ii) The
application of the exception had to be based on the facts of each case and no
generalisation could be made. The Appellate Tribunal had elaborately dealt with
the rationale in rejecting the imposition of penalty by the Assessing Officer
and had not committed any error of law.”

18. Co-operative society – Deduction u/s. 80P(2)(a)(i) – Society providing credit facilities to members – Finding that assessee not a co-operative bank and its activities confined to its enrolled members in particular area – Class B members enrolled for purpose of availing of loans and not participating in administration are also members – Benefit of exemption cannot be denied to assessee

CIT vs. S-1308 Ammapet Primary Agricultural Co-operative
Bank Ltd; 392 ITR 55 (Mad):

The assessee was a co-operative society involved in banking
and trading activities. It filed a Nil return after claiming deduction u/s.
80P(2)(a)(i) of the Act. The Assessing Officer disallowed the claim of the
assessee on the ground that the assessee had lent monies to the members, who had
undertaken non-agricultural/non-farm activities and had received commercial
interest, that since interest was received, the non-farm sector loans did not
qualify for deduction u/s. 80P(2)(a)(i), that the activity of the assessee was
in the nature of commercial banking activity, that u/s. 80P(2)(a)(i), deduction
was available only if primary agricultural credit societies were engaged with
the primary object of providing financial assistance to its members for
agricultural activities. The Commissioner (Appeals) allowed the assessee’s
claim. The Tribunal perceived that in the definition of “member” u/s. 2(16) of
the Co-operative Societies Act, 1983, the associate member under clause 2(6)
was also included. It held, that therefore, the enrolled class B members who
had availed of loans from the assessee could not be treated as non-members and
consequently held that the assessee was entitled to deduction u/s. 80P(2)(a)(i)
of the Act.

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

“i)  The appellate authorities had clearly
perceived that the assessee was not a co-operative bank and that the activities
of the assessee were not in the nature of accepting the deposits, advancing
loans, etc., but was confined to its members only and that too in a
particular geographical area.

ii)  Exemption u/s. 80P(2)(a)(i) could not be
denied on the ground that the members of the assessee society were not entitled
to receive any dividend or have any voting right or right to participate in the
general administration or to attend any meeting etc., because they were
admitted as associate members for availing of loans only and were also charged
a higher rate of interest.

iii)   The
assessee society was entitled to deduction u/s. 80P(2)(a)(i) of the Act.”

17. Charitable purpose – Registration u/s. 12AA – A. Y. 2009-10 – Cancellation of registration- Assessee a housing development authority constituted under Act of Legislature – No activity demonstrating that assessee not genuine trust – No material indicating that assessee or its affairs not carried out in accordance with object of trust – Registration cannot be cancelled

DIT(E) vs. Maharashtra Housing and Area Development
Authority; 392 ITR 240 (Bom)

The assessee is a housing development authority registered
u/s. 12AA of the Act. The Director of Income-tax (Exemption) received a
proposal from the Assistant Director stating that the assessee had been
carrying on activities in the nature of trade, commerce or business, and had
gross receipts therefrom in excess of Rs. 10 lakh and that the proviso
to section 2(15) of the Act, would be attracted and therefore requested to
consider the withdrawal of registration. The Director referred to the details
of income in income and expenditure account and profit of Rs. 114.48 crore out
of sale of housing and income by way of lease rent, tenancy deposits, and based
on that issued a show cause notice to the assessee. The assessee pointed out
that its activities were in furtherance of the Maharashtra Housing and Area
Development Act, 1976, it had no profit motive, far from indulging in any trade
or commerce and it gave houses to middle class families at affordable rents,
that the income was on account of sale of housing stock and not from a
systematic commerce and business activities. The Director (Exemption) cancelled
the registration. The Tribunal held that the assessee was entitled to
registration and set aside the order of cancellation of registration.

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

“i)  There was nothing referred to by the Director
(Exemption) which could show that the assessee was undertaking any activity
which would demonstrate that it was not a genuine trust or institution. There
was no material which would indicate that the assessee or its affairs were not
being carried out in accordance with the object of the trust or institution.

ii)  These
two aspects referred to in subsection(3) of section 12AA of the Act, and the
materials in that behalf were completely lacking. Therefore, there was no
reason for the Director (exemption) to exercise the power which he purported to
exercise.”

16. Capital gain – Exemption u/s. 54F – Investment of capital gain in purchase of residential house outside India before amendment by Finance No. 2 Act, 2014 – Assessee entitled to exemption u/s. 54F

Leena Jugalkishor Shah vs. 392 ITR 18 (Guj):

The assessee, a non-resident Indian, disposed of property
situated in India and purchased a residential house in United States. The
assessee claimed exemption u/s. 54F of the Act, in respect of the investment of
capital gain in the residential house in United States. The Assessing Officer
held that the residential house purchased outside India was not subject to tax
in India within the meaning of section 54F of the Act, and thus disallowed the
claim for exemption u/s. 54F of the Act. The Tribunal confirmed the
disallowance.

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

“i)  The assessee had purchased a residential house
in the United States out of the capital gains on sale of plot in India and thus
she had fulfilled the conditions stipulated in section 54F of the Act. The
assessee invested the capital gains in a residential house within the
stipulated time.

ii)  There was no condition in section 54F of the
Act at the relevant time that the capital gains arising out of transfer of
capital asset should be invested in a residential house situated in India. The
language of section 54F of the Act before its amendment was that the assessee
should invest capital gains in a residential house. It was only after the
amendment to section 54F of the Act, by the finance (No. 2) Act, 2014, which
came into force w.e.f. April 1, 2015 that the assessee should invest the sale
proceeds arising out of sale of capital asset in a residential house situated
in India within the stipulated period.

iii)  When section 54F was clear and unambiguous,
there was no scope for importing into the statutes words which were not there.
Moreover, when the language of a taxing provision was ambiguous or capable of
more meanings than one, then the court had to adopt the interpretation which
favoured the assessee.

iv)   The
benefit of section 54F before its amendment could be extended to a residential
house purchased outside India and hence the claim of exemption was to be
allowed.”

15. Appellate Tribunal – Order to be passed within 90 days – Section 254(1) and ITAT Rules 34(5)(c) and 34(8) – A. Y. 2009-10 – Rule requiring order to be pronounced within 90 days of conclusion of hearing – Tribunal passing order beyond period of 90 days – Assessee applying rectification on ground delay operated to its prejudice – Rejection not justified – Tribunal to consider rectification application afresh

Otters Club vs. DIT(Exemption); 392 ITR 244 (Bom):

The Tribunal passed the order dated 03/02/2016 u/s. 254(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the
“Act”) 1961 beyond the period of 90 days from the date of conclusion
of its hearing on 22/09/2015 for the A. Y. 2009-10. The assessee’s application
for rectification of the order on the ground that this delay resulted in
prejudice to the parties as binding decisions of co-ordinate Benches though
referred to were ignored, was dismissed.

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

“i)  The Tribunal while rejecting the rectification
application did not dispute the fact that the order dated 03/02/2016 was passed
beyond the period of 90 days from the date of conclusion of its hearing.
However, it recorded that administrative clearance had been taken to pass such
an order beyond the period of 90 days.

ii)  The meaning of “administrative clearance” was
not clear in the face of rule 34(5)(c) read with rule 34(8) of the
Income-tax(Appellate Tribunal) Rules, 1963. The provisions mandated the
Tribunal to pronounce its order at the very latest on or before the 90th day,
after the conclusion of the hearing. Therefore, the order was not sustainable.

iii)  The
Tribunal was to consider the rectification application afresh.”

14. Penalty: Section 271(1)(c) – A. Ys. 2003-04 to 2006-07- Assessing Officer initiating penalty proceedings for furnishing of inaccurate particulars of income and imposing penalty for concealment of income- Order imposing penalty to be made only on ground on which penalty proceedings initiated and not on fresh ground of which assessee had no notice- Penalty to be deleted

CIT vs. Samson
Perinchery; 392 ITR 4 (Bom):

The Assessing Officer
issued notice for penalty u/s. 271(1)(c) of the Act, 1961 on the ground of
furnishing inaccurate particulars of income. However, he passed order imposing
penalty on the ground of concealment of income. The Tribunal deleted the
penalty on the ground that the initiation of penalty by the Assessing Officer was
for furnishing inaccurate particulars of income while the order imposing
penalty was for concealment of income and it could not be that the initiation
would be only on one limb, i.e. for furnishing inaccurate particulars of income
while imposition of penalty on the other limb, i.e. concealment of income.

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

“i)  The
satisfaction of the Assessing Officer with regard to only one of the two
breaches u/s. 271(1)(c) of the Act, for initiation of penalty proceedings would
not permit penalty being imposed for the other breach. Thus, the order imposing
penalty was to be made only on the ground on which the penalty proceedings were
initiated and it could not be on a fresh ground of which the assessee had no
notice.

    

ii)  The Tribunal rightly deleted the penalty. The appeals are
dismissed.”

13. Income – Assessability – Land purchased for company by its director – Land shown as stock-in-trade of company – sale of land also shown in books of company and gains offered for tax – gains not assessable in hands of director

CIT vs. Atma Ram Gupta;
392 ITR 12(Raj):

The assessee was a
director of a company engaged in real estate business. In the course of
business, the company purchased land in the name of the director and duly
accounted for it in the books of the company. The sale proceeds of the land at
Rs. 1,51,80,000/- were duly recorded in the books of account of the company and
business profits were offered to tax in the case of the company. However, the
Assessing Officer was of the opinion that the resultant gain being short term capital
gains amounting to Rs. 1,23,47,880/- is liable to be taxed as short term
capital gains in the hands of the assessee. The Tribunal set aside the
assessment.

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

“i)  The
material placed by the assessee and considered by both the appellate
authorities, clearly proved that the assessee being a director executed title
deeds for and on behalf of the company and the beneficial owner for all
practical purposes was the limited company which had even paid due taxes later
on at the time when the property was sold.

ii)            The finding by the appellate Tribunal was essentially a
finding of fact based on the material on record after appreciation of evidence
and no question of law much less a substantial question of law could be said to
arise out of the order passed by the Tribunal and there was no perversity in
the order impugned so as to call for interference of the court. The amount was
not assessable in the hands of the assessee.“

12. Educational Institution – Exemption u/s. 10(23C)(vi) – A. Ys. 2008-09 and 2009-10 – CBDT Circular to the effect that approval granted on or after 01/12/2006 to operate in perpetuity till withdrawn – Assessee seeking exemption for A. Y. 2008-09 but withdrawing it pursuant to CBDT Circular – Order of Commissioner holding application delayed and denying exemption – Contrary to law – Assessee entitled to exemption – Directions to Commissioner to pass fresh orders

Param Hans Swami Uma
Bharti Mission vs. CCIT; 391 ITR 131 (P&H):

The assessee, an
educational institution, was granted exemption u/s. 10(23C)(vi) of the Act,
1961 for the A. Y. 2007-08 by the Chief Commissioner. The Assessee filed an
application seeking exemption for the A. Y. 2008-09, but was served with a
notice u/s. 147 on the premise that no exemption order was passed u/s.
10(23C)(vi). The Assessing Officer dropped the reassessment proceedings in view
of the Circular No. 7 dated 27/10/2010, issued by CBDT which clarified that the
approval issued once is perpetual till it was withdrawn. The assessee filed an
application to withdraw the application for exemption. The Chief Commissioner
ignoring the Circular dismissed the applications as barred by time and held the
assessee disentitled to exemption for the A. Ys. 2008-09 and 2009-10.

The assessee filed writ
petition challenging the said order. The Punjab and Haryana High Court allowed
the writ petition and held as under:

“i)  As
clause (4) of the CBDT Circular No. 7 of 2010 provided that an exemption once
granted operated in perpetuity till it is withdrawn, the orders passed by the
Department ignoring the circular were contrary to law and liable to be set
aside.

       

ii)  The Commissioner was to pass fresh order on the
application considering the relevant      clause of the circular.”

11. Disallowance of expenditure – Exempt income – Section 14A – A. Y. 2011-12 – Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year

CIT vs. Chettinad
Logistics (P.) Ltd.; [2017] 80 taxmann.com 221 (Mad)

The assessee was engaged
in the business of trading, clearing and forwarding. The Assessing Officer had
added certain amount by disallowing expenditure u/s. 14A of the Act, 1961. The
Commissioner (Appeals) deleted the addition. During the course of arguments
before the Tribunal, the assessee advanced a submission, that in cases, where
investments were made in sister concern (s) out of interest free funds, for
strategic purposes, the provisions of section 14A could not be invoked. The
Tribunal remanded the matter to the Assessing Officer so as to reach a
conclusion as to whether investments had been actually made in sister concerns
of the assessee, out of interest free funds

On appeal by the Revenue,
the Madras High Court held as under:

“i)  This
exercise, in the given facts which emerge from the record, was clearly
unnecessary, as the Commissioner (Appeals) had returned the finding of fact
that no dividend had been earned in the relevant assessment year. Section 14A,
can only be triggered, if, the assessee seeks to square off expenditure against
income which does not form part of the total income under the Act.

ii)  The
Legislature, in order to do away with the pernicious practice adopted by the
assessees, to claim expenditure, against income exempt from tax, introduced the
said provision. In the instant case, there is no dispute that no income i.e.,
dividend, which did not form part of total income of the Assessee was earned in
the relevant assessment year. Therefore, the addition made by the Assessing Officer
by relying upon section 14A, was completely contrary to the provisions of the
said section.

iii)  The
revenue submitted that it could disallow the expenditure even in such a
circumstance by taking recourse to Rule 8D. Rule 8D only provides for a method
to determine the amount of expenditure incurred in relation to income, which
does not form part of the total income of the assessee. Rule 8D cannot go
beyond what is provided in section 14A. Therefore, rule 8D cannot come to the
rescue of the revenue.

iv)           In any event, the Tribunal, via, the impugned judgment has
remitted the matter to the Assessing Officer. Therefore, for the foregoing
reasons, no interference is called for qua the impugned judgment.”

10. Capital asset – Agricultural land – Sections 2(1A) and 2(14) – A. Y. 2007-08 – Where assessee sold a piece of land in view of fact that assessee had planted various fruit bearing trees on land and produce was being used for personal consumption and, moreover, assessee had not filed an application for conversion of land for non-agricultural propose, it was not a ‘capital asset’ u/s. 2(14) and, thus, gain arising from sale of it was exempt from tax

Shankar Dalal vs. CIT;
[2017] 80 taxmann.com 41 (Bom):

The assessee was
individual deriving income from salaries and income from other source (interest
income). He was also co-owner of an ancestral agricultural land along with
other family members. The land was situated within the limits of village
Panchayat. During relevant year, i.e. A. Y. 2007-08, assessee sold said land.
He claimed gain on sale of agricultural land as exempt since the land did not
constitute ‘Capital Assets’ as defined u/s. 2(14). The Assessing Officer
rejected assessee’s claim holding that the land did not constitute agricultural
land since no agricultural operations were carried out regularly and same was
sold to a company engaged in the business of development of infrastructure
activity. The Tribunal upheld the order of Assessing Officer.

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

“i)  The
impugned order and the whole action of the department proceeds on the
foundation that the land in question so transferred is a “non-agricultural
land” and falls within the ambit of “non-agricultural land”
because of use and/or non-use and/or stated to be unused for specific
agricultural purpose for want of labour and no-agricultural operations and/or
no specific regular income continuously for three years, as required and many
other such facets.

ii)  For the
purposes of such transfer of land, one has to consider the provisions of the
Goa, Daman and Diu Land Revenue Code, 1968. (Code) and the Rules made
thereunder and so also the definition so provided to deal with the concept of
“agricultural land”. Under the Code, there was no bar that an
agriculturist and/or one who possesses agricultural land cannot transfer such
land to any third party who is not agriculturist. Nothing contrary has been
pointed out and/or placed on record that any permission and/or formalities are
required to be completed before transfer of such lands. Under the Code, a transfer
could be made to a non-agriculturist and/or to a person whose activities are
not related to agricultural project or purpose

iii)  The
assessee had received the consideration. Admittedly, the property was not
divided and/or sub-divided. Admittedly, before transfer of the property, the
parties were fully aware about the nature of the land which includes rocky
area, used and usable area for agricultural, number of trees, plants growing or
in existence for so many years, apart from certain plantations. Being the
ancestral agricultural property, the families were using the agricultural
produce for their own consumption.

iv) Here, at
this stage, it is relevant to note the definition of the term
“agriculture”. This definition, ought not to have been overlooked,
while taking any action against the assessee. The definition itself provides
that expression “agriculture” means raising of useful or valuable
products which derive nutriment from the soil with the aid of human labour.
This inclusive definition, no where provides and/or takes away rights of the
assessee to treat such land as an agricultural land which they had been using
before transfer and/or till the date it came to be transferred as an
“agricultural land”

v)  The
definition of “agriculture” itself permitted, such unused land to be
used and utilised even for grazing, horticulture, dairy farming, stock
breeding. This is clear terms of the law and so also the intent of the Code
which governs such agriculture land and its transfer. The report so submitted
and/or referred to by the department against the assessee, is unsustainable,
unacceptable and contrary to the specific provisions of the Code. All the
“agriculture” activities so defined covers the agriculture land in
question. Therefore, exemption from the capital gain is the only option, on
fact and the law.

vi) The whole
approach of the Tribunal and the Assessing Officer is incorrect and
unsustainable in law. Section 105 of the Code further clarifies the position
with regard to presumption of correctness of entries in the record of rights
and register of mutations. It provides that an entry in the record of rights,
and certified entry in the register of mutation shall be presumed to be true
and until the contrary is proved or a new entry is lawfully substituted
therefor. The assessee has placed on record material to justify their claim.
There is no issue with regard to assessee’s ownership, title and the name
recorded in the land records at the relvant time. Even, otherwise, in view of
settled position of law, all concerned are bound by the entries, unless contra
material is placed on record. On the contrary, adverse findings are given by
the department solely based upon the so called inspection initially taken at
the stage of assessment by the concerned officer and later on by the Tribunal
Members. But the fact is that this inspection reports, in no way, has
considered the purpose and object of the Code and the definition of
‘agriculture’ so liberally mentioned.

vii) The
finding of facts recorded by the Tribunal itself confirms the position that the
case of the assessee falls within the ambit of definition of
“agriculture” as defined under the Code. The property requires to be
treated as agricultural land and its ‘activities are “agricultural”
in nature. In view of above, it is held that the property in question cannot be
treated as “capital asset” as contemplated u/s. 2(14)(iii). It is
wrong to hold, in view of the facts and circumstances and the nature of
agricultural land because of peculiar situation of the land near the sea side
or stony side of the sea, that assessees are not doing any regular agriculture
operation, this is also on the ground that they never showed agriculture income
out of it. Any agriculture produce and products can be for personal use also.

viii)In the result, the
impugned order of the Tribunal is set aside and assessee’s appeal is allowed.”

9. Capital gain or business income- A. Y. 2006-07 – Where assessee converted the stock-in-trade of shares into investments and sold the same at a later stage, profit arising from sale of shares shall be deemed to be capital gains and not business income -Since shares were held as long-term capital asset, profit arising from sale of share shall be exempt from tax u/s. 10(38)

Deeplok Financial
Services Ltd. vs. CIT; [2017] 80 taxmann.com 51 (Cal):

The assessee was a company
which was engaged in the business of leasing, finance and investment. On 1st
April, 2004, i.e. during the previous assessment year 2005-06 the
assessee transferred certain shares from its trading stock into investments. In
the A. Y. 2005-06, the assessee sold some of those shares and some more shares
were sold in the A. Y. 2006-07, the relevant year. The assessee claimed the
profit as capital gain and for the A. Y. 2006-07 claimed exemption u/s. 10(38)
of the Act, 1961 as long term capital gain. In the assessment u/s. 143(3) of
the Act, for the A. Y. 2005-06, the Assessing Officer did not accept the
assessee’s claim for conversion of shares from stock-in-trade into investment.
That decision was appealed against and carried up to the Tribunal which
confirmed the same. The assessee though preferred a delayed appeal to the High
Court but was unsuccessful in having the delay condoned and thereby lost that
right of appeal. For the assessment year under consideration i.e. A. Y.
2006-07, the Assessing Officer following the assessment order of the previous
year held accordingly on this claim of conversion by the assessee. The CIT(A)
allowed the assessee’s appeal but the Tribunal upheld the decision of the
Assessing Officer following its order for the A. Y. 2005-06.

The assessee filed appeal
before the Calcutta High Court and raised the following substantial question of
law:

     “Whether
on the facts and circumstances of the case the Tribunal erred in affirming the
order of the AO disregarding the conversion of the trading shares into
investment shares and treating the long term capital gain of Rs.22,27,819/-
arising from the sale of those shares as profit of trading in shares and
bringing the same to tax?”

The High Court formulated
another substantial question of law as under:

     “Whether
the Tribunal was correct in holding that the profit arising from the sale of
the said shares is chargeable to tax in the hands of the assessee as its
business income and not long term capital gain since in the assessee’s own case
in the previous assessment year the conversion of the shares was not accepted
by the Tribunal?”

The High Court decided to
answer both the questions. The High Court held as under:

“i)  A person
cannot transact with himself. It is only after the asset is dealt with to a
third party can a profit or loss be ascertained on the basis thereon. There was
no bar imposed by the Income Tax Act, 1961 on an assessee from converting its
stock-in-trade into investment. That conversion could not be deemed to be a
transaction but when the asset is dealt with, the profit or loss is to be
ascertained and in the case of capital asset, if there is profit then to be
assessed as capital gain. That if shares be disposed of at a value other than
the value at which it was transferred from the business stock, the question of
capital loss or capital gain would arise.

ii)  In
Dhanuka & Sons(1980) 124 ITR 24 (Cal), the same situation was contemplated
where on stock transferred in investment account, the question of capital loss
or capital gain, was held, would arise if such shares be disposed of at a value
other than the value at which it was transferred from the business stock. We,
on noticing that the Tribunal did not really hold otherwise but had held
against the assessee on the point of res judicata, had formulated the
above question. Nevertheless for the reasons aforesaid we answer the question
suggested by the assessee in the affirmative and in its favour. In that regard
the said circular dated 29th February, 2016 has no application
because the assessee’s stand was not accepted by the Revenue.

iii)  So far
as the formulated question relating to res judicata is concerned, in
answering the same reference may be had to the decision in Amalgamated
Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara; AIR (1964) SC 1013
in which the Supreme Court, inter alia, held that generally, questions
of liability to pay tax are determined by Tribunals with limited jurisdiction
and so, it would not be inappropriate to assume that if they decide any other
questions incidental to the determination of the liability for the specific
period, the decisions of those incidental questions need not create a bar of res
judicata while similar questions of liability for subsequent years are
being examined.

iv) This
assessee lost its right of appeal to this Court on the question arising in the
previous assessment year on account of delay in preferring the same. There was
no adjudication on merits, of its claim of conversion, on appeal to the High
Court. The only reason given by the Tribunal in rejecting the claim of the
assessee for the previous assessment year, as would appear from its order dated
13th May, 2011, is that to the Tribunal it appeared there is no
provision in the Act in respect of conversion of stock-in-trade into investment
and its treatment. Hence, it held that the lower authorities rightly made the
addition as there was understatement of income by analysing the assessee’s
trading and investment account in shares. Thus, before us there is no
impediment for the assessee to seek adjudication on the point. The question
formulated is answered accordingly and in favour of the assessee.”

8. Business expenditure – Deduction on actual payment – Sections 37 and 43B – A. Y. 2007-08 – Export and import business – Misdeclaration- Evasion of customs duty – Search and arrest – Bail order by court on condition assessee’s deposit amount to be appropriated towards differential liability by custom authorities – Recovery of customs duty from amount deposited by assessee evident from order of Principal Commissioner of Customs. Allowable expenses

Princ. CIT vs.
Praveen Saxena; 391 ITR 365 (Del):

The assessee was a
proprietor of a concern doing export and import business. A search was
conducted by the customs authorities in the premises. The assessee was arrested
subsequently by the Directorate of Revenue Intelligence on the suspicion of
evasion of payment of duties. In the course of the court proceedings, the
customs authorities had contended that bail could be granted to the assessee
only if a substantial amount of the customs duty and penalty levied was
deposited. Therefore, the court directed the assessee to deposit the amount
which was to be appropriated by the customs authorities. In addition the
assessee was also directed to furnish an adequate security amount. For the A.
Y. 2007-08, the assessee claimed that the amount of deposit had to be allowed
u/s. 43B of the Income-tax Act,(hereinafter for the sake of brevity referred to
as the “Act”) 1961. The Assessing Officer disallowed the expenses on
the grounds that the amount was a penalty and consequently, even otherwise, in
the absence of an adjudication order, no amount was payable. The Commissioner
(Appeals) and 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)  It was
evident from the order of the Principal Commissioner of Customs that the duty
element and the identical amount of penalty had been determined. If there was
no misdeclaration by assessee to the customs authority and consequential
differential liability towards differential duty, the Department could not have
contended that the amount duly paid constituted allowable expenditure on
account of statutory liability u/s. 43B of the Act. The assessee did not do so
but was rightly made to do so did not in any manner detract its basic liability
which it always had to satisfy.

ii)  Therefore,
the contentions of the Department were misconceived and were rejected. The
deposit amounts paid were expenses and within the ambit of section 43B. The
appeal is dismissed.”

7. ALP – International transaction – Sections 92 and 92C – R. 10B of I. T. Rules 1962 – A. Y. 2008-09 – Comparables accepted for earlier years excluded – Onus on Department to justify exclusion –

CIT vs. Welspun Zucchi
Textiles Ltd.; 391 ITR 211 (Bom):

The assessee was in export
business and entered into international transactions with its associated
enterprises. The assessee determined arm’s length price of exports to its
associated enterprises for the  A. Y.
2008-09, by benchmarking the price of exports of comparable companies, SEL and
VTI which had been accepted as comparables for the earlier assessment years.
Accordingly, no transfer pricing adjustment was made by the assessee. The
Transfer Pricing Officer while determining arm’s length price excluded two
companies SEL and VTI without assigning any reasons and enhanced the price of
exports made by the assessee to its associated enterprises. The Assessing
Officer in terms of the order of the Transfer Pricing Officer enhanced the
income on account of international transactions and passed an order. The
Tribunal held that the exclusion of the two companies was not justified.

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

“i) If the
Department was of the view that only because of the losses of the assessment
year in question the two companies were not comparable, further examination or
enquiry ought to have been done by it to find out whether loss was a symptom of
the reference points in Rule 10B(2) of the Rules making them non-comparable. It
was more so as the Department did not dispute that otherwise the two companies
were comparables to the assessee even on the parameters laid down in Rule
10B(2).

ii)  Therefore,
if the Department sought to discard the two companies SEL and VTI from the
comparables for the assessment year in question, the onus was upon the
Department to justify it. A finding has been recorded that the Department had
not shown that the two companies were consistently loss making companies, which
required examination to ascertain if it was hit by one of the reference points
mentioned in Rule 10B(2).

iii)  The
Department itself has accepted the companies SEL and VTI as comparables for the
earlier assessment years. The appeal is dismissed.”

20. Assessment – Transfer pricing – DRP is superior to AO- AO is bound by decision of DRP – ESPN Star Sports Mauritius

S. N.
C. ET Compagnie vs. UOI; 388 ITR 383 (Delhi):

In this
case, the DRP declared that the Assessing Officer lacked jurisdiction to deal
with an issue. However, the Assessing Officer passed a final assessment order
ignoring the order of the DRP.  

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

“i)  The
language used by the Assessing Officer while disagreeing with the binding order
of the DRP was wholly unacceptable.

ii)  The
draft assessment order dated 28/03/2014 and the final assessment order dated
28/01/2015, passed by the Assessing Officer were void ab initio and
liable to be quashed on that basis.”

52. Notice – Validity- Service of notice- Reassessment- Sections 148 and 282 – A. Y. 1996-97- Service of notice on accountant of assessee company- Power of attorney given to accountant to conduct assessment proceedings does not include authority to accept any fresh notice- Notice not validly served on assessee- Reassessment proceedings vitiated

CIT vs. Kanpur Plastipack Ltd.; 390 ITR 381 (All):

The managing director of the assessee company had executed a
power of attorney in favour of the company’s accountant to represent the
company in the assessment proceedings. Notice u/s. 148 of the Act, was served
on him. The Appellate Tribunal held that the assessment proceedings were
invalid and quashed the assessment order on the ground that the notice u/s. 148
was not validly served on the assessee.

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

“i)   The power of attorney had confined the
authority to representation to conduct the case. It did not include in it any
authority to accept any fresh notice.

ii)   The
person on whom the notice u/s. 148 of the Act was served was not the principal
officer of the assessee nor was there any material to show that he had been
authorized by the assessee to accept any notice. The Appellate Tribunal was
correct in concluding that the reassessment proceedings, which were initiated
on the basis of the notice u/s. 148 dated 28/05/2002 were vitiated.”

51. Income- Transport subsidy – whether income or capital- A. Y. 2001-02 – Transport subsidy to stimulate industrial activity in backward region is capital receipt and not income

Shiv Shakti Floor Mills P. Ltd. vs CIT; 390 ITR 346
(Gauhati):

For the A. Y 2001-02, the assessee had claimed the transport
subsidy received by it to stimulate industrial activity in backward region to
be capital receipt and not income. The Assessing Officer treated the subsidy as
income and made addition to the total income. The Tribunal upheld the addition.

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

“The transport subsidy received by the assessee was intended
to stimulate industrial activity in the backward region, to generate employment
opportunities and bring about development in the North Eastern States and it
was not meant to provide higher profit for the entrepreneur. It was intended to
encourage investment in difficult and far flung states and the sum received as
subsidy could not be treated as revenue receipt.”

50. DTAA between India and Singapore- Shipping corporation in Singapore earning income from operations in India – Article 8 of DTAA stating that such income would be taxable in Singapore-Article 24 of DTAA stating that if income were taxed by contracting state on basis of remittance clause 8 would not apply – Certificate by Internal Revenue of Singapore that income accrued and was taxable in Singapore – Fact that freight receipts were remitted to UK not relevant – Income not taxable in India

M. T. Maersk Mikage vs. DIT( Int. Taxation); 390 ITR 427
(Guj):

ST was a shipping and transport company based in Singapore.
It was taxed as a resident of Singapore. During the period relevant to the A.
Y. 2011-12, ST 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. ST through the assessee, filed return of income u/s. 172(3) of
the Act, declaring the gross profit calculations, but claiming Nil income
relying on article 8 of the DTAA between India and Singapore. According to ST
such income was taxable only in Singapore and therefore, was exempt from tax
under the Indian Income-tax Act. It produced a certificate issued by the
Internal Revenue Authority of Singapore dated 09/01/2013 which stated that the
income in question derived by ST 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. The Assessing Officer held
that ST was not entitled to the benefit of article 8 of the DTAA by virtue of
the provisions contained in article 24 therein. He noted that the freight
receipts were remitted to London and not to Singapore. The assessee filed a
revision petition u/s. 264 of the Act which was rejected.

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

“i)   Article 8 of the DTAA between India and
Singapore states that with reference to shipping and air transport profits
derived by an enterprise of a contracting state from the operation of ships or
aircraft in international traffic shall be taxable only in that state. Article
24 of the Agreement pertains to limitation of relief. The essence of article
24.1 is that in case certain income is taxed by a contracting state not on the
basis of accrual, but on the basis of remittance, the applicability of article
8 would be ousted to the extent such income is not remitted. This clause 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 of such income
is given.

ii)   In the absence of any rebuttal material
produced by the Revenue, one would certainly be guided by the factual
declaration made by the Internal Revenue Authority of Singapore in the
certificate and this declaration was that the income would be charged at
Singapore considering it as an income accruing or derived from business carried
on in Singapore. In other words, the full income would be assessable to tax on
the basis of accrual and not on the basis of remittance. The amount was not
taxable in India.”

49. DTAA between India and Germany – Amount received by assessee – international airlines as IATP members by rendering technical facilities i.e. line maintenance facilities to other member airlines at various Indian airports being covered under Article 8(4) of DTAA between India and Germany and article 8(1) and 8(3) of DTAA between India and Netherlands respectively, was not liable to tax in India

DIT vs. KLM Royal Dutch Airlines; 2017] 78 taxmann.com 1
(Delhi):

The assessees namely ‘Lufthansa’ and ‘KLM’, were
international airlines with headquarters and controlling offices in Cologne,
Germany and Amsterdam, Netherlands respectively and branch offices in India.
They operated aircraft in the international traffic business; these activities
were also carried out in India inasmuch as they operated aircraft in
international traffic from, and to, various Indian airports. Both the assessees
were members of the International Airlines Technical Pool (‘IATP’ or the
‘Pool’). As IATP members they extended minimal technical facilities (line
maintenance facilities) to other International Air Transport Association
(‘IATA’) member airlines at Indian airports. The assessees claimed that the
amounts received from various IATP member airlines for the above services
rendered in India were not taxable in India. The Assessing Officer held that
such amounts received by them in India were taxable, holding that these
activities were not covered under the term ‘Air Transport Services’. He held
that the assessees’ branch offices in India constituted permanent
establishments and, therefore, the income relating to the engineering and
traffic handling was taxable in India, as the same was not covered under
article 7 of DTAA. The Tribunal held that the assessees profit due to participation
in a pool was covered under article 8(4) of the DTAA between India and Germany
and by articles 8(1) and 8(3) of DTAA between India and Netherlands and such
profit could not be brought to tax in India.

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

“i)   While interpreting tax treaties and
conventions, the emphasis is upon the context in the instrument itself, and
‘any subsequent agreement between the parties’ as to the interpretation of the
treaty or the application of its provisions. The expression ‘profit from the
operation of ship or aircraft in international traffic’ has not been defined in
the Indo-Dutch DTAA, or in the Indo-German DTAA.

ii)   The Tribunal while explaining the meaning of
profit from the operation of ships or aircraft in international traffic in both
Lufthansa and the KLM cases took into consideration the bye-laws of IATP,
because this organisation authorised its members to share aircrafts, aircrafts
pooling, ground handling equipment and manpower all over the world. The
Tribunal also considered the relevant clauses of the IATP manual and held that
any receipt by the assessee due to participation in the IATP pool as provided
in its manual and dealt with in article 8(4) of Indo-German DTAA will not be
taxable in India under article 8(1); a similar finding was rendered in the case
of KLM too.

iii)   The assessees participated in the IATP pool
and earned certain revenues from such activities and also incurred expenditure.
There is, clear reciprocity as to the extension of services; IATP membership is
premised upon each participating member being able to provide facilities for
which it was formed (line services, OMR services, etc.) of a required mandate
standard. As there was reciprocity in the rendering and availing of services,
there was clearly participation in the pool; in terms of the two DTAAs
(Indo-German and India-Netherlands) the profits from such participation were
not taxable in India.”

48. Demonetisation – PMGKY deposit scheme – Where person from whom cash was seized during demonetisation 2016 and he was not tried under any provision of law, he would be eligible to deposit amount in PMGKY deposit scheme on or before 30-3-2017

Vishal Jain vs. State of Punjab; [2017] 78 taxmann.com 172
(P&H):

The assessee was travelling in a cab from Delhi carrying Rs.
30 lakh. The cash amount was seized by police officials and handed over to
Income-tax Officers. The assessee filed a writ petition seeking declaration
against action of respondents in depriving him of cash amount, unconditional
release of amount to petitioner; with a further prayer to permit him to have
his advocate present during his interrogation. He further seeked refrain of any
coercive action against him alleging to the aforesaid dispute; with a liberty
to avail the remedy under ‘Pradhan Mantri Garib Kalyan Yojana, 2016’ by
depositing the aforesaid amount, tax, surcharge and penalty.

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

“i)   The case of the petitioner has to be examined
as per the aforementioned Scheme, in view of the amendment Act, notification
and circular. Though he is eligible yet cannot be deprived of the statutory
entitlement to declare and deposit his undisclosed income or pay tax, surcharge
and penalty. The aforementioned scheme has been promulgated for a limited
period with effect from 17-12-2016 to 31-3-2017.

ii)   From the provisions of the scheme, it is
evident that a person can avail the remedy of declaration. Last date for
submitting the Form 1 as prescribed in the rules may be made at anytime on or
before 31-3-2017. The explanation is in tune of section 199 (o) of the Finance
Act as the petitioner has made a categoric statement that he is not involved in
any of the offences as referred above.

iii)   The use of the words “in relation of
prosecution of any offence” instead of “in relation to investigating
for any of the offence” clearly shows legislative intent of provisions
would apply only if the charge sheet or complaint is filed for prosecuting any
person under any of the aforementioned provisions of Act and not merely when
investigations are going on.

iv)  In the instant case, as per the petitioner’s
claim, no complaint or charge sheet is pending against him. The alleged
undisclosed seized income of the petitioner, as per the statement of Yatinder
Sharma, has been handed over to Income-tax department and summons, has already
been served upon the petitioner.

v)   The petitioner is not, thus, trying to
falsify to project undisclosed income as duly accounted for availing the
remedy. Since the petitioner is not amongst the persons mentioned in paragraph
8 of the circular No. 43 of 2016, being not eligible for availing the PMGKY
Deposit Scheme, therefore, the Income-tax Officer cannot, deny the petitioner
adjustment from his cash account seized by the department, tax charge and
penalty.

vi)  Economic offences are very serious and have a
wider ramification. The statutory investing scheme appears to be positive
process for not only enhancing the revenue collection but at the same time, it
is an opportunity for reforming those who had earlier failed to make true and
correct disclosure of income in normal course by taking into consideration the
provisions of the aforementioned Scheme.

vii)  The prayer of the petitioner of taking any
coercive steps appears to be genuine. The writ petition can be disposed of with
a direction to respondents not to take any coercive action against the
petitioner and he may be granted a permission to take the assistance of a
lawyer to be present at visible but not audible distance during his
interrogation and recording of statement in connection with said seizure in the
instant case or any proceedings consequential thereto.

viii) However, prayer of the petitioner for directing
unconditional return of the seize amount is hereby rejected. In case, the
petitioner submits any application to the Income-tax Department, the
authorities can look into matter for the purpose of declaration of undisclosed
income by availing the remedy under the PMGKY Scheme. They shall consider the
same and pass an appropriate order thereon as it enables the Government to earn
straightway 50 per cent of the amount, 25 per cent for depositing of the bonds
and 25 per cent to be deposited in the account which shall be released only
after 4 years. While releasing the amount after 4 years, the Income-tax
Authorities can release the same only when there is no outstanding amount due
towards them from the petitioner.”

47. Business expenditure- Disallowance u/s. 14A – A. Y. 2008-09- Where securities in question constituted assessee’s stock-in-trade and assessee did not hold securities to earn dividend or interest but traded in them and dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom, same would not be subject to provisions of section 14A

Principal CIT vs. State Bank of Patiala; [2017] 78
taxmann.com 3 (P&H):

The assessee held shares and securities as stock-in-trade and
not for earning dividend. Incidentally, the assessee earned dividend which was
exempt from tax. For the A. Y. 2008-09, the assessee claimed that no
disallowance was warranted u/s. 14A of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”), as the shares were
held as stock-in-trade and not as investment for earning dividend. The learned
Assessing Officer rejected the claim and made disallowance u/s. 14A applying
Rule 8D. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i)   What is of vital importance in the above
judgment are the observations emphasised by us. Each of them expressly states
that what is disallowed is expenditure incurred to “earn” exempt
income. The words “in relation to” in section 14A must be construed
accordingly. Thus, the words “in relation to” apply to earning exempt
income. The importance of the observation is this.

ii)   We have held that the securities in question
constituted the assessee’s stock-in-trade and the income that arises on account
of the purchase and sale of the securities is its business income and is
brought to tax as such. That income is not exempt from tax and, therefore, the
expenditure incurred in relation thereto does not fall within the ambit of
section 14A.

iii)   Now, the dividend and interest are income.
The question then is whether the assessee can be said to have incurred any
expenditure at all or any part of the said expenditure in respect of the exempt
income viz. dividend and interest that arose out of the securities that
constituted the assessee’s stock-in-trade. The answer must be in the negative.
The purpose of the purchase of the said securities was not to earn income
arising therefrom, namely, dividend and interest, but to earn profits from
trading in i.e. purchasing and selling the same. It is axiomatic, therefore,
that the entire expenditure including administrative costs was incurred for the
purchase and sale of the stock-in-trade and, therefore, towards earning the
business income from the trading activity of purchasing and selling the
securities. Irrespective of whether the securities yielded any income arising
therefrom, such as, dividend or interest, no expenditure was incurred in
relation to the same.

iv)  In CCI Ltd. vs. JCIT [2012] 250 CTR 291
(Karn), the Karnataka High Court held that when the assessee has not
retained shares with the intention of earning dividend income and that the
dividend income is incidental to the business of sale of shares it cannot be
said that the expenditure incurred in acquiring the shares has to be
apportioned to the extent of dividend income and that should be disallowed from
deduction.

v)   A financial decision of an assessee that
trades in securities may and, in fact, would factor in the dividend or interest
that the securities it acquires as its stock-in-trade yields or is likely to
yield. Such a decision would be taken for acquisition, retention and disposal
of the securities. That, however, is a financial consideration not with a view
to earning the dividend or interest but with a view to assessing the price at
which the security ought to be acquired, retained and sold. In other words,
such dividend or interest is an aspect that the assessee takes into
consideration for incurring the expenditure for the purpose of acquiring the
stock-in-trade and dealing with it thereafter as well as for the sale thereof.
This is entirely different from saying that the expenditure is incurred for
earning the dividend or interest. Once it is found that no expenditure was
incurred in earning this income, there would be no further expenditure in
relation thereto that falls within the ambit of section 14A.”

53. TDS- Fees for technical services or for execution of contract-Sections 9(1)(vii), 194C, 194J and 201(1) – A. Y. 2011-12- Deployment of technical personnel not for and on behalf of customer but for and on behalf of contractor for execution of contract- Consideration paid not for professional or technical services rendered to assessee- Section 194C is applicable and not 194J

Principal CIT(TDS) Vs. BHEL; 390 ITR 322 (P&H):

For the A. Y. 2012-13, the Assessing Officer found that the
assessee had made payments to five contractors in respect of various contracts
and deducted tax in respect thereof u/s. 194C Act, at the rate of 2% and paid
to the Government treasury. He found that all the contracts involved the
provision of professional and technical services which fell within the ambit of
the provisions of section 194J and not u/s. 194C. The Assessing Officer held
that the contracts were not only for the erection and installation work, but
also for the commissioning, testing and trial operation of the various
equipment and other related machinery and that under the terms of the contract
it was the duty of the contractor to provide all types of labour, supervisors,
engineers, inspectors, measuring and testing equipments, testing and
commissioning for the execution of the project in accordance with the
specifications of the assessee. He held that the level of human intervention
was high and sophisticated and accordingly held the assessee to be in default
u/s. 201(1A) of the Act for not deducting tax at source u/s. 194J. The
Commissioner (Appeals) held that the scope of the work given to the
sub-contractors involved construction work, welding, erection, alignment,
transportation of equipment and materials with the help of machines which did
not fall within the scope of technical services as defined in Explanation 2 to
section 9(1)(vii). He also held that merely because technical personel were
employed in the execution of contract it did not follow that the contract was
one for technical services. He allowed the appeal filed by the assessee. 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 contract entered into between the
assessee and each of the contractors did not involve supply of professional and
technical services at least within the meaning of section 194J Act. Therefore,
considerations paid under the contracts were not for professional or technical
services rendered by the contractors to the assessee and section 194J was not
applicable.

ii)   The technical personel were deployed not for
and on behalf of the customer, but for and on behalf of the contractor itself
with a view to ensuring that the contractor supplied the equipment in
accordance with the contractual specifications. The nature of human
intervention is reflected in the terms and conditions of the agreement itself.

iii) Questions are decided in favour of the
assessee. The appeal is, therefore, dismissed.”

28. TDS – Interest u/s. 28 of Land Acquisition Act- capital gain or income from other sources – Sections 45, 56 and 194A – Interest assessable as capital gain – Tax not deductible at source on such interest

Movaliya Bhikhubhai Balabhai vs. ITO; 388
ITR 343 (Guj):

Pursuant to acquisition of land of the
assessee, by a Court order dated 23/03/2011, additional compensation was
awarded with interest. The executive engineer proposed to deduct tax at source
of Rs. 2,07,416/- u/s. 194A. The assessee made an application to the Assessing
Officer u/s. 197 to issue certificate
for Nil deduction of tax. The Assessing Officer rejected the application.

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

“i)  In the case of CIT vs.
Ghanshyam (HUF) 315 ITR 1 (SC), the Supreme Court held that it is clear
that whereas interest u/s. 34 of the Land Acquisition Act, 1894 is not treated
as a part of income subject to tax, interest earned u/s. 28, which is on
enhanced compensation or consideration making it exigible to tax u/s.
45(5).  The substitution of section 145A
by the Finance (No. 2) Act, 2009 was not in connection with the decision of the
Supreme Court in CIT vs. Ghanshyam (HUF) 315 ITR 1 (SC), but brought to
mitigate the hardship caused to the assessee on account of the decision of the
Supreme Court in Rama Bai vs. CIT 181 ITR 400 (SC), whereby it was held
that arrears of interest computed on delayed or enhanced compensation shall be
taxable on accrual basis.

ii)  Therefore, the words
“interest received on compensation or enhanced compensation” in section 145A of
the Act have to be construed in the manner interpreted by the Supreme Court in CIT
vs. Ghanshyam (HUF) 315 ITR 1 (SC). As a necessary corollary, therefore,
the payment made u/s. 28 of the 1894 Act is interest as envisaged u/s.
145A  and cannot be treated as income
from other sources.

iii) The Assessing Officer was not
justified in requiring the deduction of tax at source u/s. 194A in respect of
such interest. The assessee was, therefore, entitled to refund of the amount
wrongly deducted u/s. 194A .”

27. Revision – Limitation – Section 263 – A. Y. 2007-08 – Reassessment in respect of items other than item sought to be revised by Commissioner – Period of limitation begins from original assessment – Not from date of reassessment in which item was not in question

I. G. Electronics India Pvt. Ltd. vs.
Principal CIT; 388 ITR 135 (All):

For the A. Y. 2007-08, the assessment u/s.
143(3) was completed on 31/10/2011. Sales tax incentive received from UP
Government was treated as revenue receipt, but the sales tax subsidy received
from the Maharashtra Government was not treated as revenue receipt and
accordingly was accepted as capital receipt. Subsequently, a reassessment order
u/s. 147 was passed on 15/03/2015 making disallowance u/s. 40(a)(i), on account
of non-deduction of tax at source. Thereafter, on 08/06/2016, the Principal
Commissioner issued notice u/s. 263, on the ground that the sales tax subsidy
accruing to the assessee under the scheme of the Government of Maharashtra was
not brought to tax as revenue receipt.

The Allowed High Court allowed the writ
petition filed by the assessee challenging the notice u/s. 263 and held
as under:

“i)  Limitation prescribed u/s.
263(2) for exercise of power u/s. sub-section (1) thereof is two years from the
end of financial year in which the order sought to be revised was passed.

ii)  The reassessment order was
not for review or reassessment of the entire case but only in respect of a
particular item. In all other respects, the original assessment order was
maintained, and addition made by assessment order dated 26/03/2015 was added in
the income assessed in the original assessment order. Though the notice u/s.
263(1) referred to the reassessment order, in fact, it referred to a
discrepancy in the regular assessment order dated 31/10/2011, wherein the
incentive of value added tax from Maharashtra Government received by the
assessee was allowed to be deducted. This incentive had no concern with the
reassessment proceedings in the order dated 26/03/2015.

iii)  Since the notice issued
by the Principal Commissioner was in reference to a discrepancy in the original
assessment order dated 31/10/2011 and not the reassessment order dated
26/03/2015, the limitation would run from the dated of the regular order of
assessment and therefore, the notice was barred by limitation prescribed u/s.
263(2). Impugned notice dated 08/06/2016 is quashed.”

26. TDS – Payment of salary to priests and nuns of catholic institutions – Ultimate beneficiaries congregation or dioceses with benefit of exemption from tax – No liability to deduct tax at source

Holy Cross Primary School vs. CBDT; 388
ITR 162 (Mad):

The assessee filed writ petition for
quashing of the letter dated 07/10/2015 of the Income-tax Department and the
Circular of the Director of Treasuries dated 26/10/2015 insisting in deduction
of tax at source from the salaries of the religious nuns and priests in the
service of the assessee school contending that, the concerned religious priests
and nuns did not take the salaries, but were ultimately depositing it with the
concerned diocese or congregation or institution only which are exempt from tax.

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

“Tax need not be deducted at source in so
far as the payments of salaries of the religious priests and nuns of the
catholic institutions who were attached to the respective congregation or
dioceses who were already exempted from the purview of the income tax liability
as on the date of the order.”

25. Capital gains – Section 50C: A. Y. 2006-07 – Stamp duty value higher than sale price- Reference to DVO – Valuation by DVO binding on AO

Principal CIT vs. Ravjibhai Nagjibhai
Thesia; 388 ITR 358 (Guj):

In the A. Y. 2006-07, the assessee sold his
land for a consideration of Rs. 16 lakh. The Stamp Valuation Authority valued
the property at Rs. 2,33,70,600/-. The case was therefore referred to the DVO
at the request of the assessee u/s. 50C(2). The DVO valued the property at Rs.
24,15,000/-. However, the Assessing Officer passed the assessment order before
the report of the DVO was received treating the difference of Rs. 2,17,70,600/-
as undisclosed income. The Commissioner (Appeals) and the Tribunal deleted the
addition and held that the capital gain has to be computed u/s. 50C on the
basis of the valuation by the DVO.

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

“i)  Once a reference was made
by the Assessing Officer u/s. 50C of the Act, to the DVO, for valuation of the
capital asset, the Assessing Officer was obliged to complete the assessment in
conformity with the estimation made by the DVO.

ii)  Under sub-section (2) of
section 50C, it was such lower valuation which was required to be taken into consideration
for the purposes of assessment. There was no legal infirmity in the orders of
the appellate authorities warranting interference.”

31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31st October 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29th October, 2010 (in respect of
AY 2007-08) and 17th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31st
March, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i)   The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21st February, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27th September, 2013.

ii)   In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii)   Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv)  Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.

v)  For
the aforementioned reasons, the final assessment orders dated 31st
March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential
demand notices issued by the AO and the initiation of penalty proceedings are
hereby set aside.”

30 Speculation business – Loss – Section 73, Explanation – Penalty u/s. 271(1)(c) – A. Y. 2001-02 – Allotment of shares – No purchase of shares- Loss on sale of shares – Not from speculation business – Question of penalty u/s. 271(1)(c) also would not arise

AMP Spinning and Weaving Mills P. Ltd. vs. ITO; 393 ITR
349 (Guj):

The assessee was a dealer in chemicals and in shares. In the
public issues of certain companies, the assessee applied for and also allotted
shares which it eventually sold and in the process suffered losses. The
assessee claimed set off of the loss as business loss. The Assessing Officer
rejected the claim and contention of the assessee that the application for
shares from the primary market and loss incurred on sale of such shares did not
fall within the purview of speculation loss under the provisions of the
Explanation to section 73 of the Act. This was upheld by the Tribunal. However,
the Tribunal cancelled the consequent penalty imposed by the Assessing Officer
u/s. 271(1)(c) of the Act.

The Gujarat High Court allowed the assessee’s appeal and
dismissed the appeal filed by the Department and held as under:

“i)   Section 73 of the
Income-tax Act, 1961 deals with carry forward and set off of losses from
speculation business. The Explanation to section 73 is a deeming provision
whereunder if the specified conditions are satisfied, purchase and sale of
shares are deemed speculation activities. There is a vital difference between
“creation” and “transfer” of shares. The words “allotment of shares” have been
used to indicate the creation of shares by appropriation out of the
unappropriated share capital to a particular person. A share is a chose in
action. A chose in action implies existence of some person entitled to the
rights in action in contradistinction from rights in possession. There is a
difference between issue of a share to a subscriber and the purchase of a share
from an existing shareholder. The first case is that of creation whereas the
second case is that of transfer of a chose in action.

ii)   Getting the shares
on allotment did not amount to purchase of the shares. The loss incurred on the
sale of the shares was not a loss in speculation business.

iii)   Accordingly, the
question of levy of penalty u/s. 271(1)(c) would not arise.”

29 Income Declaration Scheme 2016 – Assessee not filing returns for A. Y. 2010-11 onwards owing to internal problems – Declaration under Scheme for A. Y. 2010-11 onwards – Advance tax paid and tax deducted at source for those years – Assessee entitled to credit of advance tax and TDS

Kumudam Publications Pvt. Ltd. vs. CBDT; 393 ITR 599
(Del):

For the A. Y. 2010-11 onwards, the assessee company did not
file returns due to non-appointment of statutory auditor and certain internal
disputes in the company which led to litigations. It deposited the advance tax
and the tax deducted at source and Rs. 16,49,23,433 had been paid towards tax
liability by or on behalf of it. Anticipating that proceedings might be
initiated by the Department for its failure to file returns u/s. 139, the
assessee applied u/s. 119(2)(b) and sought permission to file returns ”based on
the unaudited accounts or in any other manner”. Pending disposal of the
application, the assessee also made a declaration under the Income Disclosure
Scheme, 2016 for all the assessment years on the basis of its unaudited
accounts. The details of the total tax payable including the interest and
penalty under the Scheme was Rs. 19.60 crore against which the advance tax paid
and the tax deducted at source to its benefit was Rs. 16.49 crore and the net
due of Rs. 3.11 crore, after giving credit to the sums paid, were disclosed by
the assessee in its declaration. In response to the declaration, the assessee
received an order from the Principal Commissioner demanding tax of Rs. 19.60
crore. The assesee’s representation and reminder letters to the Department and
e-mails to the Chairman CBDT requesting clarification that the net tax payable
was Rs. 3.11 crore only, were not responded to.

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

“i)   There was no bar,
express or implied which precluded the reckoning or taking into account of
previously paid amounts which has nexus with the period sought to be covered by
the Income Declaration Scheme, 2016. There should be something which provides a
clear insight that Parliament wished that past amounts were not to be reckoned
at all for purpose of payments. All that the words of the statute enjoined were
that the tax and surcharge amounts under the Scheme “shall be paid on or before
a date to be notified”. Those words necessarily referred to all payments and
were not limited in their meaning to what was paid immediately before, or, in
the proximity of the declaration filed.

ii)   The provisions of
section 182 of the Finance Act, 2016 stated that for the purposes of the Income
Declaration Scheme, 2016, the undefined terms and expressions should be
understood in terms of the Income-tax Act, 1961, by incorporating those into
the 2016 Act and the Scheme.

iii)   “Undisclosed
income” which was the foundational provision to be invoked by the declarant,
thus, was based on the definition in section 132(1)(c) of the 1961 Act. The
only bar discernible under the scheme as evident from section 189 of the 2016
Act was that “a declarant under the Scheme shall not be entitled, in respect of
undisclosed income declared or any amount of tax and surcharge paid thereon, to
reopen any assessment or reassessment made under the Income-tax Act, 1961 or
the Wealth-tax Act, 1957, or claim any setoff or relief in any appeal, reference
or any other proceeding in relation to any such assessment”. Therefore, there
was no bar for an assessee or declarant to claim credit of advance tax amounts
paid previously which pertained to the assessment years or periods for which it
sought benefits under the Scheme, 2016.

iv)  The respondents were
directed to process the assessee’s application under the 2016 Scheme giving
adjustment or credit to the amounts paid as advance tax and tax deducted at
source to its account.”

28 Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2006-07 – Acquisition of machinery in previous year and installation during A. Y. – Assessee entitled to additional depreciation at 20%

Princ. CIT vs. IDMC Ltd.; 393 ITR 441 (Guj):

The assessee was in the business of fabrication and
manufacture. For the A. Y. 2006-07, in assessment u/s. 143(3), its total income
was assessed at Nil after the Assessing Officer allowed its claim on additional
depreciation of 20% u/s. 32(1)(iia) of the Act, 1961, on account of its newly
purchased machinery. The machinery was purchased in the preceding year, but was
installed in the relevant year (A. Y. 2006-07). The Department audit party
raised the objection that as the machinery was purchased before March 31, 2005,
the claim of additional depreciation was not allowable to the assessee.
Therefore, in reassessment proceedings, the Assessing Officer disallowed the
assessee’s claim for additional depreciation. The Appellate Tribunal allowed
the assessee’s claim.

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

“i)   The purpose and
object of section 32(1)(iia) of the  Act,
1961 is to encourage the manufacturing sector by allowing the deduction of a
further sum equal to 20% of the actual cost of machinery or plant acquired and
installed. Therefore, the underlying object and purpose is to encourage the
industries by permitting the assessee in setting up the new undertaking or
installing a new plant and machinery to claim the benefit of additional
depreciation.

ii)   No error had been
committed by the Appellate Tribunal in allowing the additional depreciation at
the rate of 20% u/s. 32(1)(iia) of the Act on the plant and machinery installed
by the assessee after March 31, 2005, the year in question. The purpose and
object of granting additional depreciation u/s. 32(1)(iia) was to encourage
industries and to give a boost to the manufacturing sector by permitting the
assessees setting up new undertakings or installation of new plant and
machinery an additional depreciation allowance.

iii)  Thus
the provisions of section 32(1)(iia) was required to be interpreted reasonably
and purposively as the strict and literal reading of section 32(1)(iia) would
lead to an absurd result denying the additional depreciation to the assessee
though the assessee had installed new plant and machinery. The question of law
is answered against the revenue and in favour of the assessee.”

27 Charitable purpose – Exemption u/s. 10(23C)(via) – A. Y. 2011-12 – Application for approval cannot be rejected on ground assessee charges fees for educational courses or it entered into arrangements with other institutions to set up satellite centers to give medical treatment or its treatment involved layered subsidisation programme – Rejection of application not justified

Venu Charitable Society vs. DGIT; 393 ITR 63 (Del):

The assessee was registered u/s. 12A of the Act,1961 and also
obtained approval u/s. 80G of the Act. It was also notified for exemption u/s.
35AC of the Act by the National Committee for Promotion of Social and Economic
Welfare. The assessee was notified u/s.10(23C)(via) of the Act for the A. Ys.
2005-06 to 2007-08. But it did not file application for renewal of exemption
for the A. Ys. 2008-09 to 2010-11. In the return of income filed for those
years, the assessee claimed exemption u/s. 11 of the Act in respect of income
earned and applied for charitable purposes, the Assessing Officer while
completing the assessment for the A. Ys. 2005-06 to 2009-10 held that the
activities of the society fell within the ambit of section 2(15) of the Act,
i.e. charitable purpose. The assessee thereafter applied through Form 56D for
grant of exemption u/s. 10(23C)(via) of the Act for the A. Ys. 2011-12 onwards.
The Department rejected the exemption application inter alia on the
ground that (a) the assessee did not exist solely for philanthropic purposes
but for purpose of profit; (b) it had entered into collaboration agreements
with other hospitals and trusts for running satellite hospitals with profit
motive; (c) it provided educational courses such as medical training
programmes, long term super speciality medical programmes in ophthalmology and
was earning profit from those activities; (d) the memorandum of the assessee
society contained objects other than health care; and lastly, that it had made
no application for renewal of exemption u/s. 10(23C)(via) for the A. Ys.
2007-08 to 2010-11.

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

“i)   The objects of the assessee
society were solely for the purpose of education and medical care and not for
purposes of profit. Only if it was found that the assessee was carrying on its
activities for the purpose of profit, contrary to its objects, would the
prescribed authority be justified in rejecting the application for approval
u/s. 10(23C)(via) of the Act.

ii)   Merely because it
charges fees for educational courses or that it enters into arrangements with
other institutions to set up satellite centres, to give medical treatment, or
that its treatment involved a layered subsidisation programme, that would not
justify rejection of its application. Therefore, denial of exemption u/s. 10
23C)(via) was not justified and the order was to be quashed.

iii)  The
Revenue is directed to consider the petitioners application, process it and
pass necessary orders in accordance with law within four weeks from today.”

26 Capital gains – Transfer – Joint development agreement (JDA) – Section 2(47), r.w.s. 53A of the Transfer of Property Act, 1882 – A. Y. 2008-09 – Assessee was member of cooperative housing society which owned certain land – Society entered into tripartite JDA with developers but the JDA was not registered – Assessee was entitled to receive monetary consideration partly in money and balance as a part of built up property – During relevant assessment year, assessee actually received proportionate amount – Unregistered JDA does not fall u/s. 53A of Transfer of Property Act; does not amount to transfer – Tribunal was justified in holding that assessee was not liable to capital gain tax

Princ. CIT vs. Dr. Amrik Singh Basra; [2017] 82
taxmann.com 186 (P & H):

The assessee was a member of a cooperative housing building
society. The society entered into a tripartite ‘JDA’ with developers, viz.,
‘HASH’ and ‘THDC’ under which it was agreed that HASH and THDC would undertake
development of land owned and registered in the name of the society. The agreed
consideration to be paid by the developers was to be disbursed to each individual
member of the society partly in monetary and balance in terms of built up
property. The assessee was entitled to receive proportionate amount.

The Assessing Officer held that impugned transaction involved
allowing the possession of the immovable property to be taken or retained in
part performance of contract of the nature referred to in section 53A of 1882
Act; and thus, it would be treated as transfer for purposes of Income-tax Act.
The Assessing Officer concluded that the assessee was liable to tax during
current assessment year under consideration on the entire amount
received/receivable in future under the head ‘capital gains’. Commissioner
(Appeals) and the Tribunal deleted the addition.

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

“i)   The High Court in
the case of C. S. Atwal vs. CIT [2015] 378 ITR 244/234 Taxman 69/59
taxmann.com 359 (P&H) had arrived at the conclusion that:

–     The parties had
agreed for pro-rata transfer of land.

–     No possession had
been given by the transferor to the transferee of the entire land in part
performance in JDA so as to fall within the domain of section 53A of 1882 Act.

–     The possession
delivered, if at all, was as a licencee for the development of the property and
not in the capacity of a transferee.

–     Further section 53A
of 1882 Act, by incorporation, stood embodied in section 2(47)(v) and all the
essential ingredients of section 53A of 1882 Act were required to be fulfilled.
In the absence of registration of JDA, the agreement does not fall u/s. 53A of
the 1982 Act and consequently s. 2(47)(v) does not apply.

ii)   The
appellant-revenue has not been able to controvert the applicability of the
decision rendered in C.S. Atwal’s case (supra). The substantial
questions of law claimed in these appeals are answered accordingly.
Consequently, both the appeals stand dismissed.”

25 Business expenditure – Capital or revenue – Section 37 – A. Y. 2005-06 – Lease rent paid for plot allotted for period of 10 years by Gujarat Maritime Board – Allowable as revenue expenditure

CIT vs. Mahavir Inductomelt P. Ltd.; 394 ITR 50(Guj):

For the A. Y. 2005-06, the assessee claimed deduction of a
sum of Rs. 18,66,450 as premium paid on plot allotted by the Gujarat Maritime
Board as expenditure in its business of ship breaking. The assessee paid this
amount as premium on leasehold property. According to the Assessing Officer,
the assessee acquired this plot from the Board under lease and the lease
agreement was for 10 years and accordingly, this was a capital asset and
payment made for acquiring capital asset was capital expenditure. The Assessing
Officer allowed deduction only of one tenth of the expenditure. The
Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i)   The amount paid by
the assessee with respect to plot allotted by the Board was allowable as
revenue expenditure.

ii)   The
appeal is dismissed.“

24 Business expenditure – Accrued or contingent liability- A. Y.s. 2001-02 and 2002-03 – Award of damages with interest in arbitration made rule of court – Assessee disputing award of damages and interest and dispute pending before Division Bench – Grant of stay by Division Bench does not relieve assessee from liability of interest – Entitled to deduction on interest

National Agricultural Co-operative Marketing Federation of
India Ltd. vs. CIT; 393 ITR 666 (Del):

For the A.Y.s 2001-02 to 2003-04, the assessee claimed
deduction of interest payable to A, on account of an arbitration award on the
outstanding amount of the award. The Court made the award rule of the Court in
proceedings initiated by A  u/s.5 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 and held that  A was entitled to interest. On appeal by the
assessee against such award, the Court granted stay of the execution of the
decree. The Assessing Officer disallowed the claim for deduction by the
assessee for the A. Y. 2001-02 and 2003-04 and held that the liability of the
assessee was contingent and that it had not been entered in the books of account.
The Appellate Tribunal allowed deduction of interest for the A. Y. 2003-04.

The members of the Appellate Tribunal who heard the appeals
for the A. Y.s. 2001-02 and 2002-03 disagreed with the earlier order for the A.
Y. 2003-04. A reference was made to the Special Bench of the Appellate Tribunal
which held that the assessee had not incurred the liability for the payment of
the interest at the end of the assessment years in question and that under the
mercantile system of accounting, deduction could be granted only where the
incurring of the liability was a certainty. It held that there was no legally
enforceable liability of interest that existed against the assessee. It further
held that where the claim to damages and interest thereon was disputed by the
assessee in a Court, the deduction could not be allowed for the interest on such
damages. It concluded that as a result of the stay order granted by the
Division Bench of the Court, the liability of the assessee to pay interest
remained suspended from the date of stay.

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

“i)   With the award
being made rule of the Court by a single judge, the mere fact that the judgment
and decree was stayed by the Division Bench would not relieve the assessee of
its obligation to pay in terms thereof to A. Such liability had commenced in
the previous year in which the judgment and decree was passed by the single
judge. The order of the Special Bench of the Appellate Tribunal confirming the
disallowance of interest was unsustainable.

ii)   Appeal
is allowed.”

23 Appeal to High Court – Limitation – Appeal by Department – Receipt of copy of order of Tribunal by any of officers in Department including Commissioner (Judicial) will trigger period of limitation – Internal arrangements by Department changing jurisdiction of its officers will not alter period of limitation – Administrative instructions for administrative convenience of Department do not override statute particularly section 260A(2)(a)

CIT vs. Odeon Builders P. Ltd.; 393 ITR 27 (Del)(FB):

On 29/10/2014, the Tribunal had passed a common order in a
batch of 115 cases. A certified copy thereof was received in the office of the
CIT, Ghaziabad on 19/12/2014 and in the office of the Principal Commissioner
Delhi on 28/04/2015. The Department filed an appeal before the High Court on
25/08/2015. Assessee contended that the appeal was filed beyond the limitation
period. The Department explained that at the time the appeals were heard by the
Tribunal, the Commissioner, Ghaziabad was the concerned Commissioner and pursuant
to certain administrative orders issued by the Department, the jurisdiction
relating to the assessee was transferred to the Commissioner, Delhi. The
certified copy was received by the Commissioner, Delhi on 28/04/2015 and the
Commissioner, Delhi thereafter took a decision regarding filing of appeals.
Another appeal against the order of the Tribunal dated 16/05/2014 was filed by
the Department in the High Court on 14/01/2015. The assessee contended that in
accordance with the stamp borne on the certified copy of the order, the Copy of
the order was available with the Commissioner (Judicial) on July 23, 2014 and
with the Commissioner (Central) on July 25, 2014 and therefore, the appeal
which was filed on January 14, 2015 was beyond 120 days from the date of
receipt of the certified copy. The Department contended that limitation would
start to run only from the date of service of the order of the Tribunal on the
concerned Commissioner having jurisdiction over the assessee.

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

“i)   The word “received”
occurring in section 260A(2)(a) of the Income-tax Act, (hereinafter for the
sake of brevity referred to as the “Act”) 1961 would mean received by
any of the named officers of the Department, including the Commissioner
(Judicial). The provision names four particular officers, i.e., the Principal
Commissioner, Commissioner, Principal Chief Commissioner, and Chief
Commissioner of Income Tax. These were the only designated officers who could
receive a copy of the order. In the absence of a qualifying prefix “concerned”,
the receipt of a copy of the order of the Tribunal by any of those officers in
the Department including the Commissioner (Judicial), would trigger the period
of limitation.

ii)   The statute was not
concerned with the internal arrangements that the Department might make by
changing the jurisdiction of its officers. It was for the officer of the
Department who first received a copy of the Tribunal’s order to reach in time
to the officer who was to take a decision regarding the filing of an appeal.

iii)   Where there was a
common order of the Tribunal covering the several appeals, limitation would
begin to run when a certified copy was received first by either the
Commissioner (Judicial) or one of the officers of the Department and not only
when the Commissioner “concerned” receives it. When the same Commissioner had
jurisdiction for more than one assessee, the limitation would begin to run for
all from earliest of the dates when the Departmental representative of the
Commissioner (Judicial) or any Commissioner first receives the order in any of
the cases forming part of the batch disposed by the common order.

iv)  If there were four
separate orders passed, the limitation would begin to run when such separate
orders are received first by any officer of the Department.

v)   Instructions issued
by the Department for its administrative convenience could not alter the time
when limitation would begin to run u/s.260A(2)(a) of the Act. Administrative
instructions are for the administrative convenience of the Department and would
not override the statute, in particular section 260A(2)(a) of the Act.”

37. Appellate Tribunal – Rectification of mistake – Section 254(2) – Mistake can be on part of litigants or his advisors

Binaguri Tea Co. Pvt. Ltd. vs. Dy. CIT; 389 ITR 648 (Cal):

While assessing the fringe benefit tax, the Assessing Officer
gave the assessee the benefit applicable under rule 8 of the Income-tax Rules
1962. However, invoking section 154, of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”) the Assessing
Officer withdrew the benefit. The Commissioner(Appeals) confirmed the
rectification order. The assessee filed an appeal before the Appellate Tribunal
contending that the Commissioner (Appeals) had erred in holding that Rule 8 had
no applicability while calculating the eligible expenses of a company engaged
in the business of cultivation, manufacture and sale of tea for the purpose of
fringe benefit tax. Based on the Tribunal decisions against the assessee, the
assessee was advised by the advisors not to press the appeal. Accordingly, the
assessee did not press the appeal and the Appellate Tribunal dismissed the
appeal. It was subsequently noticed that the said Tribunal decisions were
reversed by the Calcutta High Court and the issue was decided in favour of the
assessee even before the dismissal order of the Tribunal. Therefore, within two
months of the order of the Tribunal, the assessee applied for restoration of
the appeal u/s. 254(2) of the Act which was rejected by the Tribunal for the
following reasons.

“The learned counsel for
the assessee reiterated the stand of the assessee as contained in the
miscellaneous application. We are of the view that jurisdiction u/s. 254(2) of
the Act can be exercised only to rectify an error apparent on the face of the
record. The contention in the miscellaneous application, even if true, cannot
give rise to any mistake in the order of the Tribunal apparent on the face of
the record. The miscellaneous application, in our view, cannot therefore be entertained
and the same is hereby rejected.”

On appeal by the assessee, the Calcutta High Court allowed
the appeal and held as under:

“i)   Section 254(2) of the Act did not provide
that it had to be a mistake solely on the part of the Appellate Tribunal to
recall an order and that the statutory power could also be exercised in the
case of mistake apparent on the part of the litigants or his advisors.

ii)   Neither the Appellate Tribunal nor the
assessee was aware of the judgment of the jurisdictional High Court. Therefore,
the prayer for leave to withdraw the appeal and the order allowing the prayer
were both based on a mistake. The order of the Tribunal is set aside.

iii) The Tribunal shall hear the appeal on
merits.”

45. Speculative transaction – Business loss – A. Y. 2009-10 – Hedging transactions entered into to cover variation in foreign exchange rate – Impact on business of import and export of diamond – Transactions entered only in regular course of business activity – Not speculative transactions

CIT vs. D. Chetan and Co.; 390 ITR 36 (Bom):

The Assessee was engaged in the business of import and export
of diamonds. For the A. Y. 2009-10, the assessee explained that the amount of
Rs. 78.10 lakhs claimed as loss was on account of hedging transactions entered
into to safeguard variation in exchange rates affecting its transact5ions of
import and export. The Assessing Officer disallowed the claim on the ground
that it was a notional loss of a contingent liability debited to the profit and
loss account. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim.

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

“i)   The Tribunal concluded that the transaction
entered into by the assessee was 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 findings of fact were not shown to be perverse in
any manner.

ii)   The Assessing Officer in the assessment order
did not find that the transaction entered into by the assessee was speculative
in nature. At no point of time did the department challenge the assertion of
the assessee that the activity of entering into forward contract was in the
regular course of its business only to safeguard against the loss on account of
foreign exchange variation. The Department never contended that the transaction
was speculative but only disallowed on the ground that it was notional.

iii)   Thus, it was to be concluded that the
transactions entered were only in regular course of business and not speculative.
Therefore, no substantial question of law arose.”

44. Salary – Perquisite – Fringe Benefit Tax – Sections 17 and 115WA of the Act – Once the employer is taxed on the fringe benefits same cannot be taxed as perquisite in hands of employee

Kamlesh K. Singhal vs. CIT; 389 ITR 247 (Guj):

The assessee was employed in ONGC. For the A. Y. 2007-08, the
Assessing Officer issued notice u/s. 148 of the Act, on the ground that his
employer had reimbursed the conveyance maintenance and repair expenditure and
uniform allowance to the assessee but the employer had neither reflected it in
the salary certificate issued nor had deducted the tax at source on those
amounts. Pursuant to the notice, he passed an order u/s. 143(3) r.w.s. 147
levying 20% and 100% tax respectively, on the fringe benefits and made
additions to the assessee’s income accordingly. The assessee filed a revision
petition contending that it would amount to double taxation as his employer had
paid fringe benefits tax u/s. 115WA. The Commissioner rejected the petition.

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

“i)   Once a certain benefit was held to be a
fringe benefit and the employer was taxed accordingly under Chapter XII-H of
the Act, the same benefit could not be included in the income of the
assessee-employee treating it as a perquisite.

ii)   The disallowance of 20% of the reimbursed
conveyance and repair expenses and 100% of the uniform allowance made by the
assessing Officer was reversed. The Assessing Officer was to pass a
consequential order accordingly. The order passed by the Commissioner was
unsustainable.”

43. Income – Accrual – A. Ys. 2005-06 to 2007-08 – Assessee obtaining contract – Work shared by assessee with another person – Amount received for work shared proportionate to work – Amount received by assessee and such other person shown separately – No evidence of sub-contract – Amount received by other person cannot be added to assessee’s income

CIT vs. G. Balraj; 390 ITR 50 (Karn):

The assessee was a PWD contractor and according to the
assessee, he had entered into an agreement with B Construction, whereby a
particular percentage of the income of the contract was to be shared in a
particular proportion. The assessee had shown his income to the extent of the
amount received by it. However, in the assessment proceedings, the Assessing
Officer finding that as tax was deducted at source from the total amount of the
contract(received by the assessee as well as by B Construction), brought the
entire amount under the contract to tax in the assessee’s hands. The Tribunal
deleted the addition.

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

“i)   There was enough material to show that the
amount received from the contract was directly shared by the assessee and B
Construction in accordance with their proportionate share and that it was not a
case where the money/the amount realised from the contract was apportioned as
the income of the assessee and thereafter, a portion of it or a major portion
was paid by the assessee to B Construction. When after receipt of the contract
amount, the shares were identified and taken by both the parties of the joint
venture, it could not be treated as sub-contract.

ii)  There
was no material brought by the Revenue to show that there was any contract
entered into by the assessee to assign the work to B Construction as
sub-contractor. Further, when the respective share was received by the
assessee, it had been shown as the income by the assessee in the return of
income. Similarly, for the respective share of B Construction it had shown its
income of the amount received by it. Under these circumstances, the findings of
the Tribunal that it was a joint venture between the assessee and B
Construction was not contrary to the material or based on conjectures or
surmises.”

42. Educational institution – Exemption u/s. 10(23C)(vi) of the Act – A. Y. 2014-15 – Application for approval can be filed before end of financial year and further information if needed can be sought from assessee – Application filed in the financial year rejected on the ground that it was filed prematurely – Not justified

Shri Guru Ram Dass Ji Education Trust vs. CCIT; 389 ITR
423 (P&H):

The assessee-trust was running educational institutions.
Since its receipts exceeded Rs. 1 crore in the F. Y. 2013-14, it made an
application for approval u/s. 10(23C)(vi) of the Act for the A. Y. 2014-15 onwards. The application was rejected on the
ground that the assessee had prematurely filed the application and that it
could only have been filed after the expiry of the F. Y. 2013-14 and before
September 30, 2014.

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

“i)   The fourteenth proviso to section
10(23C) of the Income-tax Act, 1961 states that an application under the
section can be filed on or before 30th September of the relevant assessment
year, from which the exemption is sought. The proviso simply gives an outer
date for making an application and does not say that the application is to be
made between 1st April and 30th September of the
assessment year. If an application is filed prior to 1st April of
the relevant assessment year and after filing thereof, any further information
is still needed by the Department, before taking a final decision thereon, that
information can be sought from the applicant.

ii)   A trust might know or have reason to believe
prior to 1st April that its receipts were likely to exceed Rs. 1
crore. There was no reason why such an institution ought not to be permitted to
make the application even before the 1st day April of the relevant
year.

iii)   All the accounts for the year ending March
31, 2014, when asked for, were duly provided by the assessee much before the
passing of the order. Further, note 1(a) and note 3 to Form 56D clearly
indicated that the application could be filed even prior to 1st
April of the relevant assessment year, from which the exemption was sought.

iv)   The
Chief Commissioner was directed to consider the application filed by the
assessee for the grant of exemption u/s. 10(23C) of the Act, on the merits.”

41. Charitable purpose – Charitable trust – Exemption u/s. 11 of the Act – A. Y. 2008-09 – Expenditure incurred in excess of income from accumulated funds – Trust entitled to exemption

CIT vs. Krishi Upaj Mandi Samiti; 390 ITR 59 (Raj):

The assessee, a charitable trust, incurred expenditure for
charitable purposes during the previous year relevant to the A. Y. 2008-09 in
excess of the income derived during the relevant period. The excess expenditure
was incurred by transferring the fund from interest bearing public deposit
account to non-interest bearing public deposit account. The Assessing Officer
held that the excess expenditure having been incurred from charity
fund/accumulated fund of earlier years, the assessee was nor entitled to
exemption u/s. 11(1)(a) of the Act – and accordingly, assessed the income as
the taxable income. The Tribunal held that the assessee was entitled to
exemption u/s. 11 of the Act.

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

“i)   When the income of a trust is used or put to
use to meet the expenses incurred for religious or charitable purposes, it is
applied for charitable or religious purposes. The application of the income for
charitable or religious purposes takes place in the year in which the income is
adjusted to meet the expense incurred for charitable or religious purposes.

ii)   In other words, even if the expenses for
charitable or religious purposes have been incurred in an earlier year and the
expenses are adjusted against the income of a subsequent year, the income of
that year can be said to have been applied for charitable or religious purposes
in the year in which the expenses were incurred for charitable and religious
purposes had been adjusted.

iii)   The Tribunal holding the assessee entitled to
claim exemption u/s. 11(1)(a) of the Act during the relevant assessment year
was justified.”

40. Capital gain – Exemption u/s. 54EC of the Act – A. Y. 2008 -09 – Investment in specified bonds from the amounts received as an advance is eligible for section 54EC deduction – The fact that the investment is made prior to the transfer of the asset is irrelevant

CIT vs. Subhash Vinayak Supnekar (Bom); ITA No. 1009 of
2014 dated 14/12/2016; (www.itatonline.org)

An Agreement to Sale for the subject property was entered
into on 21st February, 2006. The final sale took place under a Sale
Deed dated 5th April, 2007. The assessee invested an amount of Rs.50
lakh from the advance received under the Agreement to Sale in the Rural Electrification
Corporation Ltd. bonds on 2nd February, 2007. The Assessing Officer
as well as the Commissioner of Income Tax (Appeals) held that the assessee is
not entitled to the benefit of section 54EC of the Act, as the amounts were
invested in the bonds prior to the sale of the subject property on 5th
April, 2007. The Tribunal allowed the claim of the assessee by following the
decision of its coordinate bench in Bhikulal Chandak HUF vs. Income Tax
Officer 126 TTJ 545 wherein it has been held that where an assessee makes
investment in bonds as required u/s. 54EC of the Act on receipt of advance as
per the Agreement to Sale, then the assessee is entitled to claim the benefit
of Section 54EC of the Act.

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

“i)   The short question is whether an amount
received on sale of a capital asset as an advance on the basis of Agreement to
Sale and the same being invested in specified bonds before the final sale,
would entitle the assessee to the benefit of Section 54EC of the Act.

ii)   The Sale Deed dated 5th April, 2007
records in clause (d) thereof the fact that the Agreement to Sale had been
entered into on 21st February, 2006 in respect of the subject
property and the amounts being received by the vendor (respondent assessee)
under that Agreement to Sale. Thus, these amounts when received as advance
under an Agreement to Sale of a capital asset are invested in specified bonds
the benefit of Section 54EC of the Act is available. In the above view, the
Tribunal holds that the facts of the present case are similar to the facts
before the Tribunal in Bhikulal Chandak HUF (supra). The Revenue does
not dispute the same before us. Moreover, on almost identical facts, this Court
in Parveen P. Bharucha vs. DCIT, 348 ITR 325, held that the earnest
money received on sale of asset, when invested in specified bonds u/s. 54EC, is
entitled to the benefit of section 54EC. This was in the context of reopening
of an assessment and reliance was placed upon CBDT Circular No. 359 dated 10th
May, 1983 in the context of section 54E.

iii)   The Revenue had preferred an appeal against
the order of the Tribunal in Bhikulal Chandak HUF (supra) to this Court
(Nagpur Bench) being Income Tax Appeal No.68 of 2009. This Court by an order
dated 22nd August, 2010 refused to entertain the Revenue’s above
appeal from the decision of the Tribunal in Bhikulal Chandak HUF (supra).
In the above view, the question as proposed for our consideration in the
present facts does not give rise to any substantial question of law.”

39. Capital gain – Exemption u/s. 54 of the Act – A.Y. 2003-04 – Sale of residential property on 04/02/2003 – Agreement to purchase another residential property on 08/09/2003 and invested the capital gain within specified time – Assessee entitled to exemption u/s. 54 even if there is delay in completing the transaction

CIT vs. Mrs. Shakuntala Devi; 389 ITR 366 (Karn):

The assessee sold a flat
in Mumbai for a total consideration of Rs. 1,71,00,000/- on 04/02/2003 and the
consequent capital gain was Rs. 1,44,68,032/-. The assessee entered into an
agreement for purchase of the another residential property on 08/09/2003 for a
consideration of Rs. 3,25,00,000/- and invested the capital gain for the same.
The assessee’s claim for exemption u/s. 54 for the A. Y. 2003-04 was rejected
by the Assessing Officer on the ground that the transaction has not been
concluded, no registration of the sale deed has taken place and the balance
consideration was yet to be paid. The Tribunal held that the assessee is
entitled to exemption u/s. 54 of the Act.  

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

“i)   The Tribunal had rightly held that the date
of purchase was to be taken as the basis for reconing the period of two years
prescribed u/s. 54 of the Act extending the benefit following therefrom.

ii)   In the instant case the consideration paid by
the assessee under the memorandum of understanding dated 08/09/2003 would fully
cover the consideration of capital gains portion for being eligible to claim
exemption u/s. 54 of the Act.”

38. Business expenditure – Interest on borrowed capital – Section 36(1)(iii) of the Act – A. Y. 1989-90 – Advance of loans at lower rate of interest to subsidiary concerns in financial difficulty for business purposes – Commercial expediency- Assessee entitled to deduction

Hindalco Co. vs. CIT; 389 ITR 430 (All):

The assessee paid interest at the rate of 16% on its
borrowings from the bank. The Assessing Officer found that the assessee had
advanced loans to its subsidiary companies at a lower rate of interest, 6% or
12%. He determined the rate of interest at 12%, as the rate at which loans were
advanced to the sister concerns and disallowed the difference between the
interest at market rate and the rate at which loans were advanced to sister
companies u/s. 36(1)(iii) of the Act. The Tribunal upheld the disallowance.

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

“i)   The financial condition of the assessee’s
sister concerns was not good and to help them run smoothly, the assessee
advanced them loans at a lower rate of interest. Both sister concerns were
subsidiaries of the assessee and there was nothing per se adverse.

ii)   For the welfare and proper functioning of the
sister concerns, the assessee had decided to advance loans so that ultimately
they could function properly, and the assessee being the holding company would
also benefit. Therefore, the loans advanced to its sister concerns were for
commercial expediency and the assessee was entitled to the deduction of
interest u/s. 36(1)(iii) of the Act.”

6. Settlement Commission – Application for settlement of case – Maintainability – Application offering undisclosed foreign income and assets – A. Ys. 2005-06 to 2014-15- Section 245C – Effect of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – Act coming into force w.e.f. 01/07/2015 – Return filed on 21/05/2015 and notice u/s. 148 issued on 29/05/2015 – Application for settlement maintainable

Arun Mammen vs. UOI; 391ITR 23 (Mad):

Assessee had filed returns of income on 21/05/2015 disclosing foreign income and assets. On 29/05/2015, the Assessing Officer issued notices u/s. 148 of the  Act. The assessee made applications before the Settlement Commission for settlement of the cases. The Settlement Commission rejected the applications holding that the Commission does not have jurisdiction to entertain these applications offering undisclosed foreign income and assets.

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

“i)    Explanatory notes dated July 2, 2015 issued in Circular No. 12 of 2015 have clarified that the Black Money(Undisclosed Foreign Income and Assets) and Imposition of tax Act, 2015 comes into effect from 01/07/2015.

ii)    The assessee having filed their return of income on 21/05/2015 and notice having been issued u/s. 148 by the Assessing Officer on 29/05/2015 which was before coming into effect of the provisions of the 2015 Act, the applications submitted by the assessee before the Settlement Commission were maintainable.”

5. Refund – Interest on refund – Section 244A – A. Ys. 2007-08 and 2008-09 – Period for which interest payable – Exclusion of period of delay caused by assessee – Belated claim during assessment or revised return not a delay caused by assessee – Claim of assessee accepted in appeal by Commissioner (Appeals) – Time taken for appeal proceedings cannot be excluded

Ajanta Manufacturing Ltd. vs. Dy. CIT; 391 ITR 33(Guj):

For the A. Ys. 2007-08 and 2008-09, the assessee had claimed refund with interest in respect of relief given by Commissioner (Appeals). Refund was granted but the Commissioner held that the assessee would not be entitled to interest up to the period of giving effect to the order of the Commissioner(Appeals).

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

“i)    In cases covered under sub-section (1) of section 244A of the Income-tax Act, 1961, the assessee would be entitled to interest on refund at specified rate. Under sub-section (2) of section 244A, however, such interest would not be payable to the assessee if the proceedings which resulted in refund are delayed by reasons attributable to the assessee, whether wholly or in part. In such a case the period of delay so attributable to the assessee would be excluded from the period for which interest is payable.

ii)    The act of revising the return or revising a claim during the course of assessment proceedings could not be said to be a reason for delaying the proceedings which could be attributable to the assessee. The fact that the assessee had filed an appeal which ultimately came to be allowed by the Commissioner, could not be a reason for delaying the proceedings which could be attributed to the assessee.
iii)    The Department did not contend that the assessee had needlessly or frivolously delayed the assessment proceedings at the original or appellate stage. In the absence of any such foundation, the mere fact that the assessee made a claim during the course of the assessment proceedings which was allowed at the appellate stage would not ipso facto imply that the assessee was responsible for causing the delay in the proceedings resulting in refund. Under the circumstances, the order passed by the Commissioner was not valid.”

4.Recovery of tax – Stay of demand during pendency of appeal before CIT(A) – Circular/Instruction No. 1914 dated 02/02/1993 and Circular dated 29/02/2016 modifying Instruction No. 1914 – Circular No. 1914 deals with collection and recovery of income tax, however it does not standardise the quantum of lumpsum payment required to be made by asssessee as a pre-condition of stay of disputed demand before CIT(A). Circular dated 29-2-2016 being a partial modification of Circular No. 1914 merely prescribes the percentage of the disputed demand that needs to be deposited by assessee. Thus, although process for granting stay was streamlined, and standardised by Circular dated 29-2-2016 but it could not mean that Instruction No. 2-B(iii) contained in Circular No. 1914 dealing with situation of unreasonably high pitched or dealing with situation of genuine hardship caused to assessee was erased by Circular dated 29-2-2016, therefore, both these factors should have been considered by both, Assessi

Flipkart India (P.) Ltd. vs. ACIT; [2017] 79 taxmann.com 159 (Karn):

For the A. Ys. 2014-15 and 2015-16, the assessee had filed appeals before the CIT(A) against the assessment orders. The assessee also filed applications for stay of the disputed demand during the pendency of appeals. Relying on the CBDT Circular dated 29/02/2016, the assessee was directed to pay 15% of the disputed demand for grant of stay of the balance.

The assessee filed writ petitions challenging the said orders. The Karnataka High Court allowed the writ petition and held as under:
“i)    Undoubtedly, the present case raises the issue of balancing the interest of the Revenue, and the interest of an assessee. Needless to say, the Revenue does have the right to realise the assessed income tax amount from the assessee. However, while trying to realise the said amount, the Revenue cannot be permitted, and has not been permitted by the Circulars mentioned above, to act like a Shylock. It is precisely to balance the conflicting interests that certain guidelines have been prescribed by Circular No.1914, and Circular dated 29.2.2016. The Circular dated 29.2.2016 clearly states that the circular is “in partial modification of Instruction No.1914”. Therefore, the Circular dated 29.2.2016 does not supersede the Circular No.1914 in toto, but merely “partially modifies” the instructions contained in Circular No.1914.

ii)    According to Instruction No.4(A) of Circular dated 29.2.2016, it is a general rule, that 15% of the disputed demand should be asked to be deposited. But, according to Instruction No.4(B)(a) of the Circular dated 29.2.2016, the demand can be increased to more than 15%; according to Instruction No.4(B)(b) of the Circular dated 29.2.2016, the percentage can be lower than 15%, provided the permission of the Prl. CIT is sought by the Assessing Officer. However, in case the Assessing Officer does not seek the permission from the Prl.CIT, and in case the assessee is aggrieved by the demand of 15% to be deposited, the assessee is free to independently approach the Prl. CIT. The assessee would be free to request the Prl. CIT to make the percentage of disputed demand amount to be less than 15%.

iii)    It is true that Instruction No.4 (B)(b) of the Circular dated 29.2.2016, gives two instances where less than 15% can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No.2-B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29.2.2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Prl. CIT, are required to see if the assessee’s case would fall under Instruction No.2-B(iii) of Circular No.1914, or not? Both the Assessing Officer, and the Prl. CIT, are required to examine whether the assessment is “unreasonably highpitched”, or whether the demand for depositing 15% of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not?

iv)    A bare perusal of the two orders, both dated 23.11.2016, clearly reveal that the Assessing Officer has relied upon Instruction No.4(B)(b) of the Circular dated 29.2.2016, and has concluded that since the petitioner’s case does not fall within the two illustrations given therein, therefore, it is not entitled to seek the relief that less than 15% should be demanded to be deposited by it. Moreover, the Assessing Officer has jumped to the conclusion that the petitioner’s finances do not indicate any hardship in this case. However, the Assessing Officer has not given a single reason for drawing the said conclusion. Since the petitioner has been constantly claiming that it has suffered loss from the very inception of its business, from 2011 to 2016, the least that the Assessing Officer was required to do was to elaborately discuss as to whether “genuine hardship” would be caused to the petitioner in case the petitioner were directed to pay 15% of the disputed demand amount or not? Yet the Assessing Officer has failed to do so. Therefore, this part of the order, naturally, suffers from being a non-speaking order. Hence, the said orders are legally unsustainable.

v)    A bare perusal of the order dated 25.1.2017 also reveals that the Prl. CIT has failed to appreciate the co-relation between Circular No.1914, and Circular dated 29.2.2016. The Prl. CIT has failed to notice the fact that the latter Circular has only “partially modified” the former Circular, and has not totally superceded it. The Prl. CIT has also ignored the fact that Instruction No.2-B(iii) contained in Circular No.1914 continues to exist independently of and in spite of the Circular dated 29.2.2016. Therefore, it has failed to consider the issue whether the assessment orders suffers from being “unreasonably highpitched”, or whether “any genuine hardship would be caused to the assessee” in case the assessee were required to deposit 15% of the disputed demand amount or not? Thus, the Prl. CIT has failed to apply the two important factors mentioned in Circular No.1914.

vi)    For the reasons stated above, this Writ Petition is, hereby, allowed. The twin orders dated 23.11.2016, and the order dated 25.1.2017, are set aside. The case is remanded back to the Prl. CIT to again decide the Review Petitions filed by the petitioner. The Prl. CIT is further directed to decide the Review Petition within a period of two weeks from the date of receipt of the certified copy of this order.”

3.Offences and prosecution – Compounding of offences – Sections 276B and 279(2) – Failure by assessee to deposit amount deducted as tax at source – Rejection of application for compounding on basis of guidelines by CBDT – Assessee’s failure to deposit amount collected beyond its control – Chief Commissioner should consider objective facts on merits before exercising jurisdiction – order rejecting application for compounding not sustainable

Sports Infratech P. Ltd. vs. Dy CIT; 391 ITR 98 (Del):

The assessee failed to deposit the amounts deducted as tax from the sums payable under various contracts. A complaint u/s. 276B of the Act, 1961 was filed against the assessee. The assessee sought for compounding of the offence u/s. 279(2) of the Act. The Chief Commissioner rejected the application on the ground that the compounding was not permissible in view of the guidelines issued by the CBDT imposed especially in view of para 8(v) thereof which stated that the offences having a bearing in a case under investigation by any other Central or State agency such as the CBI, were not to be compounded.

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

“i)    The rejection of the assessee’s application was entirely routed on the Chief Commissioner’s understanding of the conditions of ineligibility in para 8(v). The view was based upon an erroneous understanding of law. While exercising jurisdiction, the Chief Commissioner should consider the objective facts before it.

ii)    The assessee’s failure to deposit the amounts collected was beyond its control and was on account of seizure of books of account and documents. But for such seizure, the assessee would quite reasonably be expected to deposit the amount within the time prescribed or at least within the reasonable time. Instead of considering these factors on their merits and examining whether indeed they were true or not, the Chief Commissioner felt compelled by the text of para 8(v). The material on record in the form of a letter by the Superintendent of CBI also showed that a closure report was in fact filed before the competent court.

iii)    Therefore, the refusal to consider and accept the assessee’s application u/s. 279(2) of the Act could not be sustained. The impugned order is hereby set aside. The Chief Commissioner is hereby directed to consider the relevant facts and pass necessary orders in accordance with law within six weeks after granting a fair opportunity to the petitioner.”

2.Charitable purpose – Sections 10(23C)(vi), 12AA and 80G – Trust registered u/s. 12A and income exempt u/s. 10(23C) – Surplus income utilised for charitable purposes – Trust entitled to approval for purpose of section 80G

CIT vs. Gulabdevi Memorial Hospital; 391 ITR 73 (P&H):

The assessee, a charitable trust was registered u/s. 12A of the Income-tax Act (hereinafter for the sake of brevity referred to as the “Act”), 1961 since 1977 and was also granted approval for section 80G and the same were renewed from time to time till the A. Y. 2009-10. On 23/03/2009, the assessee filed application for approval u/s. 80G for the period 2010-11 to 2014-15. The Commissioner rejected the application. The Commissioner found that the assessee was generating substantial surplus and was spending only a small percentage for charitable purposes. The Commissioner was of the view that the assessee had disentitled itself for the grant of renewal of exemption u/s. 80G of the Act as according to him, the assessee had deviated from its charitable objects. The Tribunal held that the assessee was entitled to approval for the purposes of section 80G.

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

“i)    It was admitted that the assessee was registered u/s. 12AA and that it has been held entitled to exemption u/s. 10(23C)(vi). The assessee was granted exemption u/s. 80G of the Act from the year 1997 till the passing of the order. Further, the finding of the Tribunal, that the assessee had never misutilised its funds, had not been assailed.

ii)    The generated surplus having been ploughed back for expansion purposes also remained undisputed by the Revenue. The charges for its services were also considered by the Tribunal and were found to be extremely reasonable. The assessee was entitled to approval for purposes of section 80G.”

1. Business expenditure – Disallowance u/s. 40A(2) – A. Y. 1997-98 – Disallowance is not automatic and can be called into play only if AO establishes that expenditure incurred is, in fact, in excess of fair market value

CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):

The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.

On appeal by the Revenue, one of the questions raised was:

“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”

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

“i)    There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.

ii)    The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.

iii)    The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”

24. Income – Accrual – Mercantile system of accounting- Section 145(1) – A. Ys. 2007-08 and 2009-10 – Nonconvertible unsecured debentures issued by group company – Group company in financial difficulties – Resolution passed by board of directors of assessee to waive interest on debentures for six years – The Tribunal holding that even though assessee following mercantile system of accounting interest did not accrue – Neither perverse nor arbitrary – Notional interest cannot be brought to tax

CIT vs. Neon Solutions Pvt. Ltd; 387 ITR
667 (Bom):

The assessee
subscribed 2 % non-convertible unsecured debentures issued by one of its group
companies in 2003. As the company which issued the debentures was in financial
difficulties, waiver of interest on the debentures till March 31, 2010 was
approved at a meeting of the debenture holders in 2004. A resolution was passed
by the board of directors of the assessee to this effect.

The Assessing
Officer brought to tax the notional interest at the rate of 2 %  on the debentures for the A. Ys. 2007-08 and
2009-10 on the ground that the waiver of interest was unbelievable. The
Tribunal deleted the addition and held that even in the mercantile system of
accounting, income could be regarded as accrued only if there was certainty of
receiving it and not when it was waived.

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

“i)  The
order of the Tribunal was based on the facts and its findings were not found to
be perverse or arbitrary. It found that the various resolutions passed by the
company and the communications exchanged between the parties established the
fact that the interest on the debentures was waived for six years and that
there was no reason to disbelieve the resolution waiving the interest.

ii)  Amalgamation of the
issuing company with the also establishes the fact that it was in financial
difficulties. Moreover, for the A. Ys. prior to 2007-08 no additions were made
by the Department on account of notional interest.

iii)  No question of law
arose.”

23. Business expenditure – Gratuity – Sections 36(1)(v), 40A(9) – A. Ys. 2007-08 to 2009-10 – Application by assessee for approval of scheme neither approved nor rejected by Competent Authority – Finding that assessee complied with conditions stipulated for approval – Assessee entitled to allowance

CIT vs. Jaipur Thar Gramin Bank; 388 ITR
228 (Raj):

The assessee is a co-operative society doing
banking business. For the A. Ys. 2007-08 to 2009-10, it claimed deduction u/s.
36(1)(v), of the sum paid on account of employer’s contribution to the gratuity
scheme created by it exclusively for the benefit of its employees under an
irrevocable trust. It claimed that it had filed an application to the competent
authority for approving the gratuity scheme. The  Assessing Officer disallowed the expenditure
on the ground that formal order had been passed by the competent authority. The
Commissioner (Appeals) and the Tribunal allowed the claim for deduction.

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

“i)  The assessee could not be
made to suffer for the inaction of the authorities and the Assessing Officer
ought not to have disallowed the claims of contribution to gratuity scheme
merely because the Commissioner had not granted approval to the gratuity
scheme.

ii)  The assessee was sponsored
by the UCO bank, a Government of India undertaking and held duly complied with
the conditions laid down for approval u/s. 36(1)(a) of the Act.

iii)  Both the appellate
authorities had found the expenses allowable based on material and evidence on
record. The assessee had fulfilled the condition laid down for approval having
created a trust with the Life Insurance Corporation of India and had deposited
the amount.

iv) The Tribunal was justified
in holding that the claims were proper and allowable. No question of law
arose.”

22. Business expenditure – A. Y. 1999-00 – Same business or different business – tests – Expenditure incurred in setting up new line of same business is deductible

CIT vs. Max India Ltd. (No.1); 388 ITR 74
(P&H):

For the A. Y. 1999-00, the Assessing Officer
made disallowance of Rs. 6,70,78,483/- on account of expenses for setting up
new business. The Commissioner (Appeals) and the Tribunal allowed the
deduction.

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

“i)  While determining whether
two or more lines of businesses of the assessee are the same “business” or
“different businesses” regard must be had to the common management of the main
business and other lines of businesses, unity of trading organization, common
employees, common administration, a common fund and a common place of business.
For evaluating the “same business”, the test of unity of control and the nature
of business is to be applied.

ii)  The Commissioner (Appeals)
after appreciating the evidence produced on record had observed that various
businesses carried on by the assessee including health care constituted the
same business of the assessee. The Appellate Tribunal was right in law in
allowing the expenses in setting up new business of Rs. 6,70,78,483 treating it
as revenue in nature.”

54. Search and seizure- Block assessment- Sections 132 and 158BC – B P. 1990-91 to 2000-01 – Undisclosed income-corroborative evidence needed in case of statement- Finding that additions were not sustainable – Justified

CIT vs. Smt. S Jayalaxmi Ammal; 390 ITR 189 (Mad):

The assessee was a jeweler. On 29/12/1999, a search u/s. 132
of the Act, was conducted in the residential and business premises of the
assessee. Based on the materials collected during search, a notice u/s. 158BC
of the Act was issued. The assessee filed a Nil return. The Assessing Officer
completed the block assessment making the following additions (i) Rs. 31,00,000
being the value of immovable properties purchased in the name of daughter in
law of the assessee; (ii) Rs 80,000 towards excess stock of 215 gms. of gold
jewellery found in the business premises; (iii) Rs. 2,90,000 towards excess
stock of 39 kgs of silver articles; (iv) difference in cost of construction of
Rs. 83,700; (v) Rs. 3,00,000 towards inadequate drawings, and (vi) Surcharge of
Rs. 2,10,360 The Commissioner (A) substituted a figure of Rs. 5,00,000 in the
place of Rs. 31,00,000 and reduced the addition of Rs. 3,00,000 to Rs. 2,00,000
He deleted the additions of Rs 80,000 and Rs. 83,700 and confirmed the other additions.
The Tribunal held that in the absence of any material found during the course
of search operation the addition of Rs. 5,00,000 cannot be sustained as
undisclosed income. The Tribunal also upheld the deletion of Rs. 80,000 and Rs.
86,700 by the Commissioner (Appeals).

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

“i)   In case of a block assessment for deciding
any issue against the assessee, the authorities under the Income-tax Act, 1961
have to consider, whether there is any corroborative material evidence. If
there is no corroborating documentary evidence, then the statement recorded
u/s. 132(4) of the Income-tax Act, 1961 alone should not be the basis for
arriving at any adverse decision against the assessee.

ii)   On the facts and circumstances of the case, a
mere statement without any corroborative evidence, should not be treated as
conclusive evidence against the maker of the statement. The deletions of
additions by the Tribunal were justified.”

21. Business expenditure – Section 37 – A. Y. 2005-06- Capital or revenue expenditure – Assessee engaged in oil exploration – Expenses on dry dockings of rigs and vessels – is expenditure on maintenance of assets – deductible

CIT
vs. ONGC Ltd; 387 ITR 710 (Uttarakhand):

The assessee was engaged in oil exploration.
For the A. Y. 2005-06, the Assessing Officer disallowed expenditure on dry
docking of its rigs and vessels treating the same as capital expenditure. The
Tribunal allowed the assessee’s claim for deduction. The Tribunal found that
under the Merchant Shipping Act, every floating rig and vessel has to undergo a
compulsory survey at specified intervals in order to determine whether it is
seaworthy and can withstand the safety standards laid out. Under such survey,
the structural and mechanical fitness of a floating installation is tested. The
expenses on dry docking were on account of removing the old paint and
repainting the rigs and vessels, overhauling the propellers, thrusters, gears
and electric motors, repair and replacement/upgrading of the obsolete
equipment. Such expenses were, therefore, only for maintaining and preserving
the existing assets. It was deductible.

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

“The expenditure on dry docking is revenue expenditure and hence
deductible.”

TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

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CIT vs. Herbalife International India (P.) Ltd.; [2016] 69 taxmann.com 205 (Delhi)

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. 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) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.
 
iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”

TDS: Business expenditure- Disallowance u/s. 40(a)(i)- A. Ys. 2007-08 and 2008-09- Payment of commission to non-resident agent- Commission not income deemed to accrue or arise in India- Tax need not be deducted at source- Disallowance of expenditure u/s. 40(a)(i) not justified-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

In the A. Ys. 2007-08 and 2008-09, the assessee had made payment of commission to non-resident agents in respect of sales made outside India. The Assessing Officer disallowed the claim for deduction u/s. 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source. The basis of disallowance was that Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent for sale does not give rise to income chargeable to tax in India had been withdrawn by Circular No. 7 dated 22/10/2009. The Tribunal allowed the assesee’s claim and held that the provisions of section 40(a)(i) would have no application for the two assessment years under consideration. On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The circular of 1969 was admittedly in force during the two assessment years. It was only subsequently i.e. on 22/10/2009 that the circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier circular cannot have retrospective operation.

ii) Hence no tax was deductible at source and no disallowance of expenditure could be made u/s. 40(a)(i).”

Housing Project- Deduction u/s. 80-IB(10) – A. Y. 2010-11- Two flats in project exceeding specified dimension- Assessee entitled to deduction in respect of other flats not exceeding specified dimension-

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CIT vs. Elegant Estates; 383 ITR 49 (Mad);

In the A. Y. 2010-11, the assessee had claimed deduction u/s. 80-IB(10) of the Act in respect of the housing project. The Assessing Officer found that the assessee had built two flats measuring 1572 sq. ft. and 1653 sq. ft. respectively. Therefore he disallowed the entire claim for deduction. The Tribunal held that the assessee would be disqualified for the deduction proportionately, only in respect of the two flats of area exceeding 1500 sq. ft. but would be entitled to deduction in respect of the other flats which measured less than 1500 sq. ft.

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

“i) The language used in section 80-IB(10) does not bar a deduction claim altogether if some of the units sold exceed the specified dimensions.

ii) The Tribunal was right in holding that the assessee was entitled to deduction u/s. 80-IB(10) with respect to income from flats measuring less than 1500 sq. ft. limit and would not be entitled to deduction with respect to the income from the two flats exceeding the limit of 1500 sq. ft. when the assessee had considered all the flats as forming part of a single project on interpretation of the provisions of section 80-IB(10)(c).

iii) The order passed by the Appellate Tribunal was correct in the eye of law and the contentions raised on behalf of the Department could not be countenanced.”

Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

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Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

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

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

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DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

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CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

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Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

Capital gain vs. Business income – A. Y. 2006-07 – Profit from purchase and sale of shares – Assessee not registered with any authority or body to trade in shares – Entire investment made out of assessee’s own funds – Purchase and sale of shares were for investment accepted by Department for earlier years – Gain from purchase and sale of shares cannot be taxed as business income

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CIT vs. SMAA Enterprises P. Ltd.; 382 ITR 175 (J&K):

The
assessee company was incorporated in the year 1996 and the assessments
for the A. Ys. 2001-02 to 2005-06 had attained finality with the
Department, accepting the declaration made by the assessee, that it was
engaged in purchase and sale of shares as an investment. For the A. Y.
2006-07, the assessing Authority treated the short term capital gains
from purchase and sale of shares as income from business, and levied tax
at 30% instead of 10%, on the ground that the assessee was engaged in
the business of general trading in shares. The Tribunal allowed the
assessee’s claim that it is short term capital gain.

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

“i)
The assessee was not registered with any authority or body, such as
the Securities and Exchange Board of India to carry on trading in
shares. The entire investments were made out of the assessee’s own funds
and no material was placed on record by the Department to come to a
different conclusion.

ii) The factual finding by the Tribunal
was on a proper appreciation of facts. The Department could not change
its stand in subsequent years without change in material. The order was
passed by the Tribunal based on appreciation of documents and recording
reasons, which were not considered by the Assessing Authority as well as
the first Appellate Authority. The contention of the Department that
the assessee was dealing in stockin- trade and not investment, could not
be accepted and no substantial question of law arose for
consideration.”

Business expenditure – Section 37(1) – A. Y. 2001- 02 – Payment to Port Trust by way of compensation for encroachment of land by assessee – Is business expenditure allowable u/s. 37(1)

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Mundial Export Import Finance (P) Ltd. vs. CIT; 284 CTR 87(Cal):

The assessee had acquired a plot of land by way of lease from CPT. By a letter dated 28/06/2000, CPT informed the assessee that about 855.7 sq. mtrs. of land belonging to the trust adjacent to the demised plot had been encroached by the assessee, in violation of the terms and conditions of the lease agreement. The assessee paid an amount of Rs. 6,67,266/- by way of damages to the CPT, in respect of such additional land. The assessee claimed this amount as business expenditure. The Assessing Officer disallowed the claim relying on Explanation to section 37(1). 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) Payment was made by assessee, to compensate the loss suffered by port trust due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty.

ii) The payment could not partake the character of a capital expenditure, because the contention of the port trust was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land.

iii) Payment was an expenditure incurred wholly and exclusively for the purposes of the business and therefore, allowable as deduction u/s. 37(1). Explanation to section 37(1) was not applicable.”

Additional depreciation – Section 32(1)(iia) – A. Y. 2008-09 – Manufacture – Broadcasting amounts to manufacture of things – Plant and machinery used in broadcasting entitled to additional depreciation

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CIT vs. Radio Today Broadcasting Ltd.; 382 ITR 42 (Del):

The assessee was engaged in the business of FM radio broadcasting. In the A. Y. 2008-09, the assessee claimed additional depreciation on the plant and machinery used for broadcasting, claiming that broadcasting of radio programmes amounted to manufacture or production of articles or things. The Assessing Officer rejected the claim. 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) “Manufacture” could include a combination of processes and broadcasting amounts to manufacture. In the context of “broadcasting”, manufacture could encompass the process of producing, recording, editing and making copies of the radio programme followed by its broadcasting. The activity of broadcasting, in this context, would necessarily envisage all these incidental activities, which are nevertheless integral to the business of broadcasting.

ii) The assessee was entitled to additional depreciation for the machinery used by it to broadcast radio programmes in the FM channel.”

Business expenditure – Disallowance u/s. 40A(3) – A. Y. 2008-09 – Payments in cash – Agents appointed by assessee for locations to enable dealers of petrol pumps to buy diesel and petrol – No cash payment made directly to agents but cash deposited in respective bank accounts of agents – Rule 6DD(k) applicable – Amount not disallowable u/s. 40A(3)

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CIT vs. The Solution; 382 ITR 337 (Raj);
The assessee was engaged in supplying diesel at various sites. The Assessing Officer noticed that the assesee had debited huge expenses on account of purchase of diesel and had made payment in cash exceeding Rs.20,000. The Assessing Officer disallowed the expenditure relying on section 40A(3). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) The findings of the Commissioner (Appeals) and the Tribunal are findings of fact. The assessee had appointed various representatives and agents for 110 locations, wherein diesel and petrol were purchased by dealers of the petrol pumps. No cash payment was made directly to the agents, but was deposited in their respective bank accounts. The case of the assessee fell under exception clause of Rule 6DD(k), as the assessee had made payment to the bank account of the agents, who were required to make payment in cash for buying petrol and diesel at different location.

ii) The assessing Officer did not find any discrepancy in copies of the ledger accounts produced, and no unaccounted transaction had been reported or noticed by him.

iii) The finding arrived at by the Tribunal based on the material, was essentially a finding of fact. No substantial question of law arose for consideration. Appeal is dismissed.”

Salary – Section 17(3) – A. Y. 1994-95 – Premature termination of service in terms of service rules – Payment of sum by employer to employee voluntarily with a view to bring an end to litigation – No obligation on employer to make such payment – Payment not compensation – Not profits in lieu of salary – Not liable to tax

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Arunbhai R. Naik vs. ITO; 379 ITR 511 (Guj):

The assessee was discharged from his services. Against the order of termination, he preferred an appeal to the higher authority in the company but did not succeed. In writ petition filed by the assessee the Single Judge directed reinstatement of his services. During the pendency of the appeal preferred by the employer against the order of the single judge, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. The assessee claimed that the amount of Rs. 3,51,308/- so received was capital receipt and was not liable to tax. The Assessing Officer did not accept the claim and the amount was added to the total income. The Tribunal held that the amount was taxable u/s. 17(3) of the Income-tax Act, 1961.

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

“i) The services of the assessee were terminated in terms of the service rules and the amount was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee with a view to bring an end to the litigation.

ii) There was obligation upon the employer to make such payment and, therefore, the amount would not take the character of compensation as envisaged u/s. 17(3)(i). The amount would, therefore, not fall within the ambit of the expression “profits in lieu of salary” as contemplated u/s. 17(3)(i). The Tribunal was, therefore, not justified in holding that the amount of Rs. 3,51,308 received by the appellant pursuant to the judgment of the High Court was income liable to tax u/s. 17(3) of the Act.”

References and appeals to High Court – Sections 256 and 260A – Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh

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CIT vs. Sunny Sounds (P.) Ltd.; [2016] 65 taxmann.com 162 (Bom):

By a Circular No. 21/2015, CBDT prescribed tax limit of Rs.20 lakh for filing appeals before the High Court and the said limit is applicable for pending appeals also. The Bombay High Court has clarified that the circular is equally applicable to the pending references. The High Court held as under:

“Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh. Accordingly, since tax effect less than Rs.20 lakh, instant reference application returned unanswered and question of law raised left open to be considered in an appropriate case.”

Appeal – A. Y. 2006-07 – CIT(A) can consider the claim though not made in the return or the revised return

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Principal CIT vs. Western India Shipyard Ltd.; 379 ITR 289 (Del):

For the A. Y. 2006-07, the Assessing Officer rejected the assessee’s claim made by way of a letter, during the assessment proceedings, for deduction of the bad debts written off by it on the ground that it could have only been made by way of revised return u/s. 139(5). CIT(A) accepted the claim and granted the deduction. The Tribunal held that the CIT(A) could have considered such claim even during the course of appellate proceedings otherwise than by way of a revised return, he did not examine whether, in fact, the assessee had taken such debts into consideration while computing its total income. For that purpose, the Tribunal remanded the matter to the Assessing Officer for a decision afresh.

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

“i) The Tribunal was right in holding that while there was a bar on the Assessing Officer entertaining such claim without a revised return being filed by the assessee, there was no such restraint on the CIT(A) during the appellate proceedings. However, while permitting such a claim he ought to have examined whether in fact the bad debts were written off by the assessee in the first instance in the accounts and then taken into consideration while computing the income.

ii) Remand of the matter to the Assessing Officer for that purpose was, therefore, justified.”

Charitable purpose – Exemption – Sections 2(15), proviso, 11 – A. Y. 2009-10 – Object of trust to provide training to needy women in order to equip or train them in skills and make them self reliant – Nursing training provided at centre of Trust free of cost – Occasional sales or generation of funds for furthering objects but not indicative of trade, commerce or business – Proviso to section 2(15) not applicable – Trust entitled to exemption

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DIT vs. Women’s India Trust; 379 ITR 506 (Bom):

The assessee-trust formed to carry out the object of education and development of natural talents of people having special skill, more particularly women. It trained them to earn while learning. It educated them in the field of catering, stitching, toy making, etc. While giving them training, it used material brought from the open market. In the process some finished product such as pickles, jam, etc., were produced and which the assessee sold through shops, exhibitions and personal contacts. The Director of Income-tax held that the assessee has shown sales to the tune of 69,72,052/-. He accordingly held that the proviso to section 2(15) is applicable and hence the assessee was not entitled to exemption. The Tribunal found that the motive of the assessee was not the generation of profit but to provide training to needy women in order to equip or train them in these fields and make them self confident and self reliant. The Tribunal took the view that occasional sales or the trusts own fund generation were for furthering the objects but not indicative of trade, commerce or business. The proviso did not apply. The Tribunal held that the assessee is entitled to exemption.

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

“i) Considering the fact that the trust had been set up and was functional for the past several decades and it had not deviated or departed from any of its stated objects and purpose, utilisation of the income, if at all generated, did not indicate the carrying on of any trade, commerce or business.

ii) The Tribunal’s view was to be upheld. The view was taken on an overall consideration and bearing in mind the functions and activities of the trust. In such circumstances it was not vitiated by any error of law apparent on the face of the record.”

TDS – Sections 194C and 194J

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i) Supply of material under turn key project – Section 194C would not apply in respect of payment made against the supply of materials included in composite contracts for executing turn key projects
ii) Bill management services are not professional or technical services – It is a service contract – Section 194C will apply and not 194J

CIT vs. Executive Engineer, O&M Division(GESCOM); 282 CTR 138 (Karn):

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

“i) Whether the provisions of section 194C would be attracted on the payments made against the supply of materials included in composite contracts for executing turn key projects?

ii) Whether bill management services are professional or technical services? Whether section 194J would apply or section 194C?”

The High Court held as under:

“i) In respect of payments made in respect of supply of materials included in composite contracts for executing turn key projects, provisions of section 194C would not apply.
ii) Services rendered by the agencies towards bill management services are not professional services and section 194J is not attracted. The contract was rightly held to be service contract by the Tribunal. Section 194C is attracted.”

Reassessment – Sections 147 & 148 – A.Y. 2002- 03 – Information received from ED – AO set out information received from ED – He failed to examine if that information provided the vital link to form the ‘reason to believe’ that income of the assessee has escaped the assessment for the A.Y. in question – Reopening of the assessment is not valid

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CIT vs. Indo Arab Air Services: 283 CTR 92 (Del):

The assessment for the A. Y. 2002-03 was reopened on the basis of the information received from the enforcement directorate. The Tribunal held that the reopening is not valid.

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

“i) The Assessing Officer set out the information received from the Enforcement Directorate but he failed to examine if the information provided the vital link to form the ‘reason to believe’ that the of the income of the assessee had escaped assessment for the assessment year in question.

ii) While the Assessing Officer had referred to the fact that the Enforcement Directorate gave the information regarding cash deposits being found in the books of the assessee, the Assessing Officer did not state that he examined the returns filed by the assessee for the said assessment year and detected that the said cash deposits were not reflected in the returns.

iii) Further, information concerning payments made to third parties, which were unable to be verified by the Enforcement Directorate, also required to be assessed by the Assessing Officer by examining the returns filed to discern whether the said transaction was duly disclosed by the assessee.
iv) Consequently, no error was committed by the Tribunal in the impugned orders in coming to the conclusion that the reopening of the assessment was bad in law.”

Presumptive tax – Section 44BB – A. Y. 2008- 09 – Assessee non-resident – Prospecting for or production of mineral oils – Service tax collected by the assessee is not includible in gross receipts for the purposes of computation of presumptive income

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DIT vs. Mitchell Drilling International Pvt. Ltd.; 380 ITR 130 (Del):

Assessee is a non resident. For the A. Y. 2008-09, the income of the assessee was assessable u/s. 44BB. For computing the income the assessee did not include the service tax received by it. The Assessing Officer included the service tax. 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) For the purpose of computing the presumptive income of the assessee for the purpose of section 44BB the service tax collected by the assessee on the amount paid to it for rendering services was not to be included in the gross receipts in terms of section 44BB(2) r.w.s. 44BB(1).

ii) The service tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee only collected the service tax for passing it on to the Government.”

Manufacture – Exemption u/s. 10B – A. Ys. 2003- 04 and 2004-05 – Assembling of instruments and apparatus for measuring and detecting ionizing radiators amounts to manufacture – Assessee entitled to exemption u/s. 10B –

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CIT vs. Saint Gobain Crystals and Detectors India P. Ltd.; 380 ITR 226 (Karn):

The assessee was in the business of assembling instruments and apparatus for measuring and detecting ionizing radiators. The assessee claimed deduction u/s. 10B. For the relevant years, the Assessing Officer disallowed the claim on the ground that the assessee had not manufactured or produced articles or things as required u/s. 10B(1). The Tribunal allowed the assessee’s claim and held that the process carried out by the assessee in getting the final product, showed that the assessee was engaged in manufacture or production of an article or thing.

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

“The finished product which was sold by the assessee, was different from the materials which were procured for making such a finished product. A series of processes were carried out and a new product emerged. The assessee was entitled to exemption u/s. 10B.”

Limitation – Amendment – Increased limitation period of 7 years u/s 201(3) as amended by Finance (No.2) Act, 2014 w.e.f.1.10.2014 shall not apply retrospectively to orders which had become timebarred under the old time-limit (2 years/6 years) set by the unamended section 201(3). Hence, no order u/s. 201(i) deeming deductor to be assessee in default can be passed if limitation had already expired as on 1-10-2014 –

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Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

Pursuant to the amendment of section 201(3) by the Finance (No.2) Act, 2014 w.e.f.1.10.2014, extending the period of limitation to 7 years the Assessing Officer issued notices u/s. 201(1) for the A. Ys. 2007-08 and 2008-09. The notices were challenged by the assessee by filing writ petitions. The Gujarat High Court allowed the writ petitions, considered the retrospectivity and the applicability of the amendment of section 201(3) and held as under:

“i) Considering the law laid down by the Hon’ble Supreme Court, to the facts of the case on hand and more particularly considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable w.e.f. 1/10/2014 and even considering the fact that proceedings for F.Y. 2007-08 and 2008- 09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) of the Act had already expired on 31/3/2011 and 31/3/2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee and considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1/4/2010, it is to be held that section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(i) of the Act can be passed for which limitation had already expired prior to amended section 201(3) as amended by Finance Act No.2 of 2014.

ii) Under the circumstances, the impugned notices / summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

Depreciation – Additional depreciation – Section 32(1)(iia) – A. Ys. 2007-08 and 2008-09 – Plant and machinery set up after 1st October 2006 but before 31st March 2007 – Half of additional depreciation of 20% is allowable in A. Y. 2007-08 and the balance half allowable in A. Y. 2008-09

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CIT vs. Rittal India Pvt Ltd.; 380 ITR 423 (Karn): 282 CTR 431 (Karn):

The assessee acquired and installed new plant and machinery in the F. Y. 2006-07 after 1st October 2006. The assessee therefore claimed additional depreciation of 10%, in the A. Y. 2007-08, being half of the 20% allowable u/s. 32(2)(iia) and the same was allowed. The balance half was claimed in the A. Y. 2008-09 which was disallowed by the Assessing Officer. 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 beneficial legislation should be given liberal interpretation so as to benefit the assessee. The intention of the legislature is absolutely clear that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to half being granted in one assessment year, if certain condition was not fulfilled. But that would not restrain the assesee from claiming the balance of the benefit in the subsequent assessment year.
ii) The Tribunal had rightly held that the additional depreciation allowed u/s. 32(1)(iia) is a onetime benefit to encourage industrialisation and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. Appeal is accordingly dismissed.”

Search and seizure – Retention of seized articles – Section 132A – A. Y. 2012-13 – IT authorities requisitioning silver articles of assessee from railway police for purpose of investigation – Assessment order taking note of such seizure but no addition on account of seized articles – IT authorities to hand over seized articles to assessee

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K. S. Jewellers Pvt. Ltd. vs. DIT; 379 ITR 526 (Guj):

The railway police seized silver ornaments from the authorised person of the assessee and registered a case u/s. 124 of the Bombay Police Act. The Railway police informed the Income-tax Department about seizure of the silver ornaments pursuant to which the Income-tax Department requisitioned the ornaments for the purpose of investigation under the provisions of the Income-tax Act, 1961. Assessment order took note of the seizure but no addition was made on that count. Assessee’s applications for release of the articles were ignored.

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

“i) The silver ornaments weighing 219.841 kgs. were requisitioned by the Income-tax Authorities in exercise of the powers of section 132A in the F. Y. 2011- 12. Thereafter the assessment was framed by the Assessing Officer of the assessee for the A. Y. 2012-13, whereby after taking note of such requisition made by the authorities, the return as filed by the assessee was accepted without making any addition on account of such seizure.

ii) Under the circumstances, without entering into the merits of the validity of the authorisation issued u/s. 132A and in view of the assessment order made in the case of the assessee, the Income-tax Authorities could no longer continue with the seizure of the ornaments and the seized ornaments were required to be returned to the assessee.

iii) The respondent authorities are directed to forthwith hand over the seized silver ornaments to the petitioner within a period of four weeks from today.”

Penalty – Concealment – Section 271(1)(c) – A. Y. 2008-09 – Capital gains – Exemption – Whether assesee entitled to exemption u/s. 54 or section 54F or neither pending before High Court – Addition itself debatable – Penalty u/s. 271(1)(c) not justified

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CIT vs. Dr. Harsha N. Biliangudy; 379 ITR 529 (Karn):

For the A. Y. 2008-09, the assessee’s claim for deduction u/s. 54/54F was pending before High Court for consideration. The Tribunal deleted the penalty imposed by the Assessing Officer u/s. 271(1)(c).

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

“i) The imposition of penalty u/s. 271(1)(c) was for concealment of material particulars of income by the assessee or furnishing inaccurate particulars of such income. It was not the case of the Revenue that the assessee had furnished details with regard to the income derived from the sale and purchase of the properties. The question as to whether the assessee was to be given the benefit u/s. 54 or section 54F or was not to be given the benefit, was yet to be finalized by the High Court, where the appeal against the assessment proceedings was still pending.

ii) The assessee had given full description of the property which was sold by him and of the property purchased by him. Merely because the assessee was not to be given the benefit u/s. 54 as the property sold by the assessee was not a residential property it could not be said that there was concealment of material information by the assessee because complete details of the property sold by the assessee were given by him in the returns filed by him.

iii) Where penalty was imposed in respect of any addition where the High Court has admitted the appeal on substantial question of law, then the sustainability of the addition itself becomes debatable, and in such circumstances penalty could not be levied u/s. 271(1)(c).”

Exemption u/s. 10A – A. Y. 2000-01 – Relevance of date of notification of STPI – Assessee having been notified by STPI on 04/03/2000 is eligible for exemption u/s. 10A for entire A. Y. 2000-01 – AO was not justified in restricting the benefit for the period after 04/03/2000

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CIT vs. Soffia Software Ltd.; 281 CTR 594 (Mad):

The assessee was notified by the STPI on 04/03/2000 as eligible for exemption u/s. 10A of the Income-tax Act, 1961. For the A. Y. 2000-01, the assessee claimed exemption u/s. 10A of the Act. The Assessing Officer restricted the exemption to the period after 04/03/2000/-. 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 CIT(A) as well as the assessing authority fell into error by holding that registration as an STPI is a requirement for the assessee to claim the benefit u/s. 10A. Section 10A applies if an industrial undertaking has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year.

 ii) In this case, the date of STPI notification is 04/03/2000. Therefore the assessee has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year in the STPI unit and it will be entitled to deduction u/s. 10A in respect of profit attributed to export turnover. The Circular issued u/s. 10B cannot be made applicable to a case falling u/s. 10A.

iii) Furthermore, the circular which has been relied upon by the CIT(A) dated 06/01/2005, has no relevance to the A. Y. 2000-01. The assessee is eligible for exemption u/s. 10A for the entire A. Y. 2000-01.”

Business expenditure – Disallowance u/s. 40(a)(ia) – A. Y. 2008-09 – Reimbursment of service charges is not taxable – Tax not deductible at source from such amount – Expenditure cannot be disallowed u/s 40(a)(ia) of the Act

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CIT vs. DLF Commercial Project Corporation; 379 ITR 538 (Del):

For the A. Y. 2008-09, the Assessing Officer made an addition of Rs. 19,09,83,236/- u/s. 40(a)(ia), for non deduction of tax at source on reimbursement of expenditure paid to DLF though the latter entity had deducted tax at source on the payments made by it as a facilitator on behalf of the assessee. The Tribunal deleted the addition.

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

“It is undisputed that DLF deducted tax at source on payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charges paid by it to DLF on reimbursement expenses. In such circumstances this Court holds that the entire amount paid by the assessee to DLF is entitled to deduction as expenditure.”

Business expenditure – Disallowance u/s. 14A – Variable ‘A’ prescribed in the formula in Rule 8D(2)(ii) (to make disallowance in case of common interest expenditure) would exclude both interest attributable to tax exempt income as well as taxable income

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Principal CIT vs. Bharti Overseas (P.) Ltd.; [2015] 64 taxmann.com 340 (Delhi):

Considering the scope of Rule 8D(2)(ii) for computing disallowance u/s. 14A of the Income-tax Act, 1961, the Delhi High Court held as under:

“i) The object behind section 14A (1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates.

ii) Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to “allocate” some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only ‘common interest expenditure’ i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income.”

Transfer pricing – S. 92C r.w.s. 144C – Where petitioner is not a foreign company and Transfer Pricing Officer has not proposed any variation to return filed by petitioner, neither of two conditions of section 144C being satisfied, petitioner is not an ‘eligible assessee’ and, consequently, Assessing Officer is not competent to pass draft assessment order u/s. 144C(1)

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Honda Cars India Ltd. vs. Dy. CIT; [2016] 67 taxmann. com 29 (Delhi)

The petitioner, an Indian company, was engaged in the business of manufacture and sale of passenger cars. It was a subsidiary company of Japanese company. It purchased raw material, spare parts, capital goods etc. from Honda Japan and cars were manufactured in India under the technical collaboration agreements and paid royalty. On reference, the TPO passed an order u/s. 92CA(3), but no variation was proposed to the returned income of the petitioner. However, the Assessing Officer passed the impugned draft assessment order u/s. 144C and made disallowance u/s. 40(a)(i) in respect of payments made by the petitioner to non-resident associated enterprise for non-deduction of TDS u/s. 195.

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

“i) A reading of section 144C(1) shows that the Assessing Officer, in the first instance, is to forward a draft of the proposed order of assessment to the ‘eligible assessee’, if he proposes to make any variation in the income or loss return which is prejudicial to the interest of such assessee. The draft assessment order is to be forwarded to an ‘eligible assessee’ which means that for the section to apply a person has to be an ‘eligible assessee’.

ii) Section 144C(15)(b) defines an ‘eligible assessee’ to mean (i) any person in whose case the variation referred to in s/s. (1) arises as a consequence of the order of the Transfer Pricing Officer passed u/s. 92CA(3); and (ii) any foreign company.

iii) In section 144C(15)(b), the term ‘eligible assessee’ is followed by an expression ‘means’ only and there are two categories referred therein. The use of the word ‘means’ indicates that the definition of ‘eligible assessee’ for the purposes of section 144C(15)(b) is a hard and fast definition and can only be applicable in the above two categories.

iv) First of all, the petitioner is not a foreign company and the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. Neither of the two conditions being satisfied in the case of the petitioner, the petitioner for the purposes of section 144C(15) (b) is not an eligible assessee. Since the petitioner is not an eligible assessee in terms of section 144C(15) (b), no draft order can be passed in the case of the petitioner u/s. 144C(1).

v) In view of the above, it is clear that the petitioner, not being an ‘eligible assessee’ in terms of section 144C(15)(b), the Assessing Officer was not competent to pass the draft assessment order u/s. 144C(1). The draft assessment order dated 31-3-2015 is accordingly quashed.”

TDS – Consequence of failure to deduct or pay (Time Limit for passing order) – Section 201(3) – A. Ys. 2008-09 and 2009-10 – Section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) could be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014 came into force:

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Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

The assessee was engaged in the business of providing telecommunication services and selling service products across the country. The assessee was served notices/summons u/s. 201(1)/(1A) in December, 2014 in connection with TDS proceedings concerning assessment years 2008-09 and 2009-10. The assessee contended that section 201(3) inserted vide Finance (No. 2) Act, 2009 with effect from 1-4-2010 provided period of limitation of two years from the end of financial year in which TDS statement is filed and four years from the end of financial year where the statement had not been filed. Since the assessee regularly filed TDS statements, period for passing order u/s. 201(3) for relevant assessment years expired on 31-3-2011/2012. Hence the assessee submitted that the notices issued in December, 2014 were time-barred. However, the Assessing Officer rejected the arguments of the assessee and held that the notices were valid and within the time-period relying upon the amended section 201(3) vide the Finance Act, 2014 which prescribed a common period of limitation i.e. seven years from the end of financial year in which payment was made.

The assessee filed a writ petition before the Gujarat High Court and contended that amendment to section 201(3) by Finance Act, 2014 was expressly made prospective with effect from 1-10-2014 and therefore the impugned notices/summons for financial years 2007-08 and 2008- 09 were erroneously issued by revenue. The assessee submitted that the proceedings had already become time barred in view of the provisions of section 201(3) prior to amendment in section 201(3) by the Finance Act 2014.

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

“i) It is required to be noted that in the instant cases, limitation for passing orders as per the provisions prevailing at the relevant time and even as provided u/s. 201(3)(i) as amended by Finance Act of 2012 had already expired on 31-3-2011 and 31-3-2012, respectively.

ii) Considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable with effect from 1-10- 2014 and even considering the fact that proceedings for financial years 2007-08 and 2008-09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) had already expired on 31-3- 2011 and 31-3-2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee.

iii) Considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1-4-2010, it is to be held that section 201(3), as amended by Finance Act No. 2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) can be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014.

iv) Under the circumstances, the impugned notices/ summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

Reassessment in case of dead person – Sections 147, 148 and 159 – A. Y. 2008-09 – Where department intended to proceed u/s. 147 against assessee when he was already dead, it could have been done so by issuing a notice to legal representative of assessee within period of limitation for issuance of notice

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Vipin Walia vs. ITO; [2016] 67 taxmann.com 56 (Delhi)

A notice u/s. 148 dated 27th March 2015 was addressed by the ITO to one Mr. Inder Pal Singh Walia, seeking to reopen the assessment for A. Y. 2008-09. The notice was returned unserved to the Department with the postal authorities endorsing on it the remarks “Addressee expired”. Mr. Inder Pal Singh Walia had expired on 14th March 2015. In other words, the notice dated 27th March 2015 had been addressed to a dead person. The ITO then wrote letter to the petitioner the legal representative on 15/06/2015 proposing to continue the reassessment proceedings. On 6th July 2015, the Petitioner wrote to the ITO pointing out that his father Shri Inder Pal Singh Walia had expired on 14th March 2015 and that the proceedings initiated u/s. 148 of the Act were barred by limitation. Additionally, it was stated that he was unaware of the financial affairs or transactions carried on by his late father. On 18th July 2015, the ITO took the stand that since the intimation of the death of Shri Inder Pal Singh Walia on 14th March 2015 was not received by her office “therefore the notice was not issued on a dead person”.

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

“If department intended to proceed u/s. 147, it could have been done so prior to period of limitation by issuing a notice to legal representative of deceased assessee and beyond that date it could not have proceeded in matter even by issuing notice to Legal Representatives of assessee. Therefore, subsequent proceedings u/s. 147 against petitioner were wholly misconceived and were to be quashed.”

Loss – Set-off – Section 74 r.w.s. 50 – A. Y. 2005- 06 – Where deemed short-term capital gain arose on account of sale of depreciable assets that was held for a period to which long-term capital gain would apply, said gain would be set-off against brought forward long-term capital losses and unabsorbed depreciation

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CIT vs. Parrys (Eastern) (P.) Ltd.; [2016] 66 taxmann.com 330 (Bom)

The respondent-assessee had for the subject assessment year inter alia disclosed an amount of Rs.7.12 crore as deemed short-term capital gain u/s. 50. This deemed short-term capital gain arose on account of the sale of depreciable assets. This deemed short-term capital gain was set-off against brought forward long-term capital losses and unabsorbed depreciation.

The Assessing Officer held that in view of section 74, such set-off on short-term capital gain against the longterm capital gain was not permitted. Thus, disallowed the set-off of brought forward long-term capital losses and unabsorbed depreciation against the deemed shortterm capital gain of Rs.7.12 crore. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. It does not change the character of the capital gain from that of being a long-term capital gain into a short-term capital gain for purpose other than section 50. Thus, the respondentassessee was entitled to claim set-off as the amount of Rs. 7.12 crores arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long-term capital gain apply. Thus, for purposes of section 74, the deemed short-term capital gain continues to be long-term capital gain.

ii) Moreover, it appears that the revenue has accepted the decision of the Tribunal in Komac Investments & Finance (P.) Ltd. vs. ITO [2011] 132 ITD 290/13 taxmann.com. 185 (Mum.) as no appeal was apparently being filed from that order.”

Charitable or religious trust – Sections 11 and 32 – A. Y. 2009-10 – Section 11(6) inserted by the Finance (No. 2) Act, 2014 denying depreciation while computing income of charitable trust, is prospective in nature and operates with effect from 1-4-2015 – For the relevant year the depreciation is allowable

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DIT (Exemp) vs. Al- Ameen Charitable Fund Trust; [2016] 67 taxmann.com 160 (Karn);

The assessee was a charitable institution registered u/s. 12AA. In the course of assessment, the Assessing Officer denied exemption u/s. 11, read with section 10(23C) and also made an addition of income on account of disallowance of depreciation. The Commissioner (Appeals) as well as the Tribunal allowed assessee’s claim for depreciation.

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

“i) It is to be noticed that while in the year of acquiring the capital asset, what is allowed as exemption is the income out of which such acquisition of asset is made and when depreciation deduction is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital asset incurred if, not allowed then there is no way to preserve the corpus of the trust for deriving its income. As such, the arguments advanced by the revenue apprehending double deduction is totally misconceived.

ii) Section 11(6) was inserted with effect from 1-4-2015 by Finance Act No. 2/2014. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of charitable trust is to be effective from 1-4- 2015. This view is further supported by the Notes on Clauses in Finance [No. 2] Bill 2014, memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard. “The said amendment shall take effect from 1-4-2015 and will accordingly apply in relation to the assessment year 2015-16 and subsequent assessment years”.

iii) In view of above, it is held that the Tribunal is correct in holding that depreciation is allowable u/s. 11 and there is no double claim of capital expenditure as held by the Assessing Officer.”

Capital gains – Section 45(4) – A. Y. 1991-92 – Where natural partners of a firm transferred their rights in firm to artificial partner, being a company for its equity shares, such transfer would not amount to distribution or transfer of capital assets chargeable to capital gain

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Pipelines India vs. ACIT; [2016] 67 taxmann.com 112 (Mad)

The partners of assessee-firm, constituted a private limited company. The company was admitted as partner in the assessee-firm. Later on, the natural partners executed a release deed giving up all their rights in assesseefirm, in favour of the company. As a consequence, the company became absolute owner of the assessee-firm. The natural partners were allotted shares in the company for relinquishing their rights in the assessee-firm. The Assessing Officer held that there was a transfer of assets by way of distribution of capital assets on dissolution of the assessee-firm. He accordingly computed capital gain and made a demand. The Tribunal upheld order of the Assessing Officer holding that it was a dissolution of the firm and not conversion of the firm into a company since the relationship inter se between the partners had come to an end, the moment they released their shares in favour of the company.

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

“i) F or attracting section 45(4), the following conditions are to be satisfied:

(a) profits and gains should arise;
(b) from the transfer of a capital asset;
(c) by way of distribution of capital assets;
(d) on the dissolution of a firm or other association of persons or body of individuals not being a company or a co-operative society and
(e) or otherwise.

ii) Unless these conditions are satisfied, section 45(4) would not get attracted. Every distribution of capital assets may not lead to the attraction of section 45(4) unless it happens on the dissolution of a firm or other entity. Similarly, every distribution of capital assets on the dissolution of a firm may not attract section 45(4) unless it was a case of transfer of a capital asset by way of such distribution.

iii) The expression ‘transfer’ is defined in section 2(47) to mean several things. A sale, exchange or relinquishment of the asset or the extinguishment of any rights therein are all covered by the expression ‘transfer’.

iv) In the case on hand, the partners have taken equity shares in the private limited company that was inducted as the partner. Therefore, whatever rights that they had in the capital assets of the firm by way of being its partners, continue to exist in the form of equity shares that they held in the private limited company. In other words, one form of ownership that they had as partners of the partnership firm, got converted into another form. Hence, this is not a case where there was either a transfer of a capital asset or the distribution of a capital asset. This aspect has been completely lost sight of by all the authorities.

v) Therefore, the questions of law are answered in favour of the assessee/appellant. The tax case appeal is allowed.”

Capital or revenue receipt – Section 17(3)(iii) – A. Y. 2008-09 – Amount received by way of compensation against employment contract as goodwill and one time settlement of proposed employment – Capital receipt and not “profit in lieu of salary” – Assessee entitled to refund of tax deducted at source

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CIT vs. Pritam Das Narang; 381 ITR 416 (Del):

Under an employment agreement with a company ACEE, the assessee was to be employed as the chief executive officer of the company from July 1, 2007. The company later informed the assessee that there had been a sudden change of business plan and it would not be able to take him on board as promised under the employment contract. The assessee proposed that he be paid compensation upon which the company made a payment of Rs. 1,95,00,000/- to the assessee as “a one time payment for non-commencement of employment as proposed”. The company deducted tax of Rs. 22,09,350/- on this payment and paid him a sum of Rs. 1,70,90,650/-. The assessee did not offer this sum to tax claiming it to be capital receipt. The Assessing Officer assessed the sum as salary u/s. 17(3)(iii). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) Section 17(3)(iii)(A) presupposes the existence of an employment, i.e., a relationship of employee and employer between the assessee and the person who makes the payment of “any amount” in terms of s. 17(3)(iii) of the Act. Therefore, the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision, the existence of “employment” i.e. a relationship of employer and employee between the person who makes the payment of the amount and the assessee.

ii) It was a case where there was no commencement of employment and that the offer by the company to the assessee was withdrawn even prior to the commencement of such employment. The amount received by the assessee was a capital receipt and could not be taxed as “profit in lieu of salary”.

iii) The assessee was entitled to the refund of the tax deducted at source on Rs. 1,95,00,000/-.”

Business expenditure – Interest on borrowed funds – Section 36(1)(iii) – A. Y. 2005-06 – Assessee advancing money to its sister concern owning 89% of share capital free of interest – Holding company investing money for purpose of business in its subsidiary company amounts to expense on account of commercial expediency – Assessee entitled to deduction u/s. 36(1)(iii)

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Bright Enterprises Pvt. Ltd. vs. CIT; 381 ITR 107 (P&H):

In the A. Y. 2005-06, the assesee had advanced moneys to its sister concern of which the assessee was owning 89% of equity capital. The Assessing Officer disallowed the interest paid by the assessee on the loans taken from banks observing that if the assessee did not advance money to its sister concern without charging interest, it would be left with sufficient funds to return the bank loan and the assessee would not have to pay interest to the bank. The Assessing Officer further held that the advance made to the assessee’s sister concern was not for business purposes, since the assessee had no business dealings with the sister concern. The Tribunal upheld the disallowance on the ground that the assessee failed to establish that the money advanced by the assessee to the sister concern was used as a measure of commercial expediency.

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

“i) Whether the amount was debited to the account of the sister concern in respect of the payment made or the amount was actually paid to the sister concern and used by it for the purpose of business, was immaterial. Either way, the amount was used for the business of the sister concern. It was not even suggested that the advance was used by the sister concern for the purpose other than for the purpose of its business.

ii) In the memorandum of appeal, the assessee expressly stated that it had advanced the amount to its sister concern as a measure of commercial expediency for the purpose of business. This assertion was never denied. The assessee owned 89% of the equity capital of the sister concern. When a holding company invested money for the purpose of the business of its subsidiary, it must necessarily be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amount advanced to it by the holding company would not merely indirectly but directly benefit its holding company.

iii) There would be direct benefit on account of the advance made by the assessee to its sister company, if it improved the financial health of the sister company and made it a viable enterprise. But it was not necessary that the advance results in a positive tangible benefit. Thus the assesee was entitled to the deduction u/s. 36(1)(iii) of the Act.”

Business expenditure – TDS – Disallowance u/s. 40(a)(i), (ia) – A. Y. 2008-09 – Payment made for purchase of software as product and for resale in Indian market – Not royalty – Assessee not liable to deduct tax at source – Payment not to be disallowed

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Prin. CIT vs. M. Tech India P. Ltd.; 381 ITR 31 (Del):

For the A. Y. 2008-09, The Assessing Officer disallowed payment made in respect of software without deduction of tax at source u/s. 40(a)(i) and (ia), holding that the payments were in the nature of royalty. The Commissioner (Appeals) accepted the assessee’s contention that it was a value added reseller and the payments made by it for the purchase of software were not royalty but on account of purchases and that the assessee was not obliged to deduct tax at source on such payments. The addition/ disallowance was deleted. The Tribunal concurred with the decision of the CIT(A).

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

“i) The agreement indicated that the assessee was appointed for the purposes of reselling the software and payments made were on account of purchases made by the assessee. Payments made by a reseller for the purchase of software for sale in the Indian market could not be considered royalty.

ii) It was not disputed that in the preceding year, the Assessing Officer had accepted the transaction to be of purchase of software. The assessee was not liable to deduct tax at source. Deletion of addition was proper.”

Appellate Tribunal – Additional ground – Admissibility – Section 143(2) and 147 – A. Ys. 2005-06 to 2008-09 – The requirement of issuance of the notice u/s. 143(2) is a jurisdictional one – It does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147 is concerned – There being no fresh evidence or disputed facts sought to be brought on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise the addi

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Prin. CIT vs. Silver Line; 283 CTR 148 (Del):

In an appeal before the Tribunal filed by the Assessee, the assessee raised the additional ground for the first time that since the requisite notice u/s. 143(2) was not issued before completing assessment u/s. 147 the assessment u/s. 147 has to be held to be invalid. The Tribunal allowed the ground and decided in favour of the assessee.

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

“i) The legal position appears to be fairly well settled that section 292BB talks of the drawing of the presumption of service of notice on an assessee and is basically a rule of evidence. The failure of the Assessing Officer, in reassessment proceedings, to issue notice u/s. 143(2), prior to finalising the reassessment order, cannot be condoned by referring to section 292BB. Consequently the Court does not find merit in the objection of the Revenue that the assessee was precluded from raising the point concerning the nonissuance of notice u/s. 143(2) in the present case in view of the provisions of section 292BB.

ii) As regards the objection of the Revenue to the Tribunal permitting the assessee to raise the point concerning the non-issuance of notice u/s. 143(2) for the first time in the appeal before the Tribunal, the Court is of the considered view that in view of the settled legal position that the requirement of issuance of such notice u/s. 143(2) is a jurisdictional one, it does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147/148 is concerned. It raises a question of law as far as present cases are concerned since it is not in dispute that prior to finalisation of the reassessment orders, notice u/s. 143(2) was not issued by the Assessing Officer to the assessee. With there being no fresh evidence or disputed facts sought to be on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise such a point before it.”

TDS – Payment to non-resident – Sections 195 and 201 – A. Y. 2002-03 – Transaction not resulting in liability to tax – Tax not deductible at source – Assessee not in default

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Anusha Investments Ltd. vs. ITO; 378 ITR 621 (Mad):

The assessee had purchased shares from a non-resident company which had resulted in capital loss to the nonresident company. Therefore, the assessee had not deducted tax at source. The Tribunal held that whether or not the non-resident company suffered a loss or gain on the sale of shares, a duty was cast on the assessee to deduct the tax whenever it made payment to the nonresident and that the assessee was not only liable to deduct the tax at source, but it also had to pay the tax so collected to the exchequer.

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

“In the present transaction, admittedly, there was no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of section 195 did not arise and, therefore, the assessee could not be treated as an assessee in default.”

Revision – Section 263 – A. Y. 2007-08 – Question whether total income for purposes of section 36(1)(viia)(c) should be computed after allowing deduction u/s. 36(1)(viii) – Two possible views – Debatable issue – Revision u/s. 263 not justified

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CIT vs. Power Finance Corporation Ltd.; 378 ITR 619 (Del):

For the A. Y. 2007-08, the Assessing Officer completed the assessment u/s. 143(3), allowing the deduction u/s. 36(1)(viia)(c) and u/s. 36(1)(viii). The Commissioner exercised the revisional powers u/s. 263 and held that the deduction u/s. 36(1)(viia)(c) should have been computed after allowing deduction u/s. 36(1)(viii). The Tribunal set aside the order of the Commissioner holding that on the question whether the total income for the purpose of section 36(1)(vii)(c) should be computed after allowing the deduction u/s. 36(1)(viii) there were at least two possible views as reflected in the orders of the Delhi and Chennai Benches of the Tribunal. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) I ndependent of the two decisions, the stand of the Revenue as set out in its memorandum of appeal and that of the assessee that both deductions were independent of each other, gave rise to two further possible interpretations.

ii) The view taken by the Assessing Officer was a possible one and there was no occasion for the Commissioner to have exercised the jurisdiction u/s. 263.”

Presumptive tax – Section 44BBA – A. Y. 1989-90 to 1993-94 – Non-residents – Business of operation of air craft – Section 44BBA is not charging provision, but only a machinery provision – It cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income – When there is no taxable income, section 44BBA cannot be applied to bring to tax presumptive income constituting 5 per cent of gross receipts

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DIT vs. Royal Jordanian Airlines; [2015] 64 taxmann.com 93 (Delhi):

The assessee-airline was established by the Ministry of Transport of the Kingdom of Jardon. It appointed Jet Air Pvt. Ltd. as its general sales agency in India. The assessee commenced its operations in India, carrying passengers and cargo on international flights from and to India from 1989 onwards. Since commencement of operations in India, assessee had been incurring losses. For relevant years, the assessee filed its return declaring nil income. The Assessing Officer opined that assessee was a foreign company and was liable to pay tax in India in terms of section 44BBA. He thus proceeded to determine income at the rate of 5 per cent of the net sales. The Tribunal upheld the order of Assessing Officer on merits. However, the Tribunal remanded the matter back for recomputation of income u/s. 44BBA.

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

“i) Inasmuch as section 44BBA is not charging provision, but only a machinery provision, it cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income.

ii) Where there is no income, section 44BBA cannot be applied to bring to tax the presumptive income constituting 5 per cent of the gross receipts in terms of section 44BBA(2). No doubt, for that purpose the assessee has to produce books of account to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

iii) The Tribunal has noted the factual position regarding the losses incurred by assessee for the relevant years. This has not been disputed by the revenue in its appeal against the aforesaid order. Consequently, the question of assessee being asked to pay tax on presumptive basis u/s. 44BBA for the said year, or the matters being sent to the Assessing Officer for verifying the said facts does not arise.

In the result, assessee’s appeal has to be allowed.”

TDS – Disallowance u/s. 40(a)(i) – Royalty – Payment for import of software – Not royalty – Tax not deductible at source on such payments – Amount not disallowable u/s. 40(a)(i)

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Wipro Ltd. vs. Dy. CIT; 382 ITR 179 (Karn)

The Assessing Officer disallowed the claim for deduction of expenditure incurred for import of software relying on section 40(a)(i), on the ground that the payment was a royalty and that the tax was not deducted at source. The Tribunal allowed the assessee’s claim, holding that the payment made by the assessee for import of software is not royalty.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that the payments made by the assessee for import of software did not constitute royalty u/s. 9(1)(vi) of the Act and there was no obligation to deduct tax at source u/s. 195 and as such the expenditure cannot be disallowed u/s. 40(a)(i) of the Act.

TDS – Rent – Section 194I – Where One Time Nonrefundable Upfront Charges paid by the assessee was not (i) under the agreement of lease and (ii) merely for the use of the land and the payment was made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific SEZ(iii) for putting up an industry in the land and both the lessor as well as the lessee intended to treat the lease virtually as a deemed sale, the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor and hence lessee, not obliged to deduct TDS u/s. 194-I

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Foxconn India Developer (P.) Ltd. vs. ITO; [2016] 68 taxmann.com 95 (Mad)

In the appeal filed by the assessee, the following questions were raised before the Madras High Court:

“i)
Whether the upfront payment made by an assessee, under whatever name
including premium, for the acquisition of leasehold rights over an
immovable property for a long duration of time say 99 years, could be
taken to constitute rental income at the hands of the lessor, obliging
the lessee to deduct tax at source u/s. 194-I ?

ii) Whether in
the facts and circumstances of the case and in law, the Tribunal was
right in confirming the levy of interest u/s. 201(1-A) ?”

The High Court held as under:

“i)
The One Time Non-refundable Upfront Charges paid by the assessee was
not (i) under the agreement of lease and (ii) merely for the use of the
land. The payment made for a variety of purposes, such as (i) becoming a
co-developer (ii) developing a Product Specific Special Economic Zone
in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up
an industry in the land. The lessor as well as the lessee intended to
treat the lease virtually as a deemed sale, giving no scope for any
confusion. In such circumstances, we are of the considered view that the
upfront payment made by the assessee for the acquisition of leasehold
rights over an immovable property for a long duration of time, say 99
years, could not be taken to constitute rental income at the hands of
the lessor, obliging the lessor to deduct tax at source u/s. 194-I.
Hence, the first substantial question of law is answered in favour of
the appellant/assessee.

ii) Once the first substantial question
of law is answered in favour of the appellant/assessee, by holding that
the assessee was not under an obligation to deduct tax at source, it
follows as a corollary that the appellant cannot be termed as an
assessee in default. As a consequence, there is no question of levy of
interest u/s. 201(1-A).

iii) In the result, the appeal is allowed.”