BCAJ | Bombay Chartered Accountant Journal

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16th November, 2022

2. M/s. L. T. Stock Brokers Pvt. Ltd. vs. The Chief Commissioner of Income

[W.P. (L) 21032/2024,

Dated: 4^th March, 2025 (Bom) (HC)]

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16^th November, 2022

The Petitioner challenged the Chief Commissioner’s order dated 17 January 2024, made under Section 279(2) of the Act, dismissing the Petitioner’s application for compounding the offence.

The Chief Commissioner has dismissed this application on the sole ground that it was filed beyond 36 months from the date of filing of the complaint against the petitioners. The Chief Commissioner has relied upon paragraph 9.1 of CBDT guidelines dated 16 November 2022 for compounding offences under the Income-tax Act 1961.

The Hon. Court referred to the Co-ordinate bench decision of this Court vide order dated 18^th July, 2023 disposing of the Writ Petition (L) No.14574 of 2023 (Sofitel Realty LLP and Ors vs. Income-tax Officer (TDS) and Ors) wherein the Hon. Court considered similar CBDT guidelines dated 23 December 2014. In the context of such guidelines and clauses like Clause 9 of the 2022 guidelines, the Court held that since the Income-tax Act, 1961 had provided for no period of limitation to apply for compounding, such period could not have been introduced through guidelines. In any event, no rigid timeline could have been introduced through such guidelines. This Court held that the compounding application could not have been rejected on delay alone.

The court further referred to the Madras High Court decision in the case of Kabir Ahmed Shakir vs. The Chief Commissioner of Income Tax & Ors Writ Petition No.17388 of 2024 dated 30/08/2024 which was rendered in the context of the 2022 CBDT guidelines.

The counsel for the revenue, however, submitted that even where no limitation is prescribed by the State, the application has to be filed within a reasonable period. Further, she referred to the decision of the Hon’ble Supreme Court in the case of Vinubhai Mohanlal Dobaria vs. Chief Commissioner of Income Tax & Anr. [2025] 171 taxmann.com 268 (SC) and submitted that the CBDT guidelines of 2014 were upheld by the Hon’ble Supreme court, including, the paragraph which has prescribed limitation period to file application for compounding.

The Hon. Court observed that the above paragraph states that para 8 of the 2014 guidelines [which had referred to the period of limitation] does not exclude the possibility that in the peculiar case where the facts and circumstances so required, the competent authority should consider the explanation and allow the compounding application. This means that notwithstanding the so-called limitation period in a given case, the competent authority can exercise discretion and allow compounding application.

The Hon. Court observed that the competent authority has treated the guidelines as a binding statute. On the sole ground that the application was made beyond 36 months, the same has been rejected. The competent authority has exercised no discretion as such. The rejection is entirely premised on the notion that the competent authority had no jurisdiction to entertain a compounding application because it was made beyond 36 months. Such an approach was inconsistent with the rulings of this Court, Madras High Court and the Hon’ble Supreme Court decision relied upon by the learned counsel for the revenue.

The impugned order dated 17^th January, 2024 was set aside and the Chief Commissioner was directed to reconsider the petitioner’s application for compounding.

BCAJ Admin

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

1. Vijay Shrinivasrao Kulkarni vs. Income Tax Appellate Tribunal & Ors.

[WP (C) No. 17572 OF 2024]

AY 2019-20

Dated: 4^th February, 2025 (Bom) (HC)]

Arising from ITAT Pune ITA No.1159/Pun/2023 order dated 12^th March 2024

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

The petitioner assessee in the present case is a 64 year old retired serviceman, who earned income primarily from salary for the Assessment Year 2019-20. He was then an employee of M/s. Pfizer Healthcare India Pvt. Ltd. posted at Aurangabad, from where he derived his salary income.

The petitioner filed his original income tax return for the A.Y. 2019-20 on 1 August 2019 declaring a total income of ₹57,84,740/- The petitioner had claimed relief under section 89(1) of the Act for an amount of ₹ 13,22,187/-. Subsequently, the petitioner’s case was selected for scrutiny. In response to notices, the petitioner submitted copies of computation of income, Form 26AS, Form 16, Form 10E along with other supporting documents.

The AO issued a show cause notice-cum-draft assessment order dated 16 September 2021 to the petitioner directing him to furnish his reply on or before 19 September, 2021. The petitioner filed his submissions / reply dated 16 September 2021 to the show cause notice-cum-draft assessment order issued by AO. The petitioner also requested for the grant of a personal hearing through video conferencing, which was so granted on 23 September 2021.

According to the petitioner, the relief claimed by him under section 89(1) of the Act warranted consideration, as such amount was a salary advance, justifying such relief. However, the petitioner during assessment proceedings withdrew such relief as claimed under section 89(1) and alternatively claimed receipts of Ex-Gratia and other incentives as capital receipts. This was with reference to the amounts received from his employer, i.e., Pfizer Healthcare on account of closure of its plant at Aurangabad and in terms of the settlement to all permanent employees under the financial scheme for employees of Aurangabad 2019, dated 9 January 2019.

The AO proceeded to pass the assessment order dated 29 September 2021. While passing such order, the petitioner’s submissions were rejected on the ground that the amount received by the Petitioner on termination of employment cannot be treated as salary in advance, as claimed by the Petitioner. Thus, the relief claimed by the petitioner under section 89(1) of the Act for an amount of R13,22,187/- was rejected by the assessment order.

The Petitioner being aggrieved by the said assessment order, approached the National Faceless Appeal Centre by filing an appeal. It was during the proceedings initiated by the petitioner before the NFAC that various notices under section 250 of the Act were issued to the petitioner. However, the petitioner’s Chartered Accountant could not respond to the above notices, and sought adjournments, mainly on the ground that a senior CA was intended to be engaged to defend the petitioner in the said proceedings.

The NFAC proceeded to pass an ex-parte order dated 8 September 2023, rejecting the petitioner’s appeal filed before it, thereby confirming the assessment order passed by AO.

The Petitioner, approached ITAT, Pune, by filing an appeal. The appeal filed by the Petitioner was listed for hearing on 11 March 2024 before the Division Bench of ITAT, Pune. The petitioner’s advocate submitted that the matter was required to be remanded to the NFAC, on the ground that the order of the NFAC was an ex-parte order, as it was passed in absence of a hearing being granted to the petitioner / his representative. The Petitioner’s CA also filed an affidavit in this regard. The ITAT rejected the petitioner’s prayer to remand the matter to NFAC and insisted on hearing the appeal on merits. The Petitioner’s advocate then requested for a short adjournment, so that a paper book could be submitted. However, such request was denied. The Petitioner’s advocate then requested to the ITAT to grant one day’s time to submit such paper book and to take up appeal for hearing on merits on the next date. Such request was also rejected by the ITAT. The Petitioner’s advocate was directed to submit written submissions and paper book on the basis of which, the ITAT would pass appropriate orders. The Petitioner through his legal representative accordingly submitted written submissions, along with the paper book and case laws on 12 March 2024, before the ITAT.

It was in the above backdrop that the ITAT proceeded to pass the impugned order dated 12 March, 2024, the Petitioner being aggrieved by such order approached this court by filing a writ petition.

The learned counsel for the Petitioner submitted that the Petitioner is seriously prejudiced by the actions of the ITAT in passing the impugned order dated 12th March, 2024. He further referred to the following orders passed by the ITAT on the same day, i.e., 12th March, 2024, which are summarized below:-

The ITAT had in similar facts and circumstances remanded the matter to the JCIT-A/the NFAC for further consideration on merits. However, ITAT did not adopt the same approach in the present case. According to him, a fair approach ought to have been adopted by the ITAT considering the facts of the case, as no prejudice would have been caused to the Dept.

The Dept contended that the ITAT was justified in concluding, that there was no need to remand the proceedings to AO as such remand would be an exercise in futility. Accordingly, the ITAT was justified in dismissing the appeal of the petitioner.

The Hon. Court observed that this is a case where the violation of the settled principles of natural justice is not just apparent but real, palpable and clearly visible. The Petitioner is deprived of an opportunity to present its case not only before the NFAC but also subsequently before the ITAT. Not affording a reasonable opportunity to the Petitioner to present its case had perpetuated from the ex-parte order passed by NFAC which was not noticed by the ITAT in passing the impugned order.

It was not disputed that the NFAC under the faceless regime passed an ex-parte appeal order, without affording an opportunity to the petitioner of being heard. Thus, evaluation of assessment of the petitioner’s income and rejecting the submissions of the petitioner was undertaken also ought to have been appropriately undertaken by following the natural rules of fairness adhering to the principles of natural justice and such infirmity at least should have been addressed by the ITAT in passing the impugned order.

The Court further observed that on a perusal of the impugned order of the ITAT makes it clear that it proceeded to deal with the case of the petitioner on merits as is evident from the order. The Petitioner submitted that considering the fact that the order impugned before the ITAT itself was passed by NFAC was passed ex-parte, it would be just and proper for the ITAT to remand the matter to NFAC for passing orders on merits, after considering submissions of the petitioner. Also, the written submissions being tendered on behalf of the petitioner before the ITAT on 12th March, 2024 have not being considered in the impugned order being passed by the Tribunal. The Court referred judgment of the Supreme Court in the case of Delhi Transport Corporation vs. DTC Mazdoor Union._AIR 1999 SC 564 wherein it was held that Article 14 guarantees a right of hearing to a person who is adversely affected by an administrative order. The principle of audi alteram partem is a part of Article 14 of the Constitution of India. In light of such decision, the petitioner ought to have been granted an opportunity of being heard which, partakes the characteristic of the fundamental right under Article 14 of the Constitution of India.

The Hon. Court further referred to a decision of the Supreme Court in the case of Commissioner of Income Tax Madras vs. Chenniyappa Mudiliar (1969) 1 SCC 591 wherein the Supreme Court in interpreting the section 33(4) of the Income Tax Act, 1922 has held that the Appellate Tribunal was bound to give a proper decision on question of fact as well as law, which can only be done if the appeal is disposed-off on merits and not dismissed owing to the absence of the appellant. There is no escape from the conclusion that under the said provision, the Appellate Tribunal had to dispose-off the appeal on merits which could not have been done by dismissing the appeal summarily for default of appearance. The Court observed that the principles laid down in the said decision would squarely apply to the facts and circumstances of the present case, in as much as the Petitioner was neither heard nor were his written submissions placed before the ITAT, considered.

The Hon. Court set aside the impugned order of the ITAT dated 12^th March, 2024. Accordingly, the proceedings were remanded to the ITAT, for de novo hearing of the appeal filed before it.

BCAJ Admin

Section 148: Reassessment assessment cannot be opened twice for the same reason.

27. SarikaKansal vs. ACIT

[W.P.(C) 7940/2024 & CM APPL. 32747/2024]

Dated: 30^th January, 2025

(Del) (HC).] AY 2017-18

Section 148: Reassessment assessment cannot be opened twice for the same reason.

The petitioner challenged to the impugned order under Section 148A(d) of the Act and the impugned notice 148 of the Act. First, that the impugned order has been passed without considering that the information on the basis of which it was the subject matter of reassessment proceedings, which culminated in an order dated 29^th March, 2022 passed under Section 147 read with Section 144B of the Act.

The second ground is that the impugned notice is beyond the period of limitation. According to the petitioner, the limitation for issuance of the impugned notice expired on 31^st March, 2024.

The grounds on which the petitioner’s assessment is sought to be reopened revolves around transactions, whereby the petitioner had sold 1,70,000 (One Lac Seventy Thousand) shares of a company named Trustline Real Estate Private Limited (hereafter TREPL) to one Mr. Samir Dev Sharma at the rate of ₹42/- per share. The Assessing Officer (hereafter AO) suspects that the said shares were sold at an apparent consideration, which is below the fair market value with an intent to avoid tax.

The petitioner disputes the same and contends that her income for AY 2017-18 has been reassessed for the same reason that she had sold the shares of TREPL at a value, which was less than the fair market value.

Thus, the first and foremost question to be addressed is whether the AO had reopened the assessment for AY 2017-18 for the same reason that has led the AO to pass the impugned order holding that it is a fit case for issuance of the impugned notice.

The petitioner is an individual and there is no dispute that she files her income tax returns regularly. She had filed her return for AY 2017-18 on 2nd August, 2017 declaring her taxable income as ₹74,77,750/-. The said income also included income arising from sale of 1,70,000 (One Lac Seventy Thousand) shares of TREPL at the rate of ₹42/- per share. The petitioner claims that the said rate was settled on the basis of valuation report, whereby the shares of TREPL were valued taking into account its underlying assets including the first and third floor of the property bearing the address A-20, Friends Colony East, New Delhi (hereafter the Friends Colony property). The petitioner’s return was processed under Section 143(1) of the Act.

On 31^st March, 2021, the AO issued a notice under Section 148 of the Act, as in force at the material time, calling upon the petitioner to file her return for AY 2017-18 within a period of fifteen days from the date of the said notice. Subsequently, the AO furnished the reasons for reopening the assessment.

It is apparent from perusal of the reasons that the petitioner’s assessment was reopened on the premise that the petitioner as well as certain other companies had sold the shares of TREPL to one Mr. Samir Dev Sharma during the Financial Year 2016-17 at an abysmally low value. During the course of the reassessment proceedings, the AO issued a notice under Section 143(2) read with Section 147 of the Act calling upon certain information including the information that was relevant for determining the market value of the Friends Colony property. The petitioner responded to the said notice and provided the information as sought for. The petitioner had explained that TREPL owns two floors of the Friends Colony property — first and third floors each having covered area of 2,248.44 sq. ft.

The petitioner asserted that the market value of the Friends Colony property, as determined by the government approved valuer, was ₹8,58,90,408/-(Rupees Eight Crores Fifty-eight Lakhs Ninety Thousand Four Hundred and Eight only) and she had also furnished the copies of the valuation report, balance sheet and profit and loss account of TREPL. A letter dated 24^th March, 2022 furnished by the petitioner to the AO in response to the notice issued under Section 143(2) of the Act. The explanation as provided by the petitioner was accepted and the AO passed an assessment order dated 29^th March, 2022 accepting the petitioner’s returned income.

Now the AO once again issued a notice dated 28^th March, 2024 under Section 148A(b) of the Act enclosing therewith an annexure containing information which according to the AO, suggested that the petitioner’s income had escaped assessment and accordingly, called upon the petitioner to show cause why her assessment for AY 17-18 not be opened.
The Court observed that it was apparent from the reasons that the notice under Section 148A(b) of the Act was issued on the assumption that the petitioner had sold the shares of TREPL at an apparent value which was less than its fair value. It is important to note that whereas in the earlier round of proceedings, the AO had reasoned that income amounting to ₹18,91,41,050/- for AY 2017-18 had escaped assessment, the AO now stated that the information available suggested that the income amounting to ₹32,35,81,536/- had escaped assessment. The said view was premised on the basis that the value of the Friends Colony property was ₹32,35,81,536/- and the petitioner had sold the entire Friends Colony property to Mr. Samir Dev Sharma by transferring the shares of TREPL, which owned the said property. It is material to note that this was clearly the subject matter of examination in the previous round of the reassessment proceedings that had commenced by virtue of the notice dated 31st March, 2021 issued under Section 148 of the Act.

The petitioner responded to the notice by a letter dated 10^th April, 2024. Once again, the petitioner reiterated that TREPL owned only two floors of the Friends Colony property – first and third floors and each of the said floors measured 2,248 sq.ft.

The petitioner furnished a valuation report which was furnished earlier disclosing the value of the two floors of the Friends Colony property which was owned by TREPL as ₹8,60,00,000/- (Rupees Eight Crores Sixty Lac Only). She reiterated that the fair market value of the shares sold by her and as determined in terms of Rule 11UAA of the Income Tax Rules, 1962 would amount to ₹42/- per share after considering the market value of the two floors of the Friends Colony property. The AO passed the impugned order holding that it is a fit case for issuance of notice under Section 148 of the Act. The impugned order proceeds on the basis that the entire shareholding (25,00,000 shares) of TREPL were transferred to one Mr. Samir Dev Sharma by three persons for a consideration of ₹10,50,00,000/-

The impugned order proceeds on the assumption that TREPL owned the entire Friends Colony property ad-measuring 500 sq. yds. (418.064 sq. mtrs.) and the circle rate in the given area is ₹7,74,000/- per sq. meter. Thus, the value of the immovable property owned by TREPL is ₹32,35,81,536/- and the same had been transferred indirectly by sale of shares of TREPL. The impugned order on the aforesaid basis computes the fair market value of the shares of TREPL sold by the petitioner.

The Hon. Court observed that it is clear that the information on the basis of which the impugned order has been passed was subject matter of examination in the earlier round of reassessment under Section 147 of the Act. The AO’s reason to believe that the petitioner’s income had escaped assessment, which had led to the issuance of notice dated 31^st March, 2021, was founded on an assumption that the petitioner had sold the shares of TREPL at a price below its correct value. The notice issued under Section 143(2) of the Act during the said proceedings and the petitioner’s response dated 24^th March, 2022 issued to the said notice clearly establishes that the examination revolved around the value of the immovable property held by TREPL (Friends Colony property). The petitioner’s response dated 24^th March, 2022 indicates that the petitioner had forwarded the audited balance sheet and the profit and loss account of TREPL and had also explained that TREPL owned only two floors of the Friends Colony property. The AO had examined the said response and accepted the same. Clearly, the impugned order has been passed in respect of the same issue that was subject matter of examination in the earlier round.

The learned counsel for the Revenue contended that there was a difference in the issue involved as the impugned order has been passed on the information that TREPL had owned the entire Friends Colony property. He contended that in the earlier round, the AO had accepted that TREPL held only part of the Friends Colony property, however, information now available suggests that TREPL owns the entire Friends Colony property.

Undisputedly, the impugned order has been passed on the basis that TREPL owns the entire Friends Colony property. However, the same was clearly an issue in the earlier round as well and the petitioner had clearly explained the extent of property owned by TREPL. In her response to the notice dated 28^th March, 2024 issued under Section 148A(b) of the Act, the petitioner had reiterated that TREPL owns only two floors of the Friends Colony property and there is no material on record available with the AO to contradict the same. The impugned order does not discuss why the petitioner’s assertion that TREPL owns only two floors of the Friends Colony property had been ignored. The counter affidavit filed on behalf of the Revenue also does not address the said issue. The counter affidavit merely reiterates what is stated in the impugned order.

The Court observed that it is apparent that the impugned order has been passed on surmises without any cogent material to controvert that TREPL owns only two floors of the Friends Colony property and not the entire building at the material time.

The question whether the TREPL owned the entire Friends Colony property is one that is easily verifiable by the AO. However, as noted above, the AO has completely ignored the petitioner’s response to the notice issued under Section 148A(b) of the Act in this regard in the impugned order. Similar approach has also been adopted in the counter affidavit as well.

Section 148A(d) of the Act mandates that the AO is required to pass an order on the basis of record and considering the response to the notice under Section 148A(b) of the Act. In this case, the record indicates that the information on the basis of which the assessment is sought to be reopened was fully examined in the earlier round of reassessment under Section 147 read with Section 144B of the Act. The petitioner’s response clearly stated that TREPL owned only two floors of the Friends Colony property and there is nothing credible on record that controverts it. The impugned order does not even advert to the said issue.

Thus, the impugned order and the impugned notice were quashed and set aside.

BCAJ Admin

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

26. City Corporation Limited vs. ACIT Circle – 1 Pune &Ors.

[WP (C) No. 6076 TO 6081 OF 2023]

Dated: 29^th January, 2025

(Bom) (HC)] [Assessment Years : 2013-14 to 2019-20]

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

The assessee is engaged in constructing and developing infrastructure facilities. In terms of the NCLT’s order dated 27^th April, 2020, the CCL got merged with its wholly owned subsidiary “Amanora Future Tower Pvt. Ltd.” (AFTPL), with effect from 1^st April, 2018.

By communication dated 27^th April, 2020, the Petitioner informed the Income Tax Authority of the merger effective 1st April, 2018. This intimation bore the stamp and endorsement of receipt from the office of the Deputy Commissioner of Income Tax, Circle 1(1), Pune.

In the return filed on behalf of the Respondents, no dispute was raised about receiving this intimation on 27^th August, 2020.

On 31^st March, 2023, the Assistant Commissioner of Income Tax, Circle 1(1), Pune, issued a notice dated 31^st March, 2013 under Section 148 of the Act, to AFTPL seeking to reopen the case in PAN: AAKCA3074H. The Assistant Commissioner obtained approval from the Principal Chief Commissioner of Income Tax to issue notice to “Amanora Future Towers Private Limited (now merged with City Corporation Limited)”.

The Petitioner thereupon instituted the writ Petitions, questioning the impugned notice dated 31^st March, 2023, inter alia, on the ground that, post-merger, AFTPL was a non- existing entity. Therefore, no notice under Section 148 of the Act, could have been issued to AFTPL.

The learned counsel for the Petitioner, relied on Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. (2019) 107 taxmann.com 375 (SC); Uber India Systems (P.) Ltd. vs. Assistant Commissioner of Income(2024) 168 taxmann.com 200 (Bombay); and Alok Knit Exports Ltd. vs. Deputy Commissioner of Income-tax, Circle 6(1)(1), Mumbai (2021) 130 taxmann.com 457 (Bombay); in support of the contention that the notice issued to a non- existing entity post-merger was a substantive illegality and not some procedural violation. Accordingly, he urged that the impugned notices be quashed and set aside.

The learned counsel for the Respondents, submitted that issuing notices in the name of AFTPL was not illegal. He also submitted that the Principal Commissioner of Income Tax specifically approved the issuance of such notices. It was submitted that the material on record shows that the notice was meant to be served upon the Petitioner. However, due to certain technical glitches, the utility system generated a notice in the name of AFTPL. He said the facts in the present case were like those in Skylight Hospitality LLP vs. Asstt. CIT(2018) 92 taxmann.com 93/254 Taxman 390 (SC). He submitted that, in this case, the Delhi High Court upheld a notice issued to the company that had already merged. Accordingly, it was urged that these Petitions may be dismissed.

The Hon. Court observed that the merger between City Corporation Limited and Amanora Future Towers Private Limited, which was effective from 1^st April, 2018, was not disputed. This merger was based on the NCLT’s order dated 27^th April, 2020. There was also no dispute about the Petitioner, vide a communication received by the Income Tax Department on 27^th August, 2020 informing about the merger effective 1^st April, 2018. No dispute was raised about the department not receiving the intimation on 27^th August, 2020 or about the department being unaware of the merger. Still, the impugned notices dated 31^st March, 2023 under Section 148 of the Act, were issued only in the name of “Amanora Future Towers Private Limited”. The crucial factor being that all such notices were issued to and in the name of ‘Amanora Future Towers Private Limited’

As of the date of the issue of the impugned notices, the noticee ‘Amanora Future Towers Private Limited’ could not have been regarded as a ‘person’ under Section 2(31) of the Act. In fact, that was a non-existent entity. In Maruti Suzuki case the Hon’ble Supreme Court has held that notice issued in the name of a non-existent company is a substantive illegality and not merely a procedural violation of the nature adverted to in Section 292B of the Act.

The Hon. Court noted that in the Maruti Suzuki case, the Hon’ble Supreme Court noted that the merged company had no independent existence after the merger. The Court noted that even though the Assessing Officer was informed of the merged company having ceased to exist due to the approved merger scheme, the jurisdictional notice was issued only in its name. The Court held that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the merged entity ceases to exist upon the approved merger scheme. Participation in the proceedings by the petitioner company into which the merged company had merged or amalgamated could not operate as an estoppel against the law.

Similarly in Ubber India Systems case, the Coordinate Bench held that where by virtue of an order passed by the NCLT, the assessee company stood amalgamated with the petitioner, notice issued under Section 148A(b) and Section 148 to the assessee, which was a non-existent company was illegal, invalid and non-est. Similarly, in Alok Knit Exports Ltd(supra), another Coordinate Bench where the Assessing Officer had committed a fundamental error by issuing notice under Section 148 of the IT Act in the name of an entity which had ceased to exist because of it having merged with the petitioner company, the stand of the Assessing Officer that this was only an error which could be corrected under Section 292B could not be sustained.

The Court observed that in the affidavit filed by the tax department there is a clear admission that the amalgamation of the company was brought to the notice of the Department. The only explanation is that “notice was issued on the non-existing company due to technical glitch in the system wherein no field in the notice u/s 148 of the Act is editable.”

The affidavit states that files were moved proposing notices in the names of both entities, AFTPL and the Petitioner (CCL). There was a reference to seizure proceedings, the two PAN numbers, and the lack of an editable field on this notice. Therefore, it was submitted that the notice was generated on AFTPL’s PAN.

In short, the averments in the affidavit purport to apportion the blame on the department’s utility system. Based upon this, the fundamental error is sought to be passed off as a mere technical glitch.

The Court held that based on the above averments and the arguments, the fundamental error in issuing the impugned notices against a non-existing company despite full knowledge of the merger cannot be condone. The impugned notices, which are non-est cannot be treated as “good” as urged on behalf of the Respondents. In Maruti Suzuki case, the Hon’ble Supreme Court has held that issuing notice in the name of a non-existing company is a substantive illegality and not a mere procedural violation of the nature adverted to in Section 292B of the Act.

The department contention about the facts in the present case being akin to those in Skylight Hospitality LLP case could not be accepted. The Court held that the Special Leave Petition filed by the Skylight Hospitality LLP (supra) against the judgment of the Delhi High Court rejecting its challenge was dismissed in the peculiar facts of the case, which weighed with the Court in concluding that there was merely a clerical mistake within meaning of Section 292B. The Hon’ble Supreme Court held that in Maruti Suzuki case the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer, was issued to a non-existent company. The assessment order was issued against the amalgamating company. “This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B”.

The Hon. Court also referred to decisions in case of Anokhi Realty (P) Ltd. Vs. Income-tax Officer(2023) 153 taxmann.com 275 (Gujarat); Adani Wilmar Ltd. vs. Assistant Commissioner of Income-tax(2023) 150 taxmann.com 178 (Gujarat) and in the case of Principal Commissioner of Income Tax -7, Delhi vs. Vedanta Limited ITA No. 88 of 2022 decided on 17^th January, 2025.

Accordingly, the impugned notices were quashed and set aside.

BCAJ Admin

Section 143(3) r.w.s. 148: Reopening of assessment — Assessment completed — Petitioner had explicitly sought for a personal hearing — Not granted – breach of the principles of natural justice.

25. Pico Capital Private Limited vs. Dy. CIT Circle – 8(2)(1) &Ors.

[WP(L) No. 15940 OF 2024]

Dated: 7^th January, 2025. (Bom) (HC)

Section 143(3) r.w.s. 148: Reopening of assessment — Assessment completed — Petitioner had explicitly sought for a personal hearing — Not granted – breach of the principles of natural justice.

The Petitioner challenged the assessment order dated 26^th March, 2024 and notice dated 31^st March, 2023 disposing of objections under Section 148A(d) of the Act. However, the Court considered the challenge to the assessment order dated 26^th March, 2024 on the ground that it was made in breach of the principles of natural justice.

The Petitioner, in reply to the show cause notice, had explicitly sought for a personal hearing. There is no dispute on this aspect. However, the impugned order stated video conferencing was not required.

The Court noted that though a personal hearing was sought, the same had been denied to the Petitioner on the ground that the Petitioner would have nothing further to add to the reply already filed by the Petitioner. The Court noted that such an approach, would not be appropriate. If the law requires the grant of a personal hearing, then the same should not be ordinarily denied on the grounds that nothing further could be said in the personal hearing. The Petitioner must be allowed to convince the Assessing Officer of the merits of its version. This is more so when a law provides for a personal hearing when requested by the Assessee.

Attention was invited to Circular No.F.No.225/97/2021/ITA-II dated 6^th September, 2021 in the context of approval for the transfer of assessments / penalties proceedings to jurisdictional Assessing Officers. It was observed that the Circular provided that the request for personal hearings shall generally be allowed to the assessee with the approval of the Range Head, mainly after the assessee has filed a written submission to the show cause notice. Personal hearings may be allowed for the assessee, preferably through video conference. If Video Conference is not technically feasible, personal hearings may be conducted in a designated area in the Income-Tax Office. The hearing proceedings may be recorded. Given this Circular, the defence raised, or the justification offered by the Respondents’ affidavit cannot be accepted.

The Court noted that though the assessment order was appealable, however, the Court entertained the petition because a case of complete failure of natural justice was made out. No personal hearing was granted to the Petitioner, and such denial was not for valid reasons.

The impugned assessment order dated 26^th March, 2024 was set aside, and remand the matter to the concerned Respondent to dispose of the show cause notice issued to the Petitioner following the law and after granting the Petitioner a personal hearing.

BCAJ Admin

Section: 143(1) – Intimation – ICDS adjustment and valuation of inventory – Writ Petition – Alternate remedy – Article 226 of the Constitution of India : Assessment Year 2022-23.

24. Fiat India Automobiles Limited vs. Dy. Director of Income Tax &Ors.

[WP (L) No. 10495 OF 2023]

Dated: 15^th January, 2025 (Bom) (HC)

Section: 143(1) – Intimation – ICDS adjustment and valuation of inventory – Writ Petition – Alternate remedy – Article 226 of the Constitution of India : Assessment Year 2022-23.

The Petition challenges an intimation passed under section 143(1) of the Income-tax Act, 1961 (‘the Act’), dated 26^th July 2023 for Assessment Year 2022-23, whereby a demand of approximately ₹6,600 Crores was raised.

The Petitioner submitted that since a huge demand of ₹6,600 had been raised, the remedy of appeal would not be an efficacious remedy. Accordingly, the Court should exercise its writ jurisdiction. It was further submitted that prior to passing the impugned intimation order, no opportunity was given to the Petitioner. It was further submitted that on 28^th March, 2024 an order under section 143(3) read with Section 144B of the Act came to be passed by the Assessing Officer accepting the return income with a rider which reads as follows :-

“3.1.4…….It is clarified that the issue of ICDS adjustment and valuation of inventory is under adjudication pending with Hon’ble High Court, therefore, no decision with regard to these issues is being taken in this order.”

It was contended that in view of the subsequent 143(3) order, and on a reading of Section 143(4) of the Act, the subject matter of 143(1) gets subsumed in 143(3) proceedings. It was further pointed out that the Petitioner had made an application under Section 154 on 31^st July, 2023 for rectifying the mistake which had crept in the intimation under Section 143(1) of the Act. The said rectification application had not been disposed of on the ground that the subject matter of 143(1) was pending before the Court in the present Petition.

The Respondents, justified their action in passing 143 (1) order and submitted that since the matter was pending before this Court, the officer in the 143(3) order stated that the issue of ICDS adjustment and valuation of inventory would be subject to the outcome of this Petition.

The Hon. Court observed that at no point of time, the Hon. Court had restrained the Respondents from adjudicating any issue in the regular assessment proceedings. Accordingly, the observations made in the assessment order under Section 143(3), that since the issue of ICDS adjustment and valuation of inventory was pending before the Court, no decision with regard to this issue has been taken, was incorrect. If the officer was of the view that the ad-interim order amounted to restraining the officer from adjudicating this issue in regular assessment proceedings, then, the Respondents should have approached the Court for clarification. However, at no stage the Hon. Court had restrained the Respondents from adjudicating this issue in regular assessment proceedings.

The Court further observed that, the Petitioner had made an application on 31^st July, 2023 for rectification of the intimation. The said application of the Petitioner was not decided by the Assessing Officer on the ground that issue of Section 143(1) adjustment is pending before the Court. The Hon. Court again clarified that the Respondents were not restrained by any order of the Hon. Court from passing any order to decide the rectification application filed by the Petitioner on 31^st July, 2023. The Hon. Court observed that in the absence of any restraint order by the Court, the stand of the Respondents not to adjudicate the rectification application was misconceived. The officer ought to have adjudicated the rectification application in accordance with law.

The Hon. Court observed that the intimation under challenge is an appealable under Section 246A(1)(a) of the Act. It was the contention of the Petitioner that no notice was given before passing the intimation. However, in the order dated 23^th August 2023, the Respondents have stated that an intimation was issued to the Petitioner on 27^th May, 2023 requiring a response and since the Petitioner did not respond, the adjustment was made.

The Court held that this would require adjudication of facts whether any prior intimation was served on the Petitioner before passing the impugned intimation. This factual determination cannot be examined by the Court in the writ proceedings. However, the same can be adjudicated efficaciously before the Appellate Authority. The Court noted that in Section 246A, there is no provision of mandatory pre-deposit for admitting and entertaining the appeal. Therefore, the contention of the Petitioner that the intimation raises a huge demand of ₹6,600 crores, where the remedy of appeal is not efficacious remedy, was rejected. The Court further noted that the Petitioner had the remedy of making an application for stay of the demand and any order passed thereon, if the Petitioner was aggrieved, could be challenged in accordance with law. Therefore, although a huge demand was raised, but in the absence of any pre-deposit for admitting and entertaining the appeal, the Court cannot interfere with the impugned intimation in writ proceedings.

In view of above, the Hon. Court granted the Petitioner liberty to challenge the impugned intimation dated 26^th July 2023 by filing an appeal within a period of four weeks from the date of uploading of the present order. The Appellate Authority was directed to consider the appeal on merits without recourse to limitation, since the Petitioner was bonafidely pursuing the Petition before the Court. The Respondent was directed to decide the rectification application dated 31^st July 2023 within a period of two weeks from the date of uploading the order after giving an opportunity of personal hearing to the Petitioner.

BCAJ Admin

Section 148 — Reassessment — On deceased person — Not permissible

23 Mary Gene Gracious vs. ITO Ward 20(1)(1), Mumbai
[WP(L) 3460 OF 2024
Dated: 10^th December, 2024, (Bom-HC)

Section 148 — Reassessment — On deceased person — Not permissible

The Petitioner challenged the action as resorted by the respondents against Mr. Gene Gracious, the husband of the petitioner by issuance of notice under Section 148 of the Act dated 29^th July, 2022, which was preceded by a notice issued under Section 148A(b) dated 26^th May, 2022, and an order passed thereon under Section 148A(d) dated 29^thJuly, 2022.

The case of the petitioner is that the impugned notice under Section 148 and the action prior thereto as initiated by respondent no.1 are non-est and illegal in as much as Mr. Gene Gracious against whom these notices were issued, passed away on 09 November 2016. A Death Certificate issued by Department of Health, Municipal Corporation of Greater Mumbai.

The Petitioner relying on various decisions contended that the petition is required to be granted as respondent no. 1 could not have resorted to impugned action by issuance of notices underSection 148A(b) and 148, and passing an order under Section 148A(d), against a deceased person.

The Court observed that the Supreme Court has held it to be the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given reasonable opportunity to defend himself (UMC Technologies Private Limited vs. Food Corporation of India &Anr., Civil Appeal No. 3687 of 2020, decided on 16^th November, 2020). This basic jurisprudential principle becomes applicable when any action of such nature was being initiated against Mr. Gene Gracious. Once Mr. Gene Gracious passed away, there was no question of his defending such action or being heard so as to accord any sanctity to such order, and the consequential notice under Section 148 of the Act. The entire action under clause (b) and clause (d) of Section 148A of the Act were of no consequence being non-est. In this situation, even the legal heirs cannot be bound by such order which is non-est, void ab initio.

Also, the scheme of provisions of Section 148A read with Section 148 as applicable in the facts of the present case (AY 2015-16) rests on a foundation that no notice under Section 148 could have been issued without a prior show-cause notice being issued to an assessee. Further, a hearing would need to be granted to the assessee on such show cause notice and thereafter an order could be passed. All this is certainly not possible to be undertaken against a deceased person and / or even against a non-existing entity [refer Principal Commissioner of Income-Tax, New Delhi vs. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375 (SC).]

Once such mandatory legal compliance itself could not be achieved, on such sole ground, the notice issued under Section 148 preceded by earlier actions is required to be held to be non-est and void ab initio. The department cannot maintain issuance of the notice as impugned to a deceased person.

In the present case, admittedly, the concerned assessee Mr. Gene Gracious passed away on 9^th November, 2016, the show cause notice under Section 148A(b) of the IT Act was issued on 26^th May, 2022 and an order thereon was passed on 29^th July, 2022 under Section 148A(d), as also the impugned notice under Section 148 was also issued on 29^th July, 2022. All this has happened after the said assessee, Mr. Gene Gracious had passed away.

In view of the above, the petition deserves to be allowed.

BCAJ Admin

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

22 HDFC Bank Ltd. (formerly, Housing Development Finance Corporation Ltd.) vs. The DCIT Spl. Range – 15
[ITXA No. 58 OF 2006]
Dated: 13^th November, 2024. (Bom) (HC) [Arising from ITAT order dated 12^th September, 2005]
Assessment Year: 1993-94

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

The appellant is inter alia engaged in the business of providing long term finance in the course of which, various securities are held as stock in trade. These securities are purchased from time to time, which carry interest. The purchase price includes the component of interest for the broken period. The securities which remain unsold at the end of the year are shown in the closing stock at cost. However, while computing the income, the assessee claims deduction on account of interest for the broken period in respect of unsold securities since according to assessee, the entire interest income accrues to the assessee on the fixed date falling after the end of previous year. However, the assessee offered the interest income in respect of such securities in the next year either when the securities were sold or when interest is received.

The Assessing Officer rejected the claim of the assessee and disallowed the sum. The reason for disallowance was that broken period interest formed part of the price of the asset purchased, which has already been debited to Profit & Loss Account and, therefore, question of allowing deduction did not arise in view of the Supreme Court judgment in the case of Vijaya Bank Ltd. vs. Additional Commissioner of Income-tax [1991] 187 ITR 541 (SC).

The Commissioner of Income-tax (Appeals) also agreed with the Assessing Officer and confirmed the order passed by the Assessing Officer. Against such order passed by the CIT(A), the appellant carried the matter to the Tribunal. The Tribunal also did not accept the contentions as urged on behalf of the assessee that the interest on securities is taxable as business income, since securities are held as stock in trade. As the interest paid on purchase of securities would be on revenue account, the same would entitle the assessee to claim a revenue loss, being the consistent accounting method followed by the assessee. The Tribunal, while rejecting the assessee’s contention, was of the view that when the securities are purchased by the appellant along with interest thereon, the price paid becomes the cost of the asset which is to be debited to Profit & Loss Account. The Tribunal observed that the assessee debited the entire cost of the purchase including broken period interest to Profit & Loss Account as per the commercial practice. Hence, if the security is sold, then profit would form part of the Profit & Loss Account as sales would be credited. It was observed that when such security was not sold, then as per the settled principle of accountancy, it has to be shown in the closing stock either at cost or market price whichever is lower. There is no other method of accounting for computing business profit. The Tribunal rested its view referring to the decision of Supreme Court in Chainrup Sampatram vs. Commissioner of Income-tax [1953] 24 ITR 481 (SC). It is for such reason the Tribunal was of the considered opinion that the question of allowing any deduction separately did not arise.

On further appeal, the Assessee relied on the orders passed by the Division Bench of this Court in American Express International Banking Corporation vs. Commissioner of Income-tax [2002] 258 ITR 601 (Bombay) wherein similar questions as the present questions were raised for the consideration of the Division Bench. The key issue which fell for consideration there was with regard to the correct treatment of the broken period interest and whether the broken period interest (net) paid by the assessee at the time of purchase of securities was a part of the capital costs of the investment. The Court considered the Revenue’s contention that the payment for the broken period interest (net) cannot be claimed as a revenue expenditure. It was the assessee’s contention that the banks were valuing the securities/interest held by it at the end of each year and offered to tax, the appreciation in their value by way of profits/interest earned. In answering such question, the Court considered the decision of the Supreme Court in Vijaya Bank Ltd. (supra), and the question was answered in favour of the assessee.

The decision of the Division Bench in American Express International Banking Corporation (supra) was assailed before the Supreme Court in the proceedings of Special Leave to Appeal (Civil) CC.301-303/2004, which came to be rejected by an order dated 27^th January, 2004.

The Assessee further relied on the order passed by the Hon Court in ITA No. 278 of 1997 in the case of Citi Bank N.A. vs. Commissioner of Income Tax wherein similar issues had arisen for consideration of the Court, when the Court answered the questions in favour of the assessee. The order dated 16 April, 2003 passed by the Division Bench was carried to the Supreme Court in the proceedings of Civil Appeal No. 1549 of 2006 in Commissioner of Income Tax vs. Citi Bank N.A. The Supreme Court rejected the Revenue’s appeal by its judgment dated 12 August, 2008 where the Supreme Court, while referring to the decision in Vijaya Bank Ltd. vs. Additional Commissioner of Income Tax, Bangalore (supra), as also the decision in case of American Express (supra), rejected the Revenue’s appeal. Similar view was taken by the Supreme Court in dismissing another appeal filed by the Revenue in the case of Commissioner of Income Tax vs. Citi Bank N.A., for AY 1982-83.

The Court’s attention was also drawn to a recent decision of the Supreme Court in case of Bank of Rajasthan Ltd. vs. Commissioner of Income-tax (2024) 167 taxmann.com 430 (SC) wherein the Supreme Court affirmed the view taken by this Court in Citi Bank N.A. (supra), American Express International Banking Corporation(supra) as also in HDFC Bank Ltd. vs. CIT (2014) 49 taxmann.com 335.

In view of the above, the questions of law were answered in affirmative in favour of the assessee and against the Revenue.

Insofar as the other question of law, the same pertains to a deduction in respect of the expenditure incurred by the assessee on the issue of Fully Convertible Debentures. The assessee had made a ‘rights issue’ of Fully Convertible Debentures (FCDs) and in such connection, had incurred expenditure on account of printing expenses, advertisement, professional fees, stamp duty and filing fees, bank charges, packages, etc. This expenditure was claimed as a deduction in view of the decision of the Supreme Court in India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC). The assessee’s claim for deduction was rejected by the Assessing Officer on the ground that the real intention of the assessee was to increase its capital and not to raise borrowed capital. On appeal, CIT(A) confirmed the disallowance made by the Assessing Officer inter alia following the decision of the Supreme Court in Brooke Bond India Ltd. vs. CIT (1997) 225 ITR 798. It is against such decision of the CIT(A), the assessee approached the Tribunal. The Tribunal in confirming the order passed by the CIT(A) observed that there was no dispute on the entire issue on share capital in parts. It was observed that the true intention was not to raise a loan, but to raise share capital to increase its capital base. The Tribunal opined that it was therefore necessary to apply the ratio of the decision of Supreme Court in Brooke Bond India Ltd. (supra). Accordingly, the expenditure incurred on such public issue was not allowed as a deduction confirming the order passed by the CIT(A), against which the present appeal has been filed.

In assailing such orders of the Tribunal, assessee firstly relied on the decision of the Delhi High Court in Commissioner of Income Tax vs. Ranbaxy Laboratories Ltd. ITA No. 93 of 2000 dated 13^th September, 2013 wherein one of the issues which fell for consideration was whether the Tribunal was legally correct in allowing debenture issue expenses on the issue of convertible debentures. In answering such issue in favour of the assessee and against the Revenue, the Delhi High Court observed that the said question would stand covered by the decision of Delhi High Court in CIT vs. Havells India Ltd. (2013) 352 ITR 376 (Del.), which followed the decision of the Supreme Court in India Cements Ltd.(supra) and the decision in Commissioner of Income Tax vs. Secure Meters Ltd. (2010) 321 ITR 621 (Raj.). In Ranbaxy Laboratories Ltd. vs. Deputy Commissioner of Income Tax, the Delhi High Court has taken a similar view. A similar view was also taken in case of The Commissioner of Income Tax- 6 vs. M/s. Faze Three Ltd. Income Tax Appeal No. 1761 of 2014 decided on 16^th March, 2017.

In answering such question in favour of the assessee and against the Revenue, the Court held that the expenditure incurred thereon was revenue in nature, referring to the decision in Secure Meters Ltd. (supra), as also in Havells India Ltd. (supra) wherein it was held that as the debentures were to be converted in the near future into equity shares, the expenditure incurred needs to be allowed as revenue expenditure on the basis of the factual position as reflected by the accounts and which was the consistent view being accepted by the Courts. The Court also observed that the Revenue has not been able to show any reason which would require the Court to take a different view from the one taken by the various High Courts in the country on an identical issue.

In the light of the above discussion, the question of law also needs to be answered in affirmative in favour of the assessee and against the revenue.

Resultantly, the Appeal stands allowed .

BCAJ Admin

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

21 Bloomberg Data Services (India) Pvt. Ltd. vs. Pr. DCIT Circle – 6(1)(2) &Ors.
[WP (L) No. 31412 OF 2024]
Dated: 2^nd December, 2024 (Bom) (HC)]

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

The Petitioner being aggrieved by the Revenue’s inaction of the refund being not granted to the petitioner for the Assessment Year 2016-17 and 2013-14, and which was being adjusted for the refund for 2023-24, approached the Court. The Petitioner claimed that a large sum of refund of ₹77,64,71,629/- was not being granted to the Petitioner. The Revenue department filed their reply affidavit.

The Court noted that after the earlier orders were passed by the Court, on 29^th November, 2024 a refund of ₹77,64,71,629/- was granted in the proportion of ₹45,84,30,382/- for A. Y. 2016-17 and ₹31,80,41,247/- for the A.Y. 2013-14. However, an interest of ₹1,83,37,215/- for A.Y. 2016-17 and ₹1,27,21,649/- for A.Y. 2013-14, totalling to an amount of ₹3,10,58,865/- (₹3.10 crores) was due and payable to the Petitioner which was not granted.

The Court observed that in these situations, payment of interest is an unwarranted burden required to be borne by the Government of India. The Hon. Court was concerned with several similar proceedings reaching the Court. The Court observed that it was not aware as to whether the income tax department has any procedure of any internal control / checks in such matters, in which the interest burden keeps increasing purely for departmental reasons, which may be either negligence or a casual approach on the part of the officials, not taking prompt and timely steps on such issues. Secondly, whether there is any routine audit, as to who would become accountable for such huge interest amounts being required to be paid by the Government of India, when there are refund amounts which are admittedly payable to the assessee’s. Any delay being caused in making payments of such refund and the interests payable thereon, is attributable wholly to the officials of the department, as it is they who are not taking prompt actions.

The Hon Court observed that the petition brings to the fore a serious concern in the laxity of the Respondent-department in the matter of refund of tax to the petitioner and which is an admitted amount. The Court also observed that routinely cases are reaching the Court where refunds for no rhyme or reason are stuck, they are either not being processed or if even processed, they are not being released and in such cases the interest burden on the Government of India / Public exchequer keep mounting every passing day. Once the tax payer is entitled to the refund and when there are no proceedings against the assessee in that regard are intended to be taken by the Revenue, the refund of the tax amount ought to be immediately granted to the assessee. If this is being followed in breach, merely on account of negligence / laxity on the part of the department, it results into an unwarranted interest burden being imposed on the public exchequer. It may be quite easy for the tax officials not to be serious on such issue, however, it cannot be forgotten that such interest payment goes from the taxpayers’ pockets.

The Court observed that why this laxity or lack of prompt and appropriate communication between two authorities / departments, should result in Government of India being unwarrantedly saddled with huge interest amounts is the issue. This can certainly be avoided by an effective mechanism, by having a meaningful and prompt flow of instructions between the concerned officers, handling the assessee’s case. Such unwarranted interest amounts being required to be paid, if saved can be utilised for other essential public expenditures. It is the citizens of the country who are being deprived of the benefits of such amounts instead of the same being paid to the assessee’s, on account of the negligence and / or the fault of the officers of the department. The Court observed that it is routinely seen that when the matters reach the Court, the Revenue instantly takes a position that the refund would be credited to the assessee, without disputing the claim of the assessee for refund, as in such cases there is no defence to such petitions, as it is a statutory obligation on the part of the Revenue to refund that amounts and on such refunds huge interest amounts are paid to the assessee.

The Court directed the Respondent to place an affidavit on record, after taking appropriate instructions from the CBDT and after confirming such affidavit from the CBDT, as to approach the concerned officials are required to follow, in such situations so as to avoid burdening the public exchequer with interest payments.

The Court further observed that if already the rules are not in place, such rules would be required to be framed. If any rules are already framed, as to why such rules are not being strictly adhered. The mechanism by which accountability needs to be fixed on the particular officers, whose actions are increasing the burden on the Government of India, is required to be immediately looked into.

The Court also noted that it was equally conscious that the delayed payment of refunds not only burdens the public exchequer with such interest amounts being required to be paid, but it also brings about a situation that the assessees’ are deprived of these amounts causing them a serious prejudice. Also, the Government of India would not be in a clear position to utilise such funds for any public purpose, as these funds are required, to be in any case paid to the assessee. Thus, any situation of an unjust enrichment is not acceptable. The situation in hand is of a delay, by which a serious prejudice to both the revenue and to the assessee is caused.

BCAJ Admin

Section 119(2)(b) — Condonation of delay on filing return of income — Delay in obtaining valuation report of land during Covid-19 coupled with fact that assessee was posted on Covid duty and death in family — Sufficient reason for condonation of delay.

20 SmitaDilipGhule vs. The Central Board of Direct Taxes & Others

[WP (ST) No. 2348 OF 2024,

Dated: 8^th October, 2024. (Bom) (HC).

Assessment Years 2020–21]

Section 119(2)(b) — Condonation of delay on filing return of income — Delay in obtaining valuation report of land during Covid-19 coupled with fact that assessee was posted on Covid duty and death in family — Sufficient reason for condonation of delay.

The Petitioner was an individual and a doctor by profession. The Petitioner’s return of income, under Section 139(1) of the Act, for the Assessment Year 2020–2021, was due to be filed on 10^th January, 2021 as per the extended due date. However, the return of income was filed on 31^st March, 2021, declaring total income of ₹6,75,837. The Petitioner had a claim of carry forward of long-term capital loss of ₹99,88,535. The Petitioner had claimed that during the year under consideration, she had transferred two ancestral lands which were jointly owned by her with other family members.

The Petitioner made an Application dated 31^st March, 2021 to the Central Board of Direct Taxes (the CBDT), Respondent No.1, requesting it to condone the delay in filing the return and allowing the claim of carry forward of long-term capital loss of ₹99,88,535 by exercising the power vested in Respondent No.1 under Section 119 (2)(b) of the Act, along with supporting evidence.

In the Application for condonation of delay, the Petitioner had given reasons for the delay in filing the return of income. The Petitioner had stated that she was the co-owner, along with other family members, of certain ancestral lands at District Pune. These ancestral lands were transferred during that year. On the above transaction, the Petitioner had to work out long-term capital gain and file a return. The original due date for filing of return of income was 31^st July, 2020 but due to the Covid-19 pandemic it was extended up to 31^st December, 2020, and subsequently, it was extended up to 10^th January, 2021. The Petitioner further stated that due to the Covid-19 pandemic lockdown being announced, the Petitioner, being a doctor, was rendering services to Covid-19 patients. Further, due to various Covid-19 restrictions and the nature of occupation of the Petitioner, she was unable to approach her tax consultant in advance in respect of computation of long-term capital gain. Somewhere around October 2020, when the Petitioner approached her Chartered Accountant on the subject matter of filing of return and computation of long-term capital gain, she was advised to get the valuation of the property done by a Registered Valuer to ascertain the cost of acquisition as on 1st April, 2001. The Petitioner further approached a valuer for the purpose of valuation. The documents were provided to the valuer from time to time during the months of November and December, 2020. However, the valuer was required to physically visit the site to provide the valuation report and was reluctant to do so due to the Covid-19 pandemic and the increase in cases of Covid-19 as the valuer himself was a senior citizen, aged 75 years, having respiratory issues. Due to the requirement of physical visit to the site by the valuer for the valuation of the property to ascertain the cost of acquisition for computation of capital gain under Section 49 of the Act, the valuation could not be completed before the due date of filing of return of income.

The Petitioner further clarified that on 30^th November, 2020, the Petitioner had lost her father due to Covid-19. Around the same time, other family members were also affected by Covid-19. Due to this misfortune, the Petitioner was not able to collect information required for valuation nor was she able to coordinate with the tax consultant. This also resulted in delay in getting the valuation done, which led to belated filing of income tax return. After obtaining the Valuation Report dated 16^th March, 2021, the Petitioner’s Chartered Accountant was able to calculate the capital gain / loss on the transaction in respect of each co-owner. In ordinary course, this loss would be carried forward and set-off against the income of the subsequent year. But due to delay in the filing of the Return for Assessment Year 2020–2021 within the prescribed due date, the Petitioner was not able to carry forward such loss unless the delay was condoned by Respondent No.1 under Section 119(2)(b) of the Act. The Petitioner has stated that it was in these circumstances that the Petitioner had filed the Application before Respondent No.2 under Section 119(2)(b) of the Act..

By an Order dated 20^th October, 2023, Respondent No. 1 rejected the Petitioner’s Application for condonation of delay of 80 days in filing the return of income.

The Hon.Court observed that perusal of the provisions of Section 119(2)(b) of the Act shows that the power conferred therein upon Respondent No.1 is for the purpose of “avoiding genuine hardship”. The Petitioner would be put to genuine hardship if the delay in filing the return of income is not condoned. This is because the Petitioner has given valid reasons for not filing the return of income on time. The Petitioner has mentioned that her father had passed away on 30^th November, 2022 due to Covid-19 and that her family members were affected by Covid-19 in November 2020. The Petitioner, who is a doctor, was involved in Covid-19 duty at that time. The valuation of land for working out capital gain could not be completed prior to the due date of filing of the return due to the said reasons. Also, the valuer was not able to carry out physical verification of the site until 13th February, 2021 and could provide the Valuation Report until 16^th March, 2021. In this context, it is important to note that the valuer was also a senior citizen, aged 75 years. If for these reasons, the delay of 80 days in filing of the Return of Income by the Petitioner was not condoned, then definitely the Petitioner would be put to genuine hardship as the Petitioner was prevented by genuine and valid reasons for not filing the return of income on time. The Hon. Court observed that it can never be that technicality and rigidity of rules of law would not recognise genuine human problems of such nature which may prevent a person from achieving certain compliance. It is to cater to such situations that the legislature has made a provision conferring a power to condone the delay. These are all human issues which prevented the assessee, who is otherwise diligent, in filing the return of income within the prescribed time.

The Hon. Court observed that the Respondent No.1 completely lost sight of the fact that not only was the Petitioner a doctor who was on Covid duty but also that the Petitioner faced various other problems due to the Covid-19 pandemic, and that was the reason why the Petitioner could not file her return of income within time.

Further, in the impugned Order, Respondent No..1 has also rejected the Application on the grounds that the Petitioner, being an educated person, was well equipped with basic taxation law knowledge and had accessibility to tax practitioners. Therefore, the claim of the Petitioner that she was not able to collect various information regarding income tax calculation was not tenable. The Court observed that such explanation of Respondent was unacceptable. The Petitioner has not claimed lack of accessibility to a tax practitioner. It is the case of the Petitioner that for various reasons which arose due to the Covid-19 pandemic, she was not able to obtain the Valuation Report in respect of the property on time and, therefore, was not able to compute the capital loss and file the return of income.

In view of the above, the impugned order dated 20^th October, 2023 passed by Respondent No.1 was quashed and set aside. The delay of 80 days in filing of the return of income for Assessment Year 2020–2021 by the Petitioner was condoned.

BCAJ Admin

Section 148: Reassessment — Assessment year 2015–16 — Barred by limitation.

19 20 Media Collective Pvt. Ltd. vs. Pr. ACIT Circle – 16(1) &Ors.

[WP (L) No. 25601 OF 2024,

Dated: 18^th November, 2024 (Bom) (HC)]

Section 148: Reassessment — Assessment year 2015–16 — Barred by limitation.

The Assessee-Petitioner challenged the legality of the notice dated 30^th July, 2022 issued to the Petitioner under Section 148 of the Income-tax Act for the Assessment Year 2015–16.

There is also a challenge to an order dated 29^th July, 2022 passed under Section 148A(d) of the Act passed in pursuance of a notice under Section 148A(b), dated 17^th June, 2021 and the consequent assessment order dated 17^th May, 2023 passed under Section 147 read with 144B of the Act.

The primary contention urged on behalf of the petitioner is that the impugned assessment order, as also the action taken against the petitioner under Section 148A(b), is illegal for the reason that such proceedings were barred by limitation, considering the provisions of Section 149(1)(b) of the Act, which provides a time limit of six years from the end of the relevant assessment year for issuing notice under Section 148 of the Act. As the relevant assessment year being Assessment Year 2015–16, the six years have expired on 31^st March, 2022 and for such reason, the impugned proceedings against the Petitioner could not have been adopted. In support of such contention, reliance is placed on the decision of this Court in Hexaware Technology Ltd. vs. Assistant Commissioner of Income Tax, (2024) 162 Taxmann.com 225 and AkhilaSujith vs. Income Tax Officer, International [2024] 166 taxmann.com 478 (Bombay) where following the decision in Hexaware, this Court quashed the proceeding being barred by limitation also referring to the decision of the Supreme Court in the case of Union of India vs. Ashish Agarwal, [2021] 138 taxmann.com 64.

The respondents / revenue did not dispute the contentions as urged on behalf of the petitioner in regard to the limitation as would be applicable to pass the assessment order in question. In this context in Akhila Sujith (supra), considering the position in law, this Court observed thus:

“9. Having heard learned counsel for the parties and having perused the record, in our opinion, considering the observations as made by the Division Bench in Hexaware, we find that the impugned notice itself was illegal and without jurisdiction. There was no foundation on jurisdiction for an assessment order to be passed on the basis of a notice under section 148 which itself was time barred. Thus there is no basis on which we can hold the impugned assessment order to be legal and valid as not only the impugned notice under Section 148 of the Act but also the order passed under Section 148A(d) of the Act were barred by limitation as per the first proviso to Section 149 as held in Hexaware. For such reason, we are of the clear opinion that no useful purpose would serve relegating the petitioner to avail an alternate remedy of an appeal, as filing of such appeal itself would be an empty formality.

10. In the aforesaid circumstances, the inherent illegality of the impugned notice under Section 148 of the Act being time-barred, which percolates into the assessment order passed thereunder is an incurable defect, regardless of the forum before which the same is agitated. In these circumstances, it cannot be said that it was not appropriate for the Petitioner to invoke the jurisdiction of this Court under Article 226 when the assessing officer has acted without jurisdiction.”

In view of the above, the impugned assessment order could not have been passed as the same was barred by limitation. Accordingly, the petition was allowed.

BCAJ Admin

Section 119(2): Condonation of delay — delay of two days in filing the Return of Income for Assessment Year 2021–22 — Allowed.

18. M/s. Neumec Builders Pvt. Ltd. vs. The Central Board of Direct Taxes, New Delhi & Others

WP(L) No. 30260 OF 2024

Dated: 8^th October, 2024. (Bom) (HC)

Assessment Years: 2021–22

Section 119(2): Condonation of delay — delay of two days in filing the Return of Income for Assessment Year 2021–22 — Allowed.

The Petitioner had made an application for condonation of delay on 13^th August, 2022, for condoning the delay of two days in filing the Return of Income for Assessment Year 2021–22. Despite repeated reminders, the same had not been decided by the Assessing Officer/Respondent.

The period for filing the Return of Income for the Assessment Year in question was extended up to 15^th March, 2022. It was submitted that the Return of Income was filed on 17^th March, 2022, i.e., there was a delay of two days due to various reasons which were beyond the control of the Petitioner as also its Chartered Accountant. It was stated that Form 10-IC was filed on 24^th March, 2022, also in respect of which delay is required to be condoned, considering the facts of the present case.

In so far as the reason for the delay, as contended by the Petitioner, it was submitted that the Chartered Accountant had made efforts to file a Return of Income and Form 10-IC within the prescribed time limit, however, due to technical difficulties on the Income Tax Portal, the same could not be filed. A screenshot of the technical issues faced by the Chartered Accountant in the filing of Form 10-IC was placed for consideration by the Assessing Officer along with the delay condonation application. It was contended that the Chartered Accountant had made a grievance setting out that sufficient efforts were made to file Form 10-IC, however, despite best efforts, the Form could not be uploaded. Such grievance application was filed by the Chartered Accountant on behalf of the Petitioner on 22^nd March, 2022. Further in the office premises of the Chartered Accountant, an incident of fire took place leading to the stoppage of electricity supply to the entire building. It was submitted that the Chartered Accountant has a database, and due to a sudden electricity stoppage, the entire computer system, including the server, was required to be shut-down. It was submitted that after the computer system was restarted, the Chartered Accountant tried to operate his computer system, however, the problems faced by the server led to further delay. The Chartered Accountant could resume the work only after the computer server was fully repaired. A copy of the Affidavit of the Chartered Accountant was also submitted to the Assessing Officer along with the delay condonation application. It was in these circumstances the Petitioner, by its Application dated 13^th August, 2022, sought condonation of delay of two days in filing the Return of Income and Form 10-IC.

In support, the Petitioner has also relied on the Circular No.19 of 2023 (F No.173/32/2022-ITA-I) dated 23^rd October, 2023 issued under Section 119, read with Section 115 BAA of the Income Tax Act, 1961 and Rule 21AE of the Income Tax Rules, 1962, which issues instructions to the subordinate authorities on condonation of delay in filing Form 10-IC for the AY 2021– 2022, and, more particularly, to Clause 3 thereof. Clause 3 (iii) provides that the delay in filing Form 10-IC be condoned where Form 10-IC is filed electronically on or before 31^st January, 2024 or 3 months from the end of the month in which the Circular is issued, whichever is later. It was submitted that, although in the present case, the delay is of two days in filing of the Return, however, since the Petitioner had filed its Form 10 IC on 22^nd February, 2022, the Petitioner was entitled to the benefit of Clause 3 (iii) of the said Circular in condoning the delay for filing Form 10-IC.

BCAJ Admin

Section 68: Bogus Purchase — the onus of bringing the purchases by the Assessee under the cloud was on the Revenue.

17. Ashok Kumar Rungta vs. Pr. Income Tax Officer 24(1)(1) &Ors.

ITXA No. 1753, 1759 & 2780 of 2028

Dated: 15^th October, 2024 (Bom) (HC)

Income Tax Appellate Tribunal order dated 9^th August, 2017

Assessment Years 2009–10 to 2011–12

Section 68: Bogus Purchase — the onus of bringing the purchases by the Assessee under the cloud was on the Revenue.

Originally, the Assessing Officer had passed an order dated 21^st March, 2014 (“AO Order”) on reassessment of returns for three Assessment Years, disallowing all the expenses incurred towards purchase from certain entities, and thereby adding such expenses to the income of the Appellant-Assessee. The CIT(A) restricted the disallowance @ 10 per cent of certain suspect purchases on the premise that they are bogus purchases. The ITAT upheld the findings of the CIT(A), by disallowing 10 per cent of the total purchases alleged to have been bogus and adding such sum to the income of the Appellant-Assessee for the relevant Assessment Years.

The Appellant-Assessee challenged the order of the ITAT and contended that all the purchases were genuine and must be allowed as legitimate expenses. The Respondent-Revenue wanted the Court to hold that all the expenses ought to have been treated as bogus and that the ITAT was wrong in disallowing only 10 per cent of such expenses vide Income Tax Appeal No. 1349 of 2018, filed by the Revenue against the very same Impugned Order, which was not entertained by a Division Bench of the Court by an order dated 24^th April, 2024.

The Hon. Court observed that the grievances of the Revenue being different from the grievances of the Assessee, the dismissal of the Revenue’s appeal is not conclusively determinative of the status of the Assessee’s grievances.

The Hon. Court observed that the ITAT has returned firm findings that the Respondent-Revenue had accepted the sales effected by the Appellant. The ITAT has also returned a finding that the sales are backed by compliance with indirect tax requirements such as sales tax returns and VAT audit reports. The ITAT has also held that it cannot be said that goods have not been sold by the Assessee. Most importantly, the ITAT has returned a firm finding that the adverse findings contained in the AO Order were not based on any cogent and convincing evidence. The court observed that once such a view has been arrived at by the ITAT, which is the last forum for finding of fact, the AO Order disallowing 100 per cent of the purchases under a cloud, is not based on any cogent and convincing evidence, it would follow that the AO Order has been judicially found to be untenable. Therefore, the foundation on which these proceedings were based stands completely undermined. However, the ITAT went on to state that the Appellant-Assessee has also failed to produce the parties from whom the alleged purchases were made and documents to prove the movement of goods (such as lorry receipts). The ITAT came to the view that goods would have indeed been purchased in the grey market. On this basis, it appears that the ITAT took an easy way out by simply upholding the order of the CIT(A) — by disallowing only 10 per cent of the purchases and adding that amount to the income of the Appellant-Assessee.

The Hon. Court examined the judgment of a Division Bench of this Court in the case of The Commissioner of Income Tax-1, Mumbai vs. M/s. NikunjEximp Enterprises Pvt. Ltd. wherein the Court ruled that merely because the suppliers had not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases in question had never been made and that they are bogus. In the case at hand, indeed, the sales are not under a cloud. The only ground for suspecting the purchases is that they were from suspect persons on the basis of input from the investigation wing and sales tax authorities. The ground in the instant case too is that the persons from whom the purchases were made had not been produced before the Assessing Officer. The ITAT has endorsed the CIT(A)’s acceptance of the sales tax returns and the VAT audit report. The ITAT has returned a firm finding that there is no cogent or convincing evidence in the AO Order. Against such a backdrop, the ITAT believed that the factual pattern of the matter at hand is similar to the factual context of Nikunj. That being the case, the outcome too ought to have been similar to Nikunj, where the disallowance was entirely rejected by the ITAT. In the instant case, the ITAT appears to have found it convenient that the CIT(A) had chosen to disallow 10 per cent of the expenses and it appears to be an acceptable consolation to strike a balance. However, the Court observed that once there is a quasi-judicial finding that there is no cogent and convincing evidence at all on the part of the Revenue in leveling an allegation, it would be wrong to expect that the Assessee would still have to prove its innocence. The ITAT ought to have gone into this facet of the matter and dealt with why the 10 per cent disallowance was plausible, reasonable, and necessary in the context of the facts of the case. Such an analysis is totally absent in the Impugned Order.

The Court observed that ad hoc rejection of 10 per cent of the expenses, found in the order of the CIT(A), appears to have been convenient via media that has been endorsed by the ITAT. In the instant case, the onus of bringing the purchases by the Appellant-Assessee under the cloud was on the Respondent-Revenue, which has not discharged this burden in the first place. Apart from the inputs being received from the investigation wing, there is nothing concrete in the material on record that was used to confront the Appellant-Assessee. If the counterparties in these purchases could not be produced years later, simply adopting a 10 per cent margin for disallowance, without any cogent or convincing evidence, would be unreasonable and arbitrary. It is repugnant for the ITAT to uphold such an addition of 10 per cent of the allegedly bogus purchases to the income of the Appellant-Assessee, despite returning a firm finding that the AO Order was untenable and not being backed by cogent and convincing evidence.

Therefore, the ITAT Order was set aside and the assessee’s appeals were allowed.

BCAJ Admin

Section148: Reassessment — Notice — against company that has been successfully resolved under a Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”)— effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions.

16 Uttam Galva Metallics Ltd. and Mr. SubodhKarmarkar vs. Asst. CIT

WP(L) No. 9421 OF 2022

A. Y.: 2016-17

Dated: 28^th August, 2024 (Bom) (HC)

Section148: Reassessment — Notice — against company that has been successfully resolved under a Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”)— effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions.

The Petitioner-Assessee was admitted into a CIRP by an order dated 11^th July, 2018 passed by the National Company Law Tribunal, New Delhi (“NCLT”). Various processes under the IBC were undertaken. Eventually, the company came to be resolved pursuant to a resolution plan finalised by the Committee of Creditors, and approved by the NCLT under Section 31 of the IBC by an order dated 6^th May, 2021. The resolution plan, as approved by the NCLT, entails a full waiver of all tax and tax-related interest dues pertaining to the period prior to commencement of the CIRP.

On 27^th March, 2021 i.e., well after the resolution plan was approved, the Revenue issued a notice under Section 148 of the Act seeking to initiate reassessment of the Petitioner-Assessee’s income for AY 2016-17, on the premise that income chargeable to tax had escaped assessment. On 26^th October, 2021, the Revenue issued a communication containing reasons for initiating the said reassessment. It was stated that the original assessment of the Petitioner-Assessee had been completed on December 28, 2018 in terms of the loss of ₹220.25 crores as returned by the Petitioner-Assessee. Thereafter, the Revenue had conducted survey proceedings against some companies and had reason to believe that dealings by the Petitioner-Assessee with those companies could have led to income in the sum of ₹111.28 crores escaping assessment.

On 19^th November, 2021, the Petitioner-Assessee submitted its objections, specifically asserting that after approval of a resolution plan under Section 31 of the IBC, the Petitioner-Assessee had begun on a new slate with all past claims and dues being extinguished in terms of the resolution plan. The Petitioner-Assessee made submissions on the import of Section 31 of the IBC and various case law interpreting the IBC. The Petitioner-Assessee also called upon the Revenue to share the documents and material relating to the sanction of reassessment proceedings, under Section 151 of the Act.

Thereafter, on 15^th February, 2022 the Petitioner-Assessee called for a speaking order on the objections raised by it. On 18^th February, 2022, the Revenue passed an order, rejecting all the objections raised by the Petitioner-Assessee and asserted that while recovery may be impermissible, prosecution of the erstwhile management and recovery from other persons would still be permissible. On such premise, the Revenue refused to drop reassessment proceedings against the Petitioner-Assessee. Pursuant to such rejection of the objections, the Revenue issued a notice dated 12^th March, 2022 calling upon the Petitioner-Assessee to furnish various details by 21^st March, 2022.

Being aggrieved by the Revenue persisting with the reassessment proceedings despite the successful resolution of the Petitioner-Assessee, the Petitioner-Assessee, invoked the writ jurisdiction under Article 226 of the Constitution of India, for quashing and setting aside of the impugned proceedings including all notices and communications received from the Revenue.

The Petitioner contended that Section 31 of the IBC explicitly makes the resolution plan binding on the Revenue. The Petitioner-Assessee has also submitted that the law declared by the Supreme Court, interpreting Section 31 of the IBC fully covers the position that the Petitioner-Assessee is in, namely, that a corporate debtor after being resolved, starts with a clean slate and cannot be pursued for past tax claims.

The Revenue opposing the Petition contended that once the CIRP came to an end (with the approval of the resolution plan), the moratorium on initiating and continuing proceedings against the Petitioner-Assessee too came to an end. Therefore, according to the Revenue, the power of the Revenue to continue proceedings against the Petitioner-Assessee would revive. The Revenue quoted from orders of the Supreme Court passed during the course pending CIRP proceedings, when dealing with the import of the moratorium under Section 14 of the IBC, to argue that the approval of the resolution plan can have no bearing on the power of the Revenue to pursue proceedings in relation to past tax claims. The Revenue also argued that there is nothing inconsistent between the IBC and the Act for the non-obstinate provisions in the IBC to have any relevance.

Section 31(1) of IBC and its import:

They are extracted below:

“31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.”

[Emphasis Supplied]

The court observed that even a plain reading of the foregoing would show that once the Adjudicating Authority (the NCLT) approves the resolution plan, it would be binding on, among others, the Central Government and its agencies in respect of payment of any statutory dues arising under any law for the time being in force. It is now trite law that the effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions — a position in law declared in numerous judgments of the Supreme Court. The judgment in Ghanshyam Mishra and Sons Private Limited vs.. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657](Ghanshyam Mishra) comprehensively summarises the import of various judgments on the point.

The court held that, it is crystal clear that once a resolution plan is duly approved under Section 31(1) of the IBC, the debts as provided for in the resolution plan alone shall remain payable and such position shall be binding on, among others, the Central Government and various authorities, including tax authorities. All dues which are not part of the resolution plan would stand extinguished and no person would be entitled to initiate or continue any proceedings in respect of any claim for any such due. No proceedings in respect of any dues relating to the period prior to the approval of the resolution plan can be continued or initiated.

Thus, there can be no manner of doubt that the Impugned Proceedings and their continuation against the Petitioner-Assessee are wholly misconceived and untenable. The Impugned Proceedings are essentially reassessment proceedings, and that too of AY 2016-17. Evidently, such proceedings pertain to the period prior to the approval of the resolution plan. The outcome of such proceedings, particularly if adverse to the Petitioner-Assessee, would clearly be in relation to tax claims for the period prior to the approval of the resolution plan. The resolution plan came to be approved on 6^th May, 2020. Any attempt to re-agitate the assessment for AY 2016-17, evidently and squarely, constitutes pursuit of claims for the period prior to even the initiation of the CIRP. The conduct of such proceedings would be directly in conflict with the law declared in Ghanshyam Mishra, which makes it clear that continuation of existing proceedings and initiation of new proceedings that relate to operations prior to the CIRP are totally prohibited after the approval of the resolution plan. Consequently, nothing in the Impugned Proceedings can legitimately survive.

Evidently and admittedly, the reassessment proceedings pre-date the CIRP. They would relate to the period prior to the approval of the resolution plan of the Petitioner-Assessee, and therefore stand extinguished. Upon completion of the CIRP, the Petitioner-Assessee has completely changed hands and has begun on a clean slate under new ownership and management.

Consequently, all the notices and communications issued by the Revenue in connection with the Impugned Proceedings, and the consequential actions as impugned in the Writ Petition were quashed and set aside.

BCAJ Admin

Section 119(2): CBDT — Condonation of delay in filing the return of income — the Chartered Accountant of assessee was in a situation of distress due to the ill-health of his wife — genuine human problems may prevent a person from achieving such compliances — sufficient cause for condonation of delay.

15 Jyotsna M. Mehta vs. Pr. CIT – 19

WP(L) No. 17939 of 2024

Dated: 4^th September, 2024 (Bom) (HC).

Section 119(2): CBDT — Condonation of delay in filing the return of income — the Chartered Accountant of assessee was in a situation of distress due to the ill-health of his wife — genuine human problems may prevent a person from achieving such compliances — sufficient cause for condonation of delay.

The application filed by the Assessees / Petitioners under section 119(2)(b) of the Income-tax Act, 1961 praying for condonation of delay in filing the return of income. The Petitioners are members of one family. Their accounts and all issues in relation to their income-tax returns were handled by a Chartered Accountant, who could not take timely steps on account of ill health of his spouse. For such reason, the returns of the Petitioners could not be filed within the stipulated time.

The Petitioners contended that they were fully dependent on the Chartered Accountant in all respects from the finalisation of the accounts as also in taking steps to file their respective returns. They contend that there was a genuine reason on the delay caused to the petitioners to file returns, as the Chartered Accountant was in a situation of distress due to the ill-health of his wife, keeping him away from the Petitioners professional work.

In such circumstances, the petitioners filed an application under section 119(2)(b) of the Act praying for condonation of delay in filing of their returns; setting out such reason, which according to the petitioner, was bonafide and a legitimate cause, requiring the delay to be condoned in the filing of the petitioners’ returns. The petitioners also submitted all the medical papers in support of their contentions that the case as made for condonation of delay was bonafide / genuine as reflected from the medical papers. The PCIT disbelieved the petitioners’ case and observed that the reasons are not genuine reasons preventing the petitioners from filing Income-tax returns. In recording such observations, the PCIT has not recorded any reasons as to why the documents as submitted by the petitioner were disbelieved by him, and / or the case of the petitioners was not genuine. Also, there is no contrary material on record, that the petitioner’s case on such ground was required to be rejected.

The Hon Court observed that the approach of PCIT appears to be quite mechanical, who ought to have been more sensitive to the cause which was brought before him when the petitioner prayed for condonation of delay.

The Hon Court further observed that it can never be that technicalities and rigidity of rules of law would not recognise genuine human problems of such nature, which may prevent a person from achieving such compliances. It is to cater to such situations the legislature has made a provision conferring a power to condone delay. These are all human issues and which may prevent the assessee who is otherwise diligent in filing returns, within the prescribed time. The PCIT is not consistent in the reasons when the cause which the petitioners has urged in their application for condonation of delay was common.

The Court further observed that it would have been quite different if there were reasons available on record of the PCIT that the case on delay in filing returns as urged by the petitioners was false, and / or totally unacceptable. It needs no elaboration that in matters of maintaining accounts and filing of returns, the assessees are most likely to depend on the professional services of their Chartered Accountants. Once a Chartered Accountant is engaged and there is a genuine dependence on his services, such as in the present case, whose personal difficulties had caused a delay in filing of the petitioners returns, was certainly a cause beyond the control of the petitioners / assessees. In these circumstances, the assessee, being at no fault, should have been the primary consideration of the PCIT. It also cannot be overlooked that any professional, for reasons which are not within the confines of human control, by sheer necessity of the situation can be kept away from the professional work and despite his best efforts, it may not be possible for him to attend the same. The reasons can be manifold like illness either of himself or his family members, as a result of which he was unable to timely discharge his professional obligation. There could also be a likelihood that for such reasons, of impossibility of any services being provided / performed for his clients when tested on acceptable materials. Such human factors necessarily require a due consideration when it comes to compliances of the time limits even under the Income-tax Act. The situation in hand is akin to what a Court would consider in legal proceedings before it, in condoning delay in filing of proceedings. In dealing with such situations, the Courts would not discard an empathetic /humane view of the matter in condoning the delay in filing legal proceedings, when law confers powers to condone the delay in the litigant pursuing Court proceedings. Such principles which are quite paramount and jurisprudentially accepted are certainly applicable, when the assessee seeks condonation of delay in filing income tax returns, so as to remove the prejudice being caused to him, so as to regularise his returns. In fact, in this situation, to not permit an assessee to file his returns, is quite counter-productive to the very object and purpose, the tax laws intend to achieve. In this view of the matter, the Hon court held that the delay was sufficiently explained and to be condoned.

BCAJ Admin

Section 69C — Bogus Purchase — Genuineness of purchase transaction

Pr. CIT – 1 Mumbai vs. SVD Resins & Plastics Pvt. Ltd

ITXA No. 1662 & 1664 of 2018

A.Ys.: 2009–2010 and 2010–2011

Dated: 7th August, 2024, (Bom) (HC)

14. Section 69C — Bogus Purchase — Genuineness of purchase transaction.

Briefly, the facts are that the assessee was engaged in the business of trading in resins and chemicals on wholesale basis. On information received from the DGIT (Investigation), Mumbai, the Assessing Officer (AO) invoked Section 147 of the Income-tax Act, 1961 to reopen the completed assessment by issuing notice under Section 148 dated 12th March, 2013. In response thereto, the assessee filed a revised return on 20th March, 2013, as also sought the reasons as recorded by the AO. The AO was of the opinion that the assessee had made purchases amounting to ₹1,34,25,500 from six parties who were declared by the Sales Tax Department as ingenuine dealers. It is not in dispute that during the assessment proceedings, the assessee filed ledger accounts, confirmation of suppliers, purchase bills, delivery bank statements and other documentary evidences to justify the genuineness of the purchases. The AO nonetheless was of the opinion that the disputed purchases did not have nexus with the corresponding sales. Accordingly, he made an addition of the said amount under Section 69C of the Act on the grounds of there being unexplained payments qua the disputed purchases.

Before the Commissioner of Income Tax (Appeals), the assessee contended that the AO has not rejected the books of accounts by invoking the provisions of Section 145(3); hence, the AO was not justified in invoking the provisions of Section 69C. It was also the assessee’s case that during the hearing in question as well as the preceding two years, the assessee had declared gross profit for the AY 2007–2008 at 4.23 per cent and for the AY 2008–2009 at 4.28 per cent. It was also contended that for the subsequent AY 2009–2010, a gross profit of 4.74 per cent was declared in respect of the disputed purchase; the disclosed gross profit was 0.27 per cent which was lower by 4.47 per cent than the normal gross profit margin of 4.74 per cent in respect of other accepted genuine transactions. It was also contended that if the disallowance is sustained, there will be an abnormal increase in the gross profit at 17.81 per cent which was almost impossible in trading activity of chemicals, and hence, it was urged before the CIT(A) that an alternate to estimate the total income at 5 per cent on the purchases needs to be accepted. Considering the rival contentions, the CIT(A) estimated the profit at 12.5 per cent on the purchases made by the assessee. The CIT(A) reduced the declared GP from 12.5 per cent and confirmed the addition to the extent of 7.76 per cent.

The Tribunal considering the proceeding and the respective contentions as urged on behalf of the revenue passed the impugned order in which it was observed that the CIT(A) has rightly estimated the profit in regard to the purchases at 12.5 per cent; however, the Tribunal observed that CIT(A) was not correct in reducing the gross profit already returned by the assessee at 4.74 per cent out of the 12 per cent, for the reason that the gross profit returned by the assessee related to the sales made by the assessee and did not have link to the purchases for which assessee might have procured bills by making savings in VAT, etc. For such reason, the Tribunal partly allowed the grounds as raised by the revenue and directed the AO to estimate the income at 12.5 per cent in each of the assessment years, on the purchases so made. The Tribunal rejected the assessee’s challenge to the orders passed by the CIT(A) while partly allowing the revenue’s appeals and dismissing the assessee’s appeal.

The appellant’s / revenue’s primary submission that the approach of the CIT(A) as also the part acceptance of such approach by the tribunal in the impugned order needs interference of this Court on the question of law as raised by the revenue. It is submitted that entire purchases of ₹1,34,25,500 were required to be discarded as bogus purchases, and the relevant amounts brought to tax by making additions to the assessee’s income, as rightly undertaken by the AO. However, the revenue was not in a position to dispute that the assessee had furnished all the relevant documents in so far as the purchases are concerned, namely, the ledger accounts, confirmation of suppliers, purchase bills, delivery statements and other documentary evidence, despite which the AO on the basis of information received from the Sales Tax Department had decided to make additions of the said amounts on the grounds that the purchases were presumed to be doubtful. The revenue further stated that the suppliers were not independently examined nor was their evidence recorded.

The assessee submitted that all these are factual issues which are being raised by the revenue and no question of law rises for consideration of the Court. Reliance was placed on the decision of a co-ordinate bench of this Court in the case of Pr. Commissioner of Income Tax-17 vs. Mohammad Haji Adam & Company, [2019] 103 taxmann.com 459 (Bombay) to contend that in similar circumstances, the Court had not entertained the revenue’s appeal and the same was dismissed, with observations that no question of law had arisen for consideration of the Court in similar facts.

The Honourable Court observed that the basic premise on the part of the AO so as to form an opinion that the disputed purchases were not having nexus with the corresponding sales, appears to be not correct. It was seen that what was available with the department was merely information received by it in pursuance of notices issued under Section 133(6) of the Act, as responded by some of the suppliers. However, an unimpeachable situation that such suppliers could be labelled to be not genuine qua the assessee or qua the transaction entered with the assessee by such suppliers was not available on the record of the assessment proceedings. It was an admitted position that during the assessment proceedings, the assessee filed all necessary documents in support of the returns on which the ledger accounts were prepared, including confirmation of the supplies by the suppliers, purchase bills, delivery bank statements, etc., to justify the genuineness of the purchases; however, such documents were doubted by the AO on the basis of general information received by the AO from the Sales Tax Department. The Honourable Court held that to wholly reject these documents merely on a general information received from the Sales Tax Department would not be a proper approach on the part of the AO, in the absence of strong documentary evidence, including a statement of the Sales Tax Department that qua the actual purchases as undertaken by the assessee from such suppliers, the transactions are bogus. Such information, if available, was required to be supplied to the assessee to invite the response on the same and thereafter take an appropriate decision. Unless such specific information was available on record, it is difficult to accept that the AO was correct in his approach to question such purchases, on such general information as may be available from the Sales Tax Department, in making the impugned additions. This for the reason that the same supplier could have acted differently so as to generate bogus purchases qua some parties, whereas this may not be the position qua the others. Thus, unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions. Thus a full addition could be made only on the basis of proper proof of bogus purchases being available as the law would recognise before the AO, of a nature which would unequivocally indicate that the transactions were wholly bogus. In the absence of such proof, by no stretch of imagination, a conclusion could be arrived, that the entire expenditure claimed by the petitioner qua such transactions need to be added, to be taxed in the hands of the assessee.

The Honourable Court observed that in a situation as this, the AO would be required to carefully consider all such materials to conclude that the transactions are found to be bogus. Such investigation or enquiry by the AO also cannot be an enquiry which would be contrary to the assessments already undertaken by the Sales Tax Authorities on the same transactions. This would create an anomalous situation on the sale-purchase transactions. Hence, wherever relevant, any conclusion in regards to the transactions being bogus needs to be arrived only after the AO consults the Sales Tax Department and a thorough enquiry in regards to such specific transactions being bogus is also the conclusion of the Sales Tax Department. In a given case, in the absence of a cohesive and coordinated approach of the AO with the Sales Tax Authorities, it would be difficult to come to a concrete conclusion in regard to such purchase / sales transactions being bogus merely on the basis of general information so as to discard such expenditure and add the same to the assessee’s income. Any halfhearted approach on the part of the AO to make additions on the issue of bogus purchases would not be conducive. It also cannot be on the basis of superficial inquiry being conducted in a manner not known to law in its attempt to weed out any evasion of tax on bogus transactions. The bogus transactions are in the nature of a camouflage and /or a dishonest attempt on the part of the assessee to avoid tax, resulting in addition to the assessee’s income. It is for such reason, the approach of the AO is required to be a well-considered approach and in making such additions, he is expected to adhere to the lawful norms and well-settled principles. After such scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition.

The Honourable Court further observed that the Tribunal directed the AO to assess the income from such disputed transaction at 12.5 per cent in each of the assessment years, on the purchases so made by the assessee. However, in a given case if the Income Tax Authorities are of the view that there are questionable and / or bogus purchases, in that event, it is the solemn obligation and duty of the Income Tax Authorities and more particularly of the AO to undertake all necessary enquiry including to procure all the information on such transactions from the other departments / authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to the assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department.

The Honourable Court further observed that the decision in Mohammad Haji Adam & Company [2019] 103 taxmann.com 459 (Bombay) as relied on behalf of assessee is also quite opposite in the context in hand. In this decision, the Court observed that the findings which were arrived by the CIT(A) as also by the tribunal would suggest that the department did not dispute the assessee’s sales, as there was no discrepancy between the purchases as shown by the assessee and the sales declared. This was held to be an acceptable position, in dismissing the revenue’s appeal on the grounds that no substantial question of law had arisen for consideration of the Court.

In view of the same the appeals are accordingly dismissed.

BCAJ Admin

Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding

Pr. CIT – 3 Mumbai vs. Banzai Estates P. Ltd.

ITXA No. 1703, 1727 & 1900 of 2018

A.Ys.: 2008–09, 2009–10 and 2010–11.

Dated: 9th July, 2024, (Bom) (HC).

13. Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding.

The issue before the Tribunal was as to whether the income received by the Respondent-Assessee from the property owned by it be accepted as “income from house property” or as contended by the Revenue, it should be treated as “business income”.

The Assessee is engaged in the business of hiring and leasing of properties. The Assessee declared an income from a self-owned property situated at MBC Tower, TTK Road, Chennai (for short, “MBC Tower property”) as income from house property. Apart from such income, the Assessee also declared rental income received from sub-letting of four other properties not owned by the Assessee, as income from business. The Assessing Officer did not accept the income earned from the MBC Tower property as “income from house property” and held such income necessarily to be a “business income”.

The CIT-A confirmed the view taken by the Assessing Officer in assessing the income earned by the Assessee from the self-owned property, as income from business (“profits and gains from business”).

Before the Tribunal, the Assessee contended that in the past, the Assessee was consistently treating rental income from the MBC Tower property as income from house property, which was accepted by the Revenue. The Tribunal was of the view that the Revenue was consistent in accepting Assessee’s income derived from MBC Tower property as “income from house property”; it was observed that the Assessing Officer however had taken a reverse position, for the assessment years in question, by treating its income from MBC Tower property to be “income from business”, without a valid reason. The Tribunal, referring to the decision of the Supreme Court in Raj Dadarkar & Associates vs. Assistant Commissioner of Income-tax [2017] 394 ITR 592 (SC) held that in the present case, Section 22 of the Act was clearly applicable as the property in question was owned by the Assessee. The Tribunal also observed that the Supreme Court in the case of Commissioner of Income-tax vs. Shambhu Investment (P.) Ltd. [2003] 263 ITR 143 (SC) confirmed the decision of the Calcutta High Court in Shambhu Investment P. Ltd. vs. Commissioner of Income-Tax [2001] 249 ITR 47 (Calcutta), wherein the High Court had taken a view that when the Assessee was the owner of certain premises, then the income derived from such property would be income from house property. The Tribunal also considered other relevant decisions to come to a conclusion that the Appeal filed by the Assessee must be allowed.

The revenue submitted that this was a clear case where the income earned by the Assessee from letting out the MBC Tower property was required to be assessed as income, under the head “business income”, and not under the head of “income from house property” for the reason that the primary business of the Assessee was a business of letting out properties and deriving income therefrom. It was submitted that for such reason, the rental income received by the Assessee from MBC Tower property could not be categorised under the head “income from house property”. The Revenue placed reliance on the decision of the Supreme Court in Chennai Properties & Investment Ltd. vs. Commissioner of Income-tax, Central-III, Tamil Nadu [2015] 277 CTR 185 (SC). Thus, the primary contention as urged on behalf of the Revenue is that in the context of Section 22 read with Section 24 of the Act, the provisions would permit a distinction in categorising income under different heads, in the facts and circumstances in hand. It is her contention that such a position stands approved by the Supreme Court in the case of Chennai Properties & Investment Ltd (supra).

The Assessee submitted that Section 22 of the Act makes no distinction on the basis of the Assessee’s business, and in fact, it was appropriate in the facts of the present case for the Assessee to treat the rental income from the MBC Tower property as an income from house property. It was submitted that there was nothing improper much less illegal for the benefit being conferred under Section 24 of the Act, to be availed by the Assessee. It was submitted that in fact in the previous three Assessment Years, i.e., in 2005–06, 2006–07 and 2007–08, the Revenue had accepted that this very income be taken to be income from house property and without any material change in the circumstances, much less in law, the Revenue has taken a position contrary to what had prevailed in the earlier assessment years. Hence, it was not appropriate for the Assessing Officer to take a different position for the Assessment Years in question. It was therefore submitted that the questions of law as raised by the Revenue do not arise for consideration on the principles of consistency which need to be accepted, and as applied by the Tribunal.

The Honourable Court held that it is not possible to accept the contentions as urged on behalf of the Revenue, so as to hold that the present proceedings give rise to any substantial question of law raised by the Revenue in the present Appeals. Section 22 of the Act, making a provision for “income from house property” ordains that the “annual value” of property consisting of any buildings or lands appurtenant thereto of which the Assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried out by him, the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “income from house property”. Section 23 provides the manner in which “annual value” would be determined. Section 24 provides for deductions from income from house property.

In the present case, the Assessee has availed of deduction under Section 24, which appears to be one of the reasons that the Assessing Officer thought it appropriate to disallow what was accepted in the earlier three Assessment Years: 2005–06, 2006–07 and 2007–08. On a bare reading of Section 22, we find that in the present case, the basic requirements for the Assessee to consider the income as received from MBC Tower property as “income from house property” stands clearly satisfied, as the Assessee derives income from house property “owned by it”. Even if the Assessee is to be in the business of letting or subletting of properties and deriving income therefrom, there is no embargo on the Assessee from accounting the income received by it, from the property “owned by Assessee” (MBC Tower) as “income from house property” and at the same time, categorising the rental income from other properties not of Assessee’s ownership under the head “income from business”. The Revenue’s reading of Section 22 differently to those who are in the business of letting out properties as in the present case namely in combination of a property of Assessee’s ownership and also to have income from properties which are not of Assessee’s ownership from which rental income is derived would amount to reading something into Section 22 than what the provision actually ordains. The legislature does not carve out any such categorisation / exception. Thus, the Revenue is not correct in its contention that in the circumstances in hand, a straightjacket formula is required to be applied, namely, that section 22 is unavailable to an Assessee, who is in the business of letting out properties.

In the prior Assessment Years, the Assessing Officer had accepted the Assessee’s treatment of such income as an income from house property, which is one of the factors which has weighed with the Tribunal to allow the Appeals filed by the Assessee, on the principle of consistency. The Court was of the opinion that such principles are appropriately applied by the Tribunal. The Supreme Court has held it to be a settled principle of law that although strictly speaking res judicata does not apply to income tax proceedings, and as such, what is decided in one year may not apply in the following year. Thus, when a fundamental aspect permeating through different Assessment Years has been treated in one way or the other and that has been allowed to continue, such position ought not be changed without any new fact requiring such a direction. (See M/s. Radhasoami Satsang, Saomi Bagh, Agra vs. Commissioner of Income Tax [1992] 193 ITR 321 (SC). The decision of the Supreme Court in M/s. Radhasoami Satsang (supra) has been referred in a decision of a recent origin in Godrej & Boyce Manufacturing Company Ltd. vs. Dy. Commissioner of Income Tax, Mumbai, &Anr (2017) 7 SCC 421.

The further refer to a decision of this Court in the case of Principal Commissioner of Income-tax vs. Quest Investment Advisors (P.) Ltd [2018] 409 ITR 545 (Bombay), in which this Court referring to the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. Anr. vs. Union of India Ors [2006] 282 ITR 273 (SC) which followed the decision in Radhasoami Satsang Sabha (supra) accepted the rule of consistency.

The Honourable Court further observed that the Revenue’s reliance on the decision in Chennai Properties (supra) was not well founded for the reason that in such case, the assessee itself had chosen to account such income derived by the assessee, as an income under the head “income from business”. This was a case where the Revenue was of the contrary view, namely, that such income ought not to be allowed as an income from business and must be treated as income from house property. The Supreme Court thus held that the income was rightly disclosed by the Assessee under the head “gains from business”, and it was not correct for the High Court to hold that it needs to be treated as income from house property. The situation being quite different in the said case, the same would not be applicable in the present facts. This is not a case where the Assessee itself had taken a position that such income be treated as income from business.

Accordingly the Appeals were dismissed.

BCAJ Admin

Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

CIT vs. M/s. Tata Engineering & Locomotive

Company Ltd.

[ITXA NO. 321 of 2008 & 2070 of 2009

A.Ys.: 1987–88 and 1988–89

Dated: 30th July, 2024, (Delhi) (HC)].

12. Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

The two Appeals arise from common order dated 26th October, 2004 passed by the Income-tax Appellate Tribunal, and involve identical questions of law, extracted below:

“(A) Whether the ITAT was justified in law in upholding the action of the CIT(A) in deleting the disallowance of R1,96,71,842/- made under section 40A(9) of the Act ?

(B) Whether a payment made under a memorandum of settlement under the Industrial Disputes Act can be said to be a payment required by or under any law ?”

The short point that arose for consideration was whether the payments made under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union could be allowed as revenue expenditure under Section 37(1) of the Act; the disallowance canvassed by the Appellant-Revenue was based on the purported applicability of Section 40A(9) of the Act.

The payments were envisaged under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union, namely, TELCO-Workers’ Union, Jamshedpur (“Workmen’s Union”) of the workers employed by the Respondent-Assessee. The expenses were primarily defended as being revenue expenditure as expenses towards development and welfare of the local population in the vicinity of the factory with benefits flowing the business. Such expenditure was claimed to have helped the Respondent-Assessee get the benefit of goodwill and local harmony in the conduct of its business operations in the local ecosystem, thereby justifying the claim that such expenditure should be allowed as revenue expenditure. Apart from these submissions, the Respondent-Assessee also claimed that such expenditure, having been envisaged in the Memorandum of Settlement entered into with the Workmen’s Union of the employees, the expenditure could also be defended as payments made under the law in terms of the settlement reached with the employees.

The Honourable Court observed that from a plain reading of the Memorandum of settlement, it would become clear that the Respondent-Assessee had been expending various amounts towards “Community Services” and “Social Welfare”, and this was recited in the Memorandum of Settlement, with a statement that such measures would continue. There is no commitment of any specific amount that would be spent under these heads of expenses. Owing to the linkage of the expenses with the settlement entered into with the Workmen’s Union, the Appellant-Revenue has argued that Section 40A(9) would disallow deduction of such expenditure in the computation of income under the Act.

Both, the lower authorities gave a concurrent findings to state the nature of these expenses do not fall within the jurisdiction of Section 40A(9) and that they ought to be allowed under Section 37(1) of the Act.

The Honourable Court observed that it was apparent that the expenditure on community services and social welfare, in the context of the Respondent-Assessee’s business in that region, was being undertaken even before the execution of the Memorandum of Settlement. The document merely recited that the Company would continue to spend on such measures. Indeed, employees and their extended families would have benefited from such expenditure, which is why it finds mention in the Memorandum of Settlement. However, the expenses were not aimed at employee welfare alone but formed part of the Company making its presence felt by discharging a wider range of social responsibilities in the area of its operation.

The Court noted that plain reading of the Section 40A(9) would show that the subject matter of what is positively disallowed under the provision is payments made by an assessee “as an employer”. The very core ingredient to attract the jurisdiction of the provision is that the payment ought to have been made by the assessee in the capacity of an employer. The payments that are disallowed under Section 40A are payments made towards setting up, forming or contributing to any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, but in every case, in the capacity as an employer. Even for such payments, there is an exception in relation to payments that positively fall within the scope of clauses (iv), (iva) and (v) of Section 36(1), which are essentially payments towards contribution to provident fund, pension scheme and gratuity fund. These are specifically legislated as allowable expenses and have therefore been kept out of the mischief of Section 40A(9). Yet, it cannot be overlooked that for any payment to first fall within the mischief of what has to be positively disallowed under Section 40A(9), the payment ought to have been made by the assessee “as an employer”.

The Honourable Court observed that the payments could not be regarded as payments made by the Respondent- Assessee in its exclusive capacity as an employer. The payments in question are made towards wider local welfare measures that would boost its presence in the local ecosystem and enable harmonious conduct of its factory and business operations in the vicinity. Merely because a commitment to continue such welfare measures is recited in the Memorandum of Settlement with the Workmen’s Union, these payments would not partake the character of payments made under the Memorandum of Settlement or payment required to be made under labour law, or for that matter, payment that is made “as an employer”.

The expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act. At all times, relevant to these appeals, as Section 37 then stood, such expenses were not disallowed under Section 37.

The Court observed that in the instant case, the payments made by the Respondent- Assessee were for public causes in the locality of the business operations and benefits flowed from it to the business of the Assessee. If at all the Memorandum of Settlement is relevant, it would be to show that there was a nexus between such social welfare activity undertaken by the Respondent-Assessee and the business of the Respondent-Assessee. The local harmony and goodwill that the social welfare and community expenses generated, benefited the Respondent-Assessee’s conduct of business. That such expenses were being incurred was acknowledged and recited as a continuing commitment. Thus, merely because such expenditure finds a place in the Memorandum of Settlement, the nature and character of such expenditure would not be altered, so as to fall under Section 37(1), or to attract Section 40A(9). Therefore, the two concurrent views expressed by the CIT-A and the Tribunal need not be faulted.

The Honourable court further observed that the Court, in appellate jurisdiction on substantial questions of law, should not substitute an alternate view merely because another view is possible, unless the views expressed in the concurrent findings are not at all a plausible view.

The Honourable Court held that Section 40A(9) has no application to the facts of the case. The Tribunal was indeed justified in law in upholding the view of the CIT-A in deleting the disallowance made by the Assessing Officer. Insofar as question (B) is concerned, the payments made in the facts of this case were not payments required to be made under the Industrial Disputes Act or payment required by or under any other law, but the same is irrelevant for the matter at hand since Section 40A(9) was not at all attracted. Unless it was attracted, there was no necessity to rely on the exception in that section in relation to payments required to be made or under any law.

Consequently, the two questions of law the Appeals were answered against the Revenue and in favour of the Assessee.

BCAJ Admin

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

11 CIT (IT) -3 Mumbai vs. M/s. Lucent Technologies GRL LLC

Income Tax Appeal (L) Nos. 3695 & 3693 of 2018

A.Ys.: 2006–07 & 2010–11 alongwith other companion appeals

Dated: 1^st July, 2024 (Bom) (HC)

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

The Revenue has raised the following question of law:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in not holding payments received by the assessee for supply of software to Reliance Infocomm Limited (now Reliance Communication Limited) to be in the nature of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961?”

In the connected Appeals, the question of law as raised is similar, which by consent of the parties was re-framed as under:

“Whether on the facts and circumstances of the case and in law, the Tribunal has erred in holding that the payment made to assessee did not amount to income of the payee by way of ‘royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961?”

The Respondent-assessee filed its return of income declaring NIL income, and also claimed Tax Deducted at Source (TDS) from the payments received from the purchasers (referred as “Reliance”). The return as filed by the Respondent was taken up for scrutiny. The Assessing Officer was of the view that receipts of the amounts in question from Reliance were on account of supply of the copyright software as per the terms of the Wireless Software Assignment and License Agreement. However, the case of the assessee was to the effect that the amount was a business income and was not taxable in India, in the absence of assessee having a Permanent Establishment (PE) in India.

The Respondent-assessee contended that the Revenue receipts were in terms of the sale, as the software supplied to Reliance was not a customised software but a software which was sold to several clients. The AO did not agree with the assessee’s case, and held that the supply of such software amounted to a transfer of intellectual property rights, and hence, the consideration paid to the assessee was in fact towards a license to use the software as no title or interest in the software was transferable to the user. The AO, accordingly, held that the transaction not being a sale of the software and being a payment received for the license to use such software, it was taxable as “royalty” in terms of Section 9(1)(vi) of the Act, read with relevant Article of the Double Taxation Avoidance Agreement (DTAA) (i.e., Article 12 under the Indo-US DTAA and similar clauses in the other DTAA’s). Thus, the amount received by the assessee from Reliance was assessed as royalty and, accordingly, was sought to be taxed.

The assesee’s appeal was adjudicated by the CIT(A) taking into consideration the agreements in question, as also the transaction being viewed and considered on the applicability of Section 9(1)(vi) of the Act and the relevant Articles of the DTAA, namely, Article 12. The CIT(A) accordingly held that such amount received by the assessee did not amount to receipt of “royalty” within the meaning of Section 9(1)(iv) of the Act.

The Revenue being aggrieved by such orders of the CIT(A) carried the proceedings before the Tribunal. By the impugned orders, the Tribunal confirmed the orders passed by the CIT(A) by upholding the contentions as raised on behalf of the assessee and recording finding against the Revenue.

The Hon. Court observed that the question whether the payments made by Reliance Communication Limited for obtaining computer software, whether were liable to be taxed in India as ‘royalties’ under the provisions of Section 9(1)(vi) of the Act, had fallen for consideration of the Court in a batch of appeals filed by the Revenue on similar issues filed against Reliance Industries Ltd., came to be disposed of by an order dated 24^th June, 2024.

The Respondent-assessee submitted that once in respect of the party making payment to the assessee, such question of law had fallen for consideration of the Court, and when the Court had come to a considered view that the payment for software which was supplied by the assessee was not liable to be taxed as “royalty” under the provisions of Section 9(1)(vi) of the Act, then certainly, the present assessee, which had in fact supplied the software, cannot be treated differently and the same parameters of law would be required to be applied.

The Hon. Court observed that the question of law as raised by the Revenue in the present batch of appeals would stand covered by the orders in Income Tax Appeal No. 1655 of 2018 and also a batch of appeals decided on 24^th June, 2024 in Income Tax Appeal No. 28 of 2018 and other connected appeals.

The Court further observed that the order dated 24^th June, 2024 passed in Income Tax Appeal No. 28 of 2018 is also required to be noted.

The Hon. Court observed that the question of law would stand covered by the authoritative pronouncement of the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income Tax 2. [2021] 125 taxmann.com 42 (SC).

The Revenue appeals were accordingly dismissed.
No costs.

BCAJ Admin

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

10 Cipla Pharma and Life Sciences Limited vs. Dy. CIT Circle – 1(1)(1)

WP NO. 149 OF 2023

A.Y.: 2016–17

Dated: 2^nd July, 2024, (Delhi) (HC)

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

The primary ground of challenge before the Hon. High Court was that the impugned notice u/s. 148 of the Act had been issued in breach of the provisions of Section 151 of the Act, which provides for a sanction by the specified authority before issuance of notice.

The Petitioner-assessee contended that the sanction to issue the impugned notice dated 30^th July, 2022 was issued by the Principal Commissioner which itself is contrary to the provisions of Section 151(ii), in as much as admittedly the impugned notice was issued after a period of more than three years having elapsed from that of the relevant assessment year 2016–17. Accordingly, such sanction ought to have been issued by the Specified Authority as set out in Section 151(ii) and not by an authority falling under clause (i) of the said provision. It was contended that once such compliance itself was lacking, the impugned notice issued under Section 148 would be rendered illegal, and on such count, would be required to be quashed and set aside. In support, reliance was placed on the decision of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. vs. Deputy Commissioner of Income Tax, Circle 8 (2)(1), Mumbai &Ors. (Writ Petition No. 4888 of 2022, decided on 25^th August, 2023).

The Hon. Court observed that on a plain reading of Section 148A, it is clear that the Assessing Officer (AO) before issuing any notice under Section 148 is required to follow the procedure as set out in clauses (a) to (d) of Section 148A. One of the pre-conditions as ordained by clause (d) of Section 148A is that an order under such provision can be passed by the AO only with the approval of “Specified Authority”. Thus, necessarily when clause (d) of Section 148A provides for prior approval of specified authority, it relates to the provisions of Section 151 of the Act providing for “Specified authority for the purposes of Section 148 and Section 148A of the Act”. In the present case, Section 151 as amended by the Finance Act, 2021 and Section 148A as also introduced by Finance Act, 2021 have become applicable, as although the assessment year in question is 2016–17 in respect of which the assessment is sought to be reopened by issuance of notice under Section 148, which is dated 30^th July, 2022. Such amended provision would squarely become applicable the date of notice under section 148 itself being 30^th July, 2022.

The Hon. Court further observed that the record clearly indicates that the sanction in the present case was issued by the Principal Commissioner which can only be in respect of cases if three years or less than three years have elapsed from the end of the relevant assessment year, as would fall under the provisions of clause (i) of Section 151 of the Act. As in the present case, the assessment year in question is 2016–17 and the impugned notice itself has been issued on 30^th July, 2022, it is issued after a period more than three years having elapsed from the end of the said assessment year. Accordingly, clause (ii) of Section 151 of the Act was applicable, which required the sanction to be issued by either Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General for issuance of notice under Section 148 of the Act.

The Hon. Court further observed that such an issue fell for consideration of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. (supra), wherein the Division Bench considered the provisions of Section 151 of the Act read with the provisions of Section 148A(b). The latter provision clearly provided that prior to issuance of any notice under Section 148 of the Act, the AO shall provide an opportunity of being heard to the assessee, only after considering the cumulative effect of Section 148A(b) read with Section 151 of the Act. As provided under sub-clause (d), the AO shall decide on the basis of material available on record, including reply of the assessee, whether or not it is a fit case to issue a notice under Section 148 by passing an order, with the prior approval of specified authority within one month from the end of the month in which the reply is received. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. Therefore, the sanction is required to be obtained by applying the amended Section 151(ii) of the Act, and since the sanction has been obtained in terms of Section 151(i) of the Act, the impugned order and impugned notice are bad in law and should be quashed and set aside.

The Hon. Court further observed that the respondent’s case based on the notification dated 31^st March, 2020 issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for short, “TOLA”) was concerned, the Court held that such notification was a subordinate legislation, and it could not override the statute enacted by the Parliament and in that regard, the position in law was discussed by the Division Bench in Siemens Financial Services Pvt. Ltd. (supra), paragraph 27 of the said decision.

The impugned notices are quashed and set aside, the petition is allowed.

BCAJ Admin

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

9 Flowmore Limited vs. Dy. CIT Central Circle – 28

WP (C) No. 3738 OF 2024 & CM APPL. 15409/2024

Dated: 27^th May, 2024. (Del) (HC)

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

Pursuant to a search and seizure operation conducted in respect of the Alankit Group on 18^th October, 2019, the Petitioner was served a notice under Section 153C on 3^rd March, 2022. On culmination of those proceedings, the Department proceeded to pass a final order of assessment on 23^rd March, 2023, accepting the income which had been assessed originally under Section 143(3) of the Act. The Petitioner stated that insofar as the original Section 143(3) assessment was concerned, an appeal was taken to the Income Tax Appellate Tribunal which ultimately accorded relief to the petitioner with respect to disallowances made under Section 40(a)(ia) of the Act.

The subsequent notice under Section 148 of the Act dated 31^st March, 2023 was concerned with a search which was conducted in the case of the Proform Group on 9^th February, 2022.

The court noted that for the purposes of reopening, bearing in mind the proviso to Section 149(1), action could have been initiated only up to A.Y. 2014–15. Since the notice was issued on 31^st March, 2023, it would be the amended regime of reassessment which came into effect from 1^st April, 2021 which would be applicable. The action for reassessment would thus have to satisfy the provisions made in the First Proviso to Section 149(1) of the Act.

The Court observed that from a reading of that provision, any action for reassessment pertaining to an A.Y. prior to 1st April, 2021 can be sustained only if it be compliant with the timeframes specified under Section 149(1)(b), Section 153A or Section 153C as the case may be and on the anvil of those provisions as they existed prior to the commencement of Finance Act, 2021. Viewed in that light, it is manifest that the assessment for A.Y. 2013–14 could not have been reopened.

The Honourable Court referred and relied on the following decisions:

Filatex India Ltd. vs. Deputy Commissioner of Income Tax & Anr.[WP(C) 12148/2023]; Principal Commissioner of Income Tax-1 vs. Ojjus Medicare Pvt. Ltd[2024 SCC OnLine Del 2439]

Principal Commissioner of Income Tax-Central-1 vs. Ojjus Medicare Pvt. Ltd.[2024 SCC Online Del 2439]

The Court further observed that the computation of the “relevant assessment year” from the date of the impugned Section 148 notice dated 31^st March, 2023 would be as follows:

Therefore, ex-facie evident that A.Y. 2013–14 falls beyond the 10-year block period as set out under Section 153C read with Section 153A of the Act. Consequently, the impugned notice was unsustainable.

The writ petition was allowed, and the notice dated 31^st March, 2023 under Section 148 of the Act was quashed.

BCAJ Admin

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

8 National Association of Software and Services Companies vs. Dy. CIT (Exemption) Circle – 2(1)

WP (C) NO. 9310 of 2022

A.Y.: 2018–19

Dated: 1^st March, 2024, (Delhi) (HC)

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

The Petitioner filed its Return of Income for A.Y. 2018–19 on 29^th September, 2018 claiming a refund of ₹6,45,65,160 on account of excess taxes deducted at source which was deducted during the course of the said year. In the course of processing of that ROI, notices under Sections 143(2) and 142(1) of the Act came to be issued on 22^nd September, 2019 and 9^th January, 2020, respectively. On 16^th November, 2019, the petitioner received an intimation, referable to Section 143(1) of the Act, apprising it of an amount of ₹6,42,30,413 being refundable along with interest. However, when the assessment was ultimately framed and a formal order was passed under Section 143(3) read with Section 144B of the Act, various additions came to be made to the income disclosed in the ROI and leading to the creation of a demand of ₹10,26,85,633.

Aggrieved by the aforesaid, the petitioner preferred an appeal before the Commissioner of Income Tax (Appeals), which was pending. Simultaneously, petitioner also moved an application purporting to be under Section 154 of the Act for correction of rectifiable mistakes, which according to it were apparent on the face of the record. Along with the rectification application, the petitioner on 28^th May, 2021 also filed a stay application in respect of the demand so raised. The rectification application however came to be perfunctorily rejected in terms of an order dated 7^th June, 2021

During the pendency of the appeal before CIT(A), NFAC, and without attending to the stay application which had been moved, the department proceeded to adjust the demand that stood created by virtue of the assessment order dated 29^th April, 2021 against various refunds which were payable to the petitioner for A.Y.s’ 2010–11, 2011–12 and 2020–21.

According to the Petitioner, the action so initiated and the adjustments effected are wholly arbitrary and illegal in as much as there existed no justification for the adjustments being made without its application referable to Section 220(6) being either considered or examined. According to petitioner, the very purpose of Section 220(6) has been nullified by the action of the department who have proceeded to make the impugned adjustments without even examining the application of the petitioner for not being treated as an “assessee in default”.

The Petitioner relied on the Central Board of Direct Taxes Office Memorandum No. 404/72/93-ITCC6 dated 31^st July, 2017, to state that the department could have at best required the petitioner to deposit 20 per cent of the outstanding demand.

The department contented that the application for stay which was moved by the writ petitioner was not accompanied by any challan evidencing deposit of monies against the demand for A.Y. 2018–19 which was outstanding. Thus, and according to department, since a pre-condition as specified in the Office Memorandum dated 31^st July, 2017 and OM dated 29^th February, 2016 was not adhered to, the application of the assessee was rightly not considered.

The Honourable Court observed that the Revenue department have proceeded on a wholly incorrect and untenable premise that the assessee was obliged to tender or place evidence of having deposited 20 per cent of the disputed demand before its application for stay under section 220(6) of the Act could have been considered. The interpretation which was sought to be accorded to the aforesaid OM was misconceived.

The Honourable Court noted that the two OMs neither prescribe nor mandate 15 per cent or 20 per cent of the outstanding demand as the case may be, being deposited as a pre-condition for grant of stay. The OM dated 29^th February, 2016, specifically spoke of a discretion vesting in the AO to grant stay subject to a deposit at a rate higher or lower than 15 per cent dependent upon the facts of a particular case. The subsequent OM merely amended the rate to be 20 per cent. In fact, while the subsequent OM chose to describe the 20 per cent deposit to be the “standard rate”, the same would clearly not sustain.

The Honourable Court referred and relied on the decision of Avantha Realty Ltd. vs. The Principal Commissioner of Income Tax Central Delhi 2 & Anr [2024] 161 taxmann.com 529 (Delhi) wherein it was observed that the administrative circular will not operate as a fetter on the Commissioner since it is a quasi-judicial authority, and it will be open to the authorities, on the facts of individual cases, to grant deposit orders of a lesser amount than 20 per cent, pending appeal.

The Honourable Court further relied on the order passed by the Supreme Court in Principal Commissioner of Income Tax & Ors. vs. LG Electronics India Private Limited [2018] 18 SCC 447 wherein it had been emphasised that the administrative circular would not operate as a fetter upon the power otherwise conferred on a quasi-judicial authority; and that it would be wholly incorrect to view the OM as mandating the deposit of 20 per cent, irrespective of the facts of an individual case. This would also flow from the clear and express language employed in sub-section (6) of Section 220 which speaks of the Assessing Officer being empowered “in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case”. The discretion thus vested in the hands of the AO is one which cannot possibly be viewed as being cabined by the terms of the OM.

The Honourable Court further referred the following decisions:

Dabur India Limited vs. Commissioner of Income Tax (TDS) & Anr. [2023] 291 Taxman 3 (Delhi); Indian National Congress vs. Deputy Commissioner of Income Tax Central – 19 & Ors.[2024] 463 ITR 182 (Delhi); Benara Valves Ltd. & Ors. vs. Commissioner of Central Excise & Anr [2007] 6 STT 13 (SC).

Thus, the Honourable Court held that while 20 per cent is not liable to be viewed as an entrenched or inflexible rule, there could be circumstances where the department may be justified in seeking a deposit in excess of the above dependent upon the facts and circumstances that may be obtained. This would have to necessarily be left to the sound exercise of discretion by the department based upon a consideration of issues such as prima facie, financial hardship and the likelihood of success.

The Court held that the department have clearly erred in proceeding on the assumption that the application for consideration of outstanding demands being placed in abeyance could not have even been entertained without a 20 per cent pre-deposit. The aforesaid stand as taken is thoroughly misconceived and wholly untenable in law.

Undisputedly, and on the date when the impugned adjustments came to be made, the application moved by the petitioner referable to Section 220(6)of the Act had neither been considered nor disposed of. This action of the department was wholly arbitrary and unfair. The intimation of adjustments being proposed would hardly be of any relevance or consequence once it is found that the application for stay remained pending and the said fact is not an issue of contestation.

The writ petition was allowed and the matter was remitted to the department for considering the application of the petitioner under Section 220(6) in accordance with the observations made hereinabove.

BCAJ Admin

Section 132 of the Act — Search and seizure — Condition precedent — Revenue authorities must have information in their possession on basis of which a reasonable belief can be formed — Contents of satisfaction note did not disclose any information which would lead authorities to have a reason to believe that any of contingencies as contemplated by Section 132(1)(a) to (c) were satisfied — Search and seizure action was to be quashed and set aside.

7 Echjay Industries (P.) Ltd. vs. Rajendra

WP No. 122 OF 2009 & 2309 OF 2010

A.Y. 2008–09

Dated: 10^th May, 2024. (Bom.) (HC).

Section 132 of the Act — Search and seizure — Condition precedent — Revenue authorities must have information in their possession on basis of which a reasonable belief can be formed — Contents of satisfaction note did not disclose any information which would lead authorities to have a reason to believe that any of contingencies as contemplated by Section 132(1)(a) to (c) were satisfied — Search and seizure action was to be quashed and set aside.

Petitioner no. 1 is a private limited company. Petitioner no. 2 is the Chairman and Managing Director of petitioner no. 1. Other Petitioners are Directors, their spouses and family members.

Respondent no. 1 was the officer empowered by the Central Board of Direct Taxes (CBDT) to issue authorisation under Section 132 of the Act for carrying out search and seizure under the Act. In the exercise of his powers under Section 132 of the Act, respondent no. 1 issued authorisations dated 7^th July, 2008 in favour of respondent no. 2 and others, authorising them to enter upon and search various premises belonging to petitioners.

Petitioner company was incorporated on 31^st December, 1960 under the Companies Act 1956 and was a leading manufacturer of forging and engineering products required in the automobile industry. Petitioners were regularly assessed to income-tax and wealth tax. It is stated in the petition that the income tax assessments of petitioner company for the last 20 years have been made under Section 143(3) of the Act by way of detailed scrutiny. It is also stated that no penalty under Section 271(1)(c) of the Act has ever been levied upon petitioners for any concealment or furnishing inaccurate particulars of income.

On or about 9^th and 10^th July, 2008, a search was conducted at the business premises of petitioner company as well as at residential premises of Chairman and directors, pursuant to an authorisation dated 7^th July, 2008, issued by respondent no. 1 under Section 132(1) of the Act. Respondent no. 2 and other authorised officers entered into various premises and conducted the search. Panchnamas were also drawn up in the course of the search proceedings. It is stated that petitioners submitted various clarifications and explanations to respondents as and when they were called upon to do so. Petitioners stated that by the initiation of search proceedings and also the manner in which the proceedings were conducted, they are apprehensive that respondents will, without jurisdiction or authority of law, proceed against petitioners to make assessments and / or reassessments of past six assessment years in the case of all petitioners and raise huge demands by way of tax, interest and penalties, which will cause hardship and prejudice to petitioner. It is petitioners’ case that authorisations dated 7^th July, 2008 issued against petitioners are unconstitutional, ultra vires, invalid, without jurisdiction, etc., and are liable to be quashed and set aside.

The stand taken by the revenue basically is that the grounds raised in the petition are based on presumptions and conjectures. It was submitted that respondent no. 1 had information in his possession of undisclosed assets / documents which represented income or property which has not been or would not be disclosed by petitioners under normal circumstances. There was also reason to believe that petitioners were in possession of documents relating to such undisclosed income, which would not be produced if called for under relevant provisions of the Act. Proper inquiries were made and the relevant material placed on record to give rise to reasons for such belief. It was also stated that authorised officers have not seized the entire cash and jewellery found at various premises but have seized only a part, which remained unexplained by petitioners at the relevant time or in respect of which explanation was not to the satisfaction of the authorised officers. If a bonafide belief was formed on the basis of material available on record which was the case, it is not open to petitioners to challenge the same by way of plea of lack of alternate remedy against such action by respondent no. 1.

It was also submitted by revenue that there was credible basis to believe that petitioners were in possession of assets / documents which were not disclosed or which would not be disclosed. It was stated that there were proper enquiries and application of mind by four different Statutory Authorities. The reasons for authorizing action under Section 132 of the Act are duly recorded in a Satisfaction Note which shows due application of mind by various statutory authorities. All the procedures and safeguards provided in the Act were duly followed and the search has been carried out within the framework of Section 132 of the Act.

As regards making available the details of the information received and the satisfaction note, the Learned ASG and later department counsel both strongly opposed disclosing / making available copies thereof and for that relied upon the decision of the Apex Court in Principal Director of Income-tax (Investigation) vs. Laljibhai Kanjibhai Mandalia [2022] 140 taxmann.com 282/446 ITR 18/288 Taxman 361 (SC). The Learned ASG further submitted that it is settled law that copy of the material leading to the search should not be made available to assessee. It was also submitted that in view of the explanation inserted in Section 132(1) by the Finance Act 2017 with retrospective effect from 1^st April, 1962, the reason to believe as recorded by the Income Tax authorities under Section 132(1) shall not be disclosed to any person or any authority or the Appellate Tribunal.

It was also submitted by the Learned ASG that the court may examine the information / documents based on which the authorisations of search and seizure were issued and decide the matter within the principles elaborated in paragraph 33 of Laljibhai Kanjibhai Mandalia (supra).

It was further submitted that the reason behind insertion of the Explanation is to remove the ambiguity created by judicial decisions regarding disclosure of reasons recorded to any person or to any authority.

The Petitioner relied upon the decision of the Apex Court in the matter of ITO vs. Seth Brothers (1969) 74 ITR 836 and Pooran Mal vs.Director of Inspection (Investigation)(1974) 93 ITR 505, and submitted that the court has opined that the necessity of recording of reasons was to ensure accountability and responsibility in the decision-making process. The necessity of recording of reasons also acts as a cushion in the event of a legal challenge being made to the satisfaction reached. At the same time, it would not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorisation as it would be counterproductive of the entire exercise contemplated by Section 132 of the Act. At the same time, it is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee. It was submitted that since the assessment proceedings were commenced, the time is now ripe to disclose the requisite material to petitioners.

The Honourable court noted that a similar matter came up for consideration before the Division Bench of this Court (Nagpur bench) in the case of Balkrushna Gopalrao Buty & Ors. vs. The Principal Director (Investigation), Nagpur & Ors. Judgment dated 23^rd April, 2024 in Writ Petition No.1729 of 2024. In that case also, assessee was questioning the search and seizure carried out in his premises pursuant to the provisions of Section 132 of the Act. Assessee has also submitted that a search and seizure has necessarily to be in consequence of some information in possession of the Authority, which provides him a reason to believe that any of the actions, as indicated in Section 132(1)(a) to (c) of the said Act, are likely to occur, which would be the only grounds on which the search and seizure could be made under Section 132 of the said Act. It was assessee’s case therein that the seizure was based on certain transactions which were all disclosed in the returns filed and, therefore, there was no material which would entitle the revenue to conduct the search and seizure in terms of the language and requirement of Section 132 of the said Act. The court analysed Section 132 of the Act and decided not to disclose the reasons recorded in the file for the sake of maintaining secrecy but expressed its view on the satisfaction note. The satisfaction note and the information was made available only to the court for consideration and upon its consideration, the court concluded that the requirement of Section 132(1) of the Act was not satisfied. The Court also held that the department cannot rely upon what was unearthed on account of opening of the lockers of petitioners, as the information and reason to believe as contemplated under Section 132(1) of the Act must be prior to such seizure.

The Honourable court noted that the same approach would be adopted in present matter. The court further relied on the decision in case of Director General of Income Tax (Investigation), Pune vs. Spacewood Furnishers Private Limited (2015) 12 SCC 179.

The Honourable Court noted that as per Section 132(1) of the Act, the Authority must have information in his possession on the basis of which a reasonable belief can be founded that, the person concerned has omitted or failed to produce the books of accounts or other documents for production of which summons or notice has been issued, or such person will not produce such books of accounts or other documents even if summons of notice is issued to him, or such person is in possession of any money, bullion or other valuable articles which represents either wholly or partly income or property which has not been or would not be disclosed, is the foundation to exercise the power under Section 132 of the said Act. The Apex Court in Laljibhai Kanjibhai Mandalia (supra)and in Spacewood Furnishers Pvt Ltd. (supra) has specifically held that such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the Competent Authority in which event the Court would be entitled to examine the reasons for formation of the belief, though not the sufficiency or adequacy thereof.

The Honourable Court noted that no notice or summons have been issued to petitioners calling for any information from them at any point of time earlier to the action under Section 132(1) of the Act to give rise to an apprehension of non-compliance by petitioners justifying action under Section 132(1) of the Act. Therefore, no reasonable belief can be formed that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or that such person will not produce such books of accounts or other documents even if summons or notice is issued to him.

The Honourable Court agreed with the view expressed in Balkrushma Gopalrao Buty (supra) that respondents cannot rely upon what has been unearthed pursuant to the search and seizure action as the information giving a reason to believe as contemplated under Section 132(1) of the said Act must be prior to such seizure.

The Honourable Court read the contents of the file of the department given to court in a sealed envelope by counsel for respondents. Having considered the contents thereof, the court opined that it does not disclose any information which would lead the Authorities to have a reason to believe that any of the contingencies as contemplated by Section 132(1)(a) to (c) of the said Act are satisfied. The reasons recorded only indicate a mere pretence. The material considered is irrelevant and unrelated. For the sake of maintaining confidentiality, the Court did not discuss the reasons recorded in the file, except that the information noted therein is extremely general in nature. The Honourable Court further noted that the reasons forming part of the satisfaction note have to satisfy the judicial conscience. The satisfaction note does not indicate at all the process of formation of reasonable belief. The Honourable Court noted that it has not questioned the adequacy or sufficiency of the information. That apart, the note also does not contain anything altogether regarding any reason to believe, on account of which there is total non-compliance with the requirements as contemplated by Section 132(1) of the said Act which vitiates the search and seizure. It does not fulfil the jurisdictional pre-conditions specified in Section 132 of the Act.

Hence, the action of respondents taken under Section 132(1) of the Act was quashed and set aside. The Honourable Court further observed that even though the search is held to be invalid, the information or material gathered during the course thereof may be relied upon by revenue for making adjustment to the Assessee’s income in an appropriate proceeding.

BCAJ Admin

Section 151, r.w.s 147 and 148 of the Act — Reopening of assessment — Beyond three years — Sanction for issue of notice — Appropriate authority for issuance of notice under Sections 148 and 148A(b) should have been either Principal Chief Commissioner or Principal Director General, or in their absence, Chief Commissioner or Director General – Principal Commissioner of Income Tax, do not fall within specified authorities outlined in Section 151.

6 Ashok Kumar Makhija vs. Union of India

WP (C) NO. 16680 OF 2022

A.Y.: 2017–18

Dated: 7^th May, 2024, (Delhi) (HC)

Section 151, r.w.s 147 and 148 of the Act — Reopening of assessment — Beyond three years — Sanction for issue of notice — Appropriate authority for issuance of notice under Sections 148 and 148A(b) should have been either Principal Chief Commissioner or Principal Director General, or in their absence, Chief Commissioner or Director General – Principal Commissioner of Income Tax, do not fall within specified authorities outlined in Section 151.

The petitioner is engaged in the business of wholesale trading of pan masala and beetle nut (supari) through his proprietorship concerns namely, M/s Neelkanth Trades and M/s Prem Supari Bhandar. On 28^th March, 2017, he was served with a summon under Section 131(1A) of the Act, seeking verification of cash deposits made by him in his bank account during the period of demonetisation, i.e., 8^th November, 2016 to 31^st December, 2016.

Accordingly, on 14^th October, 2017, ITR was filed by the petitioner for A.Y. 2017–18, declaring a total income of ₹1,70,43,590. The said ITR was subjected to scrutiny assessment on the issues of capital gains / loss on sale of property and cash deposits made during the demonetisation period.

The petitioner claimed that the said cash deposit in his bank account represents the sale proceeds of the business. While issuing notice dated 20^th November, 2019 under Section 133(6) of the Act, the Revenue sought confirmation from M/s Mahalaxmi Devi Flavours Pvt. Ltd., from whom the petitioner claimed to have made the purchases. Consequently, on 28^th December, 2019, an assessment order under Section 143(3) of the Act came to be passed accepting the aforesaid ITR.

On 8^th April, 2021, a notice under Section 148 of the Act was issued, reopening the assessment of the petitioner for A.Y. 2017–18 on the grounds that the income of the petitioner which was chargeable to tax had escaped assessment. However, the said notice was quashed following the decision rendered by in the case of Man Mohan Kohli vs. ACIT 2021 SCC OnLine Del 5250, which inter alia declared that all notices issued under Section 148 of the Act after 1^st April, 2021 under the erstwhile law (un-amended provision of Section 148 of the Act) could not have been issued.

In the meantime, the Supreme Court in the case of Union of India vs. Ashish Agarwal 2022 SCC OnLine SC 543 rendered a decision declaring that notices issued under Section 148 of the Act between 1^st April, 2021 to 30^th June, 2021, under the old provisions shall be treated as notices under Section 148A(b) of the Act, and the same shall be dealt with in the light of the directions contained in the aforesaid decision.

Thereafter, the Revenue issued the impugned notice dated 26^th May, 2022, under Section 148A(b) of the Act and initiated reassessment proceedings by supplying the petitioner with the information in its possession, i.e., an exponential increase in the sales turnover of the petitioner during A.Y. 2017–18, alleging that the same has escaped assessment. Consequently, the impugned order under Section 148A(d) dated 30^th July, 2022 was passed by the Revenue.

The petitioner submitted that the reassessment proceedings for A.Y. 2017–18 are after a lapse of more than three years, the appropriate authority for issuance of the notice under Sections 148 and 148A(b) of the Act should have been either the Principal Chief Commissioner or Principal Director General, or in their absence, the Chief Commissioner or Director General, instead of the Principal Commissioner of Income Tax, Delhi-10, who does not fall within the specified authorities outlined in Section 151 of the Act. He relied on the decision of this Court in the case of Twylight Infrastructure Pvt. Ltd. vs. ITO &Ors. 2024 SCC OnLine Del 330.

The Honourable Court held that there is no approval of the specified authority, as indicated in Section 151(ii) of the Act.Accordingly, for the reasons assigned in the Twylight Infrastructure (supra) judgment, the impugned notices dated 26^th May, 2022 and 30^th July, 2022 and the impugned order dated 30^th July, 2022 were quashed with liberty to the revenue to commence reassessment proceedings afresh.The writ petition was disposed accordingly.

BCAJ Admin

Section 119 — CBDT — Pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted — the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits: Section 154 — Rectification of mistake — An error committed by a professional engaged by petitioner should not be held against petitioner — Non disposal of application for six years — the PCCIT to take disciplinary action against JAO for dereliction of duty.

5 Pankaj Kailash Agarwal vs. ACIT – 17(1)

Writ Petition (L) No. 7783 OF 2024

Dated: 8^th April, 2024, (Bom-HC)

Section 119 — CBDT — Pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted — the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits:

Section 154 — Rectification of mistake — An error committed by a professional engaged by petitioner should not be held against petitioner — Non disposal of application for six years — the PCCIT to take disciplinary action against JAO for dereliction of duty.

For A.Y. 2016–17, petitioner got his books of accounts audited, and an audit report dated 19^th August, 2016 was issued by the auditors M/s Shankarlal Jain & Associates, Chartered Accountants. Petitioner filed his return of income on 7^th September, 2016 well before the due date of 30^th September, 2016 prescribed under section 139(1) of the Act.

In his return of income, the petitioner claimed a deduction under section 80IC of the Act in respect of an industrial unit / undertaking that petitioner was operating in the name and style of M/s Creative Industries in an export processing zone (EPZ) at Haridwar (Uttaranchal). In terms of section 80IC of the Act, no deduction under section 80IC of the Act could be allowed to an assessee unless the return of income was filed on or before the due date specified under section 139(1) of the Act. Since petitioner had duly filed his return of income within the said due date, petitioner could not have been denied the deduction under section 80IC of the Act. In terms of section 80IC of the Act, petitioner got the accounts of his industrial unit / undertaking also audited and an audit report dated 19^th August, 2016 in Form No.10CCB was issued by the chartered accountants of petitioner. While filing the return of income on 7^th September, 2016, the figures / details of the deduction under section 80IC of the Act from the audit report dated 19^th August, 2016 were duly mentioned. The return of income of petitioner was processed under section 143(1) of the Act and an intimation dated 29^th March, 2018 under section 143(1) of the Act was issued to petitioner. In the said intimation, petitioner was denied the deduction under section 80IC of the Act. According to petitioner, while the intimation did not mention any reason for the denial of deduction under section 80IC of the Act, petitioner addressed a letter dated 16^th April, 2018 requesting for a rectification of the intimation.

Sometime in January 2019, the chartered accountant of petitioner realised that the audit report dated 19^th August, 2016 in Form 10CCB, due to inadvertence, had not been uploaded online, which possibly could be the reason for denial of deduction under section 80IC of the Act. Therefore, on 12^th January, 2019, the said audit report dated 19^th August, 2016 in Form 10CCB was uploaded online.

It appears that immediately after the rectification application was filed and upon Form 10CCB being uploaded online, on 13th January, 2019, the rectification application was transferred to the JAO. Despite repeated reminders, JAO did not dispose petitioner’s rectification application. Petitioner filed an application under section 264 of the Act before PCIT on 19^th November, 2020, seeking the grant of deductions which were denied to petitioner in the intimation under section 143(1) of the Act. Petitioner’s application under section 264 of the Act came to be dismissed on the grounds that petitioner had not applied for revision within the limitation time prescribed and there was a delay of about two and a half years. Since the application under section 264 of the Act was rejected without deciding on merits, petitioner continued to pursue the pending rectification application. According to petitioner, till date, no decision had been taken by JAO on the rectification application filed by petitioner under section 154 of the Act, though almost six years have passed since the same was filed.

Therefore, left with no option, petitioner approached CBDT for condoning the delay, if any, and to direct JAO to allow the rectification application. Petitioner explained to CBDT in the application under section 119(2)(b) of the Act that the reason for not filing Form 10CCB on time was on account of the inadvertence / oversight by the chartered accountants and relying on a judgment of the Apex Court in CIT vs. G. M. Knitting Industries Private Limited(2015) 376 ITR 456 (SC), submitted that filing Form 10CCB was directory and not mandatory. Reliance was also placed on the Circular No.689 dated 24^th August, 1994 and Circular No.669 dated 25^th October, 1993 issued by CBDT as per which, JAO was bound to consider Form 10CCB and decide the application for rectification. Petitioner’s application was rejected by CBDT on the grounds that the reasons stated by petitioner, i.e. inadvertence on the part of the auditors / chartered accountants of petitioner in uploading Form 10CCB was very general in nature and no reasonable cause was shown to justify the genuine hardship being faced by petitioner.

The Honourable Court observed that innumerable grounds have been raised in the petition but the primary ground was that it was not the case that there was failure on the part of petitioner to comply with the requirements specified in Chapter VI-A of the Act but petitioner relied upon his chartered accountants to do the needful as required under the Act. Petitioner had engaged the services of chartered accountants who audited petitioner’s accounts and also of the undertaking M/s Creative Industries, which was run by petitioner as the sole proprietor. Petitioner was also issued the audit report within the stipulated time and the figures / details of the deductions under section 80IC of the Act were mentioned in the return of income filed by petitioner. The audit report obtained under section 44AB of the Act was filed along with the return of income, and there was no reason to believe that Form 10CCB had not been uploaded by the chartered accountants. According to petitioner, an error committed by a professional engaged by petitioner should not be held against petitioner. According to petitioner, the objective of the Act is not to penalise an assessee for such technical / inadvertent error and deny benefits of statutory provisions. No unfair advantage has been obtained by petitioner on account of this inadvertent error. Therefore, the inadvertence / oversight in uploading Form No. 10CCB by the auditor / chartered accountants of petitioner were circumstances beyond the control of petitioner and would constitute a reasonable cause for not uploading Form No.10CCB along with the return of income.

The petitioner contended that refusal to exercise of powers under section 119 of the Act by respondent no.2 on a pedantic and narrow interpretation of the expression ‘genuine hardship’ to mean only a case of ‘severe financial crises’ is unwarranted. The phrase ‘genuine hardship’ used under section 119(2)(b) of the Act ought to be liberally construed. The petitioner further submitted that the order only says that it has been issued with the approval of the Member (IT&R), CBDT. But no order passed by the said Member has been made available to petitioner or filed along with the affidavit in reply. In TATA Autocomp Gotion Green Energy Solutions Pvt Ltd. Vs. Central Board of Direct Taxes &Ors. Writ Petition No.3748 of 2024 dated 18^thMarch, 2024,it was held that the orders of CBDT shall be written, passed and signed by the Member of CBDT who has given a personal hearing. Relying on R. K. Madani Prakash Engineers vs. Union of India &Ors. [2023] 458 ITR 48 (Bom), on this ground alone, the order has to be quashed and set aside.

The Honourable Court observed that no assessee would stand to benefit by lodging its claim late. More so, in case of the nature at hand, where assessee would get tax advantage / benefit by way of deductions under section 80IC of the Act. Of course, there cannot be a straight jacket formula to determine what ‘genuine hardship’. The Court held that, certainly the fact that an assessee feels that he would be paying more tax if he does not get the advantage of deduction under section 80IC of the Act will be a ‘genuine hardship’. The Court relied on the decision in the case of K. S. Bilawala&Ors. vs. PCIT &Ors. (2024) 158 taxmann.com 658 (Bombay).

The Court has held that the phrase ‘genuine hardship’ used in Section 119(2)(b) of the Act should be considered liberally. CBDT should keep in mind, while considering an application of this nature, that the power to condone the delay has been conferred to enable the authorities to do substantial justice to the parties by disposing the matters on merits and while considering these aspects, the authorities are expected to bear in mind that no applicant would stand to benefit by lodging delayed returns. The court also held that refusing to condone the delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when the delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. Similar issue came to be considered in R. K. Madhani Prakash Engineers (supra) wherein the Honourable Court had quashed and set aside the impugned order on the grounds that the impugned order is not passed by the CBDT but only with the approval of the Member (IT & R), CBDT. So also in the case of TATA Autocomp (supra).

The Honourable Court observed that the legislature has conferred power on CBDT to condone the delay to enable the authorities to do substantive justice to the parties by disposing the matter on merits. Routinely passing the order without appreciating the reasons why the provisions for condonation of delay has been provided in the act, defeats the cause of justice. In the circumstances, the impugned order dated 1^st September, 2023 was set aside and quashed.

As regards the rectification application filed by petitioner before JAO on 14^th April, 2018 for rectification of the intimation dated 29^th March, 2018, the Court noted that the affidavit in reply filed through on Shyam Lal Meena, ACIT, stated that the rectification order under section 154 of the Act was not passed as there was no mistake apparent from record. The Court noted that the JAO was duty bound to pass orders on the application which has been pending for almost six years, instead of making such baseless statements in the affidavit in reply. The Honourable Court remarked that “Perhaps, JAO thinks that he or she is not accountable to any citizen of this country”. The Honourable Court directed to place copy of the order before the PCCIT to take disciplinary action against JAO for dereliction of duty.

The Court further held that the impugned order dated 1^st September, 2023 has been in utter disregard that the CBDT has for judicial orders. The Honourable Court directed to place copy of this order to the Chairman of CBDT so that suitable actions are taken to comply with the directions given by this Court.

The Writ Petition was disposed directing to dispose off the rectification application.

BCAJ Admin

Bogus purchases — red flagged by the Sales Tax Department — No disallowance warranted without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

4 Principal Commissioner of Income Tax-2 vs. SRS Pharmaceuticals Pvt Ltd

ITXA No. 1198 of 2018

Dated: 3^rd April, 2024 (Bom.) (HC).

Bogus purchases — red flagged by the Sales Tax Department — No disallowance warranted without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

The Department Appeal pertained to alleged bogus purchases from suppliers, who were red flagged by the Sales Tax Department. The Assessing Officer (AO) had passed the assessment order by disallowing the cost of purchases made, relying only upon the information supplied by the Sales Tax Department / Investigation Wing of the Income Tax Department without bringing on record any other evidence to prove that the purchases made by assessee were not genuine.

The CIT(A), on an appeal filed by assessee had given a categorical finding of fact that purchases made by assessee could not be doubted. Revenue challenged this order of the CIT(A). The Appellate Tribunal dismissed Revenue’s Appeal.

The Honourable Court observed that both the CIT(A) as well as the ITAT have come to a concurrent factual finding that assessee was a 100 per cent export oriented unit and was purchasing goods from various parties. Assessee was getting the goods manufactured from other manufacturers to whom payments had been made through banking channel. Both authorities have accepted the fact that manufacturers were supplying the goods with details of raw materials consumed and the batch number, and the AO had not even doubted the Batch Manufacture Record (BMR), Goods Received Note (GRN), delivery challans, etc., issued by the transporter with regard to supply of goods / supply of raw-materials. The AO had not even pointed out any defect in the tally on the quantity delivered. The AO had not even made enquiry with the suppliers and the payment of Value Added Tax by assessee had also been ignored. Therefore, the CIT(A) and the ITAT came to a finding that the AO cannot, simply relying upon information received by the Sales Tax Department, without doing any further conclude that the purchases made by assessee were not genuine.

In view of the above finding of fact the Department’s appeal was dismissed.

BCAJ Admin

Penalty u/section 271(1)(c) — Furnished inaccurate particulars of income — disallowance of claim of deduction u/s 36(i)(viii) of the Act.

3 Pr. Commissioner of Income Tax-2 vs. ICICI Bank Ltd.

ITXA NO. 1067 OF 2018

Dated: 13^th March, 2024, (Bom) (HC)

Penalty u/section 271(1)(c) — Furnished inaccurate particulars of income — disallowance of claim of deduction u/s 36(i)(viii) of the Act.

Assessee-respondent, a banking company, filed its return of income for A.Y. 1999–2000 on 31^st December, 1999, declaring total income of ₹1,19,33,33,740 under the normal provisions. Assessee also declared book profit of ₹78,29,67,083 under section 115JA of the Act. Subsequently, assessee filed revised return of income on 27^th February, 2001, declaring total income at ₹46,53,59,236 and book profit of ₹1,02,15,58,970. The Assessing Officer (AO) completed the assessment by disallowing certain deductions.

Assessee challenged the assessment order before the Commissioner of Income Tax (Appeals) (CIT(A)) and, thereafter, before the ITAT. When assessee’s appeal was pending before the ITAT, the AO issued a notice to assessee under section 271(1)(c) of the Act and the allegation was the additions made in the assessment order were a result of furnishing of inaccurate particulars of income or concealment of income by assessee. Assessee’s objections were rejected and the AO passed an order imposing penalty of ₹48,86,23,673 under section 271(1)(c) of the Act. In the appeal filed by assessee, the CIT(A) deleted the penalty imposed by the AO. The Department challenged that order of CIT(A) before the ITAT, and the ITAT upheld that finding of the CIT(A).

It is the case of revenue that in the return of income, assessee did not claim certain deductions, during the course of assessment proceedings. Assessee claimed such deductions and, thereby, has furnished inaccurate particulars of income. It is the department’s case that only because assessee has offered income and not claimed deductions in the return of income would not absolve assessee from the liability of section 271(1)(c) of the Act.

The Honourable Court observed that the ITAT correctly held that provisions of section 271(1)(c) of the Act are not attracted. The ITAT was of the view, and rightly so, that assessee had made a bona fide claim under section 36(1)(viii) as such deductions claimed are linked to the business profit. Only because there was variance in the deductions allowable due to change in determination of business profit, it cannot be said that assessee has furnished inaccurate particulars of income or concealed inaccurate particulars of income. The Hon Court relied on the Apex Court decision in the case of Commissioner of Income Tax vs. Reliance Petro Products Pvt Ltd (2010) 322 ITR 158 (SC) wherein it was held that a mere making of the claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of assessee; such claim made in the return cannot amount to be inaccurate particulars.

In the circumstances, Department’s appeal was dismissed.

BCAJ Admin

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

33 OmniActive Health Technologies Limited vs. Assessment Unit, Income Tax Department NFAC

[WP No. 474 Of 2024, Dated: 4^th March, 2024. (Bom.) (HC).]

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

Petitioner’s case is that section 144C(2) of the Act, inter alia, requires Assessee, should he choose to file reference before the Dispute Resolution Panel (DRP) to file such objection within 30 days from the receipt of Draft Assessment Order. The section also requires Assessee to file a copy of the reference with the Assessing Officer (“AO”) within the time limit prescribed. Section 144C(4) of the Act requires AO to pass a final order within one month from the end of the month in which the period of filing of objections before DRP and AO expires.

According to Petitioner, though section 144C of the Act requires Petitioner to communicate the objection filed before the DRP to the AO, due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection by way of an email dated 23^rd October, 2023. The AO, unaware of Petitioner having filed an objection before the DRP after expiry of the prescribed period of 30 days, proceeded to pass the assessment order dated 21^st November, 2023. Petitioner informed the AO only on 28^th November, 2023 about having filed objections with the DRP.

The Hon. Court observed that since Petitioner had already filed a reference raising its objections to the DRP within the 30 days period and section 144C(4) of the Act requires the AO to pass a final order including the view expressed by the DRP, the order dated 21^st November, 2023 of the AO is set aside. The AO shall take further steps in the matter after the DRP passes its order on the objection filed by Petitioner, in accordance with law.

BCAJ Admin

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

32 Gaurang Manhar Gandhi vs. ACIT – 3(2)(1)

[WP NO. 2058 OF 2020,

Dated: 4^th March, 2024, (Bom) (HC)]

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

Petitioner, an individual, filed his return of income on24^th July, 2014, declaring a total income of ₹88,13,470 for A.Y. 2014–15. Petitioner’s case was selected for scrutiny and Petitioner received a notice under section 143(2) of the Act and under section 142(1) of the Act calling upon Petitioner to provide various details / documents including details of long-term capital gains on sale of shares and short-term capital gain of office premises. Petitioner provided all the documents called for. Petitioner specifically provided details of the transactions reported in Bombay Stock Exchange for contracts of ₹10,00,000 and above. Petitioner made specific disclosure about transactions pertaining to sale of shares in Sunrise Asian Limited (“SAL”). Petitioner disclosed long-term capital gain on sale of shares of ₹6,44,61,215. Petitioner also gave the details of gain on sale of investments / shares / long term and disclosed that he had purchased and sold a quantity of 1,33,439 equity shares of SAL. The cost price is disclosed as ₹26,68,780 and the sale price is disclosed as ₹6,71,29,994.58 and a gain of ₹6,44,61,214.58 is also disclosed.

Subsequently, an assessment order dated 26^th April, 2016 came to be passed under section 143(3) of the Act. The assessment order also discusses long-term capital loss, short-term capital loss, etc. which were carried forward.

Following the introduction of Chapter IX dealing with Income Declaration Scheme, 2016 (“IDS, 2016”) by the Finance Act, 2016, which came into effect from1st June, 2016, till 30^th September, 2016, Petitioner, to get peace of mind, decided to take advantage of the IDS, 2016 and filed a declaration under section 183 of the Finance Act, 2016. Petitioner declared an amount of ₹6,84,61,220, which consisted of ₹6,44,61,215 pertaining to long-term capital gains on shares of SAL and ₹40,00,000 pertaining to cash income. Petitioner’s declaration was accepted pursuant to which Petitioner paid the amounts payable under the Finance Act, 2016 and Petitioner was also issued a certificate of declaration under section 183 of the Finance Act, 2016.

Over three and half years later, Petitioner received a notice dated 31^st March, 2021 issued under section 148 of the Act, stating that there was reason to believe Petitioner’s income chargeable to tax for A.Y. 2014–15 has escaped assessment within the meaning of section 147 of the Act. Petitioner was also provided with the reasons recorded for reopening. The reasons indicate that a total amount of ₹60,25,280 had escaped assessment, which needs to be taxed. This amount is in two parts, i.e., ₹26,68,780 paid by Petitioner for purchase of shares in SAL and ₹33,56,500 as assumed brokerage / commission paid. Reasons do not mention anywhere that this amount was paid or when it was paid or to whom it was paid. It proceeds on the assumption that for the kind of transaction Petitioner had indulged, an operator or broker charges a fixed commission, which might vary between 0.5 per cent to 5 per cent of the entire sale consideration and taking into account that the total sale consideration was ₹6,71,29,995, the brokerage that Petitioner might have paid would be ₹33,56,500, which needs to be taxed. This amount of ₹6,71,29,995 is the sale consideration, which Petitioner had disclosed in the computation of income filed along with the ROI and also during the assessment proceedings in response to a query raised by the Assessing Officer.

In response to the notice received under section 148 of the Act, Petitioner filed objections vide letter dated 17th September, 2021, and the same came to be rejected by an order dated 14^th February, 2022. Petitioner, therefore, filed this Petition.

The Hon. Court observed that under the IDS, 2016, and as per the clarifications of the IDS, 2016 dated 30th June, 2016, issued by the Central Board of Direct Taxes (“CBDT”), it is stated that the information contained in the declaration shall not be shared with any other law enforcement agency and not only that, it will not be shared within the Income Tax Department for any investigation in respect of a valid declaration. Since the declaration in Petitioner’s case was a valid declaration, the information as contained in the declaration filed by Petitioner could not have been made available to the AO, who issued the notice under section 148 of the Act. In answer to question no. 5 in the clarifications, which says “where a valid declaration is made after making valuation as per the provisions of the scheme read with IDS Rules and tax, surcharge and penalty as specified in the scheme have been paid, whether the Department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty” is an emphatic ‘NO’. The Hon. Court agreed with the contention that the information could not have been shared with the AO.

The Hon. Court observed that reliance placed on the declaration made under the IDS, 2016 is against the principles of natural justice and is not valid. Moreover, Respondents having issued a certificate under the IDS, 2016 after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

The Hon. Court further observed that the reopening merely by deeming commission expenses of 5 per cent of total sale consideration of the shares and arbitrarily and in an adhoc manner fixing 5 per cent of the total sale consideration as commission expenses amounting to ₹33,56,500 cannot be accepted. Ad-hoc disallowances without pointing out any specific defects cannot be accepted. In fact, there is not even an allegation in the reasons to believe escapement of income that Petitioner had in fact paid any commission to any broker or operator. The AO proceeds on a surmise that there was no such free service available and, therefore, Petitioner would have paid brokerage. The AO having observed that the brokerage / commission varied between 0.5 per cent to 5 per cent does not even explain why he took into account 5 per cent as the brokerage paid and not 0.5 per cent or any other figure in that band.

The Hon. Court further observed that there has been no failure on the part of Petitioner to disclose any material fact, because in the computation of income filed by Petitioner, (a) Petitioner has disclosed long-term capital gain on sale of shares of ₹6,44,61,214.58, (b) purchase of 1,33,439 equity shares of SAL on 16^th September, 2011 for a total consideration of ₹26,68,780, (c) the sale of those shares between 30th July, 2013 up to 23^rd October, 2014 for a total consideration of ₹6,71,29,994.58 and (d) the gain of ₹6,44,61,214.58. The Petitioner gave the entire details relating to the transactions in shares of SAL and even in the assessment order, long-term capital loss, short-term capital loss, etc., are discussed. It is also recorded in the assessment order dated 26^th April, 2016 that capital gain was nil.

In the circumstances, the subject matter of capital gains in the shares of SAL was certainly a subject matter of consideration of the AO during the original assessment proceedings. Once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and / or reason to believe that income chargeable to tax has escaped assessment.

In the circumstances, the impugned notice dated 31^st March, 2021 issued under section 148 of the Act quashed.

BCAJ Admin

Section 148A – Reassessment –Sanction – Non Application of mind.

31 ArunaSurulkar vs. Income Tax Officer,

Ward-19(2)(4),

Writ Petition No. 3503 of 2023 (Bom) (HC)

Date of Order: 22nd January, 2024

Section 148A – Reassessment –Sanction – Non Application of mind.

Petitioner challenged the notice dated 23rd March, 2022 issued under Section 148A(b) of the Act and order dated 22nd April, 2022 passed under Section 148A(d) of the Act, also the consequent notice dated 22nd April, 2022 issued under Section 148 of the Act.

Admittedly, Petitioner did not reply to the initial notice dated 23rd March, 2022 that Petitioner received under Section 148A(b) of the Act. The order passed under Section 148A(d) of the Act, whereby in paragraph 3, it is stated as under:

“3. From the details of transactions as mentioned above, it is seen that there is violation of the provisions of section 50C of the Income Tax Act, 1961. Due to noncompliance, assessee also failed to explain the transaction. Further, on verification of assessee’s return of income for AY 2018-2019, it is seen that differential amount of Rs. 26,44,500/- is not offered for taxation.”

The Petitioner contended that provisions of Section 50C of the Act would apply only to a seller and not the assessee in this case, who is the buyer of the property.
Therefore, it is the petitioner’s case that there has been total non application of mind while issuing this order under Section 148A(d) of the Act. If the sanctioning authority had read the order, he would not have granted the sanction because Section 50C of the Act does not apply to buyers.

The Revenue relies on an affidavit-in-reply filed by Mr. Manish and submits that it was a human error. The Court observed that the said Manish is incompetent to make the statement because it is not the said Manish, who had passed the impugned order. There is also nothing to indicate in the affidavit that Manish made inquiries with the officer Abhishek Kumar Sinha, who passed the impugned order seeking an explanation for reliance on Section 50C of the Act.

The Revenue further contended that the reopening was to provide an opportunity to the assessee of being heard and thus, thoroughly analyse the facts of the case with documentary evidence and the sufficiency or correctness of the material cannot be considered at the stage of reopening. The questions of fact and law are left open tobe investigated and decided by the Assessing Authority and therefore, reopening is valid. The Hon. Court did not accept this stand of Respondents in as much as the Assessing Officer before issuing a notice must have satisfied himself that what he writes makes sense. Even the Principal Commissioner, who granted sanction should have also applied his mind and satisfied himself that the order passed under Section 148A(d) of the Act was being issued correctly by applying mind. It cannot be a mechanical sanction.

The court further observed that there is nothingin the notice to explain as to how, if the transaction amount is less than the stamp duty value, there can be escapement of any income particularly in the hands of a buyer.

In the circumstances, the petition was allowed.

BCAJ Admin

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

30 Principal Commissioner of Income Tax-7 vs. ESSEL Infra Projects Ltd. (Former PAN India Paryatan Ltd.)

Income Tax Appeal No. 927 of 2018 (Bom.) (HC)

Date of Order: 31st January, 2024

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

The Respondent-Assessee is engaged in the business of operating amusement parks, infrastructure development management and finance activities. Assessee had given a sum of ₹25 crores to PAN India Infrastructure Private Limited, its subsidiary. The Assessing Officer took the view that Assessee had diverted the interest bearing fund by giving interest-free advance and, therefore, the entire interest claim of ₹1,48,10,695 needs to be disallowed. There were also certain other disallowances made by AO.

The Commissioner of Income Tax (Appeals) held that the investment made by Assessee in its subsidiary was in the course of carrying on its business and the interest expenditure is not required to be disallowed. It was held that under Section 36(1)(iii) of the Act, interest paid in respect of capital borrowed for the purpose of business is a permissible deduction in the computation of profits and gains of business or profession and the investment made by Assessee being in the course of carrying on its business, interest expenditure is not required to be disallowed.

This was impugned by the Revenue in the appeal filed before the Income Tax Appellate Tribunal.

The Hon. High Court observed that the Tribunal, on the facts, agreed with the finding arrived at by the CIT(A) that the amount given by Assessee to its subsidiary was for the purpose of business of Assessee. The Tribunal has accepted the factual finding of the CIT(A) that Assessee being engaged in the business of ‘infrastructure development management and finance’ in addition to its ‘amusement park and water park’, has set up the subsidiary to which these funds were provided to take up the infrastructure project on behalf of Assessee. A factual finding has been arrived at that the finance provided to the wholly owned subsidiary was for its business of infrastructure and is used for that purpose. It has accepted that the nexus between the advance of funds and the business of Appellant / Assessee carried out through the subsidiary stood established and hence, no disallowance under Section 36(1)(iii) of the Act was warranted.

The Hon Court relied on the decision in case of Vaman Prestressing Co. Pvt. Ltd. vs. Additional Commissioner of Income Tax- Rg.2(3) &Ors., 2023 SCC OnLineBom. 1947.

Held, no substantial questions of law arise.

The Appeal was dismissed.

BCAJ Admin

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

29 Commissioner of Income Tax (Exemption), Pune vs. Shree Ram Ashram Trust Nashik

ITXA (IT) No. 448 of 2018 (Bom) (HC)

Date of Order: 31st January, 2024

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

The Respondent-Assessee is a public charitable trust. It had entered into an agreement in 1994 with Buildforce Properties Pvt. Ltd. (“Buildforce”) to sell its property. Since, the Assessee was a trust, it needed permission from the Charity Commissioner before disposing of the property. The Charity Commissioner granted permission vide order dated 29th December, 1995, subject to certain conditions. As per the conditions imposed, the Assessee was to complete the sale within one year from the date of the order, the sale consideration of ₹6.30 crores was to be invested in fixed deposits with nationalised bank or scheduled bank or co-operative bank or in any public securities earning higher rate of interest and only the interest was to be utilized for the charitable activities of the trust. As per the Memorandum of Understanding (“MOU”) with Buildforce, symbolic possession was given to Buildforce. As per the MOU, Buildforce was to develop the property. Admittedly, a certain dispute arose between Buildforce and Assessee and a suit came to be filed being Suit No. 2395 of 1998. The suit was settled by filing ‘Consent Terms’ and an order was passed by the Hon’ble High Court on 25th July, 2006, taking the Consent Terms on record subject to appropriate directions/permissions to be granted by the Charity Commissioner. Under the Consent Terms, Assessee agreed to accept a sum of₹6.28 Crores in full and final settlement and transferred the property in favour of the nominee of Buildforce, i.e.,M/s. Dilip Estate & Town Planners Pvt. Ltd. (“Dilip Estate”). Post the order of the Hon’ble High Court, permissions were sought from the Charity Commissioner, who vide an order dated 5th April, 2007, extended the time to complete the transaction. The time to execute the conveyance deed was extended up to 31st May, 2007. A sale deed was executed on 20th April, 2007 for the sale of the property to Dilip Estates. On execution of the sale deed, sale proceeds were received by Assessee, who invested the same with Bank of Baroda and Dena Bank, both nationalized banks. During the course of hearing before the Income Tax Appellate Tribunal (“ITAT”) also the fixed deposits continued and the list was also made available to the ITAT. It was the case of Assessee that when the sale proceeds of capital assets are invested in fixed deposit, then no capital gain is to be assessed in the hands of Assessee in view of the provisions of Section 11(1A) of the Act.

As per clause (a) of Section 11(1A), where Assessee holds capital asset under trust wholly for charitable or religious purpose and the same is transferred, then where whole or any part of net consideration is utilized for acquiring another capital asset, the capital gains arising from the transfer shall be deemed to have been applied to charitable or religious purposes. Depending on whether whole or part of net consideration is so utilized, then so much of capital gains equal to the amount, if any, so exceeds the cost of asset is to be allowed as deduction. Therefore, in the hands of Assessee, where Assessee has sold the capital asset being immovable property which Assessee claims it was holding under trust wholly for charitable or religious purposes, and on its transfer,the sale proceeds are invested in long term investments with banks in FDRs, then no capital gain arises to Assessee.

The Assessing Officer did not accept this stand of Assessee because, according to him, Assessee entered into an agreement with Buildforce in 1994 and the sale deed was executed in favour of its nominee, Dilip Estates only on 20th April, 2007, i.e., after a period of almost 12 years. In this intervening period of 12 years, where the possession of the property was with Buildforce as per the MOU, Assessee was not in possession of the property. Therefore, it cannot be held that the property was being held under trust wholly for charitable or religious purposes. Therefore, Assessee has not fulfilled the requirement of Section 11(1A) of the Act. Hence, Assessee is not entitled to the benefit provided under the said Sub-section.

On appeal, the Commissioner of Income Tax (Appeals) allowed the appeal.

The limited issue that was before the ITAT in the appeal that the Revenue filed was whether Assessee was entitled to claim the benefit under Section 11(1A) of the Act. The ITAT, came to the conclusion that Assessee was entitled to claim the benefit.

On appeal the Revenue – Appellant proposed a following substantial question of law:

“Whether on the facts and circumstances of the present case and in law, the Hon’ble ITAT was correct in allowing Exemption under Section 11(1A) of the Income Tax Act in the instant case, even though the property was not held under Assessee Trust wholly for the charitable/religious purpose?”

The Hon. High court observed that admittedly, Assessee was the owner of the property and the sale deed was executed with Dilip Estates only on 20th April, 2007. Even the Charity Commissioner has accorded his permission for the sale. Once the year of sale is taken to be AY 2008-09, then admittedly, the possession of said property is deemed to have been given in the said assessment year. Once the AO has accepted the plea that transfer took place in AY 2008-09 and assessed income under long term capital gains in the hands of Assessee, the ITAT correctly concluded that it cannot be said that the possession was not transferred in AY 2008-09. Once legal possession has been handed over by Assessee, only in 2008-09, then it is presumed and accepted that the said capital asset was held by Assessee trust wholly for charitable purposes till the date of its sale.

In the circumstance, it was held that no substantial question of law arises.

Appeal of Revenue was dismissed.

BCAJ Admin

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A)

28 Pravir Polymers Private Limited vs. Income Tax Officer 15(2)(4) and Ors.

Writ Petition No. 2440 of 2023 (Bom.) (HC)

Date of Order: 18th December, 2023

[ITAT order dated 21st November, 2022 in MA No. 178/MUM/2022 and MA No. 179/ MUM/2022 for Assessment Years 2011-2012]

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A).

The two misc. applications were filed by petitioner (assessee) seeking recall of an order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 along with Cross Objection No. 103/MUM/2021. Following are the mistakes that were alleged to be apparent on record in the impugned order:

“I. Violation of Rule 46A of the Rules: The Revenue had neither raised the violation of the Rule 46A in the grounds of appeal, nor was it argued by the revenue, nor an opportunity was given to the appellant to explain the case there by violating the principle of natural justice.

Without prejudice to the above, If Department has raised the violation of Rule 46A, the respondent would have made an application before the Appellate Tribunal to admit the additional evidence.

II. Sufficient Opportunity of Hearing : The Assessing Officer has not given sufficient opportunity of hearing (Page 51) of paper book I) hence supplementary papers were filed before the CIT(A). Therefore, there is no violation of Rule 46A.

III. Not dealt with the cases relied on by the Applicant: The Hon’ble Tribunal has not dealt with the decision of the Hon’ble Supreme Court, Jurisdictional High Court and Jurisdictional Tribunal, inter alia which were relied on by the Applicant at the time of hearing.

IV. Non-compliance of Daily Order: Direction of the Hon’ble Tribunal via daily Order dated January 24, 2022 to the Departmental Representative to produce information/document to ascertain as to why the assessment was made under section 148 read with section 143(3) of the Act; The same was not complied by the Departmental Representative.”

The misc. applications came to be rejected by the the ITAT, as regards the alleged violation of Rule 46A of the Income Tax Rules, 1962 (the Rules) ITAT has observed that during the course of the hearing before the ITAT, the authorised representative of the assessee was asked whether the assessee could appear before the learned Commissioner of Income Tax (Appeals) [CIT(A)] or the Assessing Officer in case the matter was restored but the counsel of the assessee did not accept that suggestion because according to the assessee’s representative it was not possible for the assessee to produce the parties, from whom the assessee is alleged to have obtained unsecured loans, before the Assessing Officer or the learned CIT(A).

The Assessee contended that it was not within the power of the assessee to produce third parties before the Income Tax officer. If the officer feels presence of certain parties are required for him to probe the matter further or go behind the entries made by the assessee in its books of accounts, the Assessing Officer should exercise his powers under Section 131 of the Act by issuing a summons to those parties. Of course the assessee would provide the address as the assessee may have as on date and also co-operate in tracking those third parties.

As a background, against the Assessing Officer’s order, petitioner had preferred an appeal before the CIT(A). During the proceedings before the CIT(A), the assessee tendered certain documents. Dept contended that the CIT(A), at that stage, should have followed the procedure prescribed under Rule 46A of the Rules, forwarded a copy of those documents to the Assessing Officer and called for a remand report. Instead of calling for such a remand report, the CIT(A) proceeded to consider those documents and passed an order in favour of the assessee. In effect it is the department who is more affected by the CIT(A) not following the procedure prescribed under Rule 46A of the Rules.

The Assessee submitted that no such issue was raised by the Revenue in its grounds of appeal nor an opportunity was given to the assessee to explain the case of violation of principles of natural justice.

The Hon. Court observed that the assessee had relied on certain documents before the CIT(A) whereas the CIT(A) did not follow the procedure prescribed under Rule 46A of the Rules and call for a remand report. Thus instead of making the parties to go back and forth or devoting precious judicial time including in the appeals that have been filed by petitioner against the order dated 29th April, 2022 passed by the ITAT, interest of justice would be meet if the matter is remanded to the CIT(A) for denovo consideration.

The CIT(A) shall follow the procedure as prescribed under Rule 46A of the Rules and may also exercise all powers that he has under the Act to summon third parties to appear before him and record their statements. After hearing the parties, the CIT(A) may pass such orders, as he deems fit, in accordance with law.

In view of the above, the order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 alongwith Cross Objection No. 103/MUM/2021 for Assessment Years 2011–2012 and also the impugned order dated 21st November, 2022 were quashed and set aside.

BCAJ Admin

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income

27 Pr. Commissioner of Income Tax-13 vs. Pinstorm Technologies Pvt Ltd.

ITXA NO. 1117 of 2018 (Bom) (HC)

A.Y.: 2010-11

Date of Order: 20th December, 2023

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income.

The following substantial question of law was proposed:

“Whether on the facts and circumstances and in law, the Hon’ble ITAT erred in appreciating the fact that the error on the part of the assessee was detected during the course of assessment proceeding u/s. 143(3) of the Act on scrutiny by the AO, failing which the error would not had surfaced and therefore, levy of penalty, as a deterrent, was justified and taking any lenient view would encourage the assessee to perpetuate such mistakes?”

The Respondent (assessee) filed the return of income on 14th February, 2012 for A.Y. 2010-2011 declaring loss of ₹16,10,43,542. During the course of assessment, the Assessing Officer (AO) observed that certain expenses which were not allowable expenses under the Act were not added back to the total income in the computation of income to the tune of ₹13,11,45,849. The AO also observed that disallowance of such expenses has been mentioned by the auditors in the tax audit report furnished by assessee. The AO, therefore, disallowed the said expenses of ₹13,11,45,849 and added the same back to the total income of the assessee. During the scrutiny assessment u/s. 143(3) which was completed on 28th February, 2013, a loss of ₹1,81,57,433 was determined.

Subsequently, penalty proceedings were initiated and notice was issued u/s. 274 r.w.s 271 of the Act for concealing/ furnishing inaccurate particulars of income. Assessee responded to the notice and the stand of assessee was that while filing the return electronically, certain disallowances were not properly entered in the column of disallowances and accordingly it showed a loss. Before the Income Tax Appellate Tribunal (ITAT), affidavit of Managing Director of the assessee was filed stating that return was filed by the then CFO Mr. Sudesh Vaidya and the said Mr. Vaidya has since left the company and migrated to United Kingdom, it is assessee’s case that the CFO made an inadvertent error of not considering the disallowances which were mentioned in the tax audit report while uploading the return of income. It was also submitted that the return of income was filed belatedly and, therefore, the same cannot be revised. It was further asserted that even after the subject disallowances, the return of income showed a loss of return and due to delay in filing the return, even the loss could not be carried forward. Therefore, the mistake was not intentional or deliberate and the penalty proceedings were dropped.

The Dept pointed out that the Commissioner of Income Tax (Appeals) (CIT(A)), has made a factual finding that the tax audit report was not filed. The Hon. High court observed that there was an error in such a finding because the AO has accepted that the tax audit report was filed. In fact, even in this appeal in the facts of the case narrated, it is admitted in paragraph 3.1 that the tax audit report was furnished by the assessee.

The Hon. High further court further observed that ITAT has come to a factual finding that there is no intention on the part of assessee to conceal the income or furnish inaccurate particulars of income. It has also accepted the explanation that the CFO was entrusted with the filing of return and the CFO made a mistake in not properly uploading the return by filling up the return with the disallowances which were already reported by the auditors in the tax audit report. The ITAT has come to a factual finding that there was no intention of furnishing any inaccurate particulars or concealment of income as the facts undoubtedly suggest so. The Hon. Court relied on the decision of Apex Court in the case of Price Waterhouse Coopers Pvt Ltd. vs. Commissioner of Income Tax & Anr (2012) 348 ITR 306(SC).

The Hon. Court held that it was only a mistake while uploading the return of income in the given facts and circumstances of the case. The Dept appeal was dismissed.

BCAJ Admin

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax

26 Ramona Pinto vs. Dy. Dy. CIT – 23(3), Mumbai

ITXA No. 2610 Of 2018, (Bom.) (HC)

A.Y.: 2010–2011

Date of Order: 8th November, 2023.

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax.

The Assessee — Appellant has preferred an appeal against the impugned order dated 2nd April, 2018, passed by the Tribunal. The following substantial questions of law was admitted:

(i) Whether the Tribunal ought to have held the Respondent No. 1 had assumed jurisdiction under section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction?

(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of R28 crores received by the Appellant as per the arbitration Award was not chargeable to tax?

A partnership firm by name M/s. P. N. Writer & Co. (the said Firm) was established in or about the year 1954 between Appellant’s late father Mr. Charles D’Souza and one Mr. P. N. Writer. The said Firm was reconstituted from time to time, and the last partnership deed in this regard, according to Appellant, was executed on 18th January, 1979. As per the partnership deed, Appellant along with her late father and brothers were the partners in the said Firm. Appellant was entitled to a share of 20 per cent in the profits or losses made by the said Firm.

Appellant’s father Mr. Charles D’Souza expired on 24th November, 1997 leaving behind his last Will and Testament dated 16th September, 1990. Appellant was bequeathed a further share of 5 per cent in the profits and losses of the said Firm. Accordingly, the Appellant became entitled to a 25 per cent share in the profits and losses of the said Firm. This fact has been also mentioned in the application for probate filed by Appellant’s brother.

It is Appellant’s case that somewhere in 2005, Appellant realised that the said Firm was reconstituted vide a Deed of Partnership dated 25th November, 1997, entered into between Appellant’s brothers. According to the said Deed, Appellant was treated as having retired from the Firm as and from the close of business on 24th November, 1997. The said Firm had filed its return of income for Assessment Year 1998–1999, enclosing reconstituted Deed of Partnership and financial showing Appellant as an erstwhile partner. Appellant’s case was that she continued to be a partner in the said Firm.

Since disputes arose, Appellant and the continuing partners of the said Firm decided to refer their matter to arbitration. Finally, by an interim order dated 20th July, 2007, the Apex Court directed the said Firm to pay an amount of R50,000 per month to the Appellant. Subsequently, by a final order dated 28th March, 2008, the Apex Court appointed a sole Arbitrator to decide the disputes between Appellant, her siblings and the said Firm.

Claims and counter-claims were filed before the Arbitrator. During the course of arbitration proceedings, the parties arrived at consent terms, which was taken on record by the Arbitrator and an award in terms of the consent terms was passed on 25th September, 2009. As per the consent terms, Appellant relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, Appellant was to receive an amount of ₹28 crores. Appellant was to be paid an amount of ₹7 crores on or before 25th December, 2009 and the balance amount of ₹21 crores was to be paid, in seven equal installments of ₹3 crores, on or before 25th December of each subsequent year.

The Appellant, pursuant to the interim order dated 20th July, 2007, of the Apex Court referred earlier, received an amount of ₹5 lakhs in the previous year relevant to Assessment Year 2008–2009. In the course of assessment proceedings, Respondent no. 1 issued a show cause notice for assessment of the said receipt wherein Appellant contended that the receipt was related to her retirement from the said Firm and was, therefore, not chargeable to tax under the Act. Being satisfied, no addition in respect of the said receipt was made in the assessment order dated 26th November, 2010, passed under Section 143(3) of the Act.

As per the consent terms, during the previous year ending 31st March, 2010, Appellant received an amount of ₹7 crores. Appellant filed return of income for Assessment Year 2010–2011 on 16th July, 2010, offering to tax a total income of ₹18,91,589. In the note annexed to the return of income, Appellant referred to the receipt of ₹7 crores pursuant to the arbitration award. Reference was also made to ₹4,82,258 received during the Financial Year 2009–2010 pursuant to the interim order dated 20th July, 2007 passed by the Apex Court. Appellant claimed that as the amounts were received upon her retirement from the said Firm, the same were not chargeable to tax under the Act. Appellant also relied on various decisions of the Apex Court and of this Court.

The return of income filed by Appellant was processed by the Assessing Officer (AO), on 20th March, 2012, under Section 143(1) of the Act, whereby, the total income as offered by Appellant in her return of income was accepted.

Almost two years later, the Appellant received a notice dated 19th March, 2014, from the AO under Section 148 of the Act alleging escapement of income for Assessment Year 2010–2011. Appellant was directed to file return of income once again which was complied with. Appellant also received a copy of the reasons for reopening. The said reasons referred to the information received in respect of an order dated 21st July, 2007, passed by the Supreme Court as well as the arbitration award dated 25th September, 2009. The reasons also made reference to the fact that the amount of ₹7 crores received by Appellant during the Financial Year 2009–2010, corresponding to Assessment Year 2010–2011, has not been offered for tax in the return of income. Based on this, Respondent no. 1 has formed his belief that income of ₹7 crores chargeable to tax for Assessment Year 2010-2011 has escaped assessment.

The AO passed the assessment order on 30th March, 2015, determining Appellant’s total income at ₹28,18,91,590. Therein, the amount of ₹28 crores was added as business income by invoking Section 28(iv) of the Act. Alternatively, he held that the amount of arbitration award was chargeable to tax as capital gains. It was further alleged that Appellant had not retired from the said Firm because the consent terms did not mention so and further held that the entire amount was not towards her retirement from the said Firm.

Aggrieved by the assessment order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. During the course of hearing before the CIT(A), Appellant filed valuation reports in respect of various properties owned by the said Firm to justify the amount of ₹28 crores that was received as her share from the said Firm. The CIT(A) dismissed the appeal by an order dated 3rd February, 2017. While dismissing the appeal, the CIT(A), however, accepted Appellant’s contention that the provisions of Section 28(iv) had no application to the present case and that the amount of ₹28 crores could not be assessed as capital gains in the hands of the Appellant. The CIT(A), however, held the amount of the arbitration award as income from other sources under Section 56(1) of the Act because the amount had been received for settlement of a composite bundle of rights. It is Appellant’s case that the CIT(A) failed to appreciate that the dispute between Appellant and her brothers was primarily in respect to her wrongful retirement from the said Firm and as reference was also made to the inheritance from the father which also mainly comprised of further partnership interest of 5 per cent in the said Firm being given to her, even assuming that any part of the said award also related to the inheritance right as per the father’s Will, no part

of such amount would be chargeable to tax under the Act.

The Appellant filed an appeal before the Tribunal. Appellant raised all grounds before the Tribunal which dismissed the appeal by the impugned order dated 2nd April, 2018. The Tribunal upheld the reassessment proceedings to be valid on the ground that prima facie there was material on record which shows that income chargeable to tax had escaped assessment. The Tribunal, however, referred to the amount of arbitration award as special income which has to be considered in a wider sense. Miscellaneous application was filed before the Tribunal which came to be dismissed.

The Hon. Court observed that the jurisdictional pre-conditions have not been fulfilled. Therefore, it can be stated that the assumption of jurisdiction by the AO under Section 148 of the Act to reassess the Appellant’s income is without jurisdiction.

The Hon. Court observed that on a bare perusal of the reasons shows that there was no mention as to whether and how the amount as per the arbitration Award was in the nature of income. Apart from referring to the fact that there was a decision of the Supreme Court as well as an arbitration award pursuant to which Appellant had received the amount of ₹7 crores, nothing else has been mentioned in the reasons. The belief formed by the AO without any statement on whether and how the receipt was of an income nature would render the reasons as vague and incomplete thereby making the reassessment proceedings initiated under Section 148 of the Act bad in law. The AO while disposing the objections raised by Appellant to his assumption of jurisdiction under Section 148 of the Act has stated that the receipt of ₹7 crores was not in respect of Appellant’s retirement from the said Firm. The order, however, states that the information / material available with the AO at the time of formation of his belief consisted of information received by him from the AO of P. N. Writer & Co. as well as the note placed by Appellant in her return of income filed for Assessment Year 2010–2011. The information reveals that the said receipt was towards the Appellant’s retirement from the said Firm. Therefore, justification given by the AO in the order dated 21st August, 2014, for taxability of the said receipt as not relating to Appellant’s retirement from the said Firm was contrary to the information / material available with him.

The law is very settled in as much as the belief formed by the AO has to be based on the information / material available with him at the time of formation of the belief. There was no material whatsoever available with the AO at that point of time to show that the said receipt of R7 crores by Appellant as referred to in the reasons did not relate to her retirement from the said Firm. In the absence of any statement in the reasons recorded for reopening the assessment regarding taxability of the said receipt and in view of non-sustainability of the justification provided by the AO, the reassessment proceedings initiated under Section 148 of the Act is bad in law.

The Court further observed that for Assessment Year 2008–2009 also, Appellant had received similar amounts from the said Firm. After scrutinising the character of such receipt, it was held by the predecessor of the AO that the receipt was not taxable in nature. Therefore, the formation of the belief that the amount received for the current year was taxable, tantamount to a change of opinion which is not permissible in law.

The Court further observed that in the present case, as the AO has initiated reassessment proceedings without forming the requisite belief and only with a view to enquire / investigate into the facts, his assumption of jurisdiction under Section 148 of the Act would be bad in law. Moreover, it also indicates that even at the stage of disposing the objections, the AO was not clear on the basis why Appellant’s income chargeable to tax has escaped assessment.

As regards taxability of the amount is concerned, the court observed that having considered the consent terms with the arbitration award and the statement of claim, it is clear, the amount of ₹28 crores was receivable by Appellant in terms of the arbitration award dated 25th September, 2009. As per the award, Appellant has relinquished all her claims against the partnership firm of P. N. Writer & Co. as well as the partners. Appellant had initiated arbitration proceedings as she was wrongfully shown as retired from the said Firm. This is brought out by the statement of claim made by the Appellant before the Arbitrator. Even the claim based on the father’s Will was mainly related to the additional 5 per cent share of the said Firm. Therefore, the real dispute between the parties related to the termination of Appellant’s partnership interest in the said Firm. The consent terms were arrived at between the parties with a view to settle this dispute. It goes without saying that when Appellant’s rights and claims in the said Firm were settled by the consent terms and the arbitration award, there could not be her continuance as a partner with the said Firm. Therefore, the arbitration award was receivable by Appellant in respect of her retirement from the said Firm. As held by the Apex Court in Mohanbhai Pamabhai ((1987) 165 ITR 166) and this Court in Prashant S. Joshi ((2010) 324 ITR 154 (Bom)), the amount receivable upon retirement from the said Firm could not be of an income nature. Therefore, the Tribunal was not correct in holding that the amount of arbitration award receivable by Appellant was not relatable to her retirement from the said Firm.

The Tribunal has failed to appreciate that there was a dispute between Appellant and her brothers with respect to her wrongful retirement from the said Firm. For invocation of arbitration proceedings, the matter was carried right up to the Hon’ble Supreme Court. The settlement amount was receivable by Appellant for relinquishment of her rights and claims as a partner of the said Firm. In these circumstances, though there may be no mention of her retirement from the said Firm in the consent terms or the arbitration award, the only inference possible would be that she no longer continued as a partner of the said Firm after such settlement. It is also not anybody’s case that the Appellant has not played any role in the said Firm or received any share from the said Firm after the settlement.

Further, the said Firm — P. N. Writer & Co. had also filed the relevant information with respect to change of constitution of the firm with the Registrar of Firms which showed that Appellant had retired from the said Firm with effect from 24th November, 1997. The arbitration award was also given for withdrawal of all claims and rights in respect of the suits filed by Appellant against the said Firm and its partners. This fact also supports Appellant’s claim to show that the rights settled were in respect of her partnership interest in the said Firm. As regards the observation on no positive balance in Appellant’s capital account with the said Firm, the same is an irrelevant factor because for working out of rights upon retirement, one is not required to look at the balance in the capital account. Further, Appellant had produced a valuation report valuing the immovable assets of the partnership firm which discloses that the value of the immovable properties of the said Firm was more than ₹100 crores. The fact that the partners agreed to a payment of ₹28 crores fits in with this value. Further, the said Firm had also transferred its business on a going concern basis to a private limited company by name P. N. Writer & Co. Pvt. Ltd., in the Financial Year 1992–1993. The Balance Sheet of the said company as on 31st March, 2006, revealed that there were substantial reserves which showed that the business of the said Firm was extremely profitable. Therefore, the Tribunal was not correct in holding that the amount of the arbitration award was not relatable to the Appellant’s retirement from the said Firm.

Moreover, the amount of the arbitration award was also related to the settlement of the inheritance rights which the Appellant was entitled to under her father’s Will. An amount received in satisfaction of the inheritance rights also cannot be regarded as of an income nature chargeable to tax under the Act. The Tribunal failed to appreciate that the relevant details formed part of the arbitration proceedings, and Appellant had raised this as an alternative claim in view of the stand taken by the AO in the assessment order and the CIT(A) in the appellate order.

The court further observed that the dominant component in the settlement was Appellant’s separation from the said Firm. The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by Appellant and bifurcated the amount of arbitration award between each of such rights and claims. Instead of doing this exercise and considering whether the amount was capital or revenue in nature, the ITAT has simpliciter accepted the conclusion reached by the CIT(A) to the effect that such receipt is of an income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective.

The Tribunal failed to appreciate that a receipt on capital account cannot be assessed as income unless it was specifically brought within the scope of the definition of the term “income” in Section 2(24) of the Act . The Tribunal erred in evolving a concept of “special income” when no such concept exists either in the Act or in the jurisprudence and saying that the same is judicially settled.

The Court further held that even if the portion of the arbitration award relates to the inheritance by Appellant under the Will of her late father or otherwise, in the absence of Estate Duty or a similar tax, no tax is chargeable in respect of the same. In any event, the same would be on the estate and not on a legatee. Even the provisions of Section 56(2)(vii) which seek to tax an amount received without consideration specifically excludes from the ambit of the charge any amount received pursuant to a bequest.

Alternatively, even if the amount received / receivable under the arbitration award is regarded as damages, the nature of the dispute which was settled was with respect to disputes pertaining to the partnership firm or inheritance and, hence, the receipt should be capital in nature (CIT v/s. Saurashtra Cement Ltd.18). Further, it has been held by this Court in CIT v/s. Abbasbhoy A. Dehgamwalla19 that the amount received as damages also cannot be brought to tax as capital gains.

Burden to show that a particular receipt is of an income nature is on the Revenue which has not been discharged in the facts of the present case. The mere rejection of an assessee’s explanation without any positive finding as to the true character of the receipt cannot justify a conclusion being reached by an AO that the amount is of an income nature.

Therefore, the amount of ₹28 crores can be considered as the amount received by a partner upon retirement from the said Firm and is not chargeable to tax.

In the circumstances, the substantial questions of law were answered in favour of the Appellant. It was held that the reassessment proceedings were without jurisdiction. Further, the Tribunal ought to have held that the amount of ₹28 crores received by Appellant as per the arbitration award was not chargeable to tax.

BCAJ Admin

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract

25 The Commissioner Of Income Tax (TDS) And Another vs. Lalitpur Power Generation Co. Ltd.

ITXA No. 111 of 2018, (All.) (HC)

Date of Order: 16th November, 2023

[Arising from Income Tax Appellate Tribunal, Delhi Bench “C” New Delhi order dated: 20th February, 2018 (Assessment Year 2013–2014)].

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract.

The assessee was engaged in the business of generation of power. It set up a 3×660 MW (Mega Watt) Super Critical Thermal Power Plant at District-Lalitpur, Uttar Pradesh. For that purpose, the assessee was incorporated as a Special Purpose Vehicle (“SPV”) by the State Government of Uttar Pradesh. Later, its ownership was transferred to a private company.

To set up that thermal power plant, the assessee entered into two sets of contracts. First, with Bharat Heavy Electric Ltd. (“BHEL”) to set up a Boiler Turbine Generator (“BTG”) and the second with Carbery Infrastructure Pvt. Ltd. (“CIPL”) to set up a Balance of Plant (“BOP”).

The contract entered into between the assessee and the BHEL involved services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG, for consideration ₹689 crores. Similarly, the contract with CIPL involved Erection, Installation and Commissioning of BOP for ₹197 crores.

These two contracts included description and execution of other work as well, inasmuch as the contract with BHEL for BTG involved supply of BTG package equipments of value ₹5,311 crores, whereas the contract for BOP with CIPL involved procurement and supply of equipments and civil constructions, structural works, engineering, information, design and drawings and project management of value ₹2,008 crores. The supply component under the two contracts entered into by the assessee with BHEL and CIPL does not form the subject matter of dispute in these appeal proceedings.

On 19th June, 2014, individual orders came to be passed under Section 201 of the Act describing the assessee to be in default of deduction of TDS required to be made by it at the higher rate of 10 per cent (under Section 194J of the Act) against the lower rate of 2 per cent (under Section 194C of the Act) applied by the assessee, to the payments made by the assessee in each year, against the two contracts for the works done under the head of “services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG”, awarded to BHEL and also the work under the head of “Erection, Installation and Commissioning of BOP”, awarded to CIPL.

Thus, under the assessment order dated 15th January, 2015 passed by the Assistant Commissioner of Income Tax (TDS), Noida for the Assessment Years 2012–2013, 2013-2014 and 2014–2015, demand for short deduction of TDS and the corresponding demand of interest were raised. The Orders were confirmed on appeal by common order dated 16th March, 2016, passed by the Commissioner of Income Tax (Appeals)-I, Noida.

Upon further appeal, the Income Tax Appellate Tribunal, vide its common order dated 20th February, 2018, allowed the appeals preferred by the assessee.

The Revenue appeal was admitted on following substantial question of law:

Question No. 1

Whether the Tribunal has erred in annulling the assessment order and reaching to a conclusion that Tax Deduction at Source (for short “TDS”) was required to be made under Section 194C of the Act and not under Section 194J of the Income-tax Act, 1961 without first dealing with the reasons and findings recorded by the assessing authority, as affirmed in first appeal?

Question No. 2

Whether, in absence of proper books maintained to establish the exact expenditure incurred by the assessee in availing technical services, the Tribunal has erroneously granted relief to the assessee?

The revenue contended that the assessing authority had made a detailed consideration of facts. It was found that the assessee had not maintained any account to establish the actual payment made to BHEL for the work of Testing and Commissioning of BTG. Similarly, the assessee had not maintained a separate account to establish the payment made to CIPL for Installation and Commissioning of BOP. Since payments for those works performed by the BHEL and CIPL fell under the head “fees for technical services” as defined under clause (b) of sub-section (1) of Section 194J of the Act, read with Explanation [2] to clause (vii) to sub-section (1) of Section 9 of the Act, the assessee was liable to deduct the Tax at Source / TDS, at the rate of 10 per cent in terms of Explanation (b) to section 194J of the Act. Relying on the reasoning given by the assessing authority, it was submitted that it cannot be denied that BHEL had performed Testing and Commissioning of BTG and similarly, CIPL had performed the work of Installation of Commissioning of BOP.

The revenue further contended that since the payments made to BHEL and CIPL were “fees for the technical services”, rendered to the assessee by BHEL and CIPL, the Assessing Officer had not erred in determining the default in deduction of TDS by the assessee.

The assessee contended that the contracts awarded by the assessee to BHEL and CIPL were exactly identical to that awarded to BHEL, as was considered by the Punjab and Haryana High Court in Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (2017) 390 ITR (P&H).

The assessee further contended that the contract awarded to BHEL was for BTG and the contract awarded to CIPL was for BOP and the reliance placed by the revenue to non-specification or quantification of value of sub-components or parts of the contracts awarded to the BHEL and CIPL is inconsequential. Those contracts remained indivisible or composite. The revenue authorities being obligated to assess income tax payable by the assessee, they could not have broken down that indivisible contract for wholly artificial reasons-to discover on an assumptive basis, the alleged component of “fees for technical services”. The undisputed fact remains that the work awarded to the BHEL was for commissioning of BTG and that awarded to CIPL was for BOP, the contract clauses should have been read in light of that main object. In absence of any internal tool arising therefrom and in absence of any legal provision allowing the assessing authority to break down the indivisibility or composite nature and character of the contract, the exercise carried out by the assessing authority is described as erroneous and impermissible in law.

Reliance was placed on the decision of the division bench of the Karnataka High Court in the case of Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (2022) 449 ITR 431 (Karnataka).

The assessee alternatively submitted that it was only a payer. The payees i.e., BHEL and CIPL were subjected to tax. Upon completion of their assessment, those payers were also issued certificates of full payment of tax due. Therefore, if at all the assessee may only be liable for delay in payment of TDS. Yet, liability of short deduction of TDS could not be imposed.

The Hon Court held that it has not been disputed that the essence of the contract involved in the present case and that involved in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) were similar — to set up a thermal power plant. In both cases, the dispute arose upon a survey. That inconsequential similarity apart, it is undisputed that in both cases, the element of testing and commissioning of technical works etc. was part of the main contract — to set up a thermal power plant including therein the work of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG and also Commissioning of BOP.

In view of the undisputed similarity between two cases, the court followed the reasoning given by the division bench of Punjab and Haryana High Court in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) that the work of testing etc., had to be performed by the contractor not by way of independent work awarded to it but by way of execution of the whole contract that was to set up a thermal power plant.

Thus, Punjab and Haryana High Court has principally reasoned that the primary / dominant object of the contract would govern or subsume the other object /clause therein. In absence of any internal tool shown to exist (in the contract), it was incorrect to reach an inference that the contracting parties, i.e., assessee on one hand and BHEL and CIPL on the other, had intended to treat the work of Testing and Commissioning, separate / independent of the contract to set up BTG and BOP by those contracting parties. Further, in absence of any enabling law, it never became open to the taxing authorities to overlook the dominant object of the contract and reach to a conclusion, because part of the contract involved Testing, Commissioning, etc., necessarily, there would exist component of “fees for technical services”, by necessary implication.

Then, the Karnataka High Court in Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (supra) has further reasoned that an indivisible / composite contract may not be bifurcated to cull out any indivisible component of such contract, to make a higher deduction of tax at source. Thus, that Court applied the principle of indivisibility of a composite contract. It may not be bifurcated to subject a part of the contract to higher TDS. Thus, that Court applied the principle of indivisibility of a contract, that may not be artificially dissected at the hands of a taxing authority, to the prejudice of the assessee.

On plain reading, the contracts executed by the assessee with BHEL and CIPL were indivisible contracts for BTG and BOP, respectively. The taxing authorities exist to apply the taxing statute to the proven facts of a case. Such facts are not for the taxing authority to imagine or presume or assume. Therefore, the burden existed on the revenue authorities to establish that they were enabled in law and also that the proven facts of the case permitted them to divide an otherwise indivisible / composite contracts executed by the assessee with the BHEL and CIPL. Unless that exercise had been carried out by the assessing authority, no presumption was available in law.

Accordingly, the first question of law framed was answered in negative, i.e., in favour of the assessee and against the revenue.

The question no. 2 was left unanswered, at this stage. Accordingly, the revenue appeal was dismissed.

BCAJ Admin

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion

24 Pr. Commissioner of Income Tax – 2 vs. Tata Industries Ltd.

[Income Tax Appeal No. 1039 of 2018, (Bom.) (HC)]

Date of Order: 9th November, 2023

Section 271(1)(c): Penalty — Concealment of income — Full disclosure of facts — No facts concealed or hidden — Penalty cannot be levied for difference in the opinion.

Assessee had filed a return of income on 30th October, 2004, declaring total income at the loss of Rs.15,97,83,660. The Assessing Officer (AO) completed the assessment under section 143(3) of the Act, determining the total income at Rs.32,38,84,147 under the normal provisions of the Act. Various additions / disallowances were made related to capitalisation of fees paid to S. B. Billimoria& Co. of Rs.19,44,000, disallowance of legal fees claimed in case of Deejay System Consultants Pvt Ltd. of Rs.4,85,000 and disallowance of claim of provision of diminution in value of investments written back of Rs.38,84,00,000.

The penalty proceedings under Section 271(1)(c) of the Act were also commenced. The AO came to the conclusion that assessee had committed default by filing inaccurate particulars of total income in respect of certain disallowances and levied penalty of Rs.1,60,96,088 being 100 per cent of the tax on the income of Rs.44,86,69,234 sought to be evaded under the normal provisions of the Act and Rs.18,43,03,149 being 100 per cent of the tax on the income of Rs.51,37,37,000 sought to be evaded under Section 115JB of the Act. The CIT(A) allowed the appeal, and the penalty levied by AO was deleted. The Tribunal dismissed the appeal filed by the Department vide order dated 28th September, 2016.

The Hon Court observed that the Tribunal has upheld the findings of the CIT(A) on the basis that the entire claim was made by the assessee making full disclosure, and no facts were concealed or hidden. The disallowance was made by the AO due to a difference in the opinion of the assessee and the AO. The explanation given by the assessee is a plausible explanation. Further, the AO has not found the expenses to be not genuine or not bona fide. The nature of the disallowance does not appear as the case of concealment or furnishing inaccurate particulars of the claim.

The Hon Court observed that the ITAT on the facts has agreed with the CIT(A) that the assessee had made the claim in a transparent and befitting manner. In view of the conclusions arrived on facts, the ITAT agreed with the view of the CIT(A) that the assessee has not committed any default or filed any inaccurate particulars of income warranting imposition of penalty.

The Apex Court in Commissioner of Income Tax vs. Reliance Petroproducts Pvt Ltd (2010) 322 ITR 158(SC) has held that where assessee has furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as concealment of income on its part, and where the AO has taken a particular view contrary to the view that assessee had, it would not attract any penalty under Section 271(1)(c) of the Act. The Apex Court held that if this contention of the Revenue is accepted, then in case of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty under Section 271(1)(c).

Thus, the Department’s appeal was dismissed.

BCAJ Admin

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified

23 Hasmukh Estates Pvt. Ltd. vs.

Dy. ACIT – 1 (1)1, Mumbai

[W.P. No. 4574 of 2022, (Bom.) (HC)]

A.Y.: 2015–16

Date of Order: 8th November, 2023

Section 148A and 151: Reassessment — Change of opinion — Tangible material — Reasons/ information cannot be substituted or modified.

The Petitioner is a private company engaged in the business of undertaking real estate projects, selling a plot of land situated at Raigad District to one Regency Nirman Limited by a registered agreement to sell, dated 7th October, 2011, for consideration of Rs.18 Crores. The property was valued at Rs.16.50 Crores for the purpose of stamp duty. It was agreed between the Petitioner and the purchaser that in case the Petitioner was unable to discharge any obligation under the agreement, damages shall be settled. Thus, on non-fulfilment of some obligations on the part of Petitioner, the consideration was reduced by R6 Crores, making the consideration payable for the land at Rs.12 Crores. Petitioner e-filed its return of income on 31st March, 2017, declaring income of Rs.8,43,58,620 and booked profits under Section 115JB of the Act at Rs.9,72,27,472. An assessment order came to be passed on 26th December, 2017, accepting Petitioner’s figure of Rs.12 Crores. In the assessment order, the sale of this property and resultant capital gains were discussed. Namely, non-applicability of Section 50C of the Act.

Original notice under Section 148 of the Act was issued on 31st March, 2021, by the Assessing Officer (AO), and Petitioner filed a return of income raising objections against the reasons recorded. Thereafter, Petitioner received a communication dated 28th May, 2022, from the AO conveying that pursuant to the order of the Apex Court in the matter of Union of India vs. Ashish Agarwal, a copy of the approval under Section 151 of the Act and the reasons recorded prior to the issuance of notice under Section 148 of the Act were being forwarded to it. The Petitioner filed its objections to the letter dated 28th May, 2022 and explained its stand on the sale of the plot of land to Regency Nirman Limited. However, Respondent No.1-AO passed an order dated 29th July, 2022, under Section 148A(d) of the Act holding that the sale consideration offered was Rs.12 Crores, which was lesser than the stamp duty valuation of Rs.16.50 Crores, inviting applicability of Section 50C of the Act. The order was passed with prior approval of the PCCIT, Mumbai, followed by notice dated 30th July, 2022, under Section 148 of the Act.

The Hon Court observed that:

(a) The AO has dealt with the entire issue of long-term capital gains during the course of original assessment proceedings, including the fact of deduction of compensation / damages of an amount of Rs.6 Crores from the agreed consideration of Rs.18 Crores and the stamp valuation shown to be Rs.16.50 Crores.

(b) The AO clearly accepted the non-applicability of Section 50C of the Act to the transaction of sale while issuing the original assessment order.

(d) The audit memo was raised by an internal audit of the Department and not by CAG as required by the provision which was in effect prior to the amendment which came into force w.e.f. 1st April, 2022, and applicable to the present case.

(e) The AO conveyed his objections to the audit memo, maintaining that the original assessment order was correct.

(f) The ACIT once again maintained its objections. This time, the said ACIT accepted that the AO did not properly examine the allowability of Rs.6 Crores expense under the long-term capital gains head. Hence, the audit objection was accepted, leading to reopening of the assessment of the income of the Petitioner.

(g) Relying upon the decision of the Apex Court in the matter of Union of India vs. Ashish Agarwal, the notice under Section 148 of the Act dated 21st April, 2021, issued under the old law was treated as notice under Section 148A(b) of the Act.

Thus, the admitted facts indicate that the basis on which the AO issued notice alleging that there was ‘information’ that suggests escapement of income was an internal audit objection. What information is explained in Section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of India…” and no one else. This itself makes the reopening of assessment in the present case impermissible.

Consequently, a view deviating from that which was already taken during the course of issuing the original assessment order is nothing but a ‘change of opinion’, which is impermissible under the provisions of the Act.

The fact that the notice was issued based on audit objections received by the AO also does not find a mention in the impugned notice. It is settled law that the reopening notice can be sustained only on the basis of the ground mentioned in the reasons recorded. It is not open to the revenue to add and / or supplement later the reasons recorded at the time of reopening notice.

The Hon. Court held that the information which formed the basis of reopening itself does not fall within the meaning of the term ‘information’ under the 1st Explanation to Section 148 of the Act, and hence, the reopening is not permissible as it clearly falls within the purview of a ‘change of opinion’, which is impermissible in law.

BCAJ Admin

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an applicationunder Section 154 and first time claimed indexcost of improvement being renovation expenses which was not claimed in original return of income

22 Pramod R. Agrawal vs. The Pr. CIT Circle – 5

[W.P. No. 2435 of 2017, (Bom.) (HC)]

A.Y.: 2007–08

Date of Order: 13th October, 2023

Revision u/s. 264 — Powers of Commissioner are not limited to correct an error committed by subordinate authorities but could even be exercised where errors are committed by the assessee — Assessee filed an application under Section 154 and first time claimed index cost of improvement being renovation expenses which was not claimed in original return of income.

The assessee, a resident individual, had sold a flat and offered the same as capital gain in the return of income without considering the allowance of indexed cost of improvement in respect of renovation expenses.

The Assessing Officer (AO) had made an addition under Section 50C by taking the stamp duty value as the full value of consideration while computing thecapital gains arising from the sale of said flat. No adjustment was made to the allowances claimed fromthe full value of consideration to determine the capital gains.

On appeal, the Commissioner confirmed the addition made by the AO by an order dated 13th July, 2013.

Thereafter, the assessee filed an application under Section 154 on 4th November, 2015, to rectify the previous orders passed by allowing the deduction of indexed cost of improvement of Rs.2.95 lakhs being renovation expenses incurred in the year 1990. It had claimed in the application that the allowance of the said cost was not claimed in the original return of income and the same should be allowed as it was a rectifiable defect under Section 154.

The ITO, however, rejected the application filed by the assessee on the ground that the claim was made the first time in the application under Section 154, and it was never brought to the notice earlier.

Aggrieved by the order of the ITO, the assessee had filed an application under Section 264, which was also rejected by an order dated 22nd March, 2017.

The Hon’ble Court observed that there was no delay in filing the application under Section 264 because the application under Section 264 was against the order passed under Section 154 and not Section 143(3). The order under Section 154 was passed on 8th December, 2015, and the application under Section 264 was filed on 18th January, 2016, within one year.

The Court further held that the proceedings under Section 264 are intended to meet a situation faced by an aggrieved assessee, who is unable to approach the Appellate Authorities for relief and has no other alternate remedy available under the Act. The Commissioner is bound to apply his mind to the question of whether the assessee was taxable on that income, and his powers are notlimited to correcting the error committed by thesubordinate authorities but could even be exercised where errors are committed by the assessee. It would even cover a situation where the assessee because of an error has not put forth a legitimate claim at the time of filing the return and the error is subsequently discovered and raised for the first time in an application under Section 264.

The Court referred and relied on the case of Asmita A. Damale vs. CIT Writ Petition No. 676 of 2014, dated 9th May, 2014, wherein the Court had held thatthe Commissioner while exercising revisionary powers under Section 264 has to ensure that there isrelief provided to the assessee where the law permits the same.

In the assessment order dated 30th December, 2010, passed under Section 143(3) in the case of Ravi R Agarwal, the other co-owner of the flat, theAO has accepted the amount of Rs. 2.95 lakhs as the cost of renovation of indexation. Therefore, this figure has to be accepted as correct and suitable allowance should be made while arriving at the long-term capital gain.

The impugned order dated 22nd March, 2017, was quashed, and the matter was remanded to the AO for denovo consideration.

BCAJ Admin

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

21 Pr. Commissioner of Income Tax – 10 vs. Nilkanth Tech Park Pvt. Ltd [Income Tax Appeal No. 807 of 2018;
Date of Order: 4th October, 2023 (Bom.) (HC)]

Section 263: Revision — Erroneous and Prejudicial to the interest of Revenue — Show Cause Notice (SCN) — Issue not raised in SCN — No opportunity provided — Order cannot be erroneous.

The respondent / assessee was engaged in the business of manufacturing chemicals. The assessee filed a Return of Income for Assessment Year 2009–10 on 29th September, 2009, declaring a total income at the loss of ₹4,88,18,926. The assessment was completed under Section 143(3) of the Act, and an assessment order dated 17th November, 2011, came to be passed.

Thereafter, CIT issued a Show Cause Notice (SCN) dated 4th March, 2014, under Section 263 of the Act, calling upon the assessee to show cause as to why the assessment made by the Assessing Officer (AO) should not be cancelled / set aside to the extent as mentioned in the notice. The issue raised was in regards to share trading loss applicability of Explanation to Section 73 of the Act.

The assessee replied to the SCN, and CIT rejected the submissions of the assessee and concluded that the order passed by the AO was erroneous and prejudicial to the interest of the assessee. CIT set aside the assessment order and directed the AO to pass the assessment order afresh by applying the provisions of Section 45(2) of the Act to the conversion of shares from investments or capital assets to stock-in-trade. The loss was directed to be treated as a speculation loss. The order passed by CIT under Section 263 of the Act was challenged before the Income Tax Appellate Tribunal (ITAT). Various grounds were taken before the ITAT. Apart from the ground that CIT erred in applying provisions of explanation to Section 73 of the Act and thereby, treating the loss as speculative, it was also urged that CIT erred in passing the order under Section 263 of the Act on the issue of Section 45(2) of the Act and treating loss as capital loss without raising the issue in the SCN. Assessee also urged that the order of CIT was a mere change of opinion and hence, erroneous.

The ITAT, after considering the submissions, by an order dated 19th May, 2017, set aside the order of CIT for various reasons, but one of the primary grounds for interfering was that the twin conditions for exercising jurisdiction under Section 263 of the Act, viz., order of the AO being erroneous and that was prejudicial to the interest of Revenue being conjunctive, have not been met. Further, in the notice, there was not even a reference to Section 45(2) of the Act. Thus, in the SCN, there is no discussion or even reference to Section 45(2) of the Act, and the assessee has not been given an opportunity to explain why the provisions of Section 45(2) of the Act should not be applied to the conversion of shares from investment or capital asset to stock-in-trade.

The Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. Once he is satisfied that the order passed by the AO is erroneous and it is prejudicial to the interest of Revenue, before he passes any order as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, an opportunity should be given to assessee of being heard. If there is no reference to provisions of Section 45(2) of the Act in the notice issued under Section 263 of the Act, it is obvious that such an opportunity of being heard has not been given to the assessee. The order passed by the CIT was quashed and set aside.

The Court further observed that the ITAT has proceeded to dispose of the matter on merits and has come to the conclusion that the very same issue of converting the capital asset into stock-in-trade was the subject of a query raised during the assessment proceedings. The ITAT came to the conclusion that the assessment order has been passed by the AO by application of mind and after considering the response of the assessee. Revenue has not disputed the replies that were placed by the assessee before the AO.

A point was raised by the tax department that there is no discussion on this in the assessment order. It is settled law as held in the judgment of this court in Aroni Commercials Ltd vs. Deputy Commissioner of Income Tax – 2(1) [2014] 44 taxmann.com 304 (Bombay) that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO, while completing the assessment, it is not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised.

The Hon. Court further relied on the judgment of this court in Commissioner of Income Tax vs. Fine Jewellery (India) Ltd [2015] 372 ITR 303 (Bom).

Accordingly, the appeal was dismissed.

BCAJ Admin

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

20 National Centre For Cell Science vs. Dy. CIT Exemption Circle, Pune

[ITA (L) No. 24310 of 2023;

Date of Order: 11th October, 2023 (Bom.) (HC)]

Section 254: Nonspeaking and Cryptic order — No reasons stated by ITAT — Matter remanded to rehear.

The Hon. Court observed that there is no reason given by the ITAT as to why the Tribunal disagrees with the view of the learned CIT(A) and opines that the amount to be carried forward cannot exceed the unspent amount.

In the circumstances, the matter was remanded to the ITAT to give reasons as to why it has opined that the CIT(A) was not correct in concluding that the amount to be carried forward cannot exceed the unspent amount. The Hon. Court relied on the decision of the Hon’ble Apex Court in Udhavdas Kewalram vs. Commissioner of Income-tax (1967) 66 ITR 462 (SC):

“6. The Tribunal performs a judicial function under the Indian IT Act: it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the CIT in the light of the evidence and the relevant law.

7. The judgment of the Tribunal suffers from a manifest infirmity. The Tribunal has not adjudicated upon the truth of the case of the assessee in the light of the evidence adduced by the assessee in support of his case. The infirmity becomes more pronounced when regard is had to fact that, relying upon the documentary evidence tendered by the assessee, the AAC had accepted the claim of the assessee relating to the sale of Gopi Bai’s ornaments. The Tribunal was undoubtedly competent to disagree with the view of the AAC. But in proceeding to do so, the Tribunal had to act judicially, i.e. to consider all the evidence in favour of and against the assessee. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the questions of fact raised before the Tribunal.”

In view of the above, the impugned order was set aside.

BCAJ Admin

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

19 Narendra Kumar Shah vs. The ACIT Circle – 42 (2)(1)

[WP No. 2558 of 2023;

Date of Order: 10th October, 2023 (Bom.) (HC);

A.Y.: 2019–2020]

Section 148A — Reopening — Incorrect information — Non-application of mind by Assessing Officer — Notice u/s. 148A(b) as well order u/s. 148A(d) bad in law.

Petitioner is an individual assessed on income from salary, house property and other sources. Petitioner filed ROI on 29th November, 2019, for Assessment Year 2019–2020. The return was processed and an order dated 26th February, 2020, was passed under section 143(1) of the Act. Subsequently, Petitioner received a notice dated 31st March, 2023, u/s. 148A(b) of the Act alleging that there was information which suggests that income chargeable to tax for Assessment Year 2019–2020 has escaped assessment within the meaning of Section 147 of the Act. The details of the information / enquiry were also enclosed. Petitioner was directed to submit a reply to the notice along with supporting documents on or before
20th April, 2023.

The only information Respondent No. 1 had was that Petitioner, despite having a salary of ₹58,18,452 per annum and having purchased securities worth ₹5,22,000, was a non-filer for the Assessment Year 2019–2020, having failed to file a return of income. In short, the basis for re-opening is despite having a salaried income, Petitioner has not filed a return of income.

The Petitioner, as per the e-Proceedings response acknowledgement responded to the notice dated 26th April, 2023, issued u/s. 148A(b) of the Act and explained that the Return of Income has been filed and the copy Income Tax Returns were also attached.

On 26th April, 2023, the impugned order u/s. 148A(d) of the Act came to be passed rejecting the objections. The Assessing Officer (AO) observed that “the assessee in his reply only stated that he had filed Income Tax Returns for the year under consideration. However, the assessee did not provide his justification for the transactions in question. Thus it is logical to conclude that the assessee has no explanation to offer with respect to the above-mentioned information suggesting escapement of income in the case for Assessment Year 2019–2020.”

The Hon. Court held that the order dated 26th April, 2023, passed under Section 148A(d) of the Act is unsustainable. This is because the notice under Section 148A(b) of the Act does not call upon Petitioner to provide any justification for any transaction in question. The entire basis for issuing the notice under Section 148A(b) of the Act was that Petitioner was a non-filer for Assessment Year 2019–2020 as he had failed to file the Return of Income, and therefore, the income from salary and purchase of securities have not been declared / offered for taxation. But the fact is, Petitioner had filed his Return of Income and had also paid a total tax of ₹18,36,575 and had also claimed a refund of ₹1,27,100. Therefore, the order under Section 148A(d) of the Act, passed on 26th April, 2023, was quashed and set aside. Consequently, the notice issued under Section 148A(b) of the Act, dated 26th April, 2023, was quashed and set aside.

The Court further observed that even the notice under Section 148A(b) of the Act was unjustified. This is because the AO, before issuing the notice, was bound to at least verify or enquire following the information that was received in accordance with the Risk Management Strategy. The Hon. Court referred to the guidelines for issuance of notice under Section 148 of the Act bearing F. No. 299/10/2022-Dir(Inv.III)/611 dated 1st August, 2022, paragraph 2.1 (vi) and (vii) and the instruction regarding the uploading of data on functionalities / portal of the Income Tax Department bearing F. No. 299/10/2022-Dir(Inv. III)/647 dated 22nd August, 2022, paragraphs 3 and 4.

The court observed that if the AO had only verified in the portal of the assessee before initiating proceedings, particularly when he had the PAN number with him, AO would have realised that not only has Petitioner filed the Return of Income, but also the return has been processed and an order dated 26th February, 2020, under Section 143(1) of the Act had been passed. Therefore, the notice issued under Section 148A(b) of the Act also has to be quashed and set aside.

BCAJ Admin

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

18. Principal Commissioner of Income Tax – 31 vs. Indravadan Jain, HUF

[Income Tax Appeal No. 454 OF 2018; Dated: 12th July, 2023; A.Y.: 2005-06; (Bom.) (HC)]

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

Assessee had shown sale proceeds of shares in scrip RamkrishnaFincap Ltd (RFL) as long-term capital gain and claimed exemption under the Act. The Respondent had claimed to have purchased this scrip at ₹3.12 per share in the year 2003 and sold the same in the year 2005 for ₹155.04 per share. It was AO’s case that investigation revealed that the scrip was a penny stock and the capital gain declared was held to be accommodation entries. A broker BasantPeriwal & Co. (the said broker) through whom these transactions have been effected had appeared and it was evident that the broker had indulged in the price manipulation through a synchronised and cross-deal in the scrip of RFL. SEBI had also passed an order regarding irregularities and synchronised trades carried out in the scrip of RFL by the said broker. In view thereof, the Assessee’s case was reopened under Section 148 of the Act.

The AO did not accept the Respondent’s claim of long-term capital gain and added the same to the Assessee’s income under Section 68 of the Act. While allowing the appeal filed by the Assessee, the CIT[A] deleted the addition made under Section 68 of the Act.

The Tribunal while dismissing the appeals filed by the Revenue observed on facts that these shares were purchased by the Assessee on the floor of the Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange.

The Honourable High Court observed that the CIT[A] and ITAT had observed that the AO himself has stated that SEBI had conducted an independent enquiry in the case of the said broker and in the scrip of RFL, through whom the Assessee had made the said transaction, and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL. The lower authorities also did not find anything wrong in the Assessee doing only one transaction with the said broker in the scrip of RFL. The lower authorities concluded that the Assessee brought 3000 shares of RFL, on the floor of the Kolkata Stock Exchange through a registered share broker. In pursuance of the purchase of shares, the said broker had raised an invoice and the purchase price was paid by cheque and the Assessee’s bank account has been debited. The shares were also transferred into the Assessee’sDemat Account where it remained for more than one year. After a period of one year, the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to the sale of shares, the said broker had also issued contract notes cum bill for the sale, and these contract notes and bills were made available during the course of Appellate proceedings. On the sale of shares, the Assessee effected delivery of shares by way of Demat instructions slip and also received payment from the Kolkata Stock Exchange. The cheque was deposited in the Assessee’s bank account. In view thereof, it was found that there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act. The ITAT therefore, rightly concluded that there was no merit in the appeal. In view thereof, the Appeal of Revenue was dismissed.

BCAJ Admin

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

17. Sofitel Realty LLP vs. Income Tax Officer (TDS) – Ward 2(2)(4)

[WP (L) No. 14574 OF 2023

Dated: 18th July, 2023; (Bom.) (HC)]

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

The Petitioner, a Limited Liability Partnership firm, for the period of A.Y. 2009-2010, for various reasons did not deposit the TDS amount that it had deducted with the income tax authorities. Petitioner deposited those TDS amounts on or about 23rd March, 2010 beyond the time provided for deposit. This was before Petitioners even received a show cause notice from the department. Thus there was no outstanding amount of TDS.

Petitioner and its partners received the show cause notice, dated 30th November, 2011 calling upon Petitioners to show cause as to why prosecution against them be not lodged for an offence under Section 276B read with Section 278B of the Act. On 26th March, 2012, Petitioners filed a compounding application, dated 5th March, 2012, (first application) in the prescribed format. As the Petitioners failed to deposit the compounding fees in time, therefore, the Petitioner’s application, dated
5th March, 2012, came to be rejected.

On 26th August, 2013, PCIT passed a sanction order for initiation of prosecution against Petitioners. A complaint was filed before the Metropolitan Magistrate, 38th Court at Esplanade under Section 276B read with Section 278B of the Act. On 14th July, 2014, Petitioner no.1 paid the entire compounding fees of ₹7,39,984/- as was indicated by the department. On 8th October, 2015, Petitioner filed a fresh compounding application (second application) and also agreed to pay any further or additional compounding fees as may be directed. Almost three years later, on 21st September, 2018, the Petitioner received a letter, dated 17th September, 2018, annexing the copy of the order, dated 17th July, 2013. The Petitioner addressed a letter requesting the department to provide a copy of the order passed in the second application. In response, the Petitioner received a letter, dated 13th April, 2023.

In the affidavit in reply filed through one Shashi Shekhar Singh, Income Tax Officer (TDS)-2(2)(4) Mumbai, affirmed on 7th July, 2023, it is stated that compounding application, dated 8th October, 2015, is barred by limitation of time as per the compounding guidelines, dated 23rd December, 2014 issued by CBDT. In paragraph 8(vii), it is provided that in respect of offences for which complaint had been filed with competent court 12 months prior to the receipt of the application for compounding, such offences generally not be compounded. According to the affiant, since a complaint had been filed on 20th August, 2013, and the fresh compounding application, dated 8th October, 2015, was beyond the period of 12 months, the application is null and void.

The Honourable Court observed that it is not for the Income Tax Officer to decide the compounding application. Section 279(2) of the Act provides that any offence under chapter XXII of the Act may, either before or after the institution of proceedings, be compounded by the Principal Chief Commissioner of Income Tax or Commissioner of Income Tax or Principal Director General of Income Tax or Director General. The Income Tax Officer has no power to even state that the application is null and void.

There is no limitation provided under sub-section (2) of Section 279 of the Act for submission or consideration of the compounding application. What is relied upon by the Income Tax Officer is the Guidelines issued by the Central Board of Direct Taxes (CBDT). CBDT by the Guidelines cannot provide for limitation nor can it restrict the operation of sub-section (2) of Section 279 of the Act. The Guidelines are subordinate to the principal Act or Rules, it cannot override or restrict the application of specific provisions enacted by the legislature. The Guidelines cannot travel beyond the scope of the powers conferred by the Act or the Rules. It cannot contain instructions or directions curtailing a statutory provision by prescribing the period of limitation where none is provided by either the Act or the rules framed thereunder. Moreover, the explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main Section. The Court observed that just because the first application was rejected for default, does not mean the second application should be rejected.

The Court further observed that the compounding application cannot be rejected on the grounds of delay in filing the application. Moreover, there is also no restriction on the number of applications that could be filed. The only requirement under sub-section (2) of Section 279 of the Act is that the complaint filed should be still pending.

The Court directed the compounding application to be disposed of within eight weeks, the proceedings pending before the Additional Chief Metropolitan Magistrate, 38th Court, Mumbai shall remain stayed until the department disposes of the Petitioner’s compounding application, dated 8th October, 2015.

BCAJ Admin

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

12. PCIT – 33 vs. Synergy Infrastructures
[ITA No. 442 Of 2018, Dated: 28th June 2023. (Bom.) (HC).]

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

The issue arose as to whether the ITAT is justified in confirming the action of the Ld. CIT(A) in restricting the addition to 12.5 per cent of the bogus purchase amount without appreciating the fact that assessee failed to substantiate the claim of genuineness of purchases?

The Hon’ble Court observed that there are plethora of judgments to the extent of ad hoc disallowances to be sustained with respect to the bogus purchases, what should be the percentage of the profit margin that has to be added to assessee’s income etc. Courts have held that these are issues which would require evidence to be led. Whether the purchases were bogus or parties from whom such purchases were made were bogus are essentially questions of fact.

The Court further observed that the AO in all fairness stated that the purchases by assessee, per se, are not the issue and these were not being treated as bogus. He also admits that the goods have entered into the assessee’s regular business. But AO says, assessee has not been able to give any convincing or cogent explanation as to how these goods happened to come in his possession and therefore, the purchases are not being treated as bogus or sham rather, the expenditure incurred on such purchases is treated as unexplained.

The Court held that the CIT(A) and ITAT are correct in coming to the conclusion that only the profit element embedded in such purchases should be added to the income of assessee. No substantial question of law arises for consideration revenue appeal dismissed.

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