Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Category: In The High Courts: Part B-Unreported Decisions

Section 144B – faceless assessment – breach of principles of natural justice – opportunity of personal hearing through video conference – order was passed without providing details on the basis of which the SCN was issued, pointing out the difference between the purchase value and the import invoice value.

22. JSW MINERALS TRADING PRIVATE LIMITED vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT, NATIONAL FACELESS ASSESSMENT CENTRE & ORS.

[WRIT PETITION NO. 3683 OF 2023 (BOMBAY) DATED: JANUARY 13, 2026]. Assessment Year 2020-21

Section 144B – faceless assessment – breach of principles of natural justice – opportunity of personal hearing through video conference – order was passed without providing details on the basis of which the SCN was issued, pointing out the difference between the purchase value and the import invoice value.

The Petitioner filed its return of income for Assessment Year 2020-21 on 16th January 2021, declaring its total income as ₹Nil (having incurred a loss of ₹37,08,74,848/). The case of the Petitioner was picked up for scrutiny under the faceless assessment provisions set out in Section 144B of the Act.

During the year under consideration, the Petitioner had entered into various international transactions, including the ‘purchase of finished goods’ amounting to ₹1041,48,67,611/- with its associated enterprises, namely JSW International Trade Corp Private Limited. The case of the Petitioner was referred to the Transfer Pricing officer, to determine the arm’s length price with reference to the said international transactions. The TPO vide its order dated 12th May 2023, passed under Section 92CA(3) of the Act, accepted that the international transactions as reported by the Petitioner in Form 3CEB are at an arm’s length price.

Notice under Section 142(1) was issued by Respondent No. 1 on various issues, including the following:

“7. As per the ITR, purchases shown by you is ₹1,218,03,15,231/-. However, as per the data with us, the imports made by you is ₹1,520,29,89,300/-during the year. Reconcile the difference along with necessary documentary evidences”.

The said notice was duly dealt with by the Petitioner, who requested details/data on the basis of which the aforesaid difference in import purchases had been alleged/computed by Respondent No.1. The Petitioner also stated that it could not find any discrepancies as per the audited books of accounts and the return filed. The Petitioner filed another reply, resubmitting the details filed earlier, including a request for the details/data on the basis of which the aforesaid difference in purchases had been computed by Respondent No. 1. It once again reiterated that it could not find any discrepancies as per the audited books of accounts and the return filed.

Respondent No. 1 thereafter issued a show cause notice proposing interalia an addition of ₹302,26,74,069/- under Section 69A of the Act (Unexplained Money) based on the difference between the invoice value of imports as per the data received from CBEC (₹1520,29,89,300/-) and the purchase value shown in the ROI (₹1218,03,15,231/-).

The Petitioner objected to the proposed variations and again requested inter alia that the breakup of the alleged difference in purchase value of ₹302,26,74,069/- be provided The Petitioner also submitted reconciliation (to the best of its ability, with the limited data available) for purchases worth ₹270,94,21,668/- out of the alleged difference of ₹302,26,74,069/- as stated by Respondent No. 1.

Instead of providing the breakup of the purchase value as repeatedly requested by the Petitioner , without providing an opportunity of personal hearing through video conference, and without considering the Petitioner’s request for additional time, Respondent No. 1 passed the impugned assessment order dated 29th September 2023 under Section 143(3) read with Section 144B, and, interalia made an addition of ₹302,26,74,069/- under Section 69 (Unexplained Investment) – notably different from the show cause notice, which proposed an addition under Section 69A (Unexplained Money) on account of difference between purchase values as shown by the Petitioner and the invoice value of imports as per import-export data received from the CBEC.
The Petitioner challenged the said assessment order primarily on the ground that it had requested full details of the import-export data allegedly received by / available to Respondent No.1 from the CBEC, which was in the exclusive knowledge and possession of Respondent No. 1, and which formed the sole basis for the addition of ₹302,26,74,069/-, but the same was never provided. The Petitioner pointed out that it would be impossible for it to explain/reconcile the alleged variation in the value of imports without full details of the invoice value of imports as per the CBEC data. Respondent No. 1 also failed to consider that partial reconciliation was provided by the Petitioner.

The Petitioner argued that though The TPO accepted the purchase value in the transfer pricing assessment, however, Respondent No. 1 denied the purchase values in the assessment.

The Court held that there was a violation of the principles of natural justice, as in the notice dated 18th November 2021, Respondent No. 1 required the Petitioner to reconcile the stated difference between purchases shown by the Petitioner in its return of ₹1218,03,15,231/- and the “data with us” ₹1520,29,89,300/-. Other than this aggregate figure, no details were set out in the notice.

The Hon. Court observed that it was impossible for the Petitioner to reconcile and/or explain the alleged difference between the figures of imports as per the ITR/accounts of the Petitioner and the data of the CBEC, in the absence of complete details of the break-up of the CBEC data being furnished to the Petitioner. Further, the impugned order clearly indicates that Respondent No. 1 proceeded to make an addition without providing or even referring to the breakup or details of the difference in the alleged purchase value of imports of the assessee/Petitioner. In the transfer pricing proceedings, these very purchases were scrutinised and held to be at arm’s length price.

The Hon. Court held that there has been a breach of principles of natural justice and that, on this count alone, the entire addition made and the assessment proceedings are vitiated. Respondent No. 1 simply relied upon the information provided by the CBEC on the assumption that the figure mentioned by the CBEC was the actual figure of imports required to shown by the Petitioner in its ITR, notwithstanding that it had not disclosed the details of any import bills and that no break-up value of the import purchases was given, and further by not even providing the information as received from the CBEC to the Petitioner, before passing the assessment order under Section 143(3) read with Section 144B of the Act.

In view of the above , the Impugned Order and the Impugned Demand Notice were unsustainable and has been passed in violation of the principles of natural justice. The Court further observed that Respondent No. 1 must disclose complete details of any material it is relying upon to hold that additional purchases have been made over and above the disclosed purchases, and the legal basis to make such an addition. In the present case, the only basis for the addition is the aggregate purchase figures communicated by the CBEC, which did not disclose any particulars of import bills or details of additional purchases made. Such general information, without details, without a proper opportunity to set out a reconciliation, and without any supporting evidence, could not constitute valid material for the purpose of making an addition under the Act.

The Hon. Court remanded the matter back to the file of Respondent No.1 to issue a fresh Show Cause Notice to the Petitioner with respect to the addition of ₹302,26,74,069/-, clearly bringing out the provision(s) under which the addition was proposed, providing a the detailed break-up of the import value of purchases including a copy of the information as received from CBEC, and grant sufficient time of at least 15 working days to file a reply to the notice.

Direct Tax Vivad se Vishwas Act 2020 – grant credit for taxes paid and refund/release of cash seized, in the computation of the Petitioner’s liability / refund.

21. SUNITA SAMIR SAO vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX -20 & ORS.

[WRIT PETITION NO. 1479 OF 2025 (BOMBAY) DATED: JANUARY 14, 2026]

Direct Tax Vivad se Vishwas Act 2020 – grant credit for taxes paid and refund/release of cash seized, in the computation of the Petitioner’s liability / refund.

The Petitioner is an individual and the ‘Legal Representative’ of her father, one Late Shri Bhalchandra Bhaskar Thakoor. The Petitioner’s deceased father was subjected to a ‘search & seizure’ action under section 158BC read with Section 132 of the Act’ in the year 1997, along with some of his family members. In the course of the search action, some cash was seized, along with certain
jewellery, from the persons put to search. In the case of the Petitioner (her deceased father), cash of ₹11,50,000/- was seized and an assessment was made by passing an Assessment Order under Section 158BC of the Act.

The said block assessment was carried out in appeal before the Appellate Tribunal. Against the Order of the ITAT, the Petitioner (the deceased father) filed an Appeal before the High Court, and the said Appeal, being ITXA/31/2006, was admitted. Similarly, penalty under Section 158BFA(2) of the Act was also levied and confirmed by the ITAT, against which an Appeal was filed before the Court, being ITXA/456/2015. The said Appeal against the levy of penalty was also admitted.

In the meantime, the then Assessing officer issued Notice dated 20th October 1999 to the Petitioner, stating that the cash seized of ₹11,50,000/- was contemplated to be adjusted against the demand arising out of the said assessment and called upon the Petitioner (the Petitioner’s deceased father) to give his consent for the same. The Petitioner (the deceased father), vide letter dated 1st November 1999, accorded consent for adjusting the said cash against the demand, during the pendency of the appeal against the assessment.

During the pendency of the appeals, the Petitioner paid some amount of taxes ₹7,35,049/-, arising out of the assessment, by way of challans, which were independent of the cash seized during the search action. Thereafter, the Petitioner availed of the scheme under the DTVSV Act, and also withdrew her appeals filed before the Court, in pursuance of her application under the DTVSV scheme. The Petitioner filed the necessary forms under the DTVSV Scheme (Form 1 & 2) and claimed credit for taxes paid by way of challans as well as credit for the cash that was seized and adjusted against the demand. In Form No.3 dated 27th February 2021, issued by Respondent No.1 under the said DTVSV scheme, credit was neither given for taxes paid by way of challans nor for the cash seized during the search.

The Petitioner followed/pursued the issues with the Respondents and pointed out the errors in Form-3, including non-granting of credit for cash seized of ₹11,50,000/- and raised her grievances. Having received no response from the Respondents, the Petitioner approached the Hon. Court, (being WP/836/2022), raising grievances and contending that she was entitled to the credit of the cash seized during the search action. The Court, vide its order dated 3rd March 2022, was pleased to set aside Form No.3 and directed the Respondents to grant a personal hearing to the Petitioners and also consider the Petitioner’s claim for credit of the cash seized.

The Court noted that since other family members of the Petitioner were also subjected to the search action, cash was also seized in their respective cases. The said family members had also availed of the DTVSV scheme, and the issue of non-granting of credit for cash seized had also cropped up in their cases (being WP/3850/2021 and WP/3849/2021).

The said family members had filed similar Petitions before the Hon Court, and the Court had directed the Respondent-Department to consider the claim of credit for the cash seized. The Department has released the cash seized along with interest in case of the said family members, by the Respondents.

The Respondents contended that the records pertaining to the seized cash were unavailable and, consequently, the requisite credit could not be extended. The Petitioner, in the alternative, sought release of the seized cash in accordance with Section 132B of the Act. The Hon Court noted that the Respondent-Department had adopted an identical stand in the case of a particular family member (Vasant Thakoor WP(L)/33180/2023) of the Petitioner, who was also subjected to the search action, and cash was seized in his case. The said family member had also availed of the DTVSV scheme, and the issue of non-granting of credit for cash seized had also cropped up in his case. The said family member (Shri Vasant Thakoor- WP(L)/33180/2023) had filed a similar petition before the Court wherein the Respondent-Department had conceded that cash had to be released with accumulated interest and credit had to be allowed for payments made through challans.

The Court noted that the, parties agree that the present case is identical to the facts in petition WP(L)/33180/2023.

The Hon Court observed that the Respondents have filed their reply dated 15th December 2025, wherein the fact of seizure of cash by the Department has been accepted. The Respondents state that the record of cash that was seized, was supposed to be with some other ward/circle, and there was no confirmation forthcoming from the said ward/circle despite making efforts towards the same, and hence the record/accounting treatment of the cash seized could not be ascertained.

The Hon Court, allowing the petition, directed the Respondents/Department release the cash seized and refund the cash along with accumulated interest, within 30 days from the date of order, on similar lines as in Writ Petition No. 33180/2023. The Hon. Court noted that the Respondents had called for an Indemnity Bond from the Petitioner, which the Petitioner has filed with the Respondents’ office.

Accordingly, the Respondents were directed to issue a refund of cash seized of ₹11,50,000/-, along with accumulated interest, and the CPC was further directed to issue a refund arising out of Form No.5 dated 11th December 2025, which was towards taxes paid by way of challans by the Petitioner, within 30 days.

Document Identification Number – mandate of Circular 19/2019 dated 14.08.2019 sets out the requirement of all communications from the department to bear a DIN. Section 154(7) – Rectification – Not permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed.

20. Siemens Limited vs. Deputy Commissioner of Income Tax, Circle, 8(2)(1), Mumbai & Ors

[WRIT PETITION NO. 2747 OF 2025 (BOM)(HC) dated 02/12/2025]

A.Y. 2005-06

Document Identification Number – mandate of Circular 19/2019 dated 14.08.2019 sets out the requirement of all communications from the department to bear a DIN.

Section 154(7) – Rectification – Not permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed.

The Petitioner challenged the validity of an order passed by Respondent under Section 154 of the Act, dated 29.03.2024. The impugned order did not bear a Document Identification Number (for short “DIN”). The Petitioner also challenged the intimation letter dated 10.07.2024 issued by Respondent, providing a DIN to the impugned order, when the impugned order was passed contrary to the Central Board of Direct Taxes Circular No. 19/2019 dated 14.08.2019.

The Petitioner filed its original Return of Income on 28.10.2005, declaring a total income of ₹253.76 Crores and filed a revised Return of Income on 30.03.2007 declaring a total income of ₹246.59 Crores. Since there were international transactions involved, Respondent No. 1 (AO) made a reference to Respondent No. 2 [the Transfer Pricing Officer (TPO)] under Section 92CA(1) of the Act for computing the Arm’s Length Price in relation to those international transactions entered into by the Petitioner. The TPO passed an order dated 20.02.2008 under Section 92CA(3) of the Act, recommending an addition of ₹47.53 Crores to the Arm’s Length Price in the transactions entered into by the Petitioner in 4 out of its 9 divisions, as there were mistakes in the recommendations / order of the TPO, the Petitioner filed Rectification Applications dated 25.02.2008 and 28.02.2008 to rectify various errors that had crept into the TPO’s order.

While this rectification was pending, Respondent No. 1 passed an Assessment Order dated 31.12.2008 under Section 143(3) of the Act, making the transfer pricing adjustment of ₹47.53 Crores recommended by the TPO, and in addition thereto, made other corporate tax additions aggregating ₹69.89 Crores, thereby assessing the total income of the Petitioner at ₹364.01 Crores.

Thereafter, the TPO passed an order dated 20.01.2009 under Section 154 of the Act, correcting the mistakes apparent on the record in his order dated 20.02.2008, and consequently, deleted the additions in (i) the AD & PTD Division, and (ii) the Medical Division – Manufacturing. However, the TPO did not rectify the mistake in the Medical Division – Distribution, and the Video Division.

On 29th January 2009, the Petitioner filed an Appeal before the Commissioner of Income Tax (Appeals) against the Assessment Order dated 31.12.2008, passed by Respondent No.1. In the meanwhile, to implement the TPO’s order dated 20.01.2009, Respondent No. 1 passed a rectification order dated 09.03.2011 under Section 154 of the Act revising the total income of the Petitioner to ₹337.52 Crores.

Subsequently, the CIT(A) passed an order dated 29.03.2019 under Section 250 of the Act, partly allowing the Appeal of the Petitioner, by which order he directed the TPO to recompute the adjustment made to the Arm’s Length Price of the international transactions in terms of his directions.

Being aggrieved by the order of the CIT(A), the Petitioner filed an Appeal to the Income Tax Appellate Tribunal on 06.06.2019 challenging both, the corporate tax issues, as well as the issues relating to the transfer pricing addition made to transactions in respect of two of its divisions.

The TPO passed an order dated 05.03.2020 giving effect to the order of the CIT(A) and deleted the transfer pricing adjustment of ₹34.92 Crores (i.e. in respect of transactions in the Medical Division – Distribution of ₹32.21 Crores, and in the Video Division of ₹2.71 Crores).
Consequently, Respondent No. 1 passed an order dated 16.03.2020 giving effect and deleted the transfer pricing adjustment of ₹34.92 Crores along with other reliefs granted by the CIT(A) of ₹24.01 Crores, and determined the revised total income of the Petitioner at ₹278.60 Crores.

Subsequently, when the appeal before the Tribunal initially came up for hearing, and the fact that the grounds relating to the transfer pricing addition had become infructuous in view of the order passed by the TPO was pointed out, the Members requested the Petitioner to file revised grounds of Appeal in Form No. 36 after excluding the grounds relating to the transfer pricing adjustment. Accordingly, the Petitioner filed a revised Form No. 36 on 20.06.2022 by excluding the transfer pricing grounds.

After all this, suddenly the TPO issued a notice dated 21.03.2024 whereby he proposed to rectify his order dated 05.03.2020 and withdraw the relief of ₹32.21 Crores granted in respect of the transactions in the Medical Division – Distribution. The Petitioner addressed a letter dated 26.03.2024 pointing out that there was no mistake apparent on record which could be rectified under Section 154 of the Act. However, the TPO passed a rectification order dated 27.03.2024 rectifying the order passed by him on 05.03.2020, while giving effect to the CIT(A) order, and thereby, made a revised transfer pricing adjustment of ₹32.21 Crores to the transactions of the Medical Division – Distribution.

Since the appeal before the Tribunal was still pending, the Petitioner filed another revised Form No. 36 on 12.04.2024, reinstating the transfer pricing grounds filed originally on 06.06.2019, in view of the order dated 27.03.2024 passed by the TPO.

Thereafter, Respondent No. 1 issued a notice dated 20.06.2024 seeking to initiate rectification proceedings under Section 154 of the Act and fixed the hearing on 01.07.2024. The Petitioner replied thereto by a letter dated 01.07.2024, pointing out that the proposed rectification proceedings are time-barred, as no rectification is permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended was passed, having regard to the provisions of Section 154(7). The Petitioner pointed out that Respondent No. 1 proposed to rectify his earlier order dated 16.03.2020, which could only be rectified till 31.03.2024 and that initiation of rectification proceedings under Section 154 was not permissible. Without prejudice to the above, the Petitioner also pointed out that the matter was outside the scope of Section 154 of the Act as the issue is highly debatable and cannot be termed as a mistake apparent on record and only a glaring, obvious or self-evident mistakes can be subjected to rectification proceedings under Section 154 of the IT Act.

An employee of the Petitioner, to his utter shock and surprise, saw the impugned order purportedly dated 29.03.2024 for the first time on the income tax portal on 17.07.2024. The impugned order was not received by the Petitioner, either by email, or by physical delivery.

Respondent No. 1, thereafter, uploaded the impugned letter dated 10.07.2024 (which too was never received either by email or by physical delivery by the Petitioner) and an employee of the Petitioner noticed the impugned letter for the first time on 17.07.2024 while accessing the income tax portal. The intimation letter mentioned that the order under Section 154 read with Section 250 of the Act dated 29.03.2024 has DIN ‘ITBA/REC/M/154/2024-25/1066567478(1).’

The Petitioner challenged the impugned order and the impugned letter issued by Respondent No. 1 by filing a writ petition. The primary challenge was that:- (i) the impugned order is illegal inasmuch as it does not, on the face of it, have a DIN and is, thus, contrary to the mandate of the CBDT Circular 19/2019; and (ii) is not passed on the day it is purported to be dated, i.e., 29.03.2024 as the same officer who allegedly passed the order on 29.03.2024 issued a notice dated 20.06.2024 asking the Petitioner to Show Cause on or before 1.07.2024 as to why the rectification proceedings under Section 154 of the Act should not be initiated to rectify the order passed by him on 16.03.2020.

The Petitioner relied on the mandate of Circular 19/2019 dated 14.08.2019 which sets out the requirement of all communications from the department to bear a DIN. The CBDT has elaborately set out the manner in which a DIN is required to be generated, allotted and duly quoted in the body of any notice, order, summons, letter or any correspondence issued by any income tax authority on or after 1.10.2019. The only exceptions to this requirement are set out in paragraph 3 of the Circular and the said paragraph also details out as to how care is to be taken to bring the case within the exceptional circumstances. Paragraph 4 makes it amply clear that any “communication” which is not in conformity with the provisions of paragraphs 2 and 3 will be invalid and deemed to have never been issued. Accordingly, it was submitted that the order purported to be dated 29.03.2024 is to be set aside on this narrow ground. It was further submitted that the order, on the face of it, does not refer to any of the exceptional circumstances as mentioned in paragraph 3 of the said Circular being applicable and, in any event, even if such circumstances existed, the same would have to be regularised within a period of 15 working days of its issuance by compulsorily generating the DIN and communicating the DIN to the Petitioner which has not been done by Respondent No. 1. The impugned letter dated 10.07.2024 was not communicated to the Petitioner by either email or physical delivery and from the Affidavit-in-reply it was noted that the impugned letter was sent only on 16.07.2024 by Respondent No. 1, and that too, to a wrong email ID. Further, no approval of the Chief Commissioner / Director General of Income Tax has been obtained before passing the impugned order manually which was also in contravention to paragraph 3 of the said Circular. In this regard, reliance was placed on the judgments of this Court in Ashok Commercial Enterprises vs. ACIT (2023) 459 ITR 100 (Bom) and Hexaware Technologies Ltd. vs. ACIT (2024) 464 ITR 430 (Bom) where this Court has emphasised the mandatory requirement of a document to have a DIN and the effect if it does not. Reliance was also placed on the judgement of the Madras High Court in CIT vs. Sutherland Global Services Inc (2025) 175 taxmann.com 897 (Mad) and CIT vs. Laserwoods US Inc (2025) 175 taxmann.com 920 (Mad) where the directions passed by the Dispute Resolution Panel without a DIN were held to be invalid. Further reliance was also placed on the judgments of the Delhi High Court in CIT vs. Brandix Mauritius Holdings Ltd. (2023) 456 ITR 34 (Del) as well as the Calcutta High Court in PCIT vs. Tata Medical Centre Trust (2023) 459 ITR 155 (Cal) wherein also a similar view of the mandatory nature of an order to have a valid DIN was taken. It was further submitted that the mere fact that aforesaid judgments of the Delhi High Court, Calcutta High Court and the Madras High Court in Sutherland Global Services Inc (supra) were stayed by the Supreme Court, did not mean that the judgments had lost their precedential value.

Without prejudice to the aforesaid the Petitioner next pointed out that Respondent No. 1 proposed to rectify his earlier order dated 16.03.2020, which could only be rectified till 31.03.2024, because Section 154(7) of the Act mandated that no rectification is permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed. It was further pointed out that the impugned order is back dated and could not have been passed on 29.03.2024 especially because the same individual who is purported to have passed the order dated 29.03.2024 issued a Show Cause Notice dated 20.06.2024 as to why a rectification order should not be passed, and fixed a time to respond by 1.07.2024. The Petitioner filed a detailed reply dated 01.07.2024 wherein it was, inter alia, pointed out that the proposed action is time barred having regard to the mandate of Section 154(7). It was urged that it was at this stage only that Respondent No. 1 realised his error and, thereafter, hastily took steps to back date the order before 31.03.2024. The back dating of the impugned order is also established by the impugned letter which provides the DIN of the impugned order as being “ITBA/REC/M/154/2024-25/1066567478(1)”. The use of the Financial Year 2024-25 in the DIN itself demonstrates that the DIN has been generated only in the Financial Year 2024-25 and hence, the impugned order was passed after 1.04.2024. In fact, orders / notices which indisputably are generated in the Financial Year 2023-24 have a DIN which makes a reference to the Financial Year 2023-24 . For all these reasons, it was submitted that the impugned order dated 29.03.2024 and the impugned letter dated 10.07.2024 be quashed.

The Respondent relied on the fact that the Petitioner has an alternate remedy available in the form of pursuing its Appeal before the Tribunal which is pending. Further, the Respondent sought to justify the impugned order and the impugned letter by submitting that the manual order was uploaded in the ITBA system and the same is reflected as generated on 29.03.2024 and the DIN was not generated due to a technical glitch. Further, it was pointed out that the delay in DIN generation does not invalidate the Assessment Order by relying on the Judgment of the Jharkhand High Court in Prakash Lal Khandelwal vs. CIT (2023) 151 taxmann.com 72 (Jha.). Additionally, it was pointed out that as per Circular No. 19/2019, the DIN is required only when the order is communicated to the Assessee and does not govern the passing of an order. The passing of an order, and communicating the said order, are two separate events. Time barring provisions apply to passing of the order, while DIN provisions apply to communication of the order. Reliance was also placed on Section 92CA of the Act.

In the rejoinder, the Petitioner has also objected to the tendering of the two Affidavits-in-Reply, one affirmed on 29.05.2025 (but not served on the Petitioner till 20.11.2025) and the other affirmed on 20.11.2025. It was contended that only the first Affidavit-in-Reply affirmed on 29.05.2025 should be considered as the second Affidavit-in-Reply is an afterthought and seeks to improve upon the lacuna in the Respondents’ case and should be ignored because both the Affidavits-in-Reply are affirmed by the same person, i.e., Assistant Commissioner of Income Tax, Circle 5(3)(1), Mumbai. It was only when the utter worthlessness of the first Affidavit was realised, an effort was made to improve upon the same by preparing the second one.

Further, the Petitioner pointed out that the delay in the DIN generation invalidates the order, and what is stated by the Respondents in the Affidavit-in-Reply was contrary to the Circular as it nowhere provides that the DIN is required only when the order is to be communicated to the Assessee and such an interpretation would frustrate the whole object of the Circular itself which was issued to maintain a proper audit trail. Hence, he pointed out that before passing an order a DIN has to be generated and quoted on the face of the order. Further, while dealing with the judgment of the Jharkhand High Court in Prakash Lal Khandelwal (supra), it was pointed out that the same is distinguishable on facts as it was a case where the order was passed on 31.03.2022, uploaded on 1.04.2022 and communicated to the Assessee on 3.04.2022 which is factually very different from the present case at hand and in any event the Judgment wrongly interpreted the Circular by holding that the ‘making of an order’, ‘issue of order’, ‘uploading of order on web portal’ or ‘Communicating of Order’ are all different acts or things and thereby, upheld the Assessment Order dated 31.03.2022 which was uploaded on 1.04.2022. The High Court, with respect, has also failed to appreciate the use of the word “communication” in the Circular covering within its ambit all notices, orders, letters, summons and correspondence.

Further, the Petitioner invited our attention to the provisions of Section 154(3) of the Act which specifically requires a notice to be issued by the concerned Authority to allow the assessee an opportunity of being heard, where an amendment has the effect of enhancing an assessment or reducing a refund or otherwise, and since Respondent No. 1 proposed to rectify his order dated 16.03.2020 to increase the assessed total income, albeit consequent to an order passed by the TPO, an opportunity of being heard is mandated by Section 154(3) and the impugned order cannot be passed before such a notice is issued and which, in fact, was issued only on 20.06.2024. Further it was pointed out that the impugned order is manually passed and back dated so as to save it from limitation.

The Honourable Court observed that on facts it was apparent that this was a case where Respondent No.1 has, in order to protect himself, back dated and manually passed the impugned order only to get over the period of limitation which expired on 31.03.2024.

The Honourable Court further referred to the CBDT Circular No. 19/2019 [F.No. 225/95/2019-ITA.II] dated 14.08.2019 . The Court observed that the object with which the Circular was issued by the CBDT was to ensure that a proper audit trail is maintained in respect of each and every notice / order / summons / letter / correspondence issued after 1.10.2019. The Supreme Court in Pradeep Goyal vs. UOI (2023) 1 SCC 566 also noted that the laudable object with which this requirement was introduced, albeit in the context of GST. Thus, a court ought to arrive at a conclusion which is in consonance with the object sought to be achieved, and it cannot be said that the failure to generate and quote a DIN on a document is a mere irregularity which can be ignored. The Court noted that the present case was one that exemplifies a situation whose occurrence was sought to be prevented by the CBDT, and cannot be brushed under the carpet by invoking Section 292B of the Act, or treating it as a mere procedural defect which is capable of being cured. There was no doubt that the impugned order being a rectification order under Section 154 of the Act would fall within paragraph 1 of the CBDT Circular which covers a notice, order, summons, letter and any correspondence (which has been defined as ‘communication’ in the CBDT Circular). The fact that paragraph 2 stipulates “that no communication shall be issued by any Income-tax authority relating to assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification, approval etc., to the assessee” on or after 1.10.2019 would squarely cover the impugned order, and unless a DIN was quoted on the face of the impugned order, the impugned order was to be treated as invalid and deemed to never have been issued.

The Court further noted that in the present case, the impugned order does not bear a DIN on the face of the order and no exceptional circumstance is mentioned in the impugned order while passing it manually without a DIN. Further, in spite of two Affidavits being filed, there is no approval of either the Chief Commissioner or the Director General of Income Tax which has been brought on record. Thus, it can be safely presumed that none exists. Even assuming that the present case was covered by one of the exceptional circumstances, there has been an abject failure to regularise the defect within the prescribed time frame of 15 working days by Respondent No. 1. Respondent No. 1 has issued the impugned letter dated 10.07.2024 providing a DIN for the impugned order, but the impugned letter is not communicated to the Petitioner, and in any event is beyond the time period of 15 working days provided in the Circular to regularize the impugned order. The fact that the impugned order is manually passed without a DIN on the face of the order and without referring to any exceptional circumstances on the face of the order, the impugned letter separately furnishing the DIN for passing the impugned order, cannot validate the impugned order passed without a DIN, when no reasons are mentioned in the impugned order.

The Court further observed that the judgment of the Jharkhand High Court in Prakash Lal Khandelwal (supra) was wholly misplaced. The said facts, on the basis of which that judgment was rendered, are distinguishable from the facts of this case, where there was a delay of a single day in uploading the order and generating the DIN. Even otherwise, the Jharkhand High Court has not appreciated the true scope of the meaning given to the word “communication” in the Circular correctly, as it has misread the word “communication” which is defined in paragraph 1 of the Circular and held that it was mandatory to quote a DIN at the time of communication of a notice/order and not at the time of issuance thereof, overlooking that what the circular mandates is that every notice, order, summon, letter and any correspondence issued by an Income Tax Authority should have a DIN allotted and duly quoted on the body of such communication. The only exception to this, was set out in paragraph 3 of the said circular.

The Honourable Court observed that the judgments in Ashok Commercial Enterprises (supra) and Hexaware Technologies Ltd (supra) and the Madras High Court in Laserwoods US Inc (supra) have not been stayed and the mere fact that the orders of the Delhi High Court in Brandix Mauritius Holdings Ltd (supra), Calcutta High Court in Tata Medical Centre Trust (supra) and the Madras High Court in Sutherland Global Services Inc (supra) are stayed by the Supreme Court, does not mean that these judgments have lost their precedential value.

Thus, having regard to the facts, the court held that the impugned order is back dated. It was apparent that the time limit provided for in Section 154(7), viz., a period of 4 years from the end of the relevant Financial Year expired on 31.03.2024, as the order sought to be amended was dated 16.03.2020. The impugned order was not passed till 20.06.2024 as the same Assessing Officer, who has passed the impugned order allegedly on 29.03.2024, has issued a Show Cause Notice seeking to commence rectification proceedings under Section 154 of the Act.

Further, no separate Notice under Section 154(3) of the Act was issued by Respondent No. 1 granting an opportunity of being heard to the Petitioner even though the rectification order that was proposed to be passed was to give effect to an order passed by the TPO. As the effect of the order would have been to increase the total income, the mandate of Section 154(3) would have to be complied with by Respondent No. 1. The fact that the Notice was issued on 20.06.2024 itself shows that the impugned order could not have been passed before this date and by the time this Notice dated 20.06.2024 was issued, the time limit under Section 154(7) had already expired.

The Court held that due to the noncompliance with the requirements of the CBDT Circular as it is passed without a DIN or; from the fact that the same Officer has issued the Notice under Section 154(3) on 20.06.2024 and he could not have issued the impugned order before 20.06.2024 and he had back dated the order, shows that the impugned order is not valid and should be quashed.

As far as the argument of alternate remedy was concerned, the court observed that present case squarely falls within the realm of exceptions carved out by the Supreme Court in Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai (1998) 8 SCC 1, in other words, an alternate remedy would not operate as a bar where the impugned order was passed without jurisdiction.

In View Of The Above, It Was Held That Respondent No. 1 Had Acted Beyond Jurisdiction, And Accordingly The Impugned Order Dated 29.03.2024 Passed By Respondent No. 1 And The Impugned Letter Dated 10.07.2024 Issued By Respondent Was Quashed And Set Aside.

Refund of excess amount deposited in the Government Treasury in the form of tax deducted at source :

19. BJ Services Company Middle East Limited vs. The Deputy Commissioner of Income Tax International Taxation, Circle 1(2)(2),

Mumbai & Ors

[WP (L) NO. 26966 OF 2025, Dated: 08/07/2025, (Bom)(HC)]

Refund of excess amount deposited in the Government Treasury in the form of tax deducted at source :

The Petition challenges the alleged inaction on the part of the Respondents in not disposing of the applications made by the Petitioner to refund excess amount deposited in the Government Treasury in the form of tax deducted at source. It is the claim of the Petitioner that it is entitled to a refund of ₹1,90,97,348/- in respect of Assessment Year 2012- 13 for the excess tax deposited by it.

The Petitioner is a company engaged in providing services of maintaining and testing oil and gas equipments and other related activities. To execute its project in India, the Petitioner employs overseas employees. As per the mutual understanding between the Petitioner and the expatriate employees, the Petitioner bears the tax liabilities of these expatriate employees. As the tenure of stay of the overseas employees in India is dependent upon the completion of a particular project, the Petitioner beforehand estimates and deposits the tax liabilities of such employees on estimation. However, the actual number of days the employee has worked in India and the proportionate salary paid to them is determined at the end of the Financial Year. It is at that time that the precise tax liability of the expatriate employee is calculated.

For Assessment Year 2012-13, the initial estimated tax deposited was found to exceed the actual liability. The result of this over estimation was that the Petitioner had deposited excess tax to the tune of ₹1,90,97,148/-. It is the claim of the Petitioner that it had duly applied for obtaining the refund of the said amount by filing Form 26B on the TRACES portal (TDS Reconciliation Analysis and Correction Enabling System) on 27th February 2018. Further, it also made representations time and again before Respondent Nos. 1 and 2 for seeking the said refund. The Petitioner also refiled its applications for refund in Form-26B on several dates. It was later discovered by the Petitioner that few of the refund requests were rejected alleging invalid Bank details on account of incorrect PAN-Bank account linkage. It is the case of the Petitioner that it had thereafter updated its bank details on the TRACES portal. However, the refund requests were again rejected for various reasons namely, incorrect PAN-Bank account linkage, for not approaching the Assessing Officer, time lapsed for updating details asked for. Consequent to the above, the present Writ Petition is filed.

The Hon. Court directed the Petitioner to file fresh applications for seeking refund in Form-26B and produce the required details/documents. Once this is done, the said applications shall be processed by the Respondents in accordance with the law, in a time bound manner and after affording the Petitioner an opportunity of being heard inter-alia by providing a personal hearing.

Reassessment – period of limitation – “surviving period” – Effect of UOI vs. Ashish Agarwal [444 ITR 1 (SC)] & UOI vs. Rajeev Bansal [ 469 ITR 46 (SC):

18. Hitesh Ramniklal Shah vs. Assistant Commissioner of Income Tax-23(1),Mumbai & Ors.

[WP No. 4164 OF 2025, Dated: 11/11/2025. (Bom) (HC)]

Section: 148

Reassessment – period of limitation – “surviving period” – Effect of UOI vs. Ashish Agarwal [444 ITR 1 (SC)] & UOI vs. Rajeev Bansal [ 469 ITR 46 (SC):

The Petitioner challenges a notice dated 27 July 2022 issued under Section 148 of the Income-tax Act, 1961, the subsequent notices issued by Respondent No.1, inter alia on the ground that the notice under Section 148 of the Act is issued beyond the period of limitation, and therefore, all subsequent notices will also be bad in law.

For the year under consideration, i.e. the A.Y. 2014-15, the Petitioner filed his return of income on 29 September 2014 declaring a total income of r64,86,660/- in respect of which no scrutiny assessment was made. Respondent No.1 issued a notice dated 29 June 2021 under the unamended provisions of Section 148 of the Act, after obtaining the approval of the Principal Commissioner of Income Tax, Mumbai-19. The Petitioner filed his return of income on 18 November 2021 in response to the notice issued under Section 148 of the Act declaring the same income that was declared in the original return of income.

After the judgment of the Hon’ble Supreme Court in UOI vs. Ashish Agarwal [444 ITR 1 (SC)] delivered on May 4, 2022, Respondent No.1 issued a notice dated May 25, 2022 under Section 148A(b) of the Act and called upon the Petitioner to furnish his reply within two weeks to show cause as to why a notice under Section 148 of the Act should not be issued to the Petitioner. In reply thereto, the Petitioner filed a letter dated June 3, 2022 requesting Respondent No.1 to drop the reopening proceedings. A further reply was filed on 17 June 2022 inter alia pointing out that the notice is time barred as per Section 149 of the Act; that there was no information with Respondent No.1 which suggested that income chargeable to tax has escaped assessment; and submissions were made on the merits to demonstrate that no income has escaped assessment. The Petitioner filed another reply on 25 June 2022 pointing out that the same information was already considered while seeking to reassess the income for the A.Y. 2015-16 and, hence, the reopening for the A.Y. 2014-15 should be dropped. However, Respondent No.1 passed an order under Section 148A(d) dated 26 July 2022 rejecting the submissions of the Petitioner and issued the impugned notice dated 27 July 2022 under Section 148 of the Act.

Being aggrieved, the Petitioner filed Writ Petition No.130 of 2024 challenging the validity of the notice dated 27 July 2022 issued under Section 148 of the Act. The impugned notice dated 27th July 2022 was quashed by the High Court vide its order dated 1 March 2024 solely on the ground that the notice was barred by limitation. This was done by relying on its earlier judgment in Godrej Industries vs. ACIT [160 taxmann.com 13(Bom)]. All other grounds canvassed by the Petitioner were kept open by this Court.

Being aggrieved, Respondent No.1 filed a Special Leave Petition before the Hon’ble Supreme Court on 24 January 2025 being SLP No.5515 of 2025. This SLP was disposed-off vide order dated 24 February 2025 in terms of the findings given in UOI vs. Rajeev Bansal [(469) ITR 46 (SC)].

The Petitioner submitted that the present Petition challenges the validity of the reassessment proceedings on the grounds which were not disposed-off and expressly kept open in Writ Petition No.130 of 2024, as well as on the ground of limitation having regard to the interpretation placed by the Supreme Court in its judgment in Rajeev Bansal (Supra) on Section 149 read with the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [TOLA].

In view of the order passed by the Hon’ble Supreme Court on 24th January 2025, Respondent No. 1 issued a notice dated 9 October 2025 under Section 142(1) of the Act to the Petitioner to provide details in connection with the assessment for the A.Y.2014-15 and referred to the assessment being revived consequent to the judgment of the Supreme Court in Rajeev Bansal (supra). In response thereto, the Petitioner filed letters dated 13 October 2025 and 14 October 2025 pointing out the effect of the judgment of the Supreme Court in Ashish Agarwal (supra) and the effect of the “surviving period” as per the judgment of the Supreme Court in Rajeev Bansal (supra) specifying that the notice dated 27 July 2022 issued under Section 148 of the Act fell beyond the “surviving period” as per the judgment of Rajeev Bansal (supra), and hence, the reopening proceedings should be dropped and Respondent No.1 is precluded from issuing the notice under Section 142(1) of the Act.

The Respondent No.1 noted the Petitioner’s objections as to limitation but held that prima facie the notice and the ensuing proceedings appear to be within the relaxation/extension framework under TOLA. Respondent No.1 thereafter issued a show cause notice for the proposed additions before finalizing the assessment. In this notice, Respondent No.1 dealt with the Petitioner’s objections on limitation and found the same to be untenable.

The Hon. Court confined to the challenge to the notice under Section 148 of the Act on the ground that the same is barred by limitation in view of the first proviso to the substituted Section 149(1) as interpreted by the Hon’ble Supreme Court.

The Hon. Court referred to the judgment of the Hon’ble Supreme Court in Rajeev Bansal (supra) more particularly para 149 :
“…149. The first proviso to Section 149(1)(b) requires the determination of whether the time limit prescribed under section 149(1)(b) of the old regime continues to exist for the assessment year 2021-2022 and before. Resultantly, a notice under Section 148 of the new regime cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice. This also ensures that the new time limit of ten years prescribed under section 149(1) (b) of the new regime applies prospectively. For example, for the assessment year 2012-2013, the ten year period would have expired on 31 March 2023, while the six year period expired on 31 March 2019. Without the proviso to Section 149(1)(b) of the new regime, the Revenue could have had the power to reopen assessments for the year 2012-2013 if the escaped assessment amounted to Rupees fifty lakhs or more. The proviso limits the retrospective operation of Section 149(1)(b) to protect the interests of the assessees.
******
The Hon. Court further relied on other High Court decisions which have considered the judgment in Rajeev Bansal while dealing with the issue of the surviving period namely Ram Balram Buildhome (P.) Ltd vs. ITO [477 ITR 133 (Del)] the Gujarat High Court in Dhanraj Govindram Kella vs. ITO [177 taxmann.com 194 (Guj)], and the Madras High Court in Mrs. Thulasidass Prabavathi vs. ITO [174 taxmann.com 508 (Mad)]

Based on the above, the Court held that a notice under Section 148 of the Act cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice relying on the first proviso to Section 149 of the Act. Hence, the submission of the Respondent that a period of ten years is available to issue the notice under Section 148 of the Act was misconceived.

The Court further noted that in the case of Gurpreet Singh vs. DCIT [176 taxmann.com 673 (Bom)], where the Court records the argument of the Respondent [in paragraph 7(vii)] that the order under Section 148A(d) is to be passed within one month from the end of the month in which the reply has been received, specifically rejected the same in paragraph 18 as Section 148A(d) does not govern the computation of time as contemplated in terms of Section 149 of the Act (paragraph 18 ) hereunder:

“…18. The said contention is fundamentally misconceived. A notice under Section 148 of the IT Act accompanied by an order under Section 148A(d) is required to be issued within the time stipulated under Section 149 of the IT Act. Section 148A(d) does not govern the computation of time as contemplated in terms of Section 149 of the IT Act. The entire process under Section 148A(a) to (d) and the issuance of notice under Section 148 has to be completed within the total time available in terms of Section 149(1) of the IT Act for issuance of notice under Section 148. A notice issued under Section 148 of the IT Act which is beyond the time line stipulated under Section 149(1) is non-complaint and invalid. The timeline under Section 148A(d) is for the Assessing Officer to comply with the stipulations and the streamlining contemplated under Section 148A. This is primarily to bring in transparency and accountability into the system and is intended for the benefit of the assessees. However, to suggest that Section 148A(d) extends the time limit under Section 149(1) and/or has a bearing on the time under Section 149(1) is a submission which is misconceived and lacks legal sanctity.”

(emphasis supplied)

The Court observed that after in the present case, the period of two days would expire on 10 June 2022 or 27 June 2022 respectively and, therefore, the notice under Section 148 of the Act issued on 27 July 2022 is time barred, inasmuch as it is issued much after the surviving period. Therefore, the notices issued under Section 148 of the Act passed was beyond the surviving period.

Section 254(2) – Rectification – Miscellaneous Applications before ITAT – ITAT the last fact finding authority under the Act – Non consideration of the judgments, which, at least prima facie were relevant, would certainly amount to a mistake apparent from the record.

Gulermak TPL Joint Venture vs. Income Tax Appellate Tribunal & Ors. WITH Gulermak TPL Joint Venture vs. Income Tax Appellate Tribunal & Ors.

[WRIT PETITION (L) NO.27895 OF 2025 dated 30th September 2025 (Bombay) (HC)] Assessment year 2017-18 and 2018-19

Section 254(2) – Rectification – Miscellaneous Applications before ITAT – ITAT the last fact finding authority under the Act – Non consideration of the judgments, which, at least prima facie were relevant, would certainly amount to a mistake apparent from the record.

The Petitioner is an un-incorporated joint venture between Gulermak Agir Sanayi Insaat Ve Taahhut Sirketi, a company incorporated under the laws of Turkey, and registered in India under Section 380 of the Companies Act, 2013, and Tata Projects Limited, a company incorporated under the Companies Act, 1956. The joint venture was formed by the parties to obtain and execute a contract with Lucknow Metro Rail Corporation Limited (“LMRCL“), a nodal agency established for the purpose of administering and regulating the Lucknow Metro Rail to be constructed in the city of Lucknow.

On 27th May 2016, the Petitioner had entered into a contract with LMRCL under which the Petitioner was to design and construct an underground tunnel and 3 underground metro stations for fixed consideration. The agreement entered into by the Petitioner, inter alia, imposed various obligations upon it regarding designing, procurement of labour and material, testing of the work, obtaining necessary permissions, employing its materials, plant and labour to complete execution of the construction of the tunnel/metro stations, taking financial risk and guaranteeing the quality of its work, providing/obtaining insurance, warranties etc.

For the Assessment Year 2017-18, the Petitioner had filed its return of income claiming a deduction under Section 80-IA of the Act for developing an infrastructure facility on the profits earned from the aforesaid contract with LMRCL. The Assessing Officer denied the deduction under Section 80-IA of the Act on various grounds, two of which are relevant, viz. that (a) the Petitioner was only a contractor and not a developer of the infrastructure facility; and (b) the condition set out in Section 80-IA(4) (i)(b) of the Act was not satisfied as the agreement was not entered into with Central Government, State Government, Statutory Authority or a Local Authority.

The Petitioner had challenged the denial of deduction under Section 80-IA by filing an Appeal before the Commissioner (Appeals). The first Appellate Authority, confirmed the disallowance made by the Assessing Officer under Section 80-IA of the Act. The Petitioner therefore approached the Tribunal challenging the order of the Commissioner (Appeals) approving the disallowance under Section 80-IA of the Act.

During the course of the hearing of the Appeal before the Tribunal, the Petitioner pointed out the various clauses in the agreement entered into with LMRCL, analysed the facts of the case, and urged, inter alia, that various binding decisions of the High Courts and Co-ordinate benches of the Tribunal had settled the tests to be considered when deciding the issue of whether a person was a developer entitled to deduction under Section 80-IA, or a mere contractor. The Petitioner had filed a detailed and comprehensive note setting out the various clauses of the agreements and facts, as well as the binding decisions on the issue, which, accordingly to the Petitioner, would irrefutably lead to the conclusion that the Petitioner was a developer entitled to the deduction under Section 80-IA of the Act. The Petitioner also pointed out (and cited authority on the subject) that the statute had been amended w.e.f. 1st April 2002 and it had been made clear that an assessee was entitled to a deduction under Section 80-IA, even if its business was merely developing an infrastructure facility, as opposed to developing operating and maintaining the said facility.

The Petitioner contented that the Tribunal was satisfied with these contentions and required the Petitioner’s counsel to move on to other grounds in the cross appeals before it. The said note also set out the various decisions including the decision of the Gujarat High Court in CIT vs. Ranjit Projects Pvt Ltd [(2018) 94 taxmann.com 320 (Guj)], SLP dismissed in CIT vs. Ranjit Projects Pvt Ltd [(2019) 105 taxmann.com 126 (SC)], which had held that a contract executed with a Special Purpose Vehicle (SPV) / Nodal Agency, whose entire share capital was held by a State Government [like LMRCL] would be entitled to a deduction under the said section, and was not in contravention of the condition specified in Section 80-IA(4)(i)(b) of the Act. As required by the Tribunal, during the hearing of the appeal the Petitioner also set out in the form of another note a detailed reply to the arguments of the Revenue’s counsel which once again set out the nature of contracts, which were the subject matter of the binding precedent, and the fact that they had also been entered into with SPV’s / Nodal Agencies and replied to all other arguments of the Revenue.

The Tribunal in a cursory manner, by order dated 29th January 2025 dismissed the Appeal of the Petitioner and confirmed the disallowance of deduction under Section 80-IA of the Act, purportedly on the grounds that (a) the Petitioner was not developing the infrastructure facility and was only a contractor; and (b) the agreement with LMRCL does not satisfy the requirement of having an agreement with the Central Government, State Government, Statutory Authority or a local Authority under Section 80-IA(4)(i)(b) of the Act. While setting out the aforesaid conclusions, the Tribunal did not refer to the 2 detailed notes filed by the Petitioner during the course of the hearing which captured various contentions, did not refer to the material on record, or even the terms of the contract, and simply did not deal with the binding judgments of the co-ordinate benches of the Tribunal and the High Courts. Merely bare conclusions were recorded, based on, inter alia, erroneous factual assumptions and presumptions. On the other issues raised in the Appeal the Tribunal has not recorded any finding against the contentions urged by the Petitioner.

Since the order dated 29th January 2025 [passed under Section 254(1) of the Act] did not deal with the various contentions of the Petitioner, did not refer to or consider the evidence on record including the binding judgments on the subject, and suffered from various other mistakes apparent from the record, the Petitioner filed a Miscellaneous Application under Section 254(2) of the Act for rectification of the order dated 29th January 2025. The said Miscellaneous Application exhaustively set out the mistakes apparent from record. However, the Tribunal, vide order dated 30th July 2025, dismissed the Miscellaneous Application on, inter alia, the ground that it was not necessary to deal with each and every clause of the contract entered into with LMRCL or the judicial decisions relied upon by the Petitioner, which were all ignored stating that the same were “fact specific” without in any manner setting out how this conclusion was arrived at. The Tribunal further held that merely because it has not specifically discussed various clauses of the agreement or the judicial precedents cited in the body of the order, there was no mistake apparent from the record. In this regard, the Tribunal relied on the judgement of this Court in CIT vs. Ramesh Electric and Trading Co. [(1994) 203 ITR 497 (Bom.)] and the judgment of the Supreme Court in case of CIT vs. Reliance Telecom Limited [(2022) 440 ITR 1 (SC)].

The Hon’ble Court re-iterated that the Tribunal is the last fact-finding authority under the Act. Therefore, it is necessary that the Tribunal while deciding an Appeal, considers the entire material on record and thereafter decides the factual and legal issues that arise in an Appeal. It is the duty of the Tribunal to examine the evidence which is brought on record by the parties and render findings of facts and law, as an Appeal before the High Court is entertained only on a substantial question of law. The Court referred to the Supreme Court decision in the case of Omar Salay Mohammed Sait vs. CIT [(1959) 37 ITR 151 (SC)] ; Esthuri Aswathiah vs. CIT [(1967) 66 ITR 478 (SC)] ; Killick Nixon & Co. vs. [CIT (1967) 66 ITR 714 (SC)]

Applying the principles laid down by the Hon’ble Supreme Court in the aforesaid judgments, the Court held that the order dated 29th January 2025 passed by the Tribunal falls short of the requirements set out by the Supreme Court in the abovementioned judgments. The Tribunal had not considered the evidence on record and had merely recorded bare conclusions without setting out any reasons in support thereof. The Tribunal, while coming to the conclusion that the Petitioner was a mere contractor and not a developer, had failed to consider various clauses of the agreement with LMRCL. It was incumbent upon the Tribunal to consider various clauses in the agreement with LMRCL .

The Hon’ble High Court observed that the aforesaid clauses in the agreement with LMRCL were material to determine whether the Petitioner was acting as a mere contractor or, it was a developer of the infrastructure facility undertaking operational, financial and entrepreneurial risk in execution of the aforesaid contract. The conclusion of the Tribunal that the Petitioner was a mere contractor without considering the various clauses of the agreement and other material placed on record clearly rendered the order of the Tribunal as one which suffered from a mistake apparent from the record.

The Court further observed that the Petitioner during the course of the hearing had filed a note which referred to the aforesaid clauses in the agreement and had also relied upon the judgments of the co-ordinate benches of the Tribunal and the High Courts to support its contention that it was a developer of the infrastructure facility. However, (apart from a single decision noted by the Tribunal in an erroneous context), none of the judgments relied upon by the Petitioner were referred to, much less considered, by the Tribunal in the order dated 29th January 2025. In fact, when the Petitioner in the Miscellaneous Application [filed under section 254(2) of the Act] pointed out that the Tribunal has failed to consider the various clauses in the agreement and the judicial pronouncements on the subject, the Tribunal dismissed the Application of the Petitioner holding that it was not necessary to refer to each and every clause of the agreement and that judgments filed by the Petitioner were fact specific without pointing out as to what are the distinguishing facts. Therefore, the order of the Tribunal dated 29th January 2025 passed under section 254(1) of the Act clearly suffered from a mistake apparent from the record.

The Court observed that the Tribunal in the order dated 29th January 2025 had not considered the ratio laid down by the aforesaid judgments relied upon by the Petitioner during the course of the hearing. The Court noted that the Tribunal has instead incorrectly referred to the judgment of Gujarat High Court in case of Ranjit Projects (supra) to decide the issue of “contractor or developer”. The aforesaid judgment was not cited by the Petitioner for that purpose as was evident from the note submitted before the Tribunal. The Tribunal therefore, had failed to properly consider the judgment of the Gujarat High Court in case of Ranjit projects (supra). Non consideration of the judgments, and which, at least prima facie were relevant, would certainly amount to a mistake apparent from the record.

The failure of the Tribunal to consider the contentions urged before it, the material on record, and failure to consider the judgments cited before it, amounted to a mistake apparent from record, is supported by the judgment of the Court in the case of Amore Jewels Pvt. Ltd. vs. DCIT (WP No. 1833 of 2018 decided on 3rd August 2018) wherein a similar issue arose for consideration.

Similarly, in the case of Sony Pictures Networks India (P.) Ltd. vs. ITAT [(2023) 156 taxmann.com 443 (Bom.)], the Court had held that the failure of the Tribunal to decide a fundamental submission of an assessee in an appeal is a mistake apparent from record.

Further, the Hon’ble Supreme Court, in the case of CCE vs. Bharat Bijlee Limited [(2006) 198 ELT 489 (SC)], had also held that the failure of the Tribunal to consider material evidence on record is a mistake apparent rectifiable under section 35C(2) of the Central Excise Act, 1944, which provisions are in pari materia with the provisions of section 254(2) of the Income-tax Act, 1961.

The Court further held that the reliance placed by the counsel for the Revenue on the judgments in the case of Ramesh Electric (supra) and Reliance Telecom (supra) was wholly misconceived.

The Impugned Order dated 30th July 2025 and also the order dated 29th January 2025 passed under section 254(1) of the Act suffered from mistakes apparent from the record and the Tribunal was directed to decide the appeals of the Petitioner afresh in accordance with law.

Section 119(2)(b) – Application for condonation of delay in filing Form No. 10B – the delay was neither deliberate nor mala fide but was on account of inadvertence of the accountant of the auditor – technical lapse.

16. Vesava Koli Samaj Shikshan Sanstha, Mumbai vs. Commissioner of Income (Exemption), Mumbai & Ors [WRIT PETITION NO. 2906 OF 2025 dated 17th September 2025 (BOM) (HC)] (Assessment Year 2019-20.)

Section 119(2)(b) – Application for condonation of delay in filing Form No. 10B – the delay was neither deliberate nor mala fide but was on account of inadvertence of the accountant of the auditor – technical lapse.

The Petitioner is a registered Public charitable trust running an educational institution, consisting of Pre-primary, Primary and secondary classes upto 10th Standard. For A.Y. 2019-20, the Petitioner filed its return of income on 30th September, 2020 declaring NIL income. The audit report in Form No. 10B had been obtained on 30th September, 2019, but the same was uploaded on the portal only on 30th March, 2021. The delay occurred as the auditor’s accountant, while filing the return of income, inadvertently failed to upload the audit report, though reference thereto was made in the return itself.

The CPC, Bengaluru thereafter, on 23rd November 2021, passed an intimation under section 143(1) of the Act determining the total income of the Petitioner as ₹2,52,88,547 and raised a demand of ₹1,30,48,480. The Petitioner then moved an application before Respondent No. 1 on 30th December, 2022 seeking condonation of delay of 181 days in filing Form No. 10B, supported by explanations, affidavit of the Trustee, and other documents.

Respondent No. 1, by the impugned order dated 26th March, 2025, rejected the condonation application on the ground that no “reasonable cause” was shown for the delay, holding that the audit report was not furnished within the extended due date of 30th September, 2020.

The Hon’ble High Court held that the delay was neither deliberate nor mala fide but was on account of inadvertence of the accountant of the auditor. The Petitioner, a charitable educational trust, had otherwise complied with the statutory requirements, obtained the audit report in time, and filed it immediately upon noticing the lapse. The explanation offered has not been found to be false, and the Petitioner has annexed documentary proof including the affidavit of the Trustee confirming the circumstances.

Further, the Hon’ble High Court held that, refusal to condone the delay results in grave financial hardship to the Petitioner, which runs only an educational institution, especially when the demand has arisen solely on account of a technical lapse. Considering the beneficial object of section 119(2)(b) and the CBDT circulars empowering condonation in genuine cases, the Court was satisfied that the Petitioner is entitled to relief. Therefore, the Hon’ble High Court quashed and set aside the impugned order dated 26th March, 2025 passed by Respondent No. 1 under section 119(2)(b) of the Act. Also, the Court condoned the delay of 181 days in filing Form No. 10B for A.Y. 2019-20.

It is a well-established principle of law that treatment given by the Assessee in its books of account is not decisive/conclusive for determining the taxable income under the Act.

15. Kedaara Captial Fund II LLP vs. Assessment Unit, National Faceless Assessment Centre (NFAC), Delhi and Ors.

[Writ Petition no. 2684 of 2025 dated: 09/09/2025 (Bom) (HC)]

It is a well-established principle of law that treatment given by the Assessee in its books of account is not decisive/conclusive for determining the taxable income under the Act.

The Petitioner is registered with SEBI as a Category II AIF – closed ended fund under the SEBI (AIF) Regulations, 2012. For the purposes of the Act, the Petitioner is regarded as an ‘investment fund’ as defined under Section 115UB. Resultantly, any income from investment activities earned is exempt under Section 10(23FBA). Such income is, however, taxable in the hands of the unit holders of the Petitioner. In other words, assessees like the Petitioner are granted a pass-through status under the Act.

During the year, the Petitioner implemented investments aggregating to ₹1,300.27 Crores using the capital raised from its unit holders. The total portfolio investments of the Petitioner as on 31st March 2022 was ₹8,665.75 Crores. It was an undisputed fact that the Petitioner neither sold any of the investments during the year nor did it earn any income from such investment activities. The only income earned by the Petitioner during the year was short term capital gains of ₹0.99 Crores on cancellation of certain forward contracts. The total expenses incurred by the Petitioner during the year was ₹118.99 Crores. In the books of accounts maintained, these expenses were debited to the statement of profit and loss for the year.

The Petitioner filed its Return of Income for the subject A.Y. 2022–23, declaring NIL income. Further, in such return, the income of short-term capital gains of ₹0.99 Crores was claimed as exempt under Section 10(23FBA) read with 115UB and taxable in the hands of the unit holders. Insofar as the expenses of ₹118.99 Crores incurred during the year, the Petitioner stated that no deduction whatsoever was claimed of such an amount. It was also stated that no carry forward of any loss under any head of income was claimed by the Petitioner. Moreover, it was also stated that a deduction of such an amount has also not been claimed by any of the unit holders as well.

The impugned assessment order was passed on 21st March 2025 disallowing the expenses of ₹103.15 Crores (expenses incurred towards management fees and other related costs of ₹15.84 Crores paid to its investment advisor, Kedaara Capital Advisors LLP, were allowed by the AO) and added the said amount under the head “profits and gains from business and profession” to the total income of the Petitioner. This amount was added by the AO on the ground that the expenses were “neither found genuine nor any income has offered against these expenses”. A notice of demand under Section 156 of the Act raising a tax demand of ₹49.02 Crores, as well as a penalty show cause notice, were also issued pursuant to the above assessment order.

The Petitioner filed the Writ Petition challenging the above order and the consequential notices issued by the AO. Amongst other grounds, the primary challenge was on the ground that the AO has added expenses to the Petitioner’s total income despite the fact that no deduction in respect of such expenses has been claimed either by the Petitioner or the unit holders. Therefore, the question of adding such an amount could never have arisen. The addition made therefore, was wholly without jurisdiction, perverse and arbitrary.

It was further contended that the AO miserably overlooked the fact that the Petitioner has been granted a pass through status under the Act. Therefore, assuming for the sake of argument that the Petitioner incurred non-genuine expenses, nevertheless, such an addition could not have been made in the hands of the Petitioner.

It was further contended that the unrealised gains reported in the financial statements of the Petitioner as ‘surplus’ does not constitute ‘income’ of the unit holders and is not taxable in their hands under Section 115UB. Secondly, in any case, it is a well-settled principle of income tax law that to determine the taxability of a particular item is not governed by how that item is treated by the counterpart assessee. Therefore, the treatment given in the hands of the unit holders cannot govern how the income of the Petitioner is to be determined. Accordingly, it was submitted that the addition made by the AO was completely unlawful, without jurisdiction and illegal.

On the first objection of the Revenue that the Writ Petition ought not to be entertained because there was an alternate remedy available to the Petitioner, the Hon. Court observed that in the peculiar facts and circumstances of this case, the Court can exercise its discretion under Article 226 of the Constitution of India and interfere in the above matter when an assessment order is completely illegal, contrary to the clear mandate of law prima facie, without jurisdiction.

Further, it was well settled that the jurisdiction of the High Court in entertaining the Writ Petition, despite alternate statutory remedies, was not affected in a case where the authority against whom the Writ was filed has usurped its jurisdiction without any legal foundation.

The Hon. Court further observed that it was undisputed that the addition of expenses (of ₹103.15 Crores) made by the Assessing Officer in the impugned order was never ever claimed as a deduction by the Petitioner in its Return of Income. In other words, these expenses were never claimed as a deduction to give rise to the Assessing Officer to add back those deductions in the Income Returned by the Petitioner.

The Hon. Court further observed that the AO failed to recall the well-established principle of law that treatment given by the assessee in its books of account was not decisive/conclusive for determining the taxable income under the Act. Whether an assessee is entitled to a deduction or not entirely depends upon the provisions of the Act de hors the disclosure in its books of account. The Hon. Court referred to decisions of the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Ltd. vs. CIT [(1971) 82 ITR 363 (SC)], Taparia Tools Ltd. vs. JCIT [[2015] 55 taxmann.com 361 (SC)] and United Commercial Bank vs. CIT [(1999) 240 ITR 355 (SC)].

In view of the above, the Hon. Court held that the addition of ₹103.15 crores made by the Assessing Officer in the income returned by the Petitioner was wholly unsustainable. The Hon. Court further refused to remand the matter back to file of AO.

Penalty 270 A – Writ – Alternate remedy- No virtual hearing was given to the Petitioner as mandated by the Faceless Penalty (Amendment) Scheme, 2022: AY 2017-18

14. Man Truck & Bus India Pvt Ltd vs. The Assessment Unit, Income-Tax Department & Ors.

[WRIT PETITION NO. 5437 OF 2025 Dated: 09/09/2025. (Bom) (HC)]

Penalty 270 A – Writ – Alternate remedy- No virtual hearing was given to the Petitioner as mandated by the Faceless Penalty (Amendment) Scheme, 2022: AY 2017-18

On 30th November 2017, the Petitioner had filed its return of income declaring its income as “NIL” after a set-off of the brought forward loss of ₹17.14 Crores. Thereafter, assessment proceedings were completed; and an order was passed on 24th June 2021 under section 143(3) r.w.s 144C (3) of the Act making an addition of ₹31.15 crores, on account of a Transfer Pricing Adjustment.

Being aggrieved by this order, the Petitioner preferred an Appeal before the CIT (Appeals). The Petitioner had filed its Advanced Pricing Agreement Application with the CBDT as far back as on 26th March 2014, which finally culminated in the APA on

21st December 2021 during the pendency of the Appeal. The APA applied to A.Y. 2011-12 to A.Y. 2018-19. Since the APA was entered into between the Petitioner and the CBDT, under the provisions of section 92CD(1), the Petitioner filed its modified Return of Income on 30th March 2022. No assessment order was passed under Section 92CD(3). Therefore, according to the Petitioner, the modified Return filed by the Petitioner under Section 92CD(1) had become final and deemed to be accepted by the Department.

The AO passed penalty order dated 24th March 2025 imposing penalty on the Petitioner under Section 270A of the Act.

The Petitioner contended that since no addition has been made by the AO under Section 92CD(3), penalty proceedings could not lie against the Petitioner under Section 270A of the Act.
It was further contented by the Petitioner that it was mandatory for the officer levying the penalty to grant a virtual hearing to the Petitioner before passing the impugned penalty order. This submission was made based on the Faceless Penalty (Amendment) Scheme, 2022 formulated by the CBDT.

The Hon. Court observed that it was admitted by the Department that no order under Section 92CD(3) was passed by Respondent No. 2 and the mistake crept in the penalty order because the secondary adjustment of ₹14,16,49,404/- was not visible in the modified return of income filed by the Petitioner and no order under Section 92CD(3) was available with Respondent No.1 at the time of passing the penalty order.

The Hon. Court observed that it was not in dispute that the Petitioner had entered into an APA with the CBDT on 21st December 2021. It was also not in dispute that as per the provisions of Section 92CD(1), the Petitioner filed its return of income on 30th March 2022 and offered to tax a sum of approximately ₹14.16 Crores towards Transfer Pricing Adjustment as per the APA entered into between the Petitioner and the CBDT. The tax on this amount has also been paid by the Petitioner as admitted by the Revenue in its affidavit-in-reply. It was also an admitted fact that no order has been passed under Section 92CD(3) on the modified return of income filed by the Petitioner. All these facts have not been taken into consideration by Respondent No.1 before passing the impugned penalty order. Further, no virtual hearing was given to the Petitioner as mandated by the Faceless Penalty (Amendment) Scheme, 2022.

Therefore, the impugned penalty order was quashed and the matter remanded to the 1st Respondent to give a virtual hearing to the Petitioner and thereafter pass any fresh order after taking into consideration all relevant facts.

Appeal – Corporate Insolvency Resolution Process – Appeals cannot proceed while the moratorium under Section 14 of the IBC, 2016, was in operation: Insolvency and Bankruptcy Code, 2016.

Pr. Commissioner of Income Tax-13 Mumbai vs. Shirpur Gold Refinery Ltd,

ITA Nos. 729/2018, 798/2018 & 773/2018

Dated 23.07.2025

Appeal – Corporate Insolvency Resolution Process – Appeals cannot proceed while the moratorium under Section 14 of the IBC, 2016, was in operation: Insolvency and Bankruptcy Code, 2016.

The Resolution Professional on behalf of the Respondent submitted that the Respondent Company was undergoing a Corporate Insolvency Resolution Process (“CIRP”) under the provisions of the Insolvency and Bankruptcy Code, 2016 (for short “IBC, 2016”). Since the company was undergoing a CIRP, and there was a moratorium in effect/in force under Section 14 of the IBC, 2016, the above Appeals cannot proceed. In this regard, he relied upon a decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax-6, New Delhi vs. Monnet Ispat and Energy Ltd [(2017) SCC Online DEL 12759]. He submitted that, the Delhi High Court had clearly held that during the period of moratorium, the Appeals filed by the Revenue before the High Court [against the orders of the ITAT], cannot proceed. He submitted that the aforesaid decision of the Delhi High Court was subjected to an Appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court also, relying upon section 238 of the IBC, 2016, came to the conclusion that the Delhi High Court correctly decided the law and proceeded to dismiss the Special Leave Petition. The decision of the Hon’ble Supreme Court is reported in (2018) 18 SCC 786. He, therefore, submitted that the above Appeals cannot proceed.

On the other hand, the learned counsel appearing on behalf of the Revenue submitted that though it is correct that recovery proceedings could not be proceeded with against the Assessee because of the moratorium, the same would not preclude the completion of the assessment proceedings. Since the above Appeals are in relation to assessment proceedings and penalty proceedings, the Appeals can continue. In this regard, the learned counsel for the Revenue relied upon the decision of the Hon’ble Supreme Court in the case of Sundaresh Bhatt (Liquidator) of ABG Shipyard vs. Central Board of Indirect Tax and Customs [(2023) 1 SCC 472].

The Hon. Court observed that the present case is squarely covered by the decision of the Hon’ble Delhi High Court in Monnet Ispat and Energy Limited (supra). This decision of the Delhi High Court was subjected to challenge by the Revenue before the Hon’ble Supreme Court. The Hon’ble Supreme Court proceeded to dismiss the SLP by making the following observations: –

“1. Heard. Delay, if any, is condoned.

2. Given Section 238 of the Insolvency and Bankruptcy Code,2016, it is obvious that the code will override anything inconsistent contained in any other enactment, including the Income Tax Act. We may also refer in this connection to Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. and its progeny, making it clear that income tax dues, being in the nature of crown debts, do not take precedence even over secured creditors, who are private persons.

3. We are of the view that the High Court of Delhi, is, therefore, correct in law. Accordingly, the special leave petitions are dismissed. Pending applications, if any, stand disposed of.” (emphasis supplied)

The Hon. Court observed that the above Appeals cannot proceed while the moratorium under Section 14 of the IBC, 2016, was in operation.

As regards the judgment relied upon by the learned advocate for the Revenue in the case of Sundaresh Bhatt (Liquidator) of ABG Shipyard (supra) the Hon. Court observed that the same is wholly inapplicable to the facts of the present case. That decision was rendered under the provisions of the Customs Act, 1962 and was in relation to completing assessment or reassessment of duties and other levies and not in relation to any Appeal being prosecuted before the High Court. Therefore, the reliance placed on the judgement of the Supreme Court in the case of Sundaresh Bhatt (Liquidator) of ABG Shipyard (supra) was wholly misplaced.

The Court adjourned the Appeals sine die with liberty to the parties to mention the matter after any further orders were passed by the NCLT, namely, either approving a resolution plan in relation to the Assessee, or ordering that it be wound up. At that time, the Court will consider whether the above Appeals can proceed or otherwise.

Capital Gains – Personal effect – Vintage car owned by the Appellant was not his personal effect – the gain arising on sale thereof was liable to be taxed under the head ‘Capital Gains’

12. Narendra I. Bhuva vs. Assistant Commissioner

ITA 681/Mum/2003 dated 14.08.2025

AY: 1992-1993. (BOM)(HC)

Capital Gains – Personal effect – Vintage car owned by the Appellant was not his personal effect – the gain arising on sale thereof was liable to be taxed under the head ‘Capital Gains’

The Assessee was a salaried employee. The Assessee had income from house property, share income, dividend, etc. In the course of assessment proceedings, the Assessing Officer noticed that the Assessee has purchased a vintage car namely “Ford Tourer” 1931 Model from one Mr. Jesraj Singh of Delhi sometime in the year 1983 for a consideration of ₹ 20,000/-. The said car was sold for a consideration of ₹ 21,00,000/- to one Mrs. Kamalaben Babubhai Patel. On a query made by the Assessing Officer, the Assessee by a communication dated 28 January 1994, apprised the Assessing Officer that the car was shown as a personal asset in Wealth-tax and same was an exempt asset. The Assessing Officer by an order dated 8 March 1994, added the sum of ₹ 20,80,000/- as income to the Assessee on account of sale of motor car as business income.

The Assessee filed an appeal. The Commissioner of Income Tax (Appeals) [CIT (A)] inter alia held that vintage cars are not generally used frequently as maintenance costs of these cars are very high. The car was shown as personal asset in wealth tax returns. The Assessee never claimed any depreciation in respect of the car. There was no need for purchase of foreign exchange for spare parts as the parts were locally fabricated. The CIT(A) set aside the addition of sum of ₹ 20,80,000/- under the head ‘profits from sale of car’.

Being aggrieved by the order, the Revenue preferred an Appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT reversed the finding of CIT (A) and held that the vintage car was not used by the Assessee as personal effect. The order passed by the CIT (A) was set aside by the ITAT and the Appeal preferred by the Revenue was allowed.

On Appeal before Hon. High Court, the Assessee submitted that the ITAT was not justified in law in holding that the vintage car owned by the Assessee was not his personal asset and thus the gain arising on sale whereof was liable to be taxed under the head ‘capital gain’. It was further submitted that the ITAT has not disputed or controverted any of the basic facts or arguments of the Assessee that the car was being accepted as personal asset by the department itself and the maintenance expenses were debited to the capital account as part of personal withdrawals. It was also submitted that the finding recorded by the ITAT that no evidence has been adduced by the Assessee to show that the car was used as a personal asset is perverse. It was submitted that the finding that the car was not part of any car rally organized by the Government was irrelevant.

On the other hand, the Revenue supported the order passed by the ITAT and has submitted that the finding recorded by the ITAT does not suffer from any infirmity warranting interference of the Court in exercise of powers under Section 260-A of the Income-tax Act, 1961 (ITA). The Hon Court considered the provisions of Section 2(14) of the ITA, and observed that capital assets do not include personal effects, that is to say movable property including wearing apparel and furniture, but excluding jewellery held for personal use by the Assessee or any other member of his family dependent on him. Thus, the personal effects must be for personal use for being excluded from the definition of the term ‘capital assets.

The Hon. Court further considered a pari-materia provision namely Section 2(4A) of the Income Tax Act, 1922 which was interpreted by the Supreme Court in H.H. Maharaja Rana Hemant Singhji vs. CIT Rajasthan (1976) 103 ITR 61 (SC). The Supreme Court in the said decision dealt with the expression ‘personal effects and the relevant extract of the judgment reads as under:

7. The expression “personal use” occurring in clause (ii) of the above quoted provision is very significant. A close scrutiny of the context in which the expression occurs shows that only those effects can legitimately be said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them “personal effects”.

Thus, the Hon Court observed that for treating a movable property as personal effects, an intimate connection between the effects and the person of the Assessee must be shown. In case before the Apex Court though the silver bars and silver coins were proved to be used for puja, the same was held to be not constituting personal use. It is also held that the expression ‘intended for personal or household use’ does not mean capable of being intended for personal or household use but it means normally or commonly intended for personal or household use. Thus, capability of a car for personal use would not ipso facto lead to automatic presumption that every car would be personal effects for being excluded from capital assets of the Assessee. Thus, before arriving at a finding with regard to personal effects, the evidence with regards to personal use is necessary.

The Hon. Court observed that the Assessee had failed to adduce any evidence with regard to the vintage car being put to personal use and therefore the ITAT had rightly reversed the order passed
by the CIT(A), which had applied irrelevant considerations of wealth tax returns and non-claiming of depreciation in respect of the car by the Assessee. The CIT(A) had failed to appreciate
that the said aspects were irreverent for deciding personal use of the car by the Assessee. The ITAT on the other hand concentrated only on the aspect of personal use of the car by the Assessee. The Hon. Court noted that it was not the case of the Assessee that the finding of fact recorded by the CIT(A) was perverse.

The Hon. Court further observed that none of the judgments relied upon by the Assessee are relevant for deciding the present Appeal which involves failure on the part of the Assessee to lead evidence to prove personal use of the vintage car. Therefore, what needed to be proved was that the car was used as a personal asset by the Assessee. It was therefore incumbent upon the Assessee to lead evidence to show that he actually used the car personally. It was an admitted position that the Assessee failed to adduce evidence to prove that the car was used personally by him. On the other hand, there were several indicators showing that the car was never used by the Assessee for personal use, such as (i) Assessee using company’s car for commute (ii) car not being used even occasionally by the Assessee (iii) vintage car not being parked at the Assessee’s residence (iv) Assessee’s inability to prove that he spent any amount on its maintenance for keeping the same in running condition and (v) a salaried employee purchasing a vintage car as pride of possession.

The Hon. Court noted that the failure to produce evidence to prove personal use appeared to be an admitted fact. The Appeal was accordingly dismissed.

Charitable Trust – Condonation of the delay of 24 days in filing Form 10B.

11. Mirae Asset Foundation vs. PCIT – 6.

WP No. 713 of 2025 dated 07/07/2025 (Bom) (HC) AY 2021-22 Section 119(2)(b)

Charitable Trust – Condonation of the delay of 24 days in filing Form 10B.

The 1st Respondent refused to condone the delay of 24 days in filing Form 10B for AY 2021-22. Consequently, the exemption claimed by the Petitioner-Foundation, a Charitable Trust, was denied to the Petitioner.

The Hon. Court observed that it is not in dispute that the delay in filing Form 10B is only 24 days. The ground on which delay is not condoned is that even after the filing of Form 10B with a delay of 24 days, no application for condonation of delay was filed immediately and the same was submitted only about 9 months later. Therefore, the delay was not condoned.

The Court further observed that as far as the condonation of delay is concerned, admittedly there was only 24 days delay in filing Form 10B. Further, it was true that the application seeking condonation of delay was filed after about 9 months. However, this delay was not such that should deny the Petitioner from filing Form 10B with a delay of 24 days. Further, if this delay was not condoned, there will be genuine hardship to the Petitioner, inasmuch as, the Petitioner would be denied the exemption otherwise claimed under the provisions of Section 11 of the Act, which is a substantial amount. The Court relied on a decision of the Hon’ble Gujarat High Court in the case of Sarvodaya Charitable Trust vs. Income Tax Officer (exemption) [2021] 125 taxmann.com 75 (Gujarat) wherein a view was taken that in cases like delay in filing Form 10B, the approach of the Authorities ought to be equitious, balancing and judicious and availing of exemption should not be denied merely on the bar of limitation. This is more so, when the legislature has conferred wide discretionary powers to condone the delay on the authorities concerned.

As far as the argument of Revenue that the Petitioner has not digitally signed Form 10B, the said argument was found to be factually incorrect.

The impugned order dated 11th December 2024 under Section 119(2)(b) of the Act was accordingly quashed and set aside.

Rectification of Mistake – Subsequent ruling of the Hon’ble Supreme Court cannot be a ground for invoking the provisions of Section 254(2).

10. ITAT PUNE & Others vs. Prakash D. Koli

[WP NO. 10075 OF 2024. Dated: 8/07/2025 ]

Section 254(2)

Rectification of Mistake – Subsequent ruling of the Hon’ble Supreme Court cannot be a ground for invoking the provisions of Section 254(2).

In the present case, initially, the Assessing Officer made a disallowance of ₹24.74 lakhs in the intimation under Section 143(1) of the Act on the ground that the Assessee had deposited the employee’s share of EPF and ESI etc., belatedly, and hence, they were not allowed to claim a deduction of this amount under Section 36 (1)(va) of the Act. Being aggrieved by this disallowance, the Assessee filed an Appeal before the CIT(A) without any success. In these circumstances, the Assessee finally approached the ITAT. The ITAT, by its order dated 22nd June 2022 [passed under Section 254(1)], observed that the employee’s share of EPF and ESI etc., was deposited prior to the due date of filing of returns under Section 139(1), and hence, the Assessee is entitled to the deduction. It accordingly allowed the deduction under Section 36(1)(va) of the Act. In reaching this conclusion, the Tribunal relied on the judgment of the Hon’ble Himachal Pradesh High Court in the case of CIT vs. Nipso Polyfabriks Ltd., (2013) 350 ITR 327 (HP).

After passing of the Tribunal’s order dated 22nd June, 2022, the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd., & Ors. vs. CIT & Others [(2022) 448 ITR 518 (SC)], overruled the proposition laid down in Nipso Polyfabriks Ltd., (supra). In other words, the Hon’ble Supreme Court held that the deposit of the employee’s share of EPF and ESI etc., can be allowed as a deduction to the Assessee under Section 36(1)(va) only if it is deposited before the time limits prescribed under the respective statutes, and not if it is deposited only prior to the due date of filing returns under Section 139(1).

In light of this decision of the Hon’ble Supreme Court, and which was rendered on 12th October, 2022, the Revenue moved a Rectification Application before the ITAT by invoking the provisions of Section 254(2) of the Act. It is in this Rectification Application that the impugned order is passed, wherein the Tribunal has allowed the Miscellaneous Application filed by the Revenue, and holding that the disallowance made by the Assessing Officer is sustained.

The only ground on which the Rectification is allowed is on the basis of the judgment of the Hon’ble Court in Checkmates Services (supra). As mentioned earlier, this judgment was rendered by the Hon’ble Supreme Court on 12th October, 2022 which is after the date when the original order was passed by the ITAT on 22nd June, 2022 holding that the Assessee was entitled to this deduction under Section 36 (1)(va).

The Hon. Court held that a subsequent ruling of the Hon’ble Supreme Court cannot be a ground for invoking the provisions of Section 254(2). Section 254(2) can be invoked with a view to rectify any mistake apparent from the record and not otherwise. Admittedly, on the date when the original order was passed by the ITAT on 22nd June, 2022, it followed the law as it stood then. That was overruled subsequently by the Hon’ble Supreme Court in Checkmates Services (supra). Hence, on the date when the Tribunal passed its original order (on 22nd June, 2022), it could not be said that there was any error or mistake apparent on the record, giving jurisdiction to the Tribunal to invoke Section 254(2) of the Act.

The Hon. Court referred to the decision of of Infantry Security and Facilities through, proprietor Tukaram M. Surayawanshi vs. The Income Tax Officer, Ward 4 (5) [Writ Petition No. 17175 and other connected matters decided on 3rd December, 2024] wherein the Hon. Court was concerned with the exact same decision of the Hon’ble Supreme Court in Checkmates Services (supra). The Division Bench, after examining the law on the subject, came to the conclusion that the Tribunal was in patent error in exercising jurisdiction under Section 254(2), and passing the impugned order.

In light of the aforesaid discussion, the Petition was allowed.

Capital Asset – Loss – The insurance claim received against dead horses – Taxability.

9. Commissioner of Income Tax (Exemption) Mumbai vs. M/s Poonawalla Estate Stud & Agricultural Farm.

[ITXA No. 541 of 2003, 535 of 2003 and 540 of 2003 dated: 09/07/2025. (Bom) (HC)]

[AYs : 1988 -1989, 1990-91, 1991-92 & 1995-96]

Section 41(1) vis a vis 45

Capital Asset – Loss – The insurance claim received against dead horses – Taxability.

The Assessee was carrying on the business of breeding, rearing and selling racehorses since the year 1967. At its Stud Farm, there were several mares and stallions. When a male horse or female horse was born, it was being treated as a stock in trade till it attained the age of 2 years. The value of such horses was determined by the Assessee on the basis of expenditure incurred on feeding, medical treatment, training etc. After the horse crossed the age of 2 years, it was either sold or was given on lease for horse racing or transferred to the Plant for being used for breeding activities. The horses have a racing life of about 3 to 5 years. Thereafter, they are mainly used for breeding and therefore such horses are treated as Plant and Machinery and accordingly in the Books of Accounts, the costs of such horses were added to the total of cost of livestock plant. Therefore, all expenses incurred on a horse till attaining the age of 2 years formed part of costs of such horse. After the horse was transferred to the Plant, the expenses incurred on feeding, medical treatment etc. were being claimed as a revenue expenditure. Though the horses were treated as a plant by the Assessee, the depreciation is stated to be not allowed in view of provisions of Section 43(3) of the Income Tax Act, 1961. Therefore, the revenue income generated upon sale, lease of a horse, the same was offered for taxation.

During the year ending 31 October 1987, relevant to Assessment Year 1988-89, two mares namely, ‘Certainty’ and ‘Gracian Flower’ died, the costs of which in the Books of Accounts of the Assessee was ₹40,000/- and ₹30,000/- respectively. Both the horses were insured with M/s. New India Assurance Co. Ltd. at ₹6,00,000/- and ₹1,00,000/- respectively on the basis of the market value of the said two mares. Accordingly, the Insurance Company sanctioned the insurance claim and paid ₹6,00,000/- and ₹1,00,000/- respectively to the Assessee. However, the Assessing Officer on its own, allowed ₹40,000/- and ₹30,000/- being debited to the Profit & Loss Account under Section 36(1)(vi) of the Act which provides for deduction. In the same year, the Assessee had debited to its Profit & Loss Account, an amount of ₹3,60,902/- being the loss on disposal of assets (Mares and Stallions).

In the Assessment Order, the Assessing Officer held that the Assessee ought not to have added such loss on the death of mares while computing the total income chargeable to tax as loss on death of an animal is an allowable deduction under Section 36(1)(vi) of the Act. Accordingly, the said loss of ₹3,60,902/- was allowed under Section 36(1)(vi) while computing the total income which included ₹40,000/- being the costs of the Mare “Certainty” for which the Assessee had received insurance claim of ₹6,00,000/-. The cost of the Mare “Gracian Flower” of ₹30,000/- was not allowed in Assessment Year 1988-89 as the same had remained to be debited to the Profit & Loss Account. The Assessing Officer further held that the insurance claim received by the Assessee from the Insurance Company for death of the Mares – Certainty and Gracian Flower was to be deemed as income of the Assessee under Section 41(1) of the Act. The said findings recorded by the Assessing Officer have been upheld in Appeal by Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal. Aggrieved by the decision of ITAT, the Appellant has filed the Appeal under Section 260A of the Act.

The Hon. Court observed that what has been done in the present case is to shift the income of the Assessee under the head ‘capital gains’ to the head ‘profits and gains of business or profession’ for the purpose of applicability of provisions of Section 41(1) of the Act, after realising that the said income was not chargeable to tax under Section 45 of the Act. There is no dispute to the position that the Mares were being treated as Livestock Plant and hence considered as capital assets of the Assessee. The issue for consideration is whether the loss of capital asset, which is recouped in the form of insurance claim can be shifted from the head ‘Capital Gain’ under Section 45 of the Act to the head ‘Profits and Gains of business or profession’ under Section 41(1) of the Act?

The Hon. Court noted the cardinal principle of taxation that the heads of income provided in various sections of the Income Tax Act are mutually exclusive and where any item of income falls specifically under one head, it is to be charged for taxation under that head alone and no other. To paraphrase, the income derived from different sources falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section and no other. Thus, it is impermissible for the Revenue to impose tax on income forming part of particular head and governed by particular section, by shifting the same under another head for the purpose of applicability of another section of the Act. If the department finds that an income under a particular head does not become liable to tax on account of provision of a Section governing that head, it is impermissible to shift that income to another head merely because the Department thinks that the very same income, upon its shift to another head, can be taxed under another Section of the Income Tax Act. These principles have been reiterated in several judgments namely Cadell Wvg. Mill Co. (P.) Ltd. vs. CIT [2001] 249 ITR 265 (Bombay) and CIT vs. D. P. Sandhu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1 (SC).

Thus, the Hon. Court held that the Revenue has grossly erred in shifting the amount of insurance claim received by the Assessee from the head ‘capital gains’ to another head ‘Profits and gains of business or profession’ for the purpose of bringing the same to taxation under Section 41(1) of the Act. The Revenue itself has treated the horses as ‘capital assets’. This position is affirmed by all the three Authorities. The fact that the Revenue authorities allowed deduction u/s. 36(1)(vi) only means that they are treated as capital asset of the assessee. After treating the horses as ‘capital assets’ of the Assessee, the insurance receipt would obviously become capital gain for the Assessee, which can only be taxed under the provisions of Section 45 of the Act. The Revenue however found that it was not possible to tax the said ‘capital gain’ under Section 45 of the Act and therefore decided to treat the income as ‘profit’ under Section 41(1) of the Act. This is clearly impermissible.

As regards treatment of the receipt under an insurance claim for the purpose of income-tax, the Court observed that the Revenue itself has treated the horses as ‘capital asset’ of the Assessee. Therefore, if a capital is lost on account of death of a horse, any amount received towards insurance claim of such loss would obviously be on capital account. Section 45 of the Act deals with capital gains and subsection (1) thereof provides that any profits or gains arising from ‘transfer’ of capital assets effected in the previous year shall be chargeable to income tax under the head ‘capital gains’.

The issue therefore is whether insurance receipt consequent to death of a horse would amount to ‘transfer’ within the meaning of Section 45 of the Act. The term ‘transfer’ has been defined under Section 2(47) of the Act. It is contended by the Assessee that insurance receipt on death of a horse would not be covered by definition of the term ‘transfer’ in relation to capital asset. Death of a horse cannot be treated as ‘transfer’ under Section 2(47) of the Act as a transfer presumes both existence of asset, as well as transferee to whom it is transferred.

The Hon Court observed that this position is well settled by the judgment in Vania Silk Mills (P.) Ltd. [1991] 191 ITR 647 (SC) in which the issue before the Apex Court was whether money received towards insurance claim on account of damage/destruction of capital asset would be on account of ‘transfer’ of the asset within the meaning of Section 45. The Apex Court held that when an asset is destroyed there is no question of transferring it to others. The destruction or loss of the asset, no doubt, brings about the destruction of the right of the owner or possessor of the asset, in it. But it is not on account of transfer. It is on account of the disappearance of the asset. The extinguishment of right in the asset on account of extinguishment of the asset itself is not a transfer of the right but its destruction. By no stretch of imagination, the destruction of the right on account of the destruction of the asset can be equated with the extinguishment of right on account of its transfer. Section 45 speaks about capital gains arising out of “transfer” of asset and not on account of “extinguishment of right” by itself. The capital gains are attracted by transfer and not merely by extinguishment of right howsoever brought about. Hence an extinguishment of right not brought about by transfer is outside the purview of Section 45. Transfer presumes both the existence of the asset and of the transferee to whom it is transferred. It is true that the definition of “transfer” in Section 2(47) of the Act is inclusive, and therefore, extends to events and transactions which may not otherwise be “transfer” according to its ordinary, popular and natural sense. The expression “extinguishment of any rights therein” will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer.

The above position was reiterated by the Madras High Court in Division Bench judgment in Neelamalai Agro Industries Ltd. [2003] 259 ITR 651 (Madras) where there was a fire accident in the factory of the Assessee who received compensation from the insurance company. The Apex Court proceeded to regard insurance receipt as ‘transfer’ under Section 2(47) of the Act and brought to tax, part of the said compensation claimed under Section 45 of the Act.

In CIT vs. Pfizer Ltd. [2011] 330 ITR 62 (Bombay) the Apex Court held that receipt under insurance claim would be treated in the like manner as if receipt arises on the sale of the asset.

Thus, following the ratio of the judgments in Vania Silk Mills (P.) Ltd., Pfizer Ltd and Neelmalai Agro Industries Ltd., the money received towards insurance claim on account of damage to or destruction of capital asset cannot be treated as transfer of capital assets so as to attract tax under the provisions of Section 45(1) of the Act.

Having realized that the insurance receipt cannot be taxed as capital gain under Section 45 of the Act, the Assessing Officer has taken recourse to the provisions of Section 41(1) of the Act for the purpose of bringing the insurance receipt to tax.

Section 41 provides for taxation of ‘profits’. The Court already held that it is impermissible to shift the insurance receipt as a part of ‘capital asset’ from the realm of Section 45 by treating it as ‘profits’ merely because the tax becomes leviable under Section 41. The heading ‘capital gains’ governed by the provisions of Section 45 is mutually exclusive from the heading ‘profits and gains of business or profession’ governed by Section 41 of the Act. Following these principles, it was impermissible for the Revenue to treat insurance receipts on loss of horses as profits under Section 41 of the Act.

Further, even if it is assumed that provisions of Section 41 of the Act can be invoked in the facts of the present case, the receipt towards insurance claim would still be outside the purview of Section 41(1) of the Act as the same does not satisfy the conditions laid down therein. Section 41(1) can be pressed into service only if an allowance is granted in one year and subsequently the amount is received in another year. In the present case, the insurance receipt is assessed by the Assessing Officer in the same year in which the deduction was granted. Section 41(1) essentially applies to a situation where deduction is made by the Assessee in respect of loss, expenditure or trading liability and subsequently the Assessee secures an amount in respect of such loss or expenditure, the amount obtained by such person becomes ‘profits’ and accordingly can be charged to income tax.

The contention raised on behalf of the Revenue that the expression used under Section 41(1) is ‘any amount’ and that even insurance receipt would be covered by the expression ‘any amount’ was held to be totally unfounded as no deduction was allowable under Section 36(1)(vi) of the Act in respect of the two horses for which insurance claim is received. Therefore, the insurance claim received towards death of the two horses could not be charged to tax under Section 41(1) of the Act, even independent of the principle of impermissibility to shift income of Assessee from one head to another for the purpose of taxation.

Therefore, the horses in respect of which the insurance claim was received were Assessee’s capital assets and that therefore insurance receipt arising therefrom could only have been considered as capital receipt, not chargeable to tax.

The Court further observed that the Legislature made a provision by inserting sub-section (1A) to Section 45 to cover the amount received under insurance claim on destruction of capital asset to tax. However, the said provision came to be introduced by Finance Act, 1999 w.e.f. 1 April 2000 and the same has no application to the present case. Thus, the insurance claim received towards destruction of capital asset has been brought to taxation for the first time from 1 April 2000. Going further, it is seen that provisions of sub-section (1A) of Section 45 apply only where the destruction occurs on account of one of the four specified events. It is therefore highly doubtful whether destruction of capital asset of livestock on account of death of the animal would really be covered by the provisions of sub-section (1A) of Section 45. However, since the said provision under Section 45(1A) was not even available during the relevant Assessment Year, the issue of applicability of the said provision in case of destruction of asset of livestock on account of death of an animal is left open to be decided in an appropriate case.

The Revenue was directed to treat the entire amounts of insurance claim received by the Assessee for death of horses as capital receipt governed only by provisions of Section 45(1) of the Act.

Section 144C(5): Document Identification Number [‘DIN’] – Circular No.19/2019 [F.No.225/95/2019-ITA II] dated 14.08.2019 – DIN has to be generated for DRP proceedings :

8 Commissioner of Income Tax, International Taxation vs. M/s. Laserwords US Inc.,

[T.C.A. No. 46 OF 2025 and CMP Nos. 5208 and 5211 of 2025 Dated: 10/06/2025, (Madras) (HC).]

[ Arising out of ITAT: “D” Bench, Chennai, dated 22.12.2023 passed in IT (TP) A.No.44/CHNY/2021 for the AY 2015-16.]

Section 144C(5): Document Identification Number [‘DIN’] – Circular No.19/2019 [F.No.225/95/2019-ITA II] dated 14.08.2019 – DIN has to be generated for DRP proceedings :

The ITAT by impugned order held that the direction issued by the Dispute Resolution Panel [‘DRP‘] under Section 144C(5) of the Act did not contain a Document Identification Number [‘DIN’] as mandated by the Central Board of Direct Taxes by its Circular No.19/2019 [F.No.225/95/2019-ITA II] dated 14.08.2019. The subsequent communication intimating the DIN for DRP proceedings did not satisfy the conditions prescribed in paragraph No.3 of the said circular. Accordingly, the said directions were invalid in law and as a sequitur, the assessment order which was impugned before the ITAT was liable to be quashed. In the instant case, the assessment order also did not contain a DIN.

The counsel for appellant/revenue, submitted that the DRP proceedings had a valid DIN and the DIN was also subsequently communicated to the assessee by another communication. Accordingly, the requirement under the circular has been complied with; and that in any case, the assessee had not challenged the directions issued by DRP. Hence, the impugned assessment order ought not to have been quashed.

The counsel for respondent/assessee submitted that apart from the fact that a DIN was not generated electronically for DRP proceedings, the subsequent communication does not satisfy the requirement in paragraph No.3 of the circular, i.e., to state the reasons in the prescribed format for not generating the DIN. In the instant case, the assessment order also does not contain a DIN; and that therefore, the impugned order by ITAT does not call for any interference.

The Hon. Court observed that it is well-settled that circulars issued by CBDT in exercise of its powers under Section 119 of the Act are binding on the revenue. The consequences of not following the directions issued in the circular are also provided in the circular.

The Court further observed that Paragraph No.4 of the circular makes it clear that any communication which is not in conformity with paragraph No. 2 and 3 of the circular, shall be treated as invalid and shall be deemed to have never been issued.

Further, paragraph No.3 of the circular provides for exceptional circumstances where the mandatory requirement may not be adhered to, but requires that if an order/communication is issued without a DIN, it could be done after recording reasons in writing in the file and with prior written approval of the Chief Commissioner / Director General of Income Tax. Paragraph No.3 also states that if DIN is not generated and quoted in the body of the communication, then reasons for not generating and quoting DIN should be mentioned in a specific format set out in paragraph No.3 of the circular. The argument of the appellant/revenue that, even if the directions of the DRP did not contain a valid DIN, it would not render the said DRP directions invalid because the proceedings of the DRP do not result in an order requiring the generation of DIN as per the circular, cannot hold water.

The Court observed that it is the case of appellant that there was a DIN generated and it was written in hand in the proceedings of DRP and subsequently, communicated to assessee on the same day, i.e., on 12.02.2021. Therefore, appellant conceded that DIN has to be generated for DRP proceedings.

Secondly, the issue was no longer res integra. Relying on a decision of Division Bench of Bombay High Court in Ashok Commercial Enterprises vs. Assistant Commissioner of Income Taxation [2023] 154 taxmann.com 144 (Bombay) it was observed that even a satisfaction note would fall within the scope of paragraph No.2 of the circular. Accordingly, in the view of the Hon. Court, there cannot be any doubt that the directions of the DRP (which consists of a collegium of three Income Tax Commissioners) also would fall within the scope of paragraph No.2 of the circular.

Apart from the fact that the DRP proceedings did not contain a valid DIN and was invalid for the reasons stated above, the assessment order also in this case did not contain a DIN. There was no explanation offered by the appellant for not generating the DIN in the assessment order. Therefore, the Appeal was dismissed.

Section 2(15): Charitable activity – commercial activity – violation of section 13(2) – ITAT is the last fact-finding authority: [section 260A]

7 Commissioner of Income Tax (Exemption) Mumbai vs. Kutchi Sarvodaya Nagar

[ITXA No. 1887 OF 2018, Dated: 11/06/2025; A.Y. 2011-12 (Bom) (HC)]

Section 2(15): Charitable activity – commercial activity – violation of section 13(2) – ITAT is the last fact-finding authority: [section 260A]

The Assessee is a Trust registered with Director of Income Tax (Exemption), Mumbai under Section 12A of the Act. The Assessee filed its Return of Income declaring a total income of ₹NIL. The Assessee, Trust was constructing houses for its members and this was the only activity of the Trust for the last 50 years. The construction of these houses was for deserving vegetarians. For the purpose of construction, the Assessee Trust acquired 51,000 Sq. yards of land from Shri. V. K. Chedda at ₹2.75 Per Sq. yard. 352 persons came forward to participate and contributed ₹501/- as a membership fee and accordingly a sum of ₹1,76,352/- was collected and from that amount the said plot was purchased in the year 1962. It was also observed from the Income and Expenditure Account and the Balance-sheet that the Assessee had collected ₹48.68 crores from its members as instalments, till date, towards construction of flats. Transfer fees to the tune of ₹6.35 crores was also collected by the Assessee till date. For the year under consideration i.e. A.Y. 2011-12, the Assessing Officer observed that the Assessee had collected ₹1.15 crores as transfer fees from new members and the Assessee – Trust was also in receipt of interest on investment amounting to ₹1,07,67,876/-. The Assessing Officer was, therefore, of the view that the Assessee was engaged in a commercial activity by constructing houses on the property of the Assessee Trust and was selling the same to the members. The members and the Assessee Trust were alienating the flat along with the membership, and for this alienation, the Trust had collected a sum of ₹6.35 crores as transfer fees from its members till date. Therefore, the Assessing Officer found that the activity of the Trust was not found charitable in nature and was found commercial in nature. Since the officials of the Assessee Trust were getting the flats for their residence, the activity of the Trust was also found contrary to the provisions of Section 13(2) of the Act and hence, the proposal for cancellation of registration of the Assessee Trust, as a Charitable Trust, was sent to the DIT(E), Mumbai. The activity of the Trust was also not found to be covered under the concept of mutuality. In short, the Assessing Officer, found that the Assessee Trust was not entitled to the exemption as contemplated under Section 11 of the Act.

The CIT(A), after examining the facts and circumstances of the case, inter alia came to the conclusion that in fact, there was no sale of houses to any members, and except for defaulter – members who have nominated / substituted their membership, there was no instance of admitting new members in general. Even though the nominated members had to fulfil the criteria of membership and, therefore, as such no transfer of any asset had taken place in terms of sale/purchase/trading/commerce. The CIT(A) also came to the conclusion that the finding of the Assessing Officer that the ‘activity of the Assessee Trust was a commercial activity’ was arrived at from the error that members are not fixed, that flats were sold for consideration which was received by the old member and which is not known to the Trust. The CIT(A) came to a factual finding that there is no case of sale consideration, or sale of houses in the market, and there is no transaction of sale or purchase in the admission of the new member in place of the defaulting member, who is admitted only after specifying the eligibility conditions in that behalf and confirming the Deed of the Trust and its objects. The CIT(A) also found that admittedly the Assessee Trust is not a party to any transaction between two inter se members and, therefore, the proviso to Section 2(15) of the Act was also not attracted. The CIT(A), therefore, partly allowed the Appeal filed by the Assessee.

The Revenue carried the matter in Appeal before the ITAT. The ITAT too, after examining the facts in detail, came to the conclusion that the CIT(A) had passed the order judiciously and correctly, which required no interference at the appellate stage.

The Hon. High Court observed that the entire case has been decided purely on facts. The ITAT is the last fact-finding authority which had come to the conclusion that the Assessee Trust is not carrying on any commercial activity and, therefore, is entitled to the exemption under Section 11 of the Act. This finding of the ITAT is purely based on the facts of the case, which were also analysed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust.

In these circumstances, as the decision of the ITAT is purely based on facts, the Appeal was accordingly dismissed.

Section 271(1)(c) : Penalty – Notice must be precise and there should be no room for ambiguity – Veena Estate (P.) Ltd. (Bom) distinguished.

6. Pr. Commissioner of Income Tax- 2, Thane vs. Pacific Organics Pvt. Ltd., [ITXA No. 58 OF 2020, Dated: 29/04/2025 (Bom) (HC)]

Section 271(1)(c) : Penalty – Notice must be precise and there should be no room for ambiguity – Veena Estate (P.) Ltd. (Bom) distinguished.

The ITAT held that the penalty show cause notice was ambiguous, as the relevant portions were not ticked, or the irrelevant portions were not struck off.

The Hon. Court referred to the Full Bench decision, in the case of Mohd. Farhan A. Shaikh vs. Deputy Commissioner of Income Tax, Central Circle 1, Belgaum [2021] 125 taxmann.com 253 (Bombay), wherein it was held that if the notice contains no caveat that the inapplicable portion was to be deleted, any action based on such notice would be inferred. The Full Bench held that the notice must be precise and there should be no room for ambiguity.

The tax department relied upon Veena Estate (P.) Ltd. vs. Commissioner of Income-tax [2024] 158 taxmann.com 341 (Bombay) wherein, the Appellant-Assessee, who had never raised any ground about the ambiguity of the notice before the Assessing Officer, Appellate Authority and ITAT, attempted to raise such a ground for the first time in an Appeal under Section 260-A of the Income Tax Act, 1961. This was not allowed by the coordinate bench.

The Hon. Court observed that such facts do not exists in the present Appeal, and therefore, the decision in Veena Estate (P.) Ltd. (Supra) was distinguishable. The ITAT had rightly followed the Full Bench in the case of Mohd. Farhan A. Shaikh (supra).

The Appeal was accordingly dismissed.

Section 37 : Disallowing write-off of the deposits and interest – the business loss incurred by the appellant company u/s 28 of the Act in the course of its business – commercial expediency: Section 115J : The provision does not contain any reference to concept of ‘above the line’ or ‘below the line’:

5. M/s. Mahindra & Mahindra Ltd. vs. CIT

City – II, Mumbai

[ITXA No. 416 OF 2003, Dated: 2nd May, 2025 (Bom)(HC)][AY 1990-91]

Section 37 : Disallowing write-off of the deposits and interest – the business loss incurred by the appellant company u/s 28 of the Act in the course of its business – commercial expediency:

Section 115J : The provision does not contain any reference to concept of ‘above the line’ or ‘below the line’:

The appeal pertains to Assessment Year 1990-91. Facts are that the assessee is a public limited company and is engaged in the manufacture of Jeeps, Tractors, Implements and other products. The assessee filed the return of income for the period from 1st April, 1989 to 31st March, 1990 (Assessment Year 1990-91). The Assessing Officer, by an order of assessment dated 26th March, 1993, inter alia; held that the assessee had placed deposits with certain concerns, who have declined to pay the deposits and interest on the ground that the deposits are linked to the amounts provided to M/s. Machinery Manufacturers Corporation Ltd. (MMC) by them, which have now become irrecoverable as MMC was directed to be wound-up by the Bombay High Court by an order passed on 16th April, 1989. It was further held that amount of deposit and interest due to the assessee has been adjusted by various concerns against loan given by them to MMC. Therefore, the assessee cannot claim to have not recovered its dues. It was also held that the assessee had liquidated the liability of MMC which act is for consideration other than business. The Assessing Officer, therefore, disallowed a sum of ₹49,18,786/- claimed under the head miscellaneous expenses as well as a sum of ₹200.47 lac claimed by the assessee on account of deduction of write-off of deposits and interest.

On appeal, the CIT(Appeals) held that the assessee did not incur the expenditure to carry on the business and the business of the MMC was not the business carried out by the assessee. Therefore, the expenses incurred by the assessee are not admissible under Section 37(1) of the 1961 Act. The CIT (Appeals), while computing the book profit under Section 115J of the 1961 Act, held that the provision for warranties made by the assessee cannot be allowed.

The Tribunal, by an order dated 25th February, 2003 confirmed the disallowance in view of the order passed by the Tribunal in assessee’s own case being ITA No.6886/Bom/92 for the Assessment year 1989-90. The Tribunal further held that the provision for warranties made by the assessee on the estimated basis in view of the past experience cannot be termed as an ascertained liability. It was also held that a provision for past services liability in respect of retirement gratuity has to be added back. It was also held that the amount was debited in the profit and loss account below the line and hence, it cannot be said that the profit and loss account was prepared as per Part II and III of Schedule VI to the Companies Act and cannot be disturbed.

The Hon. High Court referred to the decision of Hon. Supreme Court, in CIT vs. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC) wherein the court examined the question, whether an expenditure incurred on account of commercial expediency is admissible as deduction under Section 37 of the 1961 Act. The Supreme Court held that the expenditure incurred was a deductible expenditure.

The Court observed that the claim of the assessee for the expenditure of 42.89 lac and the deduction of write-off ₹622.01 lac being the amount lent to MMC including interest due and advances for purchase of machinery given in the course of dealing with MMC was disallowed by the authorities under the Act for the preceding year i.e. the year 1989-90. The assessee filed an appeal viz. ITXA No.626 of 2002 which was decided by a Division Bench of Bombay High Court vide order dated 9th June, 2023 in Mahindra & Mahindra Ltd. vs. Commissioner of Income Tax.

It was observed that the revenue, while negating the claim of the assessee for allowing the expenses, has relied upon the order passed by it in ITA No.6886/Bom/92 for the Assessment Year 1989-90. The aforesaid order passed by the Tribunal was set aside by a Division Bench of Bombay High Court in Mahindra & Mahindra Ltd. vs. Commissioner of Income Tax (order dated 9th June, 2023). The order passed by the Division Bench of the Bombay High Court has been accepted by the revenue and it has not filed any SLP against the judgment of the Division Bench.

The Hon. Court agreed with the view taken by Division Bench of this Court in assessee’s own case in Mahindra & Mahindra Ltd. vs. Commissioner of Income Tax (order dated 9th June, 2023) for the following reasons. Admittedly, MMC is a subsidiary of the assessee and assessee held 27% equity capital of MMC since its incorporation. The assessee promoted MMC on 15th May, 1946. From the date of incorporation of the assessee, it was the managing agent of MMC and the assessee has acted as a managing agent till 1974 when the Companies Act, 1974 abolished the Managing Agency System. However, due to severe recession in the textile industry, MMC started making losses. Thereupon, the MMC was wound-up. The assessee, in its board meeting held on 27th March, 1989 agreed to incur expenditure for maintenance of MMC. Thereafter, on 10th July, 1990, the Board of Directors of the assessee agreed to resolve the dispute to meet the expenditure till the affairs of MMC were wound-up. The Board of Directors approved the expenditure of ₹49,19,000/- (Rupees Forty-nine lac nineteen thousand only) made by the assessee in the previous year relevant to Assessment Year 1990-91. The assessee held substantial portion of equity capital of MMC and MMC was regarded in public and official circles as a Mahindra Company. The assessee, in order to protect and preserve the assets and to protect the value of goodwill attached to the assessee by various sections of the society and on the ground of commercial expediency, incurred expenditure, which is permissible as deduction.

The contention urged on behalf of the revenue in opposition to the aforesaid claim had already been dealt with by a Division Bench of the Bombay High Court. Therefore, even otherwise, the assessee is entitled to deduction of the sum of ₹49,18,786/- as well as a sum of ₹200.47 lac.

As far as the second substantial question of law on Section 115J of the Act, the same mandates that in case of a company whose total income as computed under the provisions of the Act is less than 30% of the book profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI of the Companies Act 1956, after certain adjustments, the total income chargeable to tax will be 30% of the said book profit. Explanation to Section 115J (1A) provides that the net profit so computed is to be increased by certain amounts and it is to be reduced by certain amounts which are mentioned therein. The provision does not contain any reference to concept of ‘above the line’ or ‘below the line’.

The Hon. Court referred to decision of the Hon.Supreme Court, in Apollo Tyres Ltd. vs. Commissioner of income tax [2002] 255 ITR 273 (SC) wherein it dealt with the issue whether the Assessing Officer can question the correctness of the profit and loss account prepared by the assessee and certified by the statutory auditors of the Company as having been prepared in accordance with the requirements of part II and III of Schedule VI to the Companies Act. It was held that sub section (1A) of Section 115J mandates the company to maintain its accounts in accordance with the requirements of Companies Act and is bodily lifted from the Companies Act into the Act of 1961 for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income-tax. It was also held that the provision does not empower the authority under the Act to probe into the account accepted by the authorities under the Companies Act. It was also held that if the legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in Section 115-J that “income of the company is accepted by the Assessing Officer”.

The aforesaid principle was reiterated by the Supreme Court in Malayala Manorama Company Limited vs. Commissioner of Income Tax, Trivandrum [2008] 300 ITR 251. Thus, from the aforesaid enunciation of law by the Supreme Court, it is evident that the Assessing Officer does not have jurisdiction to go behind the net profit shown in profit and loss account except to the extent provided in Explanation to Section 115J. For the aforementioned reasons the second substantial question of law was answered in favour of the assessee.

In the result, the appeal of the assessee was allowed.

Section 36(1)(vii): Advances written off – Allowable: Section 10B – Deduction – Site Transfer Income : Tribunal last fact-finding authority ought to have given independent finding while reversing decision of lower authorities :

Pr. Commissioner of Income Tax-11 vs. Watson Pharma Pvt. Ltd.,

[ITXA No. 1770 OF 2017, Dated: 26th March, 2025, (Bom) (HC)]

AY 2010-11.

Section 36(1)(vii): Advances written off – Allowable:

Section 10B – Deduction – Site Transfer Income : Tribunal last fact-finding authority ought to have given independent finding while reversing decision of lower authorities :

The Assessee is a wholly owned subsidiary of M/s. Watson Lab., USA and is engaged in the business of manufacturing and R & D facilities in India and also renders contract manufacturing services to its associate enterprises.

During the year under consideration, the assessee wrote-off various advances which were given in earlier years in the course of its business and same could not be recovered. The claim was made under Section 36(1)(vii) of the Act, and in the alternative under Section 28 of the Act. The assessee vide letter dated 4th March, 2014 addressed to the Assessing Officer (AO) gave the details of such write off by way of enclosures. These details pertain to more than 50 parties on account of various transactions which were stated in the remarks column e.g., AMC lift maintenance, raw materials, professional fees etc.

The Dispute Resolution Panel (DRP) disallowed the claim under Section 28 on the ground of want of evidence. The Tribunal allowed the claim of the respondent-assessee. The Tribunal has given reason that the genuineness of the advances have not been doubted by the revenue and further books of account have been audited by the statutory auditors and, therefore, the write off should be allowed after setting off the credit balances. The net balance written off which were allowed by the Tribunal was ₹7,66,713/-.

The ld. counsel for the appellant-revenue relied upon the order of the DRP and submitted that the claim was not sustainable. Against this, the learned counsel for the respondent-assessee submitted that the respondent-assesseehad filed the details of these advances with the AO and DRP vide letter dated 4th March, 2014 and the Tribunal after considering the said letter has allowed the claim.

The Hon. Court observed that on a perusal of the letter dated 4th March, 2014 and its enclosures, these are advances to more than 50 parties against which either the advances are not recoverable or the respondent-assessee has not received any services. The amount ranges from ₹200 to ₹3 lakh, major amounts being in few thousands. The DRP has not considered this letter and, therefore, observations made by the DRP that the claim is without evidence is incorrect. The Tribunal has correctly considered the details filed along with letter dated 4 March 2014 and allowed the claim. Further, the total income declared by the respondent-assessee is more than ₹30 crore and the net balance written off is only ₹7,66,713/-. This comparison is only to show when the income offered is more than ₹30 crore, small amounts write off would constitute reasonableness and more so looking at the nature of the write off detailed in enclosure to letter dated 4th March, 2014. Therefore, the Tribunal was justified in allowing the claim of the respondent-assessee.

Regarding the second issue i.e. deduction under section 10B of the Act, it was observed that the respondent-assessee was eligible for deduction under Section 10B of the Act with respect to its Goa unit and Ambarnath unit. The respondent-assessee has claimed deduction under Section 10B on “Site Transfer Income” of ₹19,61,98,000/- with respect to these two units. The DRP denied the deduction under section 10B on “Site Transfer Income” on the ground that same does not represent the income derived from the business of eligible unit. The Tribunal has allowed the claim.

The Ld. Counsel for the appellant-revenue submitted that the Tribunal has not given any reasons for allowing the claim of deduction under section 10B on “Site Transfer Income”. Accordingly, the relief given by the Tribunal without giving any reason would be contrary to the well-settled principle that the appellate authority has to give reasons which constitute the heart of the decision. The department relied upon the decision of the Supreme Court in the case of Santosh Hazari vs. Purushottam Tiwari (deceased) by Lrs. (2001) 3 SCC 179 and more particularly paragraphs 15 and 16 of the said order.

The Hon. Court noted the operative part of the Tribunal on this issue which reads as under :-

“We have heard the counsels for both the parties at length and we have also perused the orders passed by respective authorities, judgments relied by the parties and while taking into consideration the facts of the case, we are of the considered view that the Site Transfer Income is a part of business income earned by the assessee and is eligible for deduction while computing deduction u/s 10B of the Income Tax Act.”

The Hon. Court observed that the approach of the Tribunal is not appreciable. The Tribunal has merely stated that after hearing both the parties and perusing the orders and judgments, the Site Transfer Income is eligible for deduction under Section 10B of the Act.

According to Hon. Court the Tribunal ought to have given the reasons as to how “Site Transfer Income” constitutes the income derived from the business of the undertaking. The said reasoning is totally absent. The operative part is only the conclusion but before coming to the conclusion, the Tribunal ought to have given its reasons, especially since it is the case of reversal of the order passed by the AO and DRP and the Tribunal being the final fact finding authority and first appellate authority in this case was expected to give the reasons before coming to the conclusion which are absent in the present case. There is no discussion as to how the said decision is applicable to the Site Transfer Income before giving relief to the respondent-assessee. The Tribunal has given independent reasoning when it came for various other income being eligible but did not give any reasoning on “Site Transfer Income.”

It is well-settled that the duty to give reasons in support of adverse orders is a facet of the principles of natural justice and fair play. In several cases, the necessity of providing reasons by a body or authority to support its decision was considered before the Hon’ble Supreme Court. The Hon’ble Supreme Court held that on the face of an order passed by a quasi-judicial authority affecting the parties’ rights must speak for itself.

The Hon. Court referred and relied on the decision of the Supreme Court in case of Assistant Commissioner, Commercial Tax Department, Works Contract and Leasing, Kota vs. Shukla and Brothers (2010) 4 SCC 785 , wherein it has held that a litigant has a legitimate expectation of knowing reasons to reject his claim / prayer. Only then would a party be able to challenge the order on appropriate grounds. Recording of reasons would also benefit the appellate court. As arguments bring things hidden and obscure to the light of reasons, reasoned judgment, where the law and factual matrix of the case are discussed, provides lucidity and foundation for conclusions or exercise of judicial discretion by the courts. The reason is the very life of the law. When the reason for a law once ceases, the law itself generally ceases. Such is the significance of reasoning in any rule of law. Giving reasons furthers the cause of justice and avoids uncertainty.

The Hon. Court held that the absence of reasons essentially introduces an element of uncertainty and dissatisfaction and gives entirely different dimensions to the questions raised before the higher / appellate courts. The Court noted that there was hardly any statutory provision under the Income tax Act or the Constitution itself requiring the recording of reasons in the judgments. Still, it was no more res-integra and stands unequivocally settled by different decisions of the Court, holding that the courts and tribunals are required to pass reasoned judgments / orders.

In Union of India vs. Mohan Lal Capoor (1973) 2 SCC 836, the Hon’ble Supreme Court explained that reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They should reveal a rational nexus between the facts considered and the conclusions reached.”

 In view of the above observations, the Hon Court remanded the matter back to the Tribunal for deciding the ground of deduction under Section 10B qua “Site Transfer Income.”

Section 143(3) : Notice and Assessment order – Non-existing entity – fact of merger was intimated to the officer, prior to the assessment order – Order bad in law:

3. Commissioner of Income Tax-LTU vs. Shell India Markets Pvt. Ltd. (Erstwhile Shell Technology India Pvt. Ltd.)

[ITXA No. 2381 OF 2018,

Dated: 27th March, 2025 (Bom)

(HC)] AY 2007-08 :

Section 143(3) : Notice and Assessment order – Non-existing entity – fact of merger was intimated to the officer, prior to the assessment order – Order bad in law:

The Respondent-Assesseehad raised an additional ground before Tribunal that a notice and assessment order has been issued on a non-existing entity namely “Shell Technology India Private Limited” and therefore same is void. The Tribunal decided this ground in favour of the Respondent- Assessee and quashed the assessment order by accepting the submission of the Respondent-Assessee that the notice and order was issued in the name of a non-existing entity i.e. “Shell Technology India Pvt. Ltd.”, although the fact of the merger of this company into “Shell India Market Limited” was intimated to the officer, prior to the assessment order vide letter 21st September, 2010.

The learned counsel for the Appellant- Revenue, submitted that the appeal can be disposed of by following various orders of the Hon. Court, wherein the decision of the Hon’ble Supreme Court in the case of Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. [2019] 416 ITR 613 (SC)and PCIT (Central)-2 vs. M/s. Mahagun Realtors (P) Ltd. [2022 443 ITR 194 (SC) have been considered. He specifically relied on the order and judgment passed by the bench in the case of Reliance Industries Limited vs. P. L. Roongta And Ors. WP No. 772 of 1992 along with ors (Bombay)

The assessee contended that the notice and order ought to have been issued in the name of the transferee company “Shell India Market Private Limited” and not against the transferor company “Shell Technology India Private Limited”.

The Hon. Court held that the notice and order should have been issued in the name of the transferee company “Shell India Market Private Limited” and not the transferor company “Shell Technology India Private Limited”. The decisions relied supports that if the Assessing Officer has been intimated about the fact of merger, then the notice should have been issued in the name of the transferee company and not the transferor company. Since in the instant case the notice and the assessment order is passed in the name of the transferor company “Shell Technology India Private Limited” and not the transferee company “Shell India Market Private Limited”, same are bad in law.

The Hon. Court clarified that the present Appeal was dismissed only on the ground that the notice and assessment order has been passed in the name of the transferor company. However, this order would not preclude the Appellant-Revenue from initiating fresh proceedings against the transferee company, in accordance with law for assessing the income in the hands of the transferee company. The Appeal was accordingly disposed of.

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: 4th 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 16th 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 18th 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 17th January, 2024 was set aside and the Chief Commissioner was directed to reconsider the petitioner’s application for compounding.

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

Arising from ITAT Pune ITA No.1159/Pun/2023 order dated 12th 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 12th March, 2024. Accordingly, the proceedings were remanded to the ITAT, for de novo hearing of the appeal filed before it.

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: 30th 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 29th 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 31st 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 31st 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 24th 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 29th March, 2022 accepting the petitioner’s returned income.

Now the AO once again issued a notice dated 28th 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 10th 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 31st 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 24th 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 24th 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 28th 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.

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: 29th 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 27th April, 2020, the CCL got merged with its wholly owned subsidiary “Amanora Future Tower Pvt. Ltd.” (AFTPL), with effect from 1st April, 2018.

By communication dated 27th 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 27th August, 2020.

On 31st March, 2023, the Assistant Commissioner of Income Tax, Circle 1(1), Pune, issued a notice dated 31st 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 31st 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 1st April, 2018, was not disputed. This merger was based on the NCLT’s order dated 27th April, 2020. There was also no dispute about the Petitioner, vide a communication received by the Income Tax Department on 27th August, 2020 informing about the merger effective 1st April, 2018. No dispute was raised about the department not receiving the intimation on 27th August, 2020 or about the department being unaware of the merger. Still, the impugned notices dated 31st 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 17th January, 2025.

Accordingly, the impugned notices were quashed and set aside.

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: 7th 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 26th March, 2024 and notice dated 31st March, 2023 disposing of objections under Section 148A(d) of the Act. However, the Court considered the challenge to the assessment order dated 26th 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 6th 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 26th 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.

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: 15th 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 26th 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 28th 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 31st 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 31st 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 31st 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 23th August 2023, the Respondents have stated that an intimation was issued to the Petitioner on 27th 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 26th 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 31st 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.

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: 10th 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 29th July, 2022, which was preceded by a notice issued under Section 148A(b) dated 26th May, 2022, and an order passed thereon under Section 148A(d) dated 29thJuly, 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 16th 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 9th November, 2016, the show cause notice under Section 148A(b) of the IT Act was issued on 26th May, 2022 and an order thereon was passed on 29th July, 2022 under Section 148A(d), as also the impugned notice under Section 148 was also issued on 29th 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.

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: 13th November, 2024. (Bom) (HC) [Arising from ITAT order dated 12th 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 27th 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 13th 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 16th 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 .

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: 2nd 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 29th 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.

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: 8th 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 10th January, 2021 as per the extended due date. However, the return of income was filed on 31st 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 31st 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 31st July, 2020 but due to the Covid-19 pandemic it was extended up to 31st December, 2020, and subsequently, it was extended up to 10th 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 30th 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 16th 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 20th 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 30th 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 16th 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 20th 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.

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

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

The Assessee-Petitioner challenged the legality of the notice dated 30th 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 29th July, 2022 passed under Section 148A(d) of the Act passed in pursuance of a notice under Section 148A(b), dated 17th June, 2021 and the consequent assessment order dated 17th 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 31st 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.

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: 8th 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 13th 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 15th March, 2022. It was submitted that the Return of Income was filed on 17th 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 24th 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 22nd 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 13th 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 23rd 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 31st 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 22nd 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.

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

Income Tax Appellate Tribunal order dated 9th 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 21st 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 24th 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.

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: 28th 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 11th 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 6th 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 27th 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 26th 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 19th 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 15th February, 2022 the Petitioner-Assessee called for a speaking order on the objections raised by it. On 18th 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 12th March, 2022 calling upon the Petitioner-Assessee to furnish various details by 21st 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 6th 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.

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: 4th 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.

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.

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.

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.

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: 1st 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 24th 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 24th June, 2024 in Income Tax Appeal No. 28 of 2018 and other connected appeals.

The Court further observed that the order dated 24th 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.

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: 2nd 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 30th 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  25th 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 30th July, 2022. Such amended provision would squarely become applicable the date of notice under section 148 itself being 30th 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 30th 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 31st 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.

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: 27th 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 18th October, 2019, the Petitioner was served a notice under Section 153C on 3rd March, 2022. On culmination of those proceedings, the Department proceeded to pass a final order of assessment on 23rd 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 31st March, 2023 was concerned with a search which was conducted in the case of the Proform Group on 9th 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 31st March, 2023, it would be the amended regime of reassessment which came into effect from 1st 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 31st 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 31st March, 2023 under Section 148 of the Act was quashed.

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: 1st 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 29th 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 22nd September, 2019 and 9th January, 2020, respectively. On 16th 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 28th 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 7th 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 29th 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 31st 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 31st July, 2017 and OM dated 29th 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 29th 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.

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: 10th 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 7th 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 31st 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 9th and 10th 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 7th 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 7th 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 1st 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 23rd 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.

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: 7th 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 28th 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., 8th November, 2016 to 31st December, 2016.

Accordingly, on 14th 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 20th 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 28th December, 2019, an assessment order under Section 143(3) of the Act came to be passed accepting the aforesaid ITR.

On 8th 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 1st 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 1st April, 2021 to 30th 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 26th 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 30th 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 26th May, 2022 and 30th July, 2022 and the impugned order dated 30th July, 2022 were quashed with liberty to the revenue to commence reassessment proceedings afresh.The writ petition was disposed accordingly.

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: 8th 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 19th August, 2016 was issued by the auditors M/s Shankarlal Jain & Associates, Chartered Accountants. Petitioner filed his return of income on 7th September, 2016 well before the due date of 30th 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 19th August, 2016 in Form No.10CCB was issued by the chartered accountants of petitioner. While filing the return of income on 7th September, 2016, the figures / details of the deduction under section 80IC of the Act from the audit report dated 19th August, 2016 were duly mentioned. The return of income of petitioner was processed under section 143(1) of the Act and an intimation dated 29th 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 16th April, 2018 requesting for a rectification of the intimation.

Sometime in January 2019, the chartered accountant of petitioner realised that the audit report dated 19th 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 12th January, 2019, the said audit report dated 19th 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 19th 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 24th August, 1994 and Circular No.669 dated 25th 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 18thMarch, 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 1st September, 2023 was set aside and quashed.

As regards the rectification application filed by petitioner before JAO on 14th April, 2018 for rectification of the intimation dated 29th 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 1st 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.

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: 3rd 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.

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: 13th 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 31st 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 27th 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.

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: 4th 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 23rd 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 21st November, 2023. Petitioner informed the AO only on 28th 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 21st 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.

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: 4th 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 on24th 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 26th 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 30th 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 31st 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 14th 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 16th September, 2011 for a total consideration of ₹26,68,780, (c) the sale of those shares between 30th July, 2013 up to 23rd 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 26th 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 31st March, 2021 issued under section 148 of the Act quashed.

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.

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.

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.

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.

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.

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.

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.

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.

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.

(c) An audit memo dated 29th March, 2019, raised an objection regarding the applicability of Section 50C of the Act.

(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.

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.

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.

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.

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.

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.

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.

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.  

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

11. Tech Mahindra Ltd vs. DCIT, Circle 2(3)(1), Mumbai and Ors.
[WP (L) No. 5317 Of 2023
A.Y.: 2018-19; Dated: 27th June, 2023 (Bom) (HC).]

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

The issue involved in the petition before the Hon’ble Court was seeking relief in regards to nonissuance of refund due for A.Y. 2018-2019 of Rs.153.80 crores alongwith further interest under section 244A of the Income Tax Act, 1961 (the Act) till the date of actual payment.

The Hon’ble Court observed that the Department has filed an affidavit affirmed on 26th April, 2023 in which it is admitted that a net refund of Rs. 153.80 crores plus interest under section 244A of the Act became due to be refundable to Petitioner – Assessee. It is also admitted that the Petitioner made repeated representations to the Respondent – Department. According to the Respondent, there was an outstanding demand of Rs. 266.73 crores for A.Ys. 2012-2013, 2013-2014, 2014-2015 and 2017-2018 and admittedly, a stay has been granted to petitioner by respondent vide an order dated 27th December, 2022. By the said order, an adjustment of 20 per cent of the demand against the admitted due refund of A.Y. 2018-2019 of Rs. 153.80 crores has been granted and for the balance, a stay has been granted till 31st December, 2023 or till the disposal of appeal by CIT(A), whichever event occurs earlier. The Respondent has admitted that even after such an adjustment, the Petitioner is entitled to receive a sum of Rs. 100.49 crores being the balance refund for A.Y. 2018-2019.

The Petitioner stated that after the adjustment of refund of A.Y. 2018-19 indicated above, no income tax demands are pending against the Petitioner that can be recovered by the Revenue. Accordingly, for A.Y. 2018-19, manifestly, a net amount of Rs.100.49 crores, plus interest under section 244A of the Act is due to be refunded to the Petitioner which appears to be still not released by the CPC.

The Petitioner submitted that he has neither received the due refund nor has it heard from any of the Respondents with respect to the timelines within which the said refund will be issued to the Petitioner. Moreover, more than 14 months has elapsed since the refund was determined first by Respondent No. 1.

In view of the above circumstances, the Hon’ble Court directed Respondent No. 4, i.e., Director of Income Tax, CPC, to ensure that the refund amount of Rs. 100.49 crores alongwith interest, if any, in accordance with law, is credited to petitioner’s account within one week from the date this order is uploaded.

The Court further noted that the Department counsel submitted that the Centralised Processing Centre (CPC) in Bengaluru could not see the stay granted on 27th December, 2022 in its portal, that is not reflected in the affidavit in reply filed. Respondent no.4 is the Director of Income Tax, CPC, Bengaluru who also has chosen not to file any affidavit. It was noted that by an order dated 2nd March, 2023, Respondents were directed to refund the amount to petitioner immediately alongwith interest in accordance with law. The affidavit in reply dated 26th April, 2023 has been filed admitting Rs. 100.49 crores after adjustment as payable. Still the order dated 2nd March, 2023 has not been complied with.

The Hon’ble Court observed that since the affidavit in reply has been filed after the order dated 2nd March, 2023 was passed, there has been no legal impediment to pay the refund of Rs. 100.49 crores. In view of the affidavit being filed by respondent, the stand of Department counsel that the CPC could not see the stay order was not unacceptable. In view of the Court’s order and subsequent affidavit at least after the affidavit was filed, the CPC should have refunded the money.

Therefore, the Hon’ble Court issued a notice to Respondent No. 4, Director of Income Tax, CPC, returnable on 25th July, 2023, as to why contempt proceedings should not be initiated against him. The Petition was disposed off accordingly.

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

10. PCIT – 14 vs. M/s Godrej Industries Ltd
[ITA NO. 409 OF 201
Dated: 28th June, 2023
A.Y.: 2001-02 (Bom.) (HC)]

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

The Assessee-respondent filed on 30th October, 2001, its return of income for A.Y. 2001-02 declaring income of nil, after set off of brought forward losses and depreciation and declared a book profit of Rs. 33,13,25,132. The case was selected for scrutiny and notice under section 143(2) of the Act was issued to the assessee. In the assessment order made under section 143(3) of the Act, the AO made various additions and deletions. The assessment order dated 27th February, 2004 was impugned in the appeal filed by assessee before CIT(A). By an order dated 5th October, 2004, CIT(A) partly allowed the appeal of assessee. The said order dated 5th October, 2004, was challenged by assessee in appeal filed before ITAT. The revenue also filed an appeal before ITAT against order passed by CIT(A) which came to be disposed on 30th August, 2007. ITAT disposed the appeal filed by the assessee on 5th September, 2007 by giving partial relief.

Consequent to the order of ITAT, the order giving effect to ITAT’s order was passed on 25th August, 2008 by which the AO determined the total income in accordance with the normal provisions at nil and the book profit at Rs. 33,13,25,132. The AO passed an order dated 13th April, 2009, giving effect to ITAT’s order in department’s appeal in which he determined the total income in accordance with the normal computation at nil but increased the book profit to Rs. 33,51,66,399 on account of change in deduction that he allowed under section 80HHC of the Act.

On 29th March, 2014, the AO passed an order under section 154 of the Act rectifying the order dated 13th April, 2009 and redetermined the book profit at Rs. 53,02,83,061 — as he added the provision for depreciation in the value of the long term investment as a consequence of the retrospective amendment introduced by the insertion of clause (i) to Explanation 1 below section 115JB(2) of the Act.

This was challenged by the assessee in an appeal before CIT(A). The CIT(A) allowed the assessee’s appeal by order dated 10th April, 2015 and held that the notice under section 154 seeking to rectify the error ought to have been issued by 31st March, 2008 and, therefore, the same was barred by limitation. In doing so, he followed his order for A.Y. 2005-06. The order of CIT(A) was taken in appeal by Revenue before ITAT and ITAT, by order dated 7th April, 2017 dismissed the appeal of the Revenue. The ITAT held the rectification order was passed to give effect to the retrospective amendment made by the Finance Act, 2009. The issue which was sought to be rectified was never the subject matter of the appeal either before the CIT(A) or before the ITAT. The ITAT followed its earlier order in the case of ACIT vs. M/s. Godrej Sara Lee Ltd (now amalgamated into Godrej Consumers Products Ltd) and came to the conclusion that it was not permissible for the AO to rectify the order dated 13th April, 2009 on an issue which was not the subject matter of the appeal before it.

The Revenue contended that the AO was required to determine the correct total income as per the provisions of the Act. While doing so, the AO cannot ignore the clear provisions of the Act which even though may not be arising out of ITAT’s order but are vital for the determination of the correct total income. It was further submitted that the only requirement under section 154(7) of the Act is that the amendment under section 154 should be made within four years from the financial year in which order sought to be amended is passed, and since four years has not elapsed from the date of passing the order giving effect to the ITAT’s order, the notice under section 154 of the Act is not at all barred by limitation.

The assessee contended that period of limitation under section 154(7) of the Act in respect to the points not subject matter of order under section 154 of the Act will apply from the date of original assessment order and not from the date of assessment order of the AO giving effect to appellate order. It was submitted that the period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

“The Hon High Court observed that the settled position is that the AO, while giving effect to the ITAT’s order cannot go beyond the directions of the ITAT and since in this case, the issue of calculation of book profit qua diminution in the value of an asset was not the subject matter of the appeal, the Revenue was not justified in contending that the order is within the time limit. Because under section 154(1A) of the Act, the AO can rectify the order in respect of a matter other than the matter which has been considered and decided by the appellate/revisional authority. In the instant case, since the issue of diminution in value of an asset for calculating book profit was not a subject matter of appeal or revision, the original order under section 143(3) of the Act dated 27th February, 2004 is the order which can be rectified by the AO and since the order passed in 2004 cannot be rectified after a period of four years, the order passed under section 154 of the Act dated 29th March, 2014 is barred by Section 154(7) of the Act.”

In the circumstances, the Revenue Appeal was dismissed.

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

9. PCIT – 6 vs. Kimberly Clark Lever Pvt Ltd
[ITA No. 123 Of 2018,
Dated: 7th June, 2023. (Bom.) (HC).]

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

The assessee is engaged in the business of manufacturing diapers and sanitary napkins. It also markets consumer tissue products and had filed a return of income declaring total income at Rs.30,01,43,006 on 31st October, 2007 for the A.Y. 2007-08.

The return of income was processed under section 143(1) of the Income Tax Act, 1961 (the Act). The AO made reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26th October, 2009. The TPO passed an order under section 92CA(3) of the Act on 29th October, 2010 making an adjustment on account of arms’ length price of the international transaction at Rs.12,17,43,370. The AO recorded reasons for re-opening the assessment and issued notice under section 148 of the Act on 14th January, 2011. The assessee vide its letter dated 28th January 2011 objected to the notice. It was the case of the assessee that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order, and hence there was no reason for re-opening the assessment on the basis of the said order of TPO. The reason why the assessee took this stand was because respondent’s return of income was processed under section 143(1) of the Act and there was no assessment proceeding pending under section 143(3) of the Act during which a reference could be made to the TPO under section 92CA of the Act. Hence, such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment. Admittedly, no notice under Section 143(2) of the Act had also been issued. The AO has in fact admitted that the case was not selected for scrutiny and no notice under section 143(2) of the Act was issued but in view of the findings of the TPO he has re-opened the case for the A.Y. 2007-08.

The assessee contented that where against the return of income filed by the assessee in time, no proceedings were initiated by issuing notice under section 143(2) of the Act, the reference made to the TPO by the AO under section 92CA(1) of the Act was invalid. Consequently, the order passed by the TPO under section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings. Where the AO had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the AO to commence the re-assessment proceedings. In the absence of the same, the assessment proceedings could not be re-opened.

The Honourable Court observed that it is judicially well settled that the belief of the AO that there has been escapement of income must be based on some material on record. There must be some material on record to enable the AO to entertain a belief that certain income chargeable to tax has escaped assessment for the relevant Assessment Year. In this case, the only material relied upon is the order of the TPO.

The issue which arose for consideration is the validity of the assessment proceedings initiated under section 147/148 of the Act. As noted earlier, admittedly reference was made to the TPO for determining the arms’ length price of the international transaction and no notice under section 143(2) of the Act was issued before making the said reference to the TPO. When no assessment proceedings were pending in relation to the relevant assessment year, the AO was precluded from making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arms’ length price in relation to the international transaction.

The entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in Sections 92 to 92F of the Act. Section 92CA of the Act provides that where the AO considers it necessary or expedient so to do, he may refer the computation of arm’s length price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing under section 92CA(3) of the Act determining the arms’ length price in relation to an international transaction. On receipt of this order, Section 92CA(4) of the Act requires the AO to compute the total income of the assessee in conformity with the arms’ length price so determined by the TPO. This means that the determination of the arm’s length price wherever a reference is made to him is done by the TPO under section 92CA(3) of the Act but the computation of total income having regard to the arm’s length price so determined by the TPO is required to be done by the AO under section 92CA(4) r.w.s. 92C(4) of the Act.

Therefore, the process of determination of arm’s length price is to be carried out during the course of assessment proceedings, may it be, under Sub Section (3) of Section 92C of the Act where the AO determines the arm’s length price or under Sub Sections (1) to (3) of Section 92CA of the Act, where the AO refers the determination of arm’s length price to the TPO. Reference may also be made to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, it is prescribed that the AO shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that the AO is obligated to compute any income arising from an international transaction of an assessee with associated enterprises, having regard to the arm’s length price.

The occasion which requires the AO to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The Central Board of Direct Taxes (CBDT) in Instructions No. 3 dated 20th May, 2003 has also stated that a case is to be selected for scrutiny assessment before the AO may refer the computation of arm’s length price in relation to an international transaction to the TPO under Section 92CA of the Act.

Therefore, the Honourable Court upheld the proposition that an AO can make reference to the TPO under section 92CA of the Act only after selecting the case for scrutiny assessment. The instructions of CBDT are also a pointer to the legislative import that the reference to the TPO for determining the arm’s length price in relation to an international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. Therefore, the Tribunal was correct to hold that when reference was made to the TPO by the AO for determination of arm’s length price in relation to the international transaction, when no assessment proceedings were pending, was an invalid reference. Consequently, the subsequent order passed by the TPO determining the assessment to the international transaction was a nullity in law and void ab initio. In view thereof, the AO could not have relied upon an order of the TPO which is a nullity to form a belief that certain income chargeable to tax has escaped the assessment for the relevant Assessment Year.

In view of the above, the revenue’s Appeal was dismissed.

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

8 Pr. CIT – 2 vs. Bank of Baroda
[ITA NO. 100 OF 2018,
Dated: 07/06/2023, (Bom.) (HC)]
[Arising from ITA No 3432/MUM/2014,
Bench: E Mumbai; dated: 9th November, 2016; A.Year: 2007-08 ]

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

The Assessee had filed return of income on 30th October, 2007 for A.Y. 2007-08 declaring total income of Rs. 997,10,30,681. Subsequently, a revised return declaring an income of Rs. 615,19,97,000 was filed on 19th March, 2009. The assessment was completed under section 143(3) of the Income Tax Act, 1961 (the Act) on 23rd March, 2009 assessing total income at Rs.1904,69,88,000. The Assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in the favor of the assessee. An effect to the CIT(A) order has been given by the AO on 7th March, 2012 resulting in revised income being accepted at Rs. 968,38,10,000. This resulted in a refund of Rs. 377,95,44,631.

On verification of the records, the PCIT noticed that the AO had failed to conduct proper enquiries and examine the issues in an appropriate manner. This gave rise to an erroneous assumption in as much as in the original return the assessee had claimed a refund of Rs. 21,19,54,764 as against the claim of refund of Rs. 337,74,22,347 in the revised return. The PCIT felt that the delay in claiming enhanced refund was attributable to the assessee and accordingly interest under section 244(A) of the Act was not allowable on the refund of Rs. 125,54,67,583 for 11 months, i.e., from 1st April, 2008 to 19th March, 2009. According to the PCIT, this resulted in an excess allowance of interest of Rs. 9,81,31,689. Consequently, a notice under section 263 of the Act was issued. The Assessee appeared, made submissions and PCIT passed an order which was impugned by assessee before the ITAT. The ITAT allowed the appeal vide order dated 9th November, 2016. It followed the coordinate Bench decision on the issue in case of State Bank of India vs. DCIT (ITA No 6817&6823/M/2012, A.Y. 2001-02 and ITA No 6818 & 6824, A.Y. 2002-2003)

Sub Section (2) of Section 244(A) of the Act reads as under:

(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final.

The Honourable Court observed that as per the provision if the proceedings resulting in the refund are delayed for the reasons attributable to the assessee, the period of delay so attributable to the assessee shall be excluded from the period for which interest is payable. The Court noted that there were no findings of the PCIT as to how the assessee delayed the proceedings that resulted in the refund or what reasons could be attributable to the assessee. It was true that assessee had initially filed return of income on 30th October, 2007, declaring total income of Rs. 997,10,30,681, and subsequently on 19th March, 2009 a revised return declaring an income of Rs. 615,19,97,000 was filed. The assessment was completed under section 143(3) of the Act on 23rd March, 2009 assessing the total income at Rs. 1904,69,88,000. Against the assessment order, the assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in favour of the assesse. In giving effect to CIT(A)’s order, the AO on 7th March, 2012 granted a refund of Rs. 377,95,44,631. Therefore it cannot be stated that proceedings resulting in the refund were delayed for reasons attributable to assessee wholly or in part.

The Court observed that, the ITAT has also, relied on a judgment in the State Bank of India vs. DCIT-2 (supra) case and come to a conclusion that the order passed by the AO was neither erroneous nor prejudicial to the interest of revenue, and the AO has allowed the amount of interest in question taking one of the possible views. The Tribunal had held that where two views are possible and the AO takes one of the possible views, the PCIT could not have exercised revisional jurisdiction under section 263 of the Act.

The Honourable Court after perusal of the ITAT order held that the entire issue is fact-based. The Tribunal having come to the factual conclusion on the basis of materials on record, decided that no question of law arises. In view of the same, the revenue’s Appeal was dismissed.

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not binding:

7 Kamal Varandmal Galani vs. PCIT -19
[WP (L) No. 38534 of 2022,
Dated: 20th April, 2023, (Bom) (HC)]

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not  binding:

The Petitioner has been filing his income returns in Mumbai for the last 22 years, the last of which was filed electronically from Mumbai on 31st December, 2021 for the A.Y. 2021-22. A notice dated 24th June, 2022 came to be issued by the PCIT – 19 informing the Petitioner regarding the proposed transfer of assessment jurisdiction from the DCIT -19(3) to the DCIT Central Circle-3, Jaipur, with a view to enable a proper and co-ordinated assessment along with the assessment in the case of Veto Group, Jaipur on whom search proceedings were conducted under section 132 of the Act. The show cause notice stated that the PCIT (Central), Rajasthan vide a communication dated 16th February, 2022 had proposed for centralisation of the case of the Petitioner with Vito Group at Jaipur and, therefore, the Petitioner was asked to file his submissions in that regard.

Section 127 of the Act authorises inter alia the Principal Chief Commissioner to transfer any case from one or more AO subordinate to him to any other AO also subordinate to him, after recording reasons and after giving to the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so. Section 127(2) further envisages that where the AOs from whom the case is to be transferred and the AOs to whom the case is to be transferred are not subordinate to the same officer, then there ought to be an agreement between the Principal Commissioner or other authorities mentioned in the said sub-section exercising jurisdiction over such assessing offcers, and an Order can then be passed after recording reasons and providing the assessee a reasonable opportunity of being heard in the matter.

Objections to the transfer of jurisdiction were filed by the Petitioner, wherein, it was stated that there was no basis for transfer of the assessment jurisdiction of the Petitioner from DCIT- 19(3), Mumbai to the DCIT Central Circle-3, Jaipur as there was no material found during the search operation, which would connect the Petitioner with the Vito Group of Jaipur. It was also stated that no such search was conducted in terms of Section 132 of the Act on the premises of the Petitioner, although, a survey under section 133A of the Act was conducted in the case of M/s Landmark Hospitality Pvt Ltd in Mumbai in which the Petitioner was a Director. It was also stated that during the course of survey proceeding, statement of the Petitioner had been duly recorded and further that there was no incriminating material found during the survey proceeding so conducted, which would connect either the Petitioner or even M/s Landmark Hospitality Pvt Ltd with the Vito Group of Jaipur in whose case the search action had been conducted. It was further urged that the Petitioner had also highlighted the fact that in the show cause notice, no mention had been made as regards there being any material collected by the revenue against the Petitioner, on the basis of which, the transfer of the jurisdiction could be contemplated.

Objections raised by the Petitioner came to be decided and rejected by virtue of the Order dated 21st November, 2022.

Reply affidavit has been filed by the Respondent-revenue, wherein it is stated that the assessment jurisdiction of the Petitioner was transferred to Rajasthan for an effective investigation and meaningful assessment after fulfilling the applicable procedural and legal requirements as stated under section 127 of the Act.

The Court noted that, in the reply, there was no specific averment made that there was anything incriminating found either during the survey proceeding conducted on M/s Landmark Hospitality Pvt Ltd, of which the Petitioner was a Director, or during the search proceedings conducted on the Vito Group, which would connect either M/s Landmark Hospitality Pvt Ltd or the Petitioner to the Vito Group of Jaipur. The survey report and records prepared in regard to the survey proceedings on M/s Landmark Hospitality Pvt Ltd does reflect that there was no inventory prepared during the survey proceeding, suggesting that there was nothing incriminating found.

From the reply filed by the Respondent revenue the authorities only seem to be speculating that the incriminating documents and data found and seized/impounded ‘may relate to the assessee as well as other assesses of this group.’ The PCIT, therefore, did not appear to be in possession of any material at all, based upon which he could draw his satisfaction that the assessment jurisdiction deserved to be transferred from DCIT-19(3), Mumbai to the DCIT Central Circle-3, Jaipur and rather appears to have speculated that only because there was a search/survey conducted and a request made by the concerned PCIT (Central), Rajasthan, the jurisdiction had to be transferred following the instructions of CBDT dated 17th September, 2008. Reference to the instructions dated 17 September 2008 relied upon by the Respondent-revenue is pertinent and in particular clause (d), which is reproduced herein under:

“(d) The ADIT (Inv.) should send proposal for centralization through the Addl. DIT (Inv.) to the DIT(Inv.) who in turn should send the proposal to the CIT (C) or the CIT as mentioned in (C) above as the case may be within 30 days of initiation of search. The proposal should contain names of the cases their PANs, the designation of the present assessing officers and the present CIT charge. The list should also contain the connected cases proposed to be centralized along with reasons thereof including their relationship with the main persons of the group. The assessees not having PAN should also be included along with their addressees and territorial jurisdiction. Against each of the cases, it should be mentioned whether it is covered u/s 132(1) of 132A or 133A(1) or it is a connected case copies of the proposal should also be endorsed to the CCIT concerned from whose jurisdiction the cases are to be transferred and the DGIT(Inv.)/CCIT(C) to whose jurisdiction the cases are being transferred.”

The Court observed that the instructions make it clear that while sending a proposal for centralization, reasons had to be reflected including the relationship of the petitioner with the main persons of the group. No such sustainable reasons are forthcoming from the records except speculation connecting the Petitioner and the subject material and a request from the PCIT, Jaipur for centralisation of the case. In fact, the Deputy Commissioner of Income tax-19(3), Mumbai ought to have refused to accede to the request for centralization inasmuch as it had not received any cogent material or reasons, which would have formed a basis for the transfer of the case to the DCIT Central Circle-3, Jaipur. The Court noted that transfer of assessment jurisdiction from Mumbai to Jaipur would certainly cause inconvenience and hardship to the petitioner both in terms of money, time and resources. Therefore, the order impugned in the absence of the requisite material/reasons as the basis would be nothing but an arbitrary exercise of power and therefore liable to be set aside.

The Court held that the Order impugned passed under section 127(2) of the Act, does not at all reflect as to why it was necessary to transfer the jurisdiction from DCIT- 19(3), Mumbai to DCIT Central Circle-3, Jaipur. None of the issues raised by the Petitioner have been dealt with either in the Order dated 21st November, 2022 disposing of the objections raised by the Petitioner, much less have the same been reflected in the Order impugned under section 127(2) of the Act. The AO appears to have acted very mechanically treating the request from DCIT Central Circle-3, Jaipur, as if it was binding upon him.

The Court observed that the said request was not at all binding inasmuch as if it was so, then the agreement envisaged under section 127(1)(a) would be rendered superfluous. The agreement envisaged in terms of aforesaid section is not in the context of showing deference to a request made by a colleague or higher officer, but an agreement based upon an independent assessment of the request in the light of the reasons recorded seeking transfer of the jurisdiction. In fact, section 127(1)(b) contemplates a situation where in the event of a disagreement, the matter is referred to an officer as the Board may, by notification in the Official Gazette, authorise in that behalf. Not only this, if a request for transfer of jurisdiction was to be treated as binding, then it would have rendered otiose Section 127 to the extent the same envisages an opportunity of being heard to be provided to the Petitioner. The obligation on the part of the AO to record reasons before ordering the transfer of the case and the right of the assessee to be heard in the matter are not hollow slogans but prescribed to achieve a particular purpose and the purpose is to remove any element of arbitrariness while exercising powers under section 127 of the Act. If the request for transfer of jurisdiction was so sacrosanct as could not be refused, then the opportunity of being heard would be nothing but illusory rendering the request a foregone conclusion regarding its acceptance. Therefore, the Court was not convinced at all that the request made by the concerned officer from Jaipur, had necessarily to be allowed as per the Instructions dated 17th September, 2008.

The Order impugned was unsustainable in law and was, accordingly, set aside.

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

6 Amtek Transportation Systems Ltd vs. ACIT, Circle-1(1), New Delhi & Ors,
[WP (C). 5197 OF 2023 & CM Nos. 20269 -70 of 2023; A.Y. 2021-22.
Dated: 25th April, 2023, (Del.) (HC)]

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

An ex parte assessment order was passed on 27th December, 2022 under section 144 read with section 144B of the Act. This was followed by a demand notice dated 27th December, 2022 of Rs.129,70,09,500 for A.Y. 2021-22.

The Petitioner’s bank account was attached by virtue of an order dated 5th March, 2023 issued by the concerned authority.

The Petitioner had filed an application dated 15th March, 2023, wherein certain averments were made to set up a prima facie case for staying the demand. The aspects concerning balance of convenience and irreparable injury were also, adverted to in the application.

The department vide impugned order dated 08th April, 2023, rejected the application for stay of the operation of demand notice without any cogent reasons.

The petitioner, in terms of the impugned order dated 8th April, 2023 was directed to deposit Rs. 25,94,01,900 if it wishes to have the benefit of stay on the demand notice.

The Petitioner stated that it was unable to meet the terms of the impugned order, the demand itself was, prima facie, substantially unsustainable. It was further contented, that the value of the total assets available with the petitioner was approximately Rs. 21.91 crores, and that it has a turnover of nearly Rs. 2.15 crores. It was also contented, that the petitioner, has a negative net worth. It was emphasised, that its current liabilities, nearly, amount to Rs. 99 crores.

The Honorable High Court noted that on perusal of the order dated 8th April, 2023 it shows that the concerned authority has simply taken recourse to the CBDT instructions dated 31st July, 2017, issuing the direction that the outstanding demand will remain stayed, provided 20 per cent of the outstanding demand is deposited. Though the petitioner had indicated in its reply, that a substantial part of the addition was unsustainable.

The Court observed that the petitioner has averred in the application, that the AO has added the entire amount, which was shown as current liabilities, i.e., Rs. 99,86,14,787 on account of the fact that there was no explanation. Furthermore, expenses amounting to Rs. 71,64,71,368 have also been disallowed by the AO, on the grounds that there was no explanation. However, the Petitioner claims that these very expenses were added back by the petitioner on its own, and therefore, no explanation was required. These aspects, were inter alia referred to in the application for stay, which the concerned authority have not dealt with, while dealing with the petitioner’s application for grant of stay. If the demand was likely to get scaled down for the reasons adverted to in the petitioner’s application, these aspects will have to be taken into account by the concerned authority, while dealing with the application for stay.

The Court observed that the AO has merely gone by the CBDT instructions dated 31st July, 2017 and granted stay, on deposit of 20 per cent of the outstanding demand.

The Court referred to the Supreme Court decision in case of PCIT vs. M/s LG Electronics India Pvt Ltd (2018) 18 SCC 447 wherein it was held that the requirement to deposit 20 per cent of the demand is not cast in stone. It can be scaled down in a given set of facts.

Thus, for the aforesaid reasons, the Court set aside the order dated 8th April, 2023 The Court further directed the PCIT to carry out the de novo exercise, and take a decision on the application for stay preferred by the petitioner after granting personal hearing to the authorised representative of the petitioner. Further, the PCIT was directed to also pass a speaking order and deal with the assertions made by the Petitioner in the stay application.

The Petitioner stated that the amount lying to the credit of the petitioner in the subject bank account could be remitted to the concerned authority, subject to the debit-freeze being lifted. The Court issued a direction, to the effect that the entire amount which is available in the subject bank account shall stand remitted to the PCIT and the debit-freeze ordered by the concerned authority shall stand lifted.

[Arising out of order dated 9th February, 2022 passed by the ITAT “C” Bench Kolkata in ITA Nos. 87/Kol/2019 A.Y. 2015-2016] Section 50C: Compulsory acquisition of a capital asset being land or building or both – No room to suspect the correct valuation – the provisions of Section 50C will not be applicable:

5 PCIT, Asansol vs. M/s The Durgapur Projects Ltd
[ITAT No. 282 Of 2022, (G. A. No. 02 OF 2022)
 Dated: 24th February, 2023]

[Arising out of order dated 9th February, 2022 passed by the ITAT “C” Bench Kolkata in ITA Nos. 87/Kol/2019 A.Y. 2015-2016]

Section 50C: Compulsory acquisition of a capital asset being land or building or both – No room to suspect the correct valuation – the provisions of Section 50C will not be applicable:

The Assessee filed its original return of income on 28th September, 2015declaring a loss of Rs.591,64,96,295. Subsequently revised return was filed on 16th January, 2017 declaring a loss of Rs.581,04,07,134. The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act were issued and the AO completed the assessment under section 143(3) of the Act by order dated 30th December, 2017. The AO inter alia amongst other additions added a sum of Rs. 5,48,43,584 to the total income being capital gain on transfer of land to the National Highways Authority of India (NHAI) and also initiated penalty proceedings under section 271(1)(c) of the Act;

The assessee preferred appeal before the CIT (Appeals), Durgapur. The CIT(A) held that the AO was not justified in invoking Section 50C of the Act on the land which was compulsorily acquired for NHAI and directed to re-compute the capital gains without applying Section 50C of the said Act. The revenue challenged the said order by filing the appeal before the Tribunal. The appeal was dismissed by the Tribunal.

Before the Honorable High Court the Appellant Revenue contended that the Tribunal affirmed the decision of the CIT(A) to hold that the AO was not justified in invoking Section 50C of the Act by relying upon an order passed by the Hyderabad Tribunal in ITA No. 1680, 1681/Hyd/2018 dated 27th July, 2020, without noting that the said decision cannot be applied to the facts of the case, as in the said case the assessee had not transferred therein own property consisting of land and building but had only transferred their right to receive the amount of compensation. Reliance was placed on the judgment of the Hon’ble Division Bench of the High Court of Madras in Ambattur Clothing Company Ltd vs. ACIT, 1 for the proposition that the AO was justified in treating value adopted by the stamp valuation authority as deemed sale consideration received as a result of the acquisition.

The Respondent assessee referred to Section 96 of the Right to Fair Compensation and Re-Settlement Act, 2013 and submitted that the said provision states that no income tax or stamp duty shall be levied on any award or agreement made under the said Act except under section 46 and no person claiming under any such award or agreement shall be liable to pay any fee for the copy of the same. Therefore, it is submitted that the department is not justified in levying the tax as was done by the AO. The Respondent assessee referred to Circular No. 36 of 2016 issued by the Central Board of Direct Taxes (CBDT) dated 25th October, 2016 which dealt with the taxability of compensation received by the land owners for the land acquired under the 2013 Act. It is submitted that the circular clearly states that such compensation received by the land owners on account of compulsory acquisition of land under the said provision is not taxable. Further attention was drawn to the various proceedings initiated by NHAI as also the cheques given in favour of the assessee towards payment of compensation.

The Respondent assessee placed reliance on the decision of the High Court of Rajasthan in Gopa Ram vs. Union of India and Others in Civil Writ Petition No. 12746 of 2017 dated 22th January, 2018 for the proposition that Section 24 of the Acquisition Act, 2013 has no application in the acquisition proceedings under National Highways Act, 1956.

The Honourable High Court observed that admittedly, the land in question was compulsorily acquired for the NHAI. The assessee received compensation of Rs. 4,47,17,396 from NHAI and valuation of the stamp valuation authority was Rs. 9,95,60,980.The AO adopted the full value of sale consideration under section 50C and calculated the capital gains in the hands of the assessee at Rs. 548,43,584.

The Honourable High Court observed that in the instant case the transfer of the land was not on account of the agreement between the parties, but it was the case of the compulsory acquisition under the provisions of the 2013 Act. Therefore, the transaction cannot be treated to be a transaction between two private parties where there may be room to suspect the correct valuation and the apparent sale consideration which was reflected in the sale documents. It is common knowledge that when compensation is determined by the authorities under the said Act, it is invariably lesser than the market value of the property as the determination is done in a particular manner by taking note of several factors.

This is precisely the reason that the Act provides for an appellate remedy and further remedies in case the erstwhile land owner is of the view that the compensation paid/offered was inadequate.

The Honourable High Court observed that this provision has been designed to control the transactions where the correct market value is not mentioned and there is suppression of the correct value by the parties to the transactions. As in the instant case, it is an acquisition of land by the Government by way of compulsory acquisition, the appellant department cannot be heard to say that there was suppression of the value and consequently the question of invoking Section 50C of the Act does not arise.

The case of Ambattur Clothing Company Ltd relied on by revenue has no application to the facts of the case of hand. The facts of the case are entirely different and it was not a case of any compulsory acquisition of land as in the case on the hand.

Thus, in a case of compulsory acquisition of land by the Government there is no room for suppressing the actual consideration received on such acquisition.

In cases of transactions between the private parties, quite often the actual sale consideration paid for acquiring the immovable property is more than the .sale consideration disclosed in the sale deed. With a view to curb such transactions, Section 50C of the Act was introduced so as to adopt the market value determined by the stamp duty authorities as the sale consideration for the purpose of computing capital gains under the provisions of the Income Tax Act.

The said provision therefore provides for referring the matter to the valuation officer of the revenue to determine the actual market value of the property sold and all other relevant factors which may be considered by the State Valuation Authority.

The Honourable High Court further held that the principle culled out by the Hyderabad Tribunal is a correct interpretation of the provisions of Section 50C in the case of the compulsory acquisition of land. Thus, the findings rendered by the CIT(A) as affirmed by the Tribunal on this issue do not call for any interference.

The Honourable High Court observed that for the taxability of the compensation received by the assessee for the lands compulsory acquired under the 2013 Act, it is relevant to take note of the circular issued by the CBDT dated 25th October, 2016 in Circular No. 36/2016. It was pointed out that under the existing provisions of the Income Tax Act an agricultural land which is not situated in a specified urban area is not regarded as a capital asset, and hence capital gain arising from the transfer (including compulsory acquisition) of such agricultural land is not taxable. It is further stated that Finance (No. 02) Act, 2004 inserted Section 10(37) in the Act from 1st April, 2005 to provide specific exemption to capital gains arising to an individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limited subject to fulfilment of certain conditions.

Thus, it was ordered that the compensation received from the compulsory acquisition of an agricultural land is not taxable under the Income Tax Act subject to the fulfilment of certain conditions for specified urban land.

 It was further stated that the 2013 Acquisition Act came into effect from 1st January, 2014 and Section 96 inter alia provides that income tax shall not be levied on any award or agreement made except those made under section 46 of the said Act. Therefore, it was directed that compensation for compulsory acquisition of land under the 2013 Acquisition Act except those made under section 46 of the said act is exempted from the levy of income tax. Further, it was ordered that as no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income tax under 2013 Acquisition Act, the exemption provided under section 96 of the 2013 Acquisition Act is wider in scope than the tax exemption provided under the existing provisions of the Income Tax Act, 1961. It was pointed out that this aspect has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land especially those relating to acquisition of non-agricultural land.

This matter was examined by the CBDT and it was clarified that compensation received in respect of award or agreement which has been exempted from the levy of income tax under section 96 of the 2013 Acquisition Act, shall also not be taxable under provisions of the Income Tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income Tax Act, 1961. The said Circular No. 36 of 2016 would come to the aid and assistance of the assessee and the compensation received by the assessee on account of the compulsory acquisition of land under the 2013 Acquisition Act is exempt from the tax.

The Honourable Court also observed that the object and purpose behind insertion of the said provision in the Act was to curb the menace of the use of unaccounted cash in transfers of capital assets. Upon a plain and literal interpretation of the words used in Section 50C, it is amply clear that the legislature intended to take the valuation adopted by the stamp valuation authorities as the benchmark for the purpose of payment of stamp duty in respect of transfer of the capital asset as the deemed full value of consideration.

Keeping in mind the canons of interpretation and the object behind inserting the said provision, it appears that the legislature used the words and expressions in Section 50C of the Act consciously to give the same a restricted meaning. In view thereof, the term “transfer” used in Section 50C has to be given a restricted meaning and the same does not have a wider connotation so as to include all kinds of transfer as contemplated under Section 2(47) of the Act. The Court accordingly held that the provisions of Section 50C shall be applicable in cases where transfer of the capital asset has to be effected only upon payment of stamp duty.

In case of a transfer by way of compulsory acquisition, the capital asset being land or building or both vests upon the government by operation of the provisions of the relevant statute governing such acquisition proceeding and subject to the terms and conditions laid down in the said statute being followed.

In case of compulsory acquisition the transfer of property takes place by operation of law and the provisions of the Transfer of Property Act or the Indian Registration Act do not have any manner of application to such transfers. The question of payment of stamp duty also does not arise in such cases.

The Court held that in case of compulsory acquisition of a capital asset being land or building or both, the provisions of Section 50C cannot be applied as the question of payment of stamp duty for affecting such transfer does not arise.

In the instant case, the property was acquired under the provisions of the National Highways Act, 1956. The property vests by operation of the said statute and there is no requirement for payment of stamp duty in such vesting of property. As such there was no necessity for an assessment of the valuation of the property by the stamp valuation authority in the case on hand. For the reasons as aforesaid, it is held that the provisions under section 50C of the Income Tax Act cannot be applied to the case on hand.

Consequently the appeal filed by the revenue was dismissed and the substantial questions of law were answered against the revenue.   

[Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010 A.Y.: 2005-06. ] Section 28 viz a viz 45: Development agreement – capital gain or income from business:

4 CIT, Kolkata IV vs. M/s  Machino Techno Sales Ltd
[ITA no 160 of 2011 Dated: 20th February, 2023, (Cal.) (HC)][Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010
A.Y.: 2005-06. ]

Section 28 viz a viz 45:  Development agreement – capital gain or  income from business:

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

“Whether the learned Tribunal below committed substantial error of law in holding that the income, derived by way of return from a Development Agreement in favour of the owner of the land, should be treated as capital gain instead of income from business ?”

The Hon court observed that in the absence of any evidence to show that the land purchased by the assessee during 1985/1990 was intended for resale or was converted into stock-in-trade,  the earnings of the assessee pursuant to a development agreement entered into with the developer could not be assessed as business  income . The court observed  that the Tribunal had taken into consideration the factual position which was not disputed by the revenue that the said land and factory shed was used by the assessee as its workshop and was shown as capital asset in its balance-sheet.

Further, the revenue did not dispute the fact that the purchase prices were debited by the assessee under the head ‘land account’. On 13th November, 1994 the assessee entered into a development agreement with the developer under which the assessee in exchange of the land in question was entitled to get 45 per cent of the constructed area and the remaining portion of the land and shed continued to be used by the assesse for its own workshop purchase. The Tribunal noted that no documents have been referred to by the revenue to show that the assessee had treated the asset as stock-in-trade.

On the other hand, the assessee continued to show the land as capital asset even after 1994, which fact was accepted by the department. The Tribunal had distinguished the decisions cited by the revenue by noting the facts of the case that the land was purchased by the assessee during 1985/1990 and used as capital asset for its business purposes and continued to treat the same as capital asset in the accounts. Thus, the Tribunal correctly held that there was no intention on the part of the assessee to enter into an adventure in the nature of trade to deal in the land.

The court observed that in view of the cogent reasons assigned by the Tribunal on the undisputed factual position, there were no grounds to interfere with the order passed by the Tribunal.

Accordingly, the appeal was dismissed and the substantial questions of law were answered against the revenue.

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

3 Milestone Systems A/S vs.
Deputy CIT Circle Int Tax 2(2) (1) Delhi
[W.P.(C) 3639/2022, A.Y,: 2022 -23;
Dated: 14th March, 2023]

Section 197: Withholding tax certificate – Non application of mind – Binding effect of the Supreme Court judgement – merely filing/pendency of the review petition will not dilute the effect of the decisions

The petitioner is a non-resident company, incorporated under the laws of Denmark. The petitioner, admittedly, has been issued a tax residency certificate by the concerned authorities in Denmark. It is the petitioner’s case that it is in the business of providing IP Video Management Software and other video surveillance related products to entities and persons across the globe. In so far as India is concerned, the petitioner claims, that it has entered into a Distributor Partner Agreement with various companies/entities for sale of its Software. It is the petitioner’s case, that the Distributor Agreement does not confer any right of use of copyright on its partners or the end user. The petitioner claims, that all that the distributor partner acquires under the Distributor Agreement is a license to the copyrighted software. It is, therefore, the petitioner’s case, that this aspect of the matter has been considered in great detail by the Supreme Court in the judgment rendered in Engineering Analysis Center of Excellence Pvt Ltd vs. Commissioner of Income Tax & Anr 2021 SCC OnLine SC 159.

The petitioner, contends that the concerned officer, in passing the impugned order dated 19th May, 2021, has side stepped a vital issue i.e., whether or not the consideration received by the petitioner against the sale of software constituted royalty within the meaning of Section 9(1)(vi) and/or Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Denmark.

The department contented that while examining an application preferred under section 197 of the Act, the concerned officer is not carrying out an assessment. Therefore, the parameters which apply for assessing taxable income would not get triggered, while rendering a decision qua an application filed under the aforementioned provision. Under the provisions of Section 195, deduction of withholding tax is the rule, and issuance of a lower withholding tax certificate under Section 197 of the Act is an exception.

The Honourable Court observed that, the impugned order does not deal with the core issue which arose for consideration, and was the basis on which the application had been preferred by the petitioner under section 197 of the Act.

The Honourable Court observed that it is the petitioner’s case that the Software sold to its distributor partners under the Distributor Agreement, does not confer, either on the distributor partner or the reseller, the right to make use of the original copyright which vests in the petitioner. This plea was sought to be supported by the petitioner, by relying upon the judgment of the Supreme Court in Engineering Analysis, wherein inter alia, the Court has ruled, that consideration received on sale of copyrighted material cannot be equated with the consideration received for right to use original copyright work. Therefore, this central issue had to be dealt with by the concerned officer. Instead, as is evident on a perusal of the impugned order, the concerned officer has simply by-passed the aforementioned judgement of the Supreme Court by observing that the revenue has preferred a review petition, and that the same is pending adjudication.

The court held that as long as the judgment of the Supreme Court is in force, the concerned authority could not have side stepped the judgment, based on the fact that the review petition had been preferred. It would have been another matter, if the concerned officer had, on facts, distinguished the judgment of the Supreme Court in Engineering Analysis. That apart, the least that the concerned officer ought to have done was to, at least, broadly, look at the terms of Distributor Agreement, to ascertain as to what is the nature of right which is conferred on the distributor partner and/or the reseller.

The court observed that there is no reference whatsoever to any of the clauses of the Distributor Agreement. The concerned officer has, instead, picked up one of the remitters i.e., the distributor partners, and made observations, which to say the least, do not meet the parameters set forth in Rule 28AA of the Income Tax Rules, 1962 for estimating the income, that the petitioner may have earned in the given FY. A erroneous approach is adopted by the concerned officer.

The concerned officer was required to examine the application, in the background of the parameters set forth in Rule 28AA of the Rules. Concededly, that exercise has not been carried out.

The petitioner’s entire case is that the sum that it receives under the Distributor Agreement is not chargeable to tax. It is in that context, that the petitioner has moved an application under section 197 of the Act for being issued a certificate with “NIL” rate of withholding tax.

The Honourable Court set aside the impugned certificate and the order, with a direction to the concerned officer, to revisit the application. While doing so, the concerned officer will apply his mind, inter alia, to the terms of the Distributor Agreement, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis (supra). In this context, the provisions of Rule 28AA shall also be kept in mind. The concerned officer will not be burdened by the fact that a review petition is pending, in respect of the judgment rendered by the Supreme Court in Engineering Analysis (supra).

The writ petition was, accordingly, disposed off.

Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved

1 Geeta P. Kamat vs. Principal CIT-10 & Ors.
[Writ Petition No. 3159 of 2019,
Dated: 20th February, 2023 (Bom) (HC)]

Section 179 – Recovery proceedings against the Director of the company – Taxes allegedly due from the company – gross neglect, misfeasance or breach of duty on the part of the assessee in relation to the affairs of the company not proved:

A show cause notice dated 12th January, 2017 was served upon the petitioner in terms of section 179 of the Act requiring the petitioner to show cause as to why the recovery proceedings should not be initiated against her in her capacity as a director of KAPL. The assessee company was not traceable on the available addresses and further the tax dues could not be recovered despite attachment of the bank accounts as the funds available were insufficient. An amount of Rs.1404.42 lakhs was thus sought to be recovered from the petitioner.

With a view to prove that the non-recovery of the taxes due could not be attributed to any gross neglect, misfeasance, breach of duty on her part, in relation to the affairs of the company, the petitioner took a stand that the petitioner, as a director in the company had no liberty, authorization or independence to act in a particular manner for the benefit of KAPL. She did not have any control over the company’s affairs. It was stated that the petitioner did not have any authority to sign any cheque independently or take any decision on behalf of the company nor did KAPL provide any operational control or space to the petitioner to perform her duties. It was also stated that the petitioner did not have any functional responsibility assigned to her and no one from KAPL reported to her or her husband Prakash Kamat, who was also a shareholder and a director in the company.

The petitioner’s husband, Prakash Kamat is stated to have developed a smart card-based ticketing solution for being used at various public transport organizations like BEST, Central and Western Suburban trains, etc. Trials were run successfully and an agreement was entered into between Prakash Kamat, BEST and Central Railways in 2006. The projects with BEST and Railways were to be implemented on “BOT” model and required funds to the tune of Rs. 50 to 60 crores as an initial investment. Khaleej Finance and Investment, a company registered in Bahrain (hereinafter referred to as “KFI”) agreed to make an investment in the said project subject to certain conditions, according to which a Special Purpose Vehicle was to be incorporated to carry on the said project which lead to incorporation of KAPL on 30th March, 2006. An investment was made by KFI in the said project through its Mauritius-based company “AFC System Ltd (hereinafter referred to as “AFC”)”. A joint venture agreement dated 21st June, 2006 (“JVA”), Deed of Pledge dated 21st June, 2006 (‘”DP”) along with Irrevocable Power of Attorney dated June 2006 (“IPOA”), was entered into between Prakash Kamat, the petitioner, KFI and the said company-KAPL.

The petitioner also stated and highlighted the fact that due to some differences that had cropped up with KFI since January 2009, the petitioner’s husband was removed as the Managing Director of KAPL in September 2009 along with the petitioner herein. It was also stated that while the petitioner was a director during the financial year 2007-08, since the petitioner stood removed as such director in September 2009, she could not be held liable for the liability of KAPL for the financial year 2008-09 relevant to assessment year 2009-10. It was also stated that the petitioner was not at all aware after she had been removed that there was any tax liability which was due and payable by KAPL, and therefore, it was stated that she could not have been held guilty of any gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The AO by virtue of the order impugned dated 22nd December, 2017 passed under section 179 of the Act rejected the contention of the petitioner. It was held that not only had the petitioner failed to establish that she was not actively involved in the management of the company during the financial year 2007-08 and 2008-09 and further that she had failed to establish that there was no gross neglect, malfeasance or breach of duty on her part. The AO held that there was not a ‘shred of doubt’ that she was actively involved in the day-to-day affairs of the company till she was removed in September 2009. As regards the disputes between the petitioner and KFI, the AO held that it was normal to have such disputes during the working of an enterprise.

The petitioner preferred a revision petition under section 264 of the Act against the said order, which too, came to be dismissed vide order dated 18th March, 2019 simply on the ground that the petitioner was a director for the relevant assessment years and hence was liable.

The petitioner urged that the entire approach adopted by the AO in passing the order under section 179 of the Act was misplaced and the mistake was perpetuated by the revisional authority in dismissing the revision petition filed by the petitioner against the said order. It was urged that the order passed by the AO was perverse in as much as based upon the facts on record no proceedings under section 179 of the Act could have been initiated against the petitioner for the purposes of recovery from the petitioner the liability of the company for the assessment years 2007-08 and 2008-09. It was urged that the petitioner had placed enough material on record reflecting that the petitioner was not the Managing Director of the company and was not at the helm of affairs as such. She did not have any independent authority to take any decision on behalf of the company nor did she have any independent operational control. Yet, the AO proceeded to hold that the petitioner had failed to prove that there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company.

The Honourable Court observed that Section 179 of the Act inter-alia envisages that where any due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a director of the private company at any time during the relevant previous year, shall be jointly and severally liable for the payment of such a tax; unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It therefore follows that if tax dues from a private company cannot be recovered then, the same can be recovered from every person who was a director of a private company at any time during the relevant previous year. However, such a director can absolve himself if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

The Honourable Court observed that in so far as the requirement of the first part of the section is concerned, it can be seen from the order passed under section 179 of the Act that steps were taken for recovery against the company M/s Kaizen Automation Pvt Ltd (KAPL) including attachment of its bank accounts which did not yield any results. The company is also stated to be not traceable on the addresses available with the AO, and therefore, according to the AO, the only course left was to proceed against the directors in terms of section 179 of the Act.

The stand of the petitioner is that she could not be proceeded against, in as much as there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company. The AO, however, did not accept this assertion. It laid emphasis on the fact that the petitioner had actively participated in the affairs of the company at least till the date of her removal in September 2009 and proceeded to hold that the petitioner had failed to prove that there was any gross neglect, misfeasance or breach of duty on her part as regards the affairs of the company. However, in the order impugned dated 22nd December, 2017 passed under section 179 of the Act, although the AO did make a reference to various Board meetings attended by the petitioner from time to time from 2006 till 8th January, 2008, there was no material highlighted by the AO, contrary to the material on record placed by the petitioner, based upon which the petitioner could be held to be guilty of gross neglect, malfeasance or breach of duty in regard to the affairs of the company. The petitioner had brought on record material to suggest lack of financial control and decision making powers. She had a very limited role to play in the company as a director and that the entire decision making process was with the directors appointed by the investors, i.e., KFI which was the single largest shareholder of the JVC. She had sufficiently discharged the burden cast upon her in terms of section 179 to absolve herself of the liability of the company.

The Honourable Court observed that the AO appears to have applied himself more on the issue of the petitioner participating in the affairs of the company for purposes of pinning liability in terms of section 179; rather than discovering the element of ‘gross neglect’, misfeasance or ‘breach of duty’ on the part of the petitioner in relation to the affairs of the company and establishing its co-relation with non-recovery of tax dues. The petitioner, having discharged the initial burden, the AO had to show as to how the petitioner could be attributed such a gross neglect, misfeasance or breach of duty on her part.

Reliance was placed on Maganbhai Hansrajbhai Patel [2012] 211 Taxman 386 (Gujarat) and Ram Prakash Singeshwar Rungta & Ors [2015] 370 ITR 641 (Gujarat)
 
The Honourable Court held that in the present case, the AO has not specifically held the petitioner to be guilty of gross neglect, misfeasance or breach of duty on part in relation to the affairs of the company. Not a single incident, decision or action has been highlighted by the AO, which would be treated as an act of gross neglect, breach of duty or malfeasance which would have the remotest potential of resulting in non-recovery of tax due in future.

The order impugned dated 22nd December, 2017 as also the order dated 18th March, 2019 in revision passed was held to be unsustainable.

Section 153 – Assessment barred by limitation – Refund of the taxes paid

2 Aricent Technologies (Holdings) Ltd vs. Assistant Commissioner Of Income Tax & Anr.
[WP (C) 13765 of 2022, AY 2007-08
Dated: 27th February, 2023, (Del.) (HC)]

Section 153 – Assessment barred by limitation – Refund of the taxes paid:

FSSL (which is now amalgamated with the petitioner company) had filed its return of income for the A.Y. 2007-08 on 26th October, 2007 declaring a total income of Rs. 17,64,76,208. The said return was picked up for scrutiny under section 143(3) of the Income Tax Act, 1961. On 27th September, 2010, the Transfer Pricing Officer passed an order proposing an addition of Rs. 8,96,40,636 on account of corporate charges. Thereafter, on 24th December, 2010, the AO passed a Draft Assessment Order proposing to assess FSSL’s income for the relevant assessment year at Rs. 2,43,55,56,670 by disallowing the project expenses to the extent of Rs. 39,15,46,619 and disallowing deduction under section 10B of the Act quantified at Rs. 177,78,93,207.

The Dispute Resolution Panel upheld the Draft Assessment Order, by its order dated 02nd August, 2011. Pursuant to the said order, the AO concluded the assessment and passed the Assessment Order dated 31st October, 2011 under section 143(3) of the Act r.w.s 144C(13) of the Act, whereby the total income of FSSL was assessed at Rs. 243,55,56,670.

Pursuant to the said assessment, a demand of Rs. 117,22,62,912 was raised. A refund of Rs. 26,01,53,355 relating to assessment year 2006-07 was outstanding and payable to FSSL. The said refund was adjusted against the demand of Rs. 117,22,62,912 raised in respect of the A.Y. 2007-08.

Aggrieved by the assessment order dated 31st October, 2011, the petitioner filed an appeal before the Income Tax Appellate Tribunal (hereafter ‘the Tribunal’). By an order dated 07th January, 2016, the Tribunal partly allowed the appeal and deleted the disallowance of the project expenses to the extent of Rs. 39,15,46,619. However, in respect of the disallowance of deduction of Rs. 1,77,78,93,207 claimed under section 10B of the Act, and the transfer pricing adjustment of corporate charges, the Tribunal set aside the Assessment Order and remanded the matter to the Transfer Pricing Officer/Assessing Officer. The question of the transfer pricing adjustment on account of corporate charges was remanded to the Transfer Pricing Officer for a de novo adjudication and the question regarding disallowance of deduction claimed under section 10B of the Act, was remanded to the AOr to decide afresh in the light of the observations made in the order.

Concededly, the AO has not passed any order pursuant to the order dated 07th January, 2016 passed by the Tribunal. In the aforesaid context, the petitioner contended that the refund due to FSSL (which is now amalgamated with the petitioner company) amounting to Rs. 26,01,53,355 be refunded to the petitioner along with applicable interest. The said claim is founded on the basis that the assessment for the A.Y. 2007-08 is now barred by limitation.

Section 153 of the Act was amended by the Finance Act, 2017 with retrospective effect from 01st June, 2016 and the provision regarding limitation for framing an assessment pursuant to any order passed inter alia under section 254 of the Act was included under sub-section (3) of Section 153 of the Act. Sub-sections (3) and (4) of the Section 153 of the Act as applicable for framing the assessment pursuant to the order dated 7th January, 2016 passed by the Tribunal read as under:

“153. (3) Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of nine months from the end of the financial year in which the order under section 254 is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner.
………… ……………..
(4) Notwithstanding anything contained in sub-sections (1), (2) and (3), where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for the assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under the said sub-sections (1), (2) and (3) shall be extended by twelve months.”

Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, concededly, the AO has not passed any final order.

The Honourable Court observed that in view of the above, the contention that passing fresh assessment order pursuant to the Tribunal’s order dated 07th January, 2016, is barred under the provisions to Section 153(3) and 153(4) of the Act, is merited. In view there of the contention that the income as returned by FSSL for the A.Y. 2007-08 would stand accepted. Consequently, any adjustment made for the refund due to FSSL for the A.Y. 2006-07 is not sustainable. Accordingly, the court directed that the said amount, which was due as a refund for the A.Y. 2006-07 be refunded to the petitioner along with interest as applicable within a period of eight weeks.

The court further expressed displeasure in the manner the present matter has been dealt with by the concerned officer. Despite clear directions from the Tribunal, the AO had failed to pass the assessment order within the prescribed time.

Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

24 MA Multi-Infra Development Pvt Ltd vs.

ACIT Circle- 3(2)(1) & Ors

[Writ Petition No. 1650 of 2022,

Date of order: 09th January, 2023, (Bom.) (HC)]

Section 148 –Reopening – beyond the period of four years – Approval for issuance of notice:

The assessee challenges the notice dated 31st March, 2021 under section 148 of the Act, for the A.Y. 2015-16, inter-alia, on the ground that since the same has been issued beyond the period of four years, approval for issuance of the same ought to have been obtained from the Principal Chief Commissioner of Income-tax in terms of section 151(ii) of the Act.

The Court observed that a perusal of the notice dated 31st March, 2021 issued under section 148 of the Act by the AO shows that the same has been issued after obtaining necessary satisfaction of Additional Commissioner of Income Tax, Range (3)(2), Mumbai. As per the objections filed by the revenue, the approval was obtained from the Additional Commissioner of Income Tax, Range (3)(2), Mumbai. The said officer, it is stated, was competent to grant approval in view of the applicability of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for the sake of convenience, hereinafter referred to as ‘the Relaxation Act’).

It is stated that in terms of the Relaxation Act, the limitation inter-alia, under provisions of sections 151(i) and 151(ii) of the Act, which were originally expiring on 31st March, 2020, stood extended to 31st March, 2021. It was, thus, urged that since the Relaxation Act had extended the period of limitation, the authority which was otherwise supposed to grant approval in regard to cases falling within the ambit of section 151(i) of the Act could have granted approval beyond the period of three years based upon the Relaxation Act.

The Court in J.M. Financial & Investment Consultancy Services (P) Ltd. vs. Assistant Commissioner of Income Tax & Ors. [Writ Petition No.1050 of 2022 dated.4th April, 2022 ] has already taken a view holding that the Relaxation Act would apply only to cases where the limitation was expiring on 31st March, 2020 and since for the A.Y. 2015-16, the limitation period was six years which was to expire only on 31st March, 2022, the said provisions would not be applicable. It was held that while the time to issue notice may have been extended but that would not amount to amending the provisions of section 151 of the Act.

The petitioner urged that the case of the petitioner fell under section 149(b), and therefore, the period of limitation of six years for issuance of notice under section 148 for the A.Y. 2015-16 would expire on 31st March, 2022. It was, therefore, urged that the case of the petitioner was squarely covered by J.M. Financial & Investment Consultancy Services (P) Ltd.

Accordingly it was held that the approval for issuance of notice under section 148 ought not have been obtained from the Additional Commissioner of Income Tax but from the authority specifically mentioned under section 151(ii) of the Act.

The notice impugned notice dated 31st March, 2021 was quashed. The petition was allowed.

Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

23 Pr. Commissioner Of Income Tax-10 vs.

M/S. Rajat Finvest & Ors[ITA NO.13 OF 2023,

Date of order: 12th January, 2023, (Del.) (HC)]

[Arising out of ITAT order dated 12th September, 2019 for A.Y. 2010-2011 [ITA 13/2023], A.Y. 2009-2010 [ITA 14/2023] and A.Y. 2008-2009 [ITA 15/2023].

Unaccounted income – Bogus Long Term Capital Gains – Concurrent finding of fact – No substantial question of law :

The respondent/assessee is in the business of trading and investing in scrips. On 7th August, 2012, a survey was carried out by the appellant/revenue in exercise of powers under section 133A of the Income-tax Act, 1961, and according to the appellant/revenue, during investigation, the fact was revealed i.e., that the respondent/assessee had introduced unaccounted income in its books of accounts in the guise of long-term capital gains (LTCG), albeit, by first investing and then selling the shares of two entities i.e., REI Agro Ltd. [in short, “REI”] and REI Six Ten Ltd [in short, “REI Six”]. The respondent/assessee, against the LTCG, had claimed exemption from tax.

It is not in dispute, that REI is a listed company, and its shares were transacted on the stock exchange. The facts also show, that during the course of the survey on 7th August, 2012, the statement of one Mr. Brij Mohan Vyas was recorded. Mr. Brij Mohan Vyas, according to the appellant/revenue, is an employee of REI Agro Group. The shares of REI were bought and sold through brokers, on instructions of one Mr. Sandeep Kumar Jhunjunwala.

The AO has relied upon the details gathered by the Investigation Wing, to conclude that the respondent/assessee had introduced its unaccounted income to purchase and sell the shares of REI. Thus, based on the information gathered by the Investigation Wing, the AO concluded, that the entire set of transactions was a ‘sham’, and that the same had been configured to give the sale and purchase of shares by the respondent/assessee a legal framework. The Assessment Order was passed pursuant to reopening of assessment of the respondent/assessee under section 148 of the Act.

The CIT(A) via order dated 29th June, 2016 partly allowed the respondent/assessee’s appeals. The appellant/revenue preferred an appeal to the Tribunal.

The Tribunal considered the matter in great detail, and came to the conclusion that the order passed by the CIT(A) had to be confirmed.

The Hon. High Court noted that both the CIT(A) and the Tribunal have returned findings of fact. The important fact was that the respondent/assessee traded in shares and the respondent had converted a part of its stock-in-trade as investment. In A.Y. 2008-09, the respondent/assessee had declared profit from trading in shares of REI, and during that very year, the said shares were transferred to opening stock and were purchased under investment portfolio.

Further the statement made by Mr. Brij Mohan Vyas on 7th August, 2012 did not reveal that REI was manipulating share prices on the stock exchange. The involvement of Mr. Sandeep Kumar Jhunjunwala, based on whose instructions Mr. Brij Mohan Vyas acted, was to the extent as to the right time when shares of REI had to be bought and sold.

The observation of the AO, that the funds which flowed from REI in the form of unsecured loans to six companies, which were located in Gujarat, were unaccounted income of the respondent/assessee, appears to be based on assumptions and/or conjectures. No material to back the conclusion arrived at by the AO.

The appellant/revenue could not have bifurcated the purchase and sale transactions. Concededly, when the shares were purchased for trading purposes in earlier years, the profits so generated were accepted, and at the point in time, when these scrips were converted into investment and sold during the Assessment Years in issue, they could not be treated as bogus transactions. The fact that shares were traded on stock exchange after paying securities transaction tax, and that money had been received through banking channels only demonstrated that they were not bogus transactions.

The Court noted that there are concurrent findings of facts returned by the CIT(A) as well as the Tribunal. The proposed questions of law by the appellant/revenue do not state that the findings returned by the Tribunal or the CIT(A) are perverse.

Thus, the appeals were, dismissed, as no substantial question of law arose for consideration.

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

22 Interglobe Enterprises Pvt Ltd vs.

Pr. Commissioner of Income

Tax Delhi -4 & Ors.

[Writ Petition (L) NO. 11708 OF 2021 & CM APP. 36194 OF 2021

Date of order: 20th January, 2023, (Delhi) (HC) ]

Section 264 – Revision – amount had been taxed twice – powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

The controversy, in the present case, relates to the liability to pay tax on the interest received on income tax refund pertaining to the A.Ys. 2009-10 and 2010-11. The assessee had credited interest amounting to Rs. 1,61,38,250 in its books of account for the F.Y. 2013-14. This amount included a sum of Rs. 1,29,01,031 as interest on income tax refund for the A.Y. 2009-10 and Rs. 22,66,836 as interest on income tax refund for the A.Y. 2010-11. Thus, an aggregate amount of Rs. 1,51,67,867, on account of interest on income tax refund(s), was included as income for the F.Y. 2013-14. The assessee included the said amount in its return of income for the A.Y. 2014-15 and paid tax on the same.

The assessee’s return for the A.Y. 2014-15 was picked up for scrutiny and an assessment order dated 28th October, 2016 was passed under section 143(3) of the Act. There is no dispute that income, as assessed, included the said amount of Rs. 1,51,67,867 as interest on income tax refund(s) pertaining to the A.Ys. 2009-10 and 2010-11.

Thereafter, by a notice dated 15th February, 2017, issued under section 148 of the Act, the assessee’s assessment of income for the year 2012-13 was reopened. The interest on refund of tax, for the years 2009-10 and 2010-11, was sought to be included in the taxable income for the A.Y. 2012-13 on the grounds that the said interest was received during the previous year 2011-12.

The petitioner, inter alia, contended that the said amount was included in the income of the assessee for the A.Y. 2014-15 and thus, had not escaped assessment warranting any addition in the income changeable to tax for the A.Y. 2012-13. However, this contention was not accepted and the AO passed an order dated 08th December, 2017, inter alia, adding the amount of Rs. 1,51,67,867 as income for the A.Y. 2012-13.

Although the AO added the amount of Rs. 1,51,67,867 as income for the A.Y.2012-13, he did not pass any order excluding the said amount from the taxable income for the A.Y. 2014-15. Resultantly, the said amount has been taxed twice; once, as income assessed under the assessment order dated 8th December, 2017for the A.Y. 2012-13, and second, in terms of the assessment order dated 28th October, 2016 for the A.Y. 2014-15.

Whilst the appeal under section 246A of the Act was pending before the Commissioner of Income Tax (Appeals), the assessee accepted the addition of Rs. 1,51,67,867 in its income chargeable to tax in the A.Y. 2012-13 and applied under the Direct Tax Vivad Se Vishwas Act, 2020 (hereafter ‘the VSV Act’) for settlement of the dispute. The liability for the A.Y. 2012-13 has been finally settled; the petitioner has received the Form 5 and has paid the necessary tax.

Since a sum of Rs. 1,51,67,867 had been taxed twice, on 16th February, 2018, the petitioner applied for revision of the assessment pertaining to the A.Y. 2014-15. The respondent did not take any steps in regard to the said application for a period of more than 3.5 years.

The assessee filed a writ petition (being WP(C) No.8177/2021) in the Court. The said petition was disposed of by an order dated 11th August, 2021, directing the respondent to dispose of the assessee’s application dated 16th February, 2018, filed under section 264 of the Act. The assessee’s application was rejected by an order dated 04th October, 2021, which was under challenge before the High Court.

The assessee contended that the impugned order is, ex facie, erroneous as it proceeds on the basis that the issue regarding the interest amount does not form a part of the order under section 143(3) of the Act. It is contended on behalf of the assessee that the said reasoning is, ex facie, erroneous as the amount of Rs. 1,51,67,867 (Rs. 1,29,01,031 and Rs. 22,66,836) was subjected to tax for the A.Y. 2014-15 and is included in the income as assessed by the order dated 28th October, 2016, passed under section 143(3) of the Act.

The Hon. Court observed that section 264 of Act enables the Principal Commissioner or Commissioner, on its own motion or on an application made by the assessee, to call for records of any proceedings under the Act or to cause such inquiry to be made and, subject to the provisions of the Act, pass such order thereon as the Commissioner thinks fit. The only condition being that such order cannot be prejudicial to the assessee. Undisputedly, if the records for the A.Y. 2014-15 were recalled, it would reveal that the sum of Rs. 1,51,67,867, received on account of interest on income tax, was assessed as income for the previous year 2013-14 relevant to the A.Y. 2014-15. However, as stated above, the said amount was brought to tax by the Income Tax Authority in the A.Y. 2012-13. Clearly, the same amount cannot be taxed twice.

It is settled law that an assessee is liable to pay income tax only on the income that is chargeable under the Act. Merely because an assessee has offered a receipt of income in his return does not necessarily make him liable to pay tax on the said receipt, if otherwise the said income is not chargeable to tax. InCIT vs. Shelly Products: (2003) 5 SCC 461, the Supreme Court held that if the assessee had, by mistake or inadvertently, included his income or any amount, which was otherwise not chargeable to tax under the Act, the AO was required to grant the assessee necessary relief and refund any tax paid in excess.

It is also well settled that the powers conferred under section 264 of the Act are wide. In Vijay Gupta vs. Commissioner of Income Tax Delhi-XIII & Anr.: 2016 SCC OnLine Del 1961, a Co-ordinate Bench of this Court held that powers under section 264 of the Act were not limited to correcting any errors committed by the authorities but also extended to errors committed by the assessee.

As observed above, it is clear that the amount of Rs. 1,51,67,867 cannot be taxed twice. In the aforesaid view, it was apposite for the Commissioner to have revised the assessment order for the A.Y. 2014-15 in light of the reassessment order dated 08th December, 2017, whereby the amount of Rs. 1,51,67,867 was brought to tax in an earlier assessment year (A.Y. 2012-13).

In view of the above, the impugned order was set aside and the matter was remanded to the concerned Commissioner to pass the fresh order in light of the observations made above. The petition was allowed in the aforesaid terms.

Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279

21 Footcandles Film Pvt Ltd vs. Income-tax Officer – TDS – 1 &  Ors

[Writ Petition No.429 of 2022

Date of order: 28th November, 2022 (Bom) (HC)]

Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279:

The Writ Petition, filed under Article 226 of the Constitution of India, impugns the order, under the provisions of sub-section (2) of Section 279 of the Income- tax Act, 1961, dated 1st June, 2021, passed by respondent no.3- Chief Commissioner of Income Tax (TDS), Mumbai, whereby an application filed by the petitioners for compounding of an offence committed, under section 276B, r.w.s. 287B of the Income-tax Act, 1961 during the F.Y. 2009-10 relevant to the A.Y.  2010-11, was rejected.

The case of the petitioner no. 2 is that for the relevant F.Y. 2009-10, the petitioner no.1-company deducted income tax to the tune of Rs. 25,02,336/- from the salaries of its employees, under the provisions of Section 192 of the  Act, but had failed to deposit the tax so deducted to the credit of the Central Government within the time prescribed under section 200 r.w.s. 204 of the Act. The petitioners claim that this situation arose due to the accumulated losses and delays in receiving tax refund from the respondent no.1 during the period 1st April, 2009 to 31st March, 2010.

It is further the case of the petitioners that, subsequently, on 2nd September, 2010, petitioner no.1-company voluntarily deposited the entire amount of tax deducted at source due, along with statutory interest liability thereon, with respondent no.1 without any prior notice of default or demand from the said respondent. However, the petitioner no.1-company subsequently received a show cause notice dated 18th October, 2011, calling upon it to show cause as to why prosecution should not be launched for offences committed under section 276B, r.w.s. 278B, of the Act for failure to deposit tax deducted to the credit of the Central Government, within the statutory timeframe. The said show cause notice also required the petitioner no.1 to nominate its Principal Officer for that purpose. Petitioner no.1 replied to the show cause notice on 24th October, 2011 and 16th November, 2011, attributing accumulated losses, cash crunch and delay in receiving tax refund from respondent no.1 as reasons for their inability and delay in discharging the tax deduction liability. Petitioner no.1 further stated in the reply that the entire liability, along with interest on the delayed payment, had already been deposited by petitioner no.1 voluntarily, before any demand was made. Thereafter, upon hearing petitioner no.1-company, the respondent no.2 issued sanction letter dated 10th March, 2014, granting sanction for prosecution against petitioner no.1-company and its Principal Officer- petitioner no.2 herein, pursuant to which, on 11th March, 2014, respondent no.1 lodged a Criminal Complaint bearing No.75/SW/2014 against the petitioners before the 38th Court of Additional Chief Metropolitan Magistrate, Ballard Pier, Mumbai alleging offence punishable under section 276B, r.w.s. 278B, of the Act.

It is further the case of the petitioners that the said criminal case was tried and by order dated 14th January, 2020, the learned Magistrate convicted the petitioners, under section 248(2) of the Code of Criminal Procedure, for the offence punishable under section 278B, r.w.s. 276B of the Income-tax Act, whereby both the petitioners were sentenced to pay the fine of Rs.10,000/- each and imposed a sentence of rigorous imprisonment for one year on petitioner no.2.

Aggrieved by this Judgment and Order of the Additional Chief Metropolitan Magistrate, convicting the petitioners, Criminal Appeal No.127 of 2020 was filed on 5th February 2020 before the City Sessions Court at Greater Mumbai. Along with the Criminal Appeal, Criminal Miscellaneous Application No.407 of 2020, for stay and suspension of sentence, was filed before the same court and the sentence was suspended by order dated 7th February, 2020. Since then, the criminal appeal is pending adjudication before the Sessions Court.

In this set of facts, the application, under the provisions of Section 279(2) of the Income-tax Act, came to be filed on 5th February, 2020 for compounding of offence before respondent no.3. Along with this application, the petitioners have also filed an application for condonation of delay, if any, in filing the application for compounding of offence. It is stated by the petitioners that the application under section 279(2) of the Act was rejected by the impugned order dated 1st June, 2021, which is now challenged before the court.

The respondents opposing the petition have relied upon the CBDT Circulars No.25/2019 and 01/2020, which deal with the procedure set down by the Board for consideration of applications for compounding of offences under the provisions of Section 279 of the Income-tax Act.

The petitioner contended that the provisions of Section 279(2) do not impose any fetters on respondent no.3 from considering the petitioners’ application for compounding of offence, even when the Court of Metropolitan Magistrate had convicted the petitioners and during pendency of an appeal before the Sessions Court. It is further contended that plain reading of the provisions of sub-section (2) of Section 279 allows compounding of offence either before or after the institution of proceedings and the word “proceedings” encompasses all stages of the criminal proceedings i.e. to say before the Magistrate and even after the Magistrate has convicted the concerned party or when the proceedings are pending before the Sessions Court in appeal.

The Petitioner contended that the Circulars of the CBDT, relied upon by respondent no.3 while rejecting the application for compounding of offence, which provides that the application for compounding of offence is required to be filed within twelve months from the end of the month in which the complaint was filed, cannot operate as a rule of limitation since the same cannot override the provisions of the statute i.e. Section 279 of the Income-tax Act.

The petitioners relied upon the following decisions:-

(i)    Sports Infratech (P) Ltd vs. Deputy Commissioner of Income-tax (HQRS) (2017) 78 taxmann.com 44 (Delhi)

(ii)    Vikram Singh vs. Union of India (2017) 80 taxmann.com 371 (Delhi)

(iii)    Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) vs. R. Inbavalli (2017) 84 taxmann.com 105 (Madras)

(iv)    K.V. Produce and Ors. vs. Commissioner of Income-Tax and Anr.  (1992) 196 ITR 293 (Kerala)

The Petitioner contended that the CBDT Guidelines for Compounding of Offences under Direct Tax Laws, 2019, dated 14th June, 2019, more specifically contained in paragraph 8.1(vii), made the petitioners ineligible for compounding the offences notwithstanding the fact that the provisions of the statute contained in Section 279 of the Income-tax Act, 1961 do not provide for any rule of limitation.

The Hon’ble Court observed that in Sports Infratech (P) Ltd (Supra), a Division Bench of the Delhi High Court was considering the provisions of the Board’s Guidelines dated 3rd December, 2014. In that case, an application for compounding came to be rejected on the grounds that the petitioner did not fulfil the eligibility criteria for consideration of its case for compounding. The Delhi High Court has concluded that the condition in the guidelines, no doubt, is important but cannot be the only determining factor for deciding an application under section 279(2) of the Act. It further held that the authority, while exercising jurisdiction under this provision, was also required to consider the objective facts in the application before it.

In Vikram Singh (Supra), another Division Bench of the Delhi High Court considered the provisions of the Circular dated 23rd December, 2014 issued by the CBDT and, more specifically, the guidelines contained in para 8(vii), which provides that offences committed by a person for which complaint was filed by the Department with the competent court twelve months prior to receipt of the application for compounding was generally not to be compounded. While considering the import of such a clause in the circular, it has held as under :“The Circular dated 23rd December 2014 does not stipulate a limitation period for filing the application for compounding. What the said circular sets out in para 8 are “Offences generally not to be compounded”. In this, one of the categories, which is mentioned in sub-clause (vii), is : “Offences committed by a person for which complaint was filed with the competent court 12 months prior to receipt of the application for compounding”.

“The above clause is not one prescribing a period of limitation for filing an application for compounding. It gives a discretion to the competent authority to reject an application for compounding on certain grounds. Again, it does not mean that every application, which involves an offence committed by a person, for which the complaint was filed to the competent court 12 months prior to the receipt of the application for compounding, will without anything further, be rejected. In other words, resort cannot be had to para 8 of the circular to prescribe a period of limitation for filing an application for compounding. For instance, if there is an application for compounding, in a case which has been pending trial for, let us say 5 years, it will still have to be considered by the authority irrespective of the fact that it may have been filed within ten years after the complaint was first filed. Understandably, there is no limitation period for considering the application for compounding. The grounds on which an application may be considered, should not be confused with the limitation for filing such an application.”

A similar provision, as has been dealt with by the Delhi High Court, contained in the Circular dated 23rd December, 2014 is found in para 7(ii) of the Circular dated 14th June, 2019, which is applicable to the present case. The provisions of para 7(ii) of 2019 Circular would be required to be read with the provisions of para 9.1 of that circular, which provides for relaxation in cases where an application is filed beyond twelve months referred to in paragraph 7(ii), specially when there is a pendency of an appeal or at any stage of the proceedings.

In R. Inbavalli (Supra), a Division Bench of the Madras High Court was dealing with the CBDT Guidelines dated 16th May, 2008, wherein an application for compounding was rejected on the grounds that it was not a deserving case as parameters of para 7.2 of those guidelines had not been adhered to. In that case, it was argued by the Revenue that wherever conviction order has been passed by the competent court, it would fall under the category of cases not to be compounded and though a discretionary power was given under clause 7.2 of the guidelines for grant of approval for compounding of an offence in a suitable and deserving case, such discretion could not be exercised in favor of the assessee when the assessee had been convicted. In that case also, an appeal was pending against the order of conviction before the higher court when the application for compounding of offence was made to the party.

In the face of these facts, the Madras High Court, considering the provisions of the Guidelines dated 16th May, 2008, has held as under :“Therefore, the mere pendency of the appeal against the conviction, in our view, could no longer be a reason for refusing the consideration for compounding of offence within the meaning of clause 4.4(f) of the guidelines dated 16.05.2008.”

The Explanation to sub-section (6) of Section 279, provides power to the Board to issue orders, instructions or directions under the Act to other income tax authorities for proper composition of offences under the section. The Explanation does not empower the Board to limit the power vested in the authority under section 279(2) for the purpose of considering an application for compounding of offence specified in section 279(1).

The Hon’ble Court observed that the orders, instructions or directions issued by the CBDT under section 119 of the Act or pursuant to the power given under the Explanation will not limit the powers of the authorities specified under section 279(2) in considering such an application, much less place fetters on the powers of such authorities in the form of a period of limitation. Therefore, the guidelines contained in the CBDT Guidelines dated 14th June, 2019 could not curtail the power vested in Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General under the provisions of section 279(2) of the Income-tTax Act.

Thus, the Hon’ble High court held that to the extent CBDT Guidelines dated 14th June, 2019 creates a limitation on the time, within which application under section 279(2) of the Income-tax Act is required to be filed, is of no consequence and does not take away jurisdiction of respondent no.3 or the other authorities, referred to in sub-section (2) of Section 279, from entertaining an application for compounding of offence at any time during the pendency of the proceedings, be they before the Magistrate or on conviction of the petitioners, in an appeal before the Sessions Court. As long as a proceeding, as referred to in sub-section (1), is pending, an application for compounding of offence would be maintainable under sub-section (2) of Section 279 and will have to be dealt with by the authorities on its own merits.

The Guidelines/Circular of 2019 sets out “Eligibility Conditions for Compounding” the condition specified in clause 7(ii) is not a rule of limitation, but is only a guideline to the authority while considering the application for compounding. It does not take away the jurisdiction of the authority under section 279(2) of the Act to consider the application for compounding on its own merits and decide the same.

The court further observed that this was a classic case for consideration by respondent no.3 for compounding of offence, inasmuch as petitioner no.1- company has deposited the TDS due, though beyond time-limit set down, but before any demand notice was raised or any show cause notice was issued. The Tax Deducted at Source was deposited along with penal interest thereon. A reply setting out detailed reasons for not depositing the same within the time stipulated under the law had been filed in reply to the show cause notice issued earlier. Though the petitioners had been convicted, a proceeding in the form of an appeal is pending before the Sessions Court, which is yet to be disposed of, and in which there is an order of suspension of sentence imposed on petitioner no.2 is operating.

Under these circumstances, the impugned order dated 1st June, 2021, that the application for compounding of offence, under section 279 of the Income-tax Act, was filed beyond twelve months, as prescribed under the CBDT Guidelines dated 14th June, 2019, are contrary to the provisions of sub-section (2) of Section 279. The impugned order dated 1st June, 2021 be quashed and set aside.

Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response – violated the mandate of Circular dated 3rd August, 2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

20 CS & Sons, vs. The National Faceless Assessment Centre, Delhi & Ors

Writ Petition (l) No. 32925 of 2022

Date of order: 8th December, 2022 (Bom)(HC)

Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response –  violated the mandate of Circular dated 3rd August,  2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

The petitioner challenged the order of assessment dated 18th September, 2022, passed under section 143(3), r.w.s. 144B, of the Income-tax Act, 1961, relevant to the A.Y. 2020-21 primarily on the grounds that the show cause notice dated 13th September, 2022, issued in terms of section 144B sub-section (6), clause (vii) of the Act, did not provide to the petitioner a reasonable opportunity of filing a response to the said show cause notice. It is stated that the show cause notice came to be issued on 13th September, 2022, which was signed by the concerned AO at 6:44 p.m. on the same day and was received by the petitioner at 6:50 p.m. on the same day i.e. 13th September, 2022. It is further stated that the show cause notice required the petitioner to file its response by 15th September, 2022 by 11:00 a.m., thereby giving the petitioner less than two days’ time to file the response. It is further stated that considering the issues involved, the time made available to the petitioner being not enough, yet the  petitioner tried to upload its reply on 16th September, 2022, which could not be so uploaded because the portal had been closed. It is further stated that the petitioner accordingly registered its grievance on the official portal and also uploaded along with the said grievance its objections to the proposed variation on 16th September, 2022. Thereafter, the assessment order is stated to have been passed on 18th September, 2022.

The petitioner states that since the objections to the Show Cause notice dated 13th September, 2022 were already available on the system of the respondents, the same could have been considered while passing the order of assessment, which came to be issued at a subsequent point of time. In any case, it is urged that, the AO had violated the mandate of the circular dated 3rd August, 2022, in particular Clause N.1.3.1 thereof, which prescribes a minimum of seven days period that is required to be given in such types of cases.

The respondents contended that Clause N.1.3.2 does give enough powers to the AO to curtail the period of seven days in certain cases, keeping in view the limitation date for completing the assessment.

The Hon’ble Court observed that the time made available to the petitioner to file its response to the show cause notice was quite inadequate and illusory and therefore, the principles of natural justice can be said to have been violated in the case of the petitioner.

The Hon’ble Court  allowed the petition and the matter was remanded back to the AO, to consider the objections to the Show Cause notice dated 13th September, 2022, which shall be filed within two weeks for which the system be enabled accordingly.

The Petitioner was also given an opportunity of being heard in terms of Section 144(6)(vii) of the Income-tax Act, and thereafter AO shall proceed to pass appropriate orders in accordance with the law.

Section 263 — Revision ­­— Erroneous and prejudicial to the interest of revenue where two views are possible — Assessment Order cannot be said to be erroneous.

15. Principal Commissioner of Income Tax-12 vs. American Spring & Pressing Works Pvt Ltd,
[ITA No. 682 OF 2018, Dated: 2nd August, 2023; AY: 2011-12 (Bom.) (HC).]

Section 263 — Revision ­­— Erroneous and prejudicial to the interest of revenue  where two views are possible — Assessment Order cannot be said to be erroneous.

Assessee was engaged in the business of manufacture and sale of agricultural equipment and development of real estate and hotel business. The assessment for 2011–12 was completed on 13th March, 2014 under Section 143(3) of the Act determining the total income of Assessee at Rs. 3.29 crores. This was revised by Principal CIT under Section 263 of the Act by holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue. Respondent challenged validity of revision order passed by Principal CIT.

The ITAT held that the Principal CIT could not have invoked the jurisdiction of revision for proceedings under Section 263 of the Act.

The Honourable Court observed that the scope of revision proceedings under Section 263 of the Act has been dealt by this Court in Grasim Industries Ltd vs. CIT (321 ITR 92). In Grasim Industries (supra), wherein the Court held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as erroneous order prejudicial to the interest of Revenue, unless the view taken by the Income Tax Officer is unsustainable in law. The ITAT also considered the judgment of the Bombay High Court in Gabriel India Ltd. (203 ITR 108), on the question is to when an order can be termed as erroneous. The ITAT came to a finding that the Principal CIT could not have invoked jurisdiction under Section 263 of the Act.

The Honourable Court observed that the ITAT came to a finding of fact that Assessing Officer has taken a possible view in the matter, and there is nothing to indicate that the Assessing Officer has applied the provisions in an incorrect way. Since the view taken by the Assessing Officer is a possible view, the Principal CIT has assumed jurisdiction under Section 263 of the Act without properly complying with the mandate of Section 263 of the Act. The Principal CIT has failed to show that the Assessment Order was erroneous, causing prejudice to the Revenue. The finding of the ITAT that the Principal CIT could not have exercised its jurisdiction under Section 263 of the Act has not been even challenged. The court held that since the finding of ITAT has not been challenged, it is not permissible to go into the merits of the case as decided by the Assessing Officer. Therefore, no substantial questions of law arises. Appeal dismissed.  

Section 245HA — Settlement Commission — paying additional tax and interest on the income disclosed — Additional tax had to be calculated and paid by the Petitioner on such application.

14. Mahesh Gupta HUF vs. Income Tax Settlement Commission
[WP No. 947 Of 2009, Dated: 14th July, 2023. (Bom.) (HC).]

Section 245HA — Settlement Commission — paying additional tax and interest on the income disclosed — Additional tax had to be calculated and paid by the Petitioner on such application.

The Petitioner challenged an Order dated 11th January, 2008 passed by Settlement Commission, under Section 245HA of the Income-tax Act, 1961 holding that the Applications filed by the Petitioner under Section 245-C of the Act had abated due to short payment of taxes as required by the 245D of the Act.

A survey action under Section 133-A of the Act was conducted at the office premises of the Petitioner. The possession of various documents was taken by the survey party from both the places and statements of various persons were recorded.

The Petitioner filed an Application dated 17th May, 2006, under Section 245-C of the Act, for the Assessment Years 2002–03, 2003–04 and 2004–05. By the said Application, the Petitioner disclosed additional income and the tax on the additional income. The Commissioner of Income Tax-XIV, Mumbai, forwarded his Report dated 17th July, 2006 in the prescribed proforma under Section 245D(1) of the Act for the Assessment Years 2002–03 to 2004–05.

The said Application of the Petitioner was admitted by Settlement Commission by an Order dated 30th November, 2006. The said Order directed the Petitioner, in accordance with the provisions of sub-section (2A) of Section 245-D of the Act, to pay the additional amount of income tax payable on the income disclosed in the Application within 35 days of the receipt of the said Order and to furnish proof of such payments.

The Petitioner paid the tax as calculated by it on the total income as originally and additionally disclosed by it, and informed about the same. The Petitioner annexed to the said letter a Statement showing the tax liability on the additional income offered by the Petitioner in the Settlement Application for Assessment Years 2002–03 to 2004-05 and also challans demonstrating payment of the tax. Further, the Petitioner also made an Application dated 22nd March, 2007 to Respondent No.1, under Section 245-C of the Act, in respect of Assessment Year 2005-06. The Petitioner disclosed an additional income of Rs. 34,19,586/- and tax payable thereon of Rs. 12,22,386/.

By his letter dated 14th August, 2007, the Petitioner once again informed about the taxes paid by him on the additional income disclosed by him in the Application.

The Settlement Commission fixed the hearing of Petitioner’s Application for settlement on 11th December, 2007, and directed the Petitioner and Department to exchange requisite working / calculation of additional tax and interest liability for the Assessment Years 2002–03 to 2005–06 and thereafter prepare a reconciliation statement, if any, so that the matter could be recorded within shortest time on 19th December, 2007. Pursuant thereto, the Petitioner, by his letter dated 14th December, 2007, submitted details of calculation of additional tax and interest payable on the additional income disclosed by the Petitioner. The statements and challans annexed to the said letter show that the Petitioner had paid the taxes for all the Assessment Years, i.e., 2002–03 to 2005–06 as per the Petitioner’s Applications on or before 30th July, 2007.

By a letter dated 18th December, 2007, department gave the details of tax and interest payable by the Petitioner for the Assessment Years 2002–03 to 2005–06 showing short payment of taxes.

On 19th December, 2007, the Petitioner submitted that he had paid taxes as per his own calculation, that he was willing to pay the difference in tax, if any, that may be directed by Settlement Commission, and that if there was any shortfall, department had authority under Section 245D(2D) of the Act to recover the amount due from the Petitioner, but the application of the Petitioner cannot abate on the ground of alleged shortfall in payment of taxes and interest. The Petitioner submitted that this was more particularly so when the Petitioner had, in January, 2007, informed department about the tax payable by the Petitioner and the taxes paid and department had never informed the Petitioner till 17th December, 2007 about the alleged short fall in payment of taxes and interest on the additional income disclosed by the Petitioner.

However, the Settlement Commission, by its Order dated 11th January, 2008, held that the proceedings arising out of the two Applications of the Petitioner had abated in accordance with the provisions of Section 245HA (1)(ii) of the Act. Hence, the AO was directed to dispose of the cases in accordance with the provisions of sub-sections (2), (3) and (4) of Section 245HA of the Act.

The Petitioner filed the present Writ Petition before the Honourable High Court. The main submission was based on the provisions of Section 245D(2D) of the Act. It was submitted that, under the provisions of Section 245D (2D) of the Act, an application filed under sub-section (1) of Section 245C of the Act had to be allowed to be further proceeded with, if the additional tax on the income disclosed in such an application and the interest thereon is paid on or before 31st July, 2007.

It was submitted that, by the Order dated 30th November, 2006, Respondent No.1 had directed that the Petitioner shall within 35 days of the receipt of the Order pay additional amount of tax payable on the income disclosed in the application. It must mean that the additional tax had to be calculated and paid by the Petitioner. If the taxes and interest as calculated by the Petitioner are paid, there could not be any default in payment of taxes and interest. If, according to Settlement Commission, there was a shortfall, it was incumbent on the part of the department to inform the Petitioner about the alleged shortfall. Without any such intimation to the Petitioner, it could not be stated that there was a shortfall in payment of tax and interest.

It was submitted that, in these circumstances, the Petitioner had complied with the provisions of Section 245D(2D) of the Act and, therefore, the Applications of the Petitioner under Section 245C(1) of the Act ought to have been allowed to proceed further.

The Honourable Court further held that the provisions of Section 245D(2D) of the Act require that for an Application made under sub-section (1) of Section 245C of the Act to be allowed to be further proceeded with, the additional tax on the income disclosed in such application and the interest thereon had to be paid on or before 31st July, 2007. Sub-section (2D) says “….unless the additional tax on the income disclosed in such application and the interest thereon, is … paid on or before 31st July, 2007”. Therefore, what has to be paid before 31st July, 2007 is the additional amount of tax on the income disclosed ‘in such application’ and the interest thereon. Therefore, what has to be paid before 31st July, 2007 is the amount of income tax disclosed in the application and nothing more.

In the present case, the Petitioner paid the additional tax and interest on the income disclosed by him in his Applications for Assessment Years 2002–2003 up to 2005-2006 before 31st July, 2007, as per his calculations. On or before 31st July, 2007, the department did not give any intimation to the Petitioner that there was any short fall in the tax and interest paid by the Petitioner as per the income disclosed in his Applications. Much later, it was only by letter dated 18th December, 2007, that department intimated to the Petitioner what, according to them, was the correct tax and interest to be paid by the Petitioner.

Held that the Petitioner had complied with the provisions of Section 245D(2D) of the Act by paying the additional tax and interest on the income disclosed by him in his Applications before 31st July, 2007 as per his calculations, as required by Section 245D(2D) of the Act, and that is what was required of the Petitioner. Therefore, his Applications have to be allowed to be further proceeded with. This is more so, as, at no point of time prior to 31st July, 2007, the department intimated to the Petitioner that the taxes and interest paid by him on the additional income disclosed by him in his Applications were not correct. According to the Honourable Court, it is absurd to interpret the provisions of Section 245D(2D) as suggested by department. How is one expected to know before 31st July, 2007, the figure disclosed only in December 2007.

In these circumstances, the Order dated 11th January, 2008, which holds that the proceedings arising out of the two Applications filed by the Petitioner had abated in accordance with provisions of Section 245HA(1)(ii) of the Act, is erroneous and contrary to the provisions of Section 245D(2D) of the Act.

For the aforesaid reasons, the said Order dated 11th January, 2008 was quashed and set aside.

Section 119(2) — Application for carried forward of losses made to CBDT — Unreasoned Order passed rejecting the application — Reasons cannot be supplemented — Remanded for reconsideration.

13. ATV Projects India Ltd, vs. The Central Board of Direct Taxes & Ors.
[WP NO. 1241 OF 2020, Dated: 17th July, 2023, (Bom.) (HC)]

Section 119(2) — Application for carried forward of losses made to CBDT — Unreasoned Order passed rejecting the application — Reasons cannot be supplemented — Remanded for reconsideration.

Petitioner had filed application under Section 119 (2)(a)/(b) of Income-tax Act, 1961, before CBDT, for carry forward losses of Assessment Years 1998–99 to 2004–05 amounting to Rs.159.87 crores for further period.

The background of the case is that the Petitioner was incorporated on or about 26th February, 1987 and was engaged in the business of executing turnkey projects. After seven or eight years of operation, Petitioner suffered severe losses due to non-availability of working capital funds from the bank and also due to non-recovery from debtors. Due to the mounting loss, Petitioner filed a Reference with the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act,1985 (SICA). Petitioner was declared sick by BIFR on 21st April, 1999 and IDBI was appointed the operating agency for the purpose of formulating a scheme.

Petitioner filed a Draft Rehabilitation Scheme (DRS) before the BIFR. Petitioner having settled and paid 27 out of 28 secured lenders, BIFR directed Petitioner to file an updated DRS and IDBI the operating agency was directed to call for joint meeting of all lenders. An updated DRS was filed with IDBI. IDBI filed a fully tied up DRS with BIFR along with its recommendation. In DRS, Petitioner had also sought relief and concession from the Income Tax Department for allowance of the determined carried forward accumulated business loss of about Rs. 159.87 crores.

In view of repeal of SICA in year 2016, the application before BIFR got abated. Petitioner filed an application with CBDT under Section 119(2)(a)/(b) of the Act, showing the hardship caused due to repeal of SICA and carry forward of losses lapsed. This application came to be rejected by an order dated 2nd March, 2020 wherein no discussion / reasons were provided as to why the application was rejected.

The Honourable Court observed that reasons cannot be supplemented by the affidavit in reply. Reasons should be found in the impugned order itself. CBDT has not articulated as to why it cannot grant relief prayed for by the Petitioner. Reasons introduce clarity in an order. The Court further observed that order howsoever brief, should indicate an application of mind all the more when the same can be further challenged. Reasons substitute subjectivity by objectivity.

Therefore, the order dated 2nd March, 2020 was quashed and matter was remanded back to the CBDT to pass a reasoned order dealing with every submission made by Petitioner and also give a personal hearing to Petitioner.

Stay of demand – open to the tax authorities to grant stay against recovery of demand on deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of appeal

19. Dr. B L Kapur Memorial Hospital vs. CIT (TDS)
W.P.(C) 16287 & 16288 of 2022 (Del)(HC)
Date of order: 25th November, 2022
A.Ys.: 2013-14 and 2014-15

Stay of demand – open to the tax authorities to grant stay against recovery of demand on deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of appeal

The petitioner/assessee challenged the orders dated 6th September, 2022 and 7th November, 2022, rejecting the applications filed by the petitioner and directing the petitioner to make payment to the extent of 20 per cent of the total tax demand arising u/s 201(1) of the Income Tax Act, 1961, for A.Ys. 2013-14 and 2014-15.

The petitioner states that respondent No. 2 (AO) passed orders dated 30th March, 2021 u/s 201(1)/201(1A) of the Act holding the petitioner to be an ‘assessee-in-default’ for short deduction of tax at source and total tax liability was computed at Rs. 16,47,35,035 and Rs. 20,09,39,099 for A.Ys. 2013-14 and 2014-15, respectively. Aggrieved by the orders, the petitioner filed appeals before CIT(A) along with an application seeking stay on the recovery of demand.

The petitioner states that the respondent No. 2 (AO) passed the orders dated 6th September, 2022, whereby the stay applications filed by the petitioner were dismissed in a non-speaking manner and the petitioner was directed to pay 20 per cent of the disputed demand. The petitioner filed applications dated 20th September, 2022, before respondent No.3 for review of the stay orders dated 6th September, 2022. He, however, states that the impugned orders dated 7th November, 2022 were passed rejecting the stay applications of the petitioner without dealing with the contentions raised by the petitioner.

The petitioner further states that respondents while disposing of the petitioner’s applications have failed to appreciate that the condition under the impugned Office Memorandum dated 31st July, 2017, read with the Office Memorandum dated 29th February, 2016, stating that, “the assessing officer shall grant stay of demand till disposal of the first appeal on payment of twenty per cent of the disputed demand”, is merely directory in nature and not mandatory. In support, it relied on the decision of the Supreme Court in Pr. CIT vs. LG Electronics India (P) Ltd., 303 CTR 649 (SC), wherein it has been held that it is open to the tax authorities, on the facts of individual cases, to grant a stay against the recovery of demand on a deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of the appeal.

The Hon. Court observed that the requirement of payment of 20 per cent of disputed tax demand is not a pre-requisite for putting in abeyance recovery of demand pending first appeal in all cases. The said pre-condition of deposit of 20 per cent of the demand can be relaxed in appropriate cases. Even the Office Memorandum dated 29th February, 2016 gives instances like where an addition on the same issue has been deleted by the appellate authorities in the previous years or where the decision of the Supreme Court or jurisdictional High Court is in favour of the assessee. The Supreme Court in the case of PCIT vs. M/s LG Electronics India Pvt. Ltd. (supra) held that tax authorities are eligible to grant a stay on deposit of amounts lesser than 20 per cent of the disputed demand in the facts and circumstances of a case.

The Court held that, the impugned orders are nonreasoned orders. Neither the AO nor the Commissioner of Income Tax have either dealt with the contentions and submissions advanced by the petitioner nor considered the three basic principles i.e. the prima facie case, balance of convenience and irreparable injury while deciding the stay application.

Consequently, the impugned orders and notices were set aside and the matters are remanded back to the respondent No.1- Commissioner of Income Tax for fresh adjudication in the application for stay after granting a personal hearing to the petitioner. No coercive action shall be taken by the respondents against the petitioner in pursuance to the demands arising from the impugned orders.

Business expenditure – Corporate Social Responsibility (CSR) – Explanation 2 was inserted in Section 37 by Finance (No.2) Act, 2004 w.e.f. 1st April, 2015.

Pr. CIT – 7 vs. PEC Ltd.
ITA No. 268, 269 & 270 of 2022 (Delhi HC)
Date of order: 29th October, 2022
A.Ys.: 2013-14 to 2014-15
Section: 37 of ITA, 1961

Business expenditure – Corporate Social Responsibility (CSR) – Explanation 2 was inserted in Section 37 by Finance (No.2) Act, 2004 w.e.f. 1st April, 2015.

A common question of law arose for consideration in the appeals:“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal [hereafter referred to as “Tribunal”] erred in allowing deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavour under Section 37 of the Income Tax Act, 1961 [in short “Act”]?”

The expenses incurred by the two assessees in the A.Ys. 2013-14 to 2014-15 were disallowed by the AO in each of the assessment years detailed out hereunder:

Assessment Year

Amount of CSR expenditure

2013-2014

Rs. 3,79,19,732

2014-201

Rs. 5,32,92,063

2013-2014

Rs. 6,44,00,000

The Revenue contended that the assessees could have claimed a deduction u/s 37 of the Act only if all the conditions prescribed in the said provision were fulfilled. According to Revenue, the expenditure qua which deduction is claimed was not incurred wholly and exclusively for the purposes of carrying on the business or profession. It was the department’s contention that the funds utilized by the assessee to effectuate its CSR obligation involved the application of income and not an expense which had been incurred wholly and exclusively for the purposes of carrying on business.

In support of this plea, the department relied upon the amendment in Section 37(1) by insertion of Explanation 2. It was contented that Explanation 2 appended to subsection (1) of Section 37 is clarificatory in nature and, therefore, would be applicable qua the assessment years in issue concerning each of the respondents/assessees.

The Income Tax Appellate Tribunal had relied upon Circular No.1 dated 21st January, 2015 to reach a conclusion that the amendment brought about in Section 37(1) of the Act by way of Explanation 2 would not operate vis-à-vis the assessment years in issue.

The Hon’ble High Court referred and relied on the relevant parts of Section 37(1) and observed that a plain reading of the aforesaid extract of Section 37 would show that in order to claim deduction u/s 37, the expenditure incurred should be one that:

(i) D oes not fall in any of the provisions referred to therein, i.e. Sections 30 to 36.

(ii) S hould not be in the nature of a capital expenditure or personal expenses of the assessee.

(iii) And lastly, the expenditure should have been laid out or expended wholly or exclusively for the purposes of business or profession.

According to the Hon’ble Court, if these conditions are met, the expense incurred can be deducted while computing the income chargeable under the head ‘profits and gains of business or profession’.

In the instant case, the assessee has sought to seek the deduction of amounts spent to progress its CSR obligation and sought deduction against the income chargeable under the head ‘profits and gains of business or profession’. The Tribunal has opined that Explanation 2 inserted in Section 37(1) was prospective and therefore was not applicable in the assessment years in issue. It is required to be noted, that Explanation 2 was inserted in Section 37 via Finance (No.2) Act, 2004 w.e.f. 1st April, 2015. Furthermore, the Court noticed that, the memorandum published along with Finance (No.2) Bill 2014 clearly indicated that the amendment would take effect from 1st April, 2015 and, accordingly, would apply in relation to A.Y. 2015-2016 and the subsequent years.

This was plainly evident upon perusal of the extract from the memorandum:

“The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.”

This position was also exemplified in the circular dated 21st May, 2015 issued by the Central Board of Direct Taxes (CBDT). The relevant extract of the said circular is extracted hereafter:

“13.3 The provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income- tax Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, said section 37 has been amended to clarify that for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein.

13.4 Applicability:- This amendment takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.”

Thus, the Court observed that, if there was any doubt, the same has been removed both by the memorandum issued along with the Finance Bill, as well as the aforementioned circular issued by the CBDT.

Therefore, the contention of appellant/Revenue cannot be accepted. The appeals were accordingly disposed off.

Offence and prosecution – Failure to furnish return of income – delay of 72 days in filing of return as requisite documents were not supplied to him despite being demanded – no whisper of evasion of income-tax – cognizance taken by Trial Court for offence of tax evasion u/s 276CC was ex facie erroneous.

17. Ashish Agarwal vs. Income-tax Department
[2022] 143 taxmann.com 322 (Rajasthan)
Date of order: 4th August, 2022
Sections: 276CC, r.w.s. 279 of the ITA, 1961

Offence and prosecution – Failure to furnish return of income – delay of 72 days in filing of return as requisite documents were not supplied to him despite being demanded – no whisper of evasion of income-tax – cognizance taken by Trial Court for offence of tax evasion u/s 276CC was ex facie erroneous.

The petitioner was an assessee under the Income-tax Act, 1961. A search and seizure was conducted at the petitioner’s business and residential premises on 24th February, 2016, in furtherance whereof, a notice u/s 153-A of the Act, requiring him to file return of income-tax within 30 days came to be issued.

It is the case of the petitioner that on receipt of the notice, he had sent a letter dated 28th July, 2016 and requested the Dy. Commissioner, Income-tax to provide copies of the statements recorded during the course of the search and other relevant documents so that a return as demanded u/s 153-A can be filed. Later on, the petitioner filed the return of income.

The Commissioner, Income-tax (Central), thereafter issued a show cause notice (SCN) dated 28th February, 2019 u/s 279(1) and asked him why not prosecution u/s 276-CC of the Act, for failure to file return of Income-tax in time be launched against him.

In response to the SCN, the petitioner filed a reply and explained the delay of 72 days inter alia contending that there was no intentional delay in filing the return and he was prevented by sufficient cause, as the requisite documents were not supplied to him despite being demanded. It was also stated that the demand of tax is meagre. And hence, the prosecution sanction be not granted.

The petitioner received summons issued by the Additional Chief Metropolitan Magistrate, Jodhpur Metro (hereinafter referred to as ‘the trial Court’) requiring the petitioner to appear on 28th May, 2022.

On an inquiry being made, the petitioner came to know that the trial Court had taken cognizance of offence u/s 276-CC prima facie finding it to be a case made out against the petitioner.

The petitioner has assailed the aforesaid order dated 21st February, 2018, whereby cognizance has been taken against him so also the proceedings pending before the trial Court.

The Hon. High Court observed that a simple look at the complaint filed by the respondent-Income-tax Department leaves no room for ambiguity that the Department wanted the petitioner’s prosecution u/s 276-CC(ii), as is evident from the caption of the application. If the application is read, it is apparent that the Income-tax Department had desired petitioner’s prosecution for 72 days delay in filing the return. There is not even a whisper of evasion of income-tax, whereas the Id. trial Court, claiming to have perused the record, has observed that the accused (petitioner herein) has not filed his return of income for 2013-14 and has evaded income-tax.

The Court held that the order of the cognizance shows a clear misreading of the complaint and the same suffers from manifest error of law, for which it is liable to be quashed and set aside.

The Court further observed that the petitioner ought to have preferred a revision petition u/s 397 of the Code but then, considering that the petitioner and his group has filed about 80 petitions of identical nature, relegating the petitioners to file revision petition(s), that too when the order impugned suffers from palpable error of law and facts, would lead to multiplicity of litigation and passing of dockets from the High Court to the Revisional Court.

In view of the discrepancy and considering that not only the notice issued to the petitioner before granting prosecution sanction, even the complaint filed by the Department alleges delay in filing return, while eliciting prosecution u/s 276-CC (ii), thus the cognizance, which has been taken for evasion of tax is ex-facie erroneous and deserves to be quashed and set aside.

The Court observed that the order granting prosecution sanction has neither been challenged in the present petition nor can the same be permitted to be questioned before the Court in its jurisdiction u/s 482 of the Code. Because, the act of granting prosecution sanction is an administrative or statutory exercise of powers.

The cognizance order in each of the case was quashed and set aside.

Statement recorded – peak credit calculated by the tax authorities – assessee offered the same and paid taxes – Department wanted to bifurcate the disclosed amount in two A.Ys – tax rate in both the A.Ys is the same and there is no loss to the revenue

Pr. CIT – Central-02 vs. Shri Krishan Lal Madhok
ITA No. 229 of 2022
Date of order: 16th September, 2022 Delhi High Court
16 [Arising from the order dated 3rd August, 2021
passed by the ITAT in ITA No. 3917/Del./2017
& 6268/Del./2017 and ITA No. 6648/Del/2017 & ITA No 6269 /Del./2017]
A.Ys.: 2006-07 and 2007-08
 
16. Statement recorded – peak credit calculated by the tax authorities – assessee offered the same and paid taxes – Department wanted to bifurcate the disclosed amount in two A.Ys – tax rate in both the A.Ys is the same and there is no loss to the revenue

The assessee’s statement was recorded wherein he offered certain income for taxation. The assessee honoured his statement and offered Rs. 2,23,68,000 in his return of income for A.Y. 2007-08 and paid taxes thereon. There is no dispute that the peak credit was calculated by the tax authorities and at the behest of the tax authorities the assessee offered the same in his income for A.Y. 2007-08 and paid taxes thereon.

The Department wanted to bifurcate the disclosed amount in two A.Ys when the tax rate in both the A.Ys is the same and there is no loss to the Revenue.

The ITAT did not find any merit in bifurcating the income in two A.Ys when the assessee has paid taxes in A.Y. 2007- 08.

Before the Hon. High Court, the Revenue contended that the ITAT has erred in deleting the addition of Rs. 2,05,50,545 and Rs. 18,58,311 u/s 69 of the Act, on account of peak balance pertaining to A.Y.2006-07 and A.Y. 2007-08 respectively, in the bank account maintained by the assessee with HSBC, Geneva. The Revenue contented that the ITAT has erred in holding that there is no loss to the Revenue as the assessee has shown the said income for A.Y. 2007-08 and paid taxes on such undisclosed income. The Revenue contented that the ITAT has erred in holding that the issue of bifurcating the undisclosed amount in two A.Ys. i.e. A.Ys. 2006-07 and 2007-08 does not arise for the reasons that the tax rates in both the assessment years are the same. It was submitted that the ITAT acted contrary to the settled position of law that income of any particular year has to be taxed in the year in which said income accrues/is received, relying upon the judgment of the Supreme Court in Commissioner of Income Tax vs. British Paints India Ltd., AIR 1991 SC 1338.

The Assessee contended that the sole basis for the addition is the admission in the statement recorded u/s 132(4) of the Act and the alleged sheets received from the French government under DTAC. He pointed out that the Additional Chief Metropolitan Magistrate has vide order dated 28th June, 2021 discharged the assessee u/s 276C and 277 of the Act.

The Court held that even assuming that the statement of the assessee is paramount and sacrosanct, then also there is no denial by the Revenue authorities that the assessee has honoured his statement and offered Rs. 2,23,68,000 in his return of income for A.Y. 2007–08 and has paid taxes thereon.

Further, the peak credit had been calculated by the tax authorities and at the behest of the tax authorities, the assessee had offered the amount calculated by them in his income for A.Y.2007–08 and paid taxes thereon, which return of income has been accepted by the Revenue.

Since the tax rate in both the A.Ys. i.e. 2006-07 and 2007- 08 was same, the court held that if the present appeals are allowed and an amount of Rs. 2,05,50,545 is added to the assessee’s income in A.Y. 2006-07, it would amount to double taxation, inasmuch as, the said amount is admittedly a part of the amount of Rs. 2,23,68,000 offered to taxation in A.Y. 2007-08. The Hon Court referred to the decision in case of PCIT(Central) vs. Krishan Kumar Modi, 2021 SCC OnLine Del 3335.

With respect to the reliance placed on the judgment in British Paints India Ltd. (supra), the Court observed that the same has no application to the facts of this case, as the said observations were made by the Supreme Court while rejecting a method of accounting adopted by the assessee which has the effect of masking the profits earned in the relevant year; artificially shifting profits to next year and thus, making it difficult for revenue to assess the profits in the relevant year and thereafter.

The amount offered for by assessee for taxation is also not in dispute. The dispute has arisen only with respect to the relevant assessment year. However, the ITAT has held that the said amount was declared at the behest of the Revenue and the calculation of the peak credit was also at the behest of the tax authorities. There was no challenge to the said finding of the ITAT in the grounds of appeal.

Accordingly, no substantial question of law arose for consideration in the peculiar facts of the case and the appeal was dismissed.

Disallowance u/s 14A – dividend income – from an overseas company in Oman – no tax is payable on the said dividend in Oman and India – Total income – Section 14A would not be attracted

Pr. CIT – Central-1 vs. IFFCO Ltd.
ITA No. 390 of 2022
Date of order: 11th October, 2022
15 Delhi High Court
[Arising out of ITAT order dated 6th January,
2021 in ITA No.7367/DEL/2017] A.Y.: 2007-08

15. Disallowance u/s 14A – dividend income – from an overseas company in Oman – no tax is payable on the said dividend in Oman and India – Total income – Section 14A would not be attracted

The Assessee received dividend income of Rs. 113.86 crores from OMIFCO-OMAN, an overseas company in Oman, no tax was payable on the said dividend in Oman and India, as tax sparing credit of notional tax on the dividend is allowed under Article 25 of the Indo-Oman DTAA. The Revenue contended that the assessee is effectively not paying any tax on the said income either in the source country or in India and thus, dividend income for all purposes is exempted from tax. It was stated that the ITAT has erred in restricting the disallowance to the tune of Rs. 74.26 lakhs as against Rs. 9.10 crores disallowance made by the AO u/s 14A read with Rule 8D of the Act after excluding the investment in OMIFCO-Oman.

The Hon. Court held that in view of section 14A(1) of the Act, no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. As per section 2(45) of the Act, “total income” means the total amount of income referred to in section 5, computed in the manner laid down in the Act. Therefore, section 14A of the Act pertains to disallowance of deduction in respect of income which does not form a part of the total income. Since the dividend received by the assessee from OMIFCO, Oman is chargeable to tax in India under the head “Income from other sources” and forms a part of the total income, the same is included in taxable income in the computation of income filed by the assessee. However, rebate of tax has been allowed to the assessee from the total taxes in terms of Section 90(2) of the Act read with Article 25 of the Indo-Oman, DTAA and thus, the dividend earned can be said to be in the nature of excluded income and, therefore, the provisions of Section 14A would not be attracted in this case.

The Hon. Court relied on the case of CIT vs. M/s Kribhco [2012] 349 ITR 618 (Delhi) wherein it has been held that provisions of Section 14A are inapplicable as far as deductions, which are permissible and allowed under Chapter VIA are concerned.

In view of the aforesaid the appeal was dismissed.

Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter remanded for fresh consideration

Sanjay Gupta vs. Union Of India & Ors.
W.P.(C) 13712/2022
Date of order: 22nd September, 2022
Delhi High Court
A.Ys.: 2015-16, 2017-18 & 2018-19

Section 148A – Reopening of assessment – Notice u/s 148A(b) – Firm Dissolved – duly intimated the department – Transaction duly recorded in proprietorship concern – Matter  remanded for fresh consideration

The Present writ petition has been filed challenging the notice  issued u/s 148, 148A(b) and  orders passed u/s148A(d) of the Act.

The Petitioner stated that the impugned notices are without jurisdiction as the same have been issued in the name of a non-existent partnership firm – Railton Electronics. He states that the Petitioner, during the reassessment proceedings, duly informed the department vide replies dated 23rd March, 2022 and 19th January, 2022 that the partnership firm being M/s Railton Electronics having PAN Number AANFR1676E was dissolved as per the Deed of Dissolution dated 1st April, 2013 and thereafter, the firm was taken over by the Petitioner as a sole proprietor.

The Petitioner  stated that as per the letter obtained from the erstwhile partnership firm’s bank, the partnership firm’s bank account was closed on 19th July, 2013 itself. He contends that the Railton Electronics is now maintaining a proprietorship account opened on 25th July, 2013. In support of his contention, he relied upon the certificates issued by the Petitioner’s banker.

The Petitioner emphasises that the alleged transactions mentioned in the notices issued u/s 148A(b) of the Act are duly accounted for in the return of the sole proprietorship. He pointed out that there has been a scrutiny assessment in the account of the sole proprietorship firm in the name of the sole proprietor, Mr. Sanjay Gupta.

The Hon. Court, upon consideration of the above factual position, sets aside the orders dated 9th April, 2022 passed u/s 148A(d) of the Act for A.Ys. 2018-19 and 2015-16, the notices issued u/s 148 and directs the Petitioner to file supplementary replies before the Assessing Officer (AO) clearly stating that the transactions referred to in the notices issued  u/s 148A(b) of the Act have been duly accounted for in the account of the sole proprietorship firm, and have been offered to tax. Along with the replies, the Petitioner shall enclose all the relevant documents including certificates issued by Canara Bank, income tax returns, bank statements as well as the assessment orders passed in the name of a sole proprietorship for the said assessment years, within two weeks. The AO was directed to pass fresh orders u/s 148A(d) of the Act within a period of four weeks thereafter.

S. 260A – Additional grounds of appeal raised before High court – Revision order u/s 263 passed in case of dead person – Matter remanded

Bimal vs. Pala (Legal heir of Late Smt. Ranjana Pala) vs. ACIT – 26(2)
ITA No. 517 of 2018
Date of order: 16th September, 2022
Bombay High Court
[Arising from Mumbai ITAT order dated 17th March, 2017 – Bench “B” ITA No. 2735/Mum/2016 – A.Y.: 1996-97]

S. 260A – Additional grounds of appeal raised before High court – Revision order u/s  263 passed in case of dead person – Matter remanded

The appeal was filed u/s 260A of the Income Tax Act, 1961. The  Appellant stated that one of the grounds which ought to have been taken, but was not taken before the Tribunal, was regarding the death of Ms. Ranjana Pala, on 22nd January, 2016, which was material to the case inasmuch as the order dated 16th March, 2016, came to be passed by the Principal Commissioner of Income Tax, after the death of the said assessee. It was stated that even in the present memo of appeal, this question has not been raised and, therefore, learned Counsel for the Appellant has tendered a schedule of amendment seeking to incorporate, the following:

“28AA Whether the order dated 16-03-2016 passed by the Respondent No. 2 under Section 263 of the Act in the case of “Ms. Ranjana Pala” who had passed away on 22-01-2016 was against non-existent person and hence illegal and bad in law?”

The aforesaid prayer made by the learned Counsel for the Appellant was allowed by the court. The Hon. Court observed that the assessee, Ms. Ranjana Pala, had expired on 22nd January, 2016, at Singapore. A copy of the death certifcate issued by the authorities at Singapore which was on record, confirms this fact. According to the certificate, the deceased assessee passed away on 22nd January, 2016, in the Mount Alizabeth Hospital, Singapore. It is stated that the factum of the death of the deceased assessee was brought to the notice of the Principal Commissioner of Income Tax, vide communication dated 7th March, 2016, which was not only acknowledged by hand receipt but also got reflected in the order dated 16th March, 2016 passed u/s 263 of the Act by the Principal Commissioner of Income Tax. It is thus stated that having the full knowledge about the factum of the death of the deceased assessee, the authority had proceeded to pass an order against a dead person, which was thus a nullity in law.

The Hon. Court observed that since the issue which is now sought to be raised before this Court in the appeal, was not an issue which was raised or agitated before the Tribunal, but nevertheless has a direct bearing on the controversy, therefore the Hon. Court deemed it necessary to remand the matter to the Tribunal for a fresh consideration on the above limited issue, keeping all other issues, which have been raised in the present memo of appeal, open.

Accordingly the appeal was disposed.

S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

Pr. Commissioner of Income Tax vs. M/s Attire Designers Pvt. Ltd.
ITA 344 of 2022  
Date of order: 20th September, 2022
A.Y.: 2014-15
Delhi High Court  
[Arising from Delhi ITAT order dated
29th November, 2021 in ITA 5224/Del./2017]

S. 68 – Identity, creditworthiness and genuineness of the transactions of purchases – Concurrent finding of the fact recorded by both the authorities- sales and purchase transactions, transfer pricing report at arm’s length and book results declared accepted – No substantial question of law arises for consideration

The Assessing Officer (AO) treated the credit balance of the associate parties relating to purchase made by the assessee as non-genuine.

Before the CIT(A) the assessee furnished the  details of the payments of outstanding balance as on 31st March, 2014 along with confirmation for fair and proper disposal of the appeal. The assessee submitted details of parties as well as details of the transaction made with said parties during the Financial Year under consideration mentioned in transfer pricing report in Form 3CEB as well as transfer pricing study, which was submitted by assessee before the AO.

The CIT(A) noted that the said transactions of purchases were at arm’s length price and no adverse finding was brought on record by the AO who never doubted the purchases made by the assessee during the year which includes purchases made from sundry creditors, sale made by assessee during year and the book result declared by the assessee for the financial year under consideration.

During the appellate proceedings, the CIT(A) also observed that the sundry creditors have purchased goods during the year under consideration from different parties, and out of the said purchases, they have sold goods to the assessee company and as per general business practice, goods were purchased on credit basis and therefore, the allegation of AO that the financial statement of the sundry creditors do not support their creditworthiness, is not based on proper appreciation of the facts. The CIT(A) also perused the details of sale, purchase, trade payables and trade receivables for the financial year under consideration of the said sundry creditors and came to the conclusion that there are corresponding purchases against sales declared by them for the financial year under consideration, and there are also trade payables outstanding as on 31st March, 2014, which shows that the said companies also have trade payable against purchases of goods, therefore, the allegation made by the AO that such companies do not have creditworthiness to enter into large scale transaction of sale and purchase is factually incorrect. The CIT(A) held that once the AO has accepted sales and purchase transactions, transfer pricing report at arm’s length and book results declared by the Appellant, he is not justified in treating the credit balance of associate parties relating to sales to the assessee as non-genuine without bringing any adverse material on record. The identity, creditworthiness and genuineness of the transactions of purchases made by the assessee from sundry creditors is proved .

The ITAT upheld the findings of the CIT(A) and dismissed the appeal of the Revenue relying  on the judgment of the Delhi High  Court in the case of Commissioner of Income Tax vs. Ritu Anurag Aggarwal [2010] 2 taxmann.com 134 (Delhi).

The Hon. High Court observed that both the Appellate Authorities below have recorded concurrent findings of the fact on the issues.

The Hon. High Court relied on the Supreme Court decisions in the case of Ram Kumar Aggarwal & Anr. vs. Thawar Das (through LRs), (1999) 7 SCC 303, which reiterated that u/s 100 of the Code of Civil Procedure, the jurisdiction of the High Court to interfere with the orders passed by the Courts below is confined to hearing on substantial question of law and interference with finding of the fact is not warranted if it involves re-appreciation of evidence. Further, the Supreme Court in State of Haryana & Ors. vs. Khalsa Motor Lid & Ors., (1990) 4 SCC 659 held that the High Court was not justified in law in reversing, in second appeal, the concurrent findings of the fact recorded by both the Courts below. The Supreme Court in Hero Vinoth (Minor) vs. Seshammal, (2006) 5 SCC 545 also held that “in a case where from a given set of circumstances two inferences of fact are possible, the one drawn by the lower appellate court will not be interfered by the High Court in second appeal. Adopting any other approach is not permissible.”

It has also held that there is a difference between a ‘question of law’ and a ‘substantial question of law’. Consequently, the Hon. Court held that no substantial question of law arises for consideration in the present appeal and accordingly the same was dismissed.

S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

11 Best Buildwell Private Limited vs. Income Tax Officer, Circle 4 (2), Delhi & Anr.
W.P.(C) 11338/2022
Date of order: 1st August, 2022
Delhi High Court

S. 148A(d) – Reopening of assessment – Impugned SCN as well as the impugned order u/s 148A(d) of the Act are based on distinct and separate grounds – Information referred in SCN not provided to Assessee

The petitioner challenged the order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 as well as show cause notice (SCN) dated 16th March, 2022 issued u/s 148A(b) for A.Y. 2018-19.

The petitioner states that the petitioner had filed its return of income for A.Y. 2018-19 declaring an income of Rs. 6,32,45,180 and a loss of Rs. 74,36,185. He states that the case of the petitioner was picked up for scrutiny, and after examination of all the submissions of the petitioner, an assessment order dated 27th April, 2021 u/s 143(3) r.w.s 144B was passed assessing the income of the petitioner at Rs. 6,41,76,500. He points out that one of the points for selecting the petitioner’s case for scrutiny was ‘Business Purchases’, and after analysing the documents submitted by the petitioner, no additions were made by the Assessing Officer on account of business purchases.

The petitioner states that the impugned SCN dated 16th March, 2022 issued u/s 148A(b) did not provide any information and/or details regarding the income that has been alleged to have escaped assessment. He states that the petitioner filed a response to the impugned SCN dated 16th March, 2022, specifically requesting the respondent to provide the details of the transaction and vendors from whom the petitioner had made purchases and raised invoices which respondent No.1 considered bogus. He further states that respondent No.1 failed to consider the fact that the petitioner had made purchases from vendors who were registered under GST and had claimed an input tax credit of GST on the purchases made from them as per statement 2A reflected on the GST portal based on the invoices raised by the vendors. He points out that the credit claimed by the petitioner has not been rejected.

The petitioner states that the impugned order dated 30th March, 2022 u/s 148A(d) merely relies on an alleged report prepared against the assessee company. He emphasises that no such report was ever furnished to the petitioner.

On behalf of the respondents, it was stated that notice u/s 148A(b) had been issued in the present instance as the petitioner’s ITR and GST Data did not reconcile. He also states that the analysis of GST information of third parties reveals substantial routing of funds by way of bogus purchases.

In rejoinder, the petitioner states that the impugned order passed u/s 148A(d) does not refer to any lack of reconciliation between the ITR and GST data of the petitioner. He also states that no GST information showing substantial routing of funds was ever furnished to the petitioner.

The Court observed that the impugned SCN, as well as the impugned order u/s 148A(d), are based on distinct and separate grounds.

The SCN primarily states that “it is seen that the petitioner has made purchases from certain non-filers”. However, no details or any information about these entities was provided to the petitioner. It is not understood as to how the petitioner was to know which of the entities it dealt with were filers or non-filers!

Further, the impugned order states that a report was prepared against the petitioner-company, which concludes that the assessee had shown bogus purchases from bogus entities to suppress the profit of the company and reduce the tax liability from 2015-16 to 2020-21. However, no such report which forms the basis for the ‘information’ on which the assessment was proposed to be reopened had been provided to the petitioner. In fact, there are no specific allegations in the SCN to which the petitioner could file a reply.

Keeping in view the aforesaid, the impugned order dated 30th March, 2022 passed u/s 148A(d) and notice dated 31st March, 2022 issued u/s 148 are quashed, and the respondents are given liberty to furnish additional materials in support of the allegations made in the SCN dated 16th March, 2022 within three weeks including reports, if any. Thereafter, the AO shall decide the matter in accordance with the law. The writ petition was disposed.

S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

10 Ajay Bhandari vs. Union of India & 3 Ors.
Writ Tax No. 347 of 2022
Date of order: 17th May, 2022
Allahabad High Court

S. 148A r.w.s. 149 – Reopening of assessment – A.Y. 2014-15 – Effect of SC Judgement in case of Ashish Agarwal dated 4th May, 2022 and Board’s Circular dated 11th May, 2022 – Where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000 – Reopening not justified

The impugned notice u/s 148 of the Income Tax Act, 1961, for A.Y. 2014-15 was issued to the petitioner by respondent no. 3 on 1st April, 2021. The “reasons to believe” recorded by respondent no. 3 for issuing the impugned notice, read as under:

“I have reason to believe that an income to the tune of Rs. 2,63,324 has escaped assessment for the aforesaid year”.

The reassessment order dated 31st March, 2022 has been passed by respondent no. 4, i.e. National Faceless Assessment Centre, Delhi u/s 147 r.w.s.144B.

The Additional Solicitor General (ASG) of India relied on the judgement of Hon’ble Supreme Court under Article 142 of the Constitution of India in Civil Appeal No. 3005 of 2022 (Union of India and others vs. Ashish Agarwal) decided on 4th May, 2022 and reported in 2022 SCC OnLine SC 543 and submitted that the notices issued after 1st April, 2021 u/s 148 are liable to be treated as notices u/s 148A of the Act, 1961 as substituted by the Finance Act, 2021.

He further relied on Instruction being F.No 279/Misc./M-51/2022-ITJ, Ministry of Finance, Department of Revenue, CBDT, ITJ Section dated 11th May, 2022, paragraph 7.1 of the aforesaid instruction and stated that the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16 shall not attract the judgement of Hon’ble Supreme Court in the case of Ashish Agarwal (supra). Lastly, the ASG submitted that since the notice was issued on 1st April, 2021 for A.Y. 2014-15, therefore, it shall be covered by a Division Bench’s judgement of this Court in the case of Daujee Abhushan Bhandar Pvt. Ltd. vs. Union of India and 2 others (Writ Tax No. 78 of 2022) decided on 10th March, 2022.

The petitioner referring to paragraphs 23 and 25 of the judgement of the Hon’ble Supreme Court in the case of Ashish Agarwal (supra) submitted that the impugned notice u/s 148 issued by respondent no. 3 is wholly without jurisdiction inasmuch as jurisdiction cannot be assumed after the expiry of the limitation period. He further submits that conferment of jurisdiction is essentially an act of the legislature, and the jurisdiction cannot be conferred by any circular or even by Court orders. He submits that even under the amended provisions, which have no application on facts of the present case, impugned notice u/s 148 would be without jurisdiction and barred by limitation inasmuch as for A.Y. 2014-15, the limitation under the amended provisions of sections 148A and 149 had expired on 31st March, 2018 inasmuch as the allegation of evaded income is Rs. 2,63,324 which has been provided to be read as Rs. 26,33,324 by notice dated 17th March, 2022 u/s 142(1), which is much below Rs. 50 Lacs.

The Hon. Court observed the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and Circular F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi. Section 147, as it existed till 31st March, 2021, empowers the Assessing Officer to assess or reassess or recompute loss or depreciation allowance or any other allowance, as the case may be, for the concerned assessment year in the case of an assessee if he has reason to believe that income chargeable to tax has escaped assessment, subject to the provisions of sections 148 to 153. A pre-condition to initiate proceedings u/s 147 is the issuance of notice u/s 148. Thus, notice u/s 148 is a jurisdictional notice. Section 149 provides a time limit for issuance of notice u/s 148. The time limit is provided under the unamended provisions (existed till 31st March, 2021) and the amended provisions (effective from 1st April, 2021) as amended by the Finance Act, 2021.

The judgment of Hon’ble Supreme Court under Article 142 of the Constitution of India, in the case of Ashish Agarwal (supra) has been explained for implementation/clarified by Instruction No.01/2022 being F.No 279/Misc./M-51/2022-ITJ, dated 11th May, 2022 issued by the Ministry of Finance, Department of Revenue, CBDT, ITJ Section, New Delhi, in exercise of powers u/s 119.

The ASG has made a statement before the Court, that as per Clause-7.1 of the Board’s circular dated 11th May, 2022, the notices u/s 148 relating to A.Ys. 2013-14, 2014-15 and 2015-16, shall not attract the judgment of Hon’ble Supreme Court in the case of Ashish Agarwal (supra) and the impugned notice u/s 148 issued on 1st April, 2021 for A.Y 2014-15 is, therefore, clearly barred by limitation and consequently without jurisdiction. Therefore, in view of the admission made by the learned ASG on behalf of the respondents, all other questions, including the question of conferment of jurisdiction etc., are left open and not dealt with by the Hon. Court.

The Court further observed that as per clauses 6.2 and 7.1 of the Board’s Circular dated 11th May, 2022, if a case does not fall under clause (b) of sub-section (i) of section 149 for the A.Ys. 2013-14, 2014-15 and 2015-16 (where the income of an assessee escaping assessment to tax is less than Rs. 50,00,000) and notice has not been issued within limitation under the unamended provisions of section 149, then proceedings under the amended provisions cannot be initiated.

The impugned notice u/s 148 of the Act, 1961 issued on 1st April, 2021 for A.Y. 2014-15 and the impugned notice dated 13th January, 2022 u/s 144 and the reassessment order dated 13th January, 2022 u/s 147 r.w.s 144B for A.Y. 2014-15 passed were quashed. The writ petition was allowed.

S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

8 Omega Investments and Properties Ltd. vs. Commissioner of Income Tax- 3
[Income Tax Appeal No. 127 of 2021 & W.P. No. 1217 of 2020 (Bombay High Court); Arising out of ITA No. 868/M/2016 order of Mumbai Tribunal dated 9th April, 2018 and Third Member decision of Mumbai ITAT MA No. 282/Mum/2018 order dated 13th November, 2019]
Date of order: 7th June, 2022
A.Y.: 2007-08
 
S. 254(2) – Rectification of mistake apparent on record – ITAT –- Not following coordinate bench decision in assessee’s own case

The Assessee had undertaken a Slum Rehabilitation Project at Parel, Mumbai namely ‘Kingston Tower’. According to the Assessee, the project was initially approved by the Slum Rehabilitation Authority on 7th October, 2002. However, due to F.S.I. related issues, the Assessee filed an amended plan which was approved subsequently. A Letter of Intent for approval was issued on 16th April, 2004 and an amended intimation of approval for the project was issued on 4th June, 2004. The Assessee had filed a return of income for A.Y. 2007-08 declaring a total income of Rs. 22,050. The Assessee had claimed deduction u/s 80-IB(10) of Rs. 2,05,33,831. The assessment was completed on 15th May, 2009, and the deduction under particular provisions were granted. Subsequently, the case for A.Y. 2007-08 was reopened u/s 148 vide notice dated 17th December, 2012, and an order was passed by the AO on 7th March, 2014 against which the Assessee filed an Appeal before the CIT (Appeals), which was allowed by the CIT (Appeals) by order dated 30th November, 2015. The Revenue filed an Appeal before the Appellate Tribunal which was allowed by the impugned order dated 9th April, 2018. After the order was passed, the Assessee filed a rectification application on 17th April, 2018 u/s 254 (2). The rectification application was rejected by order dated 29th November, 2019.

Against the order of the Tribunal dated 9th April, 2018, the Assessee has filed the Income Tax Appeal No. 127 of 2021, and against the order rejecting the Rectification Application dated 29th November, 2019, the Assessee has filed Writ Petition No. 1217 of 2020.
     
The Hon. Court observed that before the Tribunal, the Assessee had made reference to the orders passed in favour of the Assessee for A.Ys. 2009-10 and 2010-11, in which it was held that the approval was given to the Assessee’s project on 4th June, 2004, which being beyond the relevant date of 1st April, 2004, as per the provisions u/s 80-IB(10), the Assessee was entitled to the benefit of the said provisions. The Tribunal in the impugned order sought to distinguish the earlier orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 on the ground that the Tribunal and the Commissioner of Income Tax (Appeals), in respect of A.Ys. 2009-10 and 2010-11 had proceeded on erroneous factual premise as regards the relevant date when the correct date of approval of the project was 7th November, 2002, and this error goes to the root of the matter. Having observed so, the Tribunal held that it would not be bound by the order passed by itself in respect of Assessee’s own case for A.Ys. 2009-10 and 2010-11. It also relied upon the decision of the Tribunal in the case of Bhavya Construction vs. ACIT – (2017) 77Taxmann.com 66 (Mum.-Tri.). Accordingly by the impugned order, the Tribunal allowed the Appeal.

In the rectification application, the Assessee, sought to point out that in respect of A.Y. 2009-10, the decision of the Tribunal holding in favour of the Assessee, but the view of the Tribunal for A.Y. 2009-10 (ITA No. 997/M/2013) was approved by this Court by dismissing the appeal filed by the Revenue ITA No. 159 of 2015 by the order dated 25th July, 2017. The Assessee also sought to point out that the decision of the Tribunal in the case of Bhavya Constructions vs. ACIT, this Court by order dated 30th January, 2020 in Income Tax Appeal No. 1009 of 2017 had set aside the same and remanded the matter to the Tribunal for a fresh hearing. However, the Tribunal did not consider the rectification application and dismissed the same.

The Assessee contends that if the Tribunal wanted to differ from the earlier view, the matter ought to have been referred to the Larger Bench. The Assessee contends that the date of approval of the project referred to in the earlier order was not a mistake or oversight but it was a specific finding on the issue and simpliciter taking a different view was improper on the part of the Tribunal. The Assessee also contends that when the fact that the orders of Tribunal for A.Ys. 2009-10 and 2010-11 were confirmed by this Court was pointed out, it ought to have been taken into consideration and the application for rectification was, without any reasons, erroneously rejected. Apart from this position, the learned Counsel for the Assessee has also placed on record a copy of the order passed by this Court in Income Tax Appeal No. 265 of 2017 in respect of the Assessee’s own case for A.Y. 2010-11. The Revenue supported both the impugned orders.

The Hon. Court observed that the Tribunal has proceeded on the premise that there was an error in the orders passed by the Tribunal for A.Ys. 2009-10 and 2010-11 in respect of the Assessee’s case which goes to the root of the matter, and therefore, the Tribunal is entitled to take a different view. However the fact that the orders passed by the Tribunal for the A.Ys. 2009-10 and 2010-11 were challenged by the Revenue by filing appeals in this Court, and they were dismissed, confirming the findings rendered therein was the material aspect which ought to have been considered by the Tribunal. If it was missed out when the Tribunal passed the impugned order dated 9th April, 2018 when it was sought to be placed on record through rectification application at that time, the Tribunal should have considered the implications of the order. The order passed by this Court in respect of A.Y. 2010-11 has been rendered thereafter on 9th April, 2018. Even the order setting aside the decision in the case of Bhavya Construction Co. and remanded the proceedings to the Tribunal was rendered on 30th January, 2020.

Therefore, on the aspect of what will be the relevant date in the facts of the Assessee’s case, the orders passed by this Court dismissing the Revenue’s appeals would be relevant and the implication of the same ought to be considered by the Tribunal before deciding whether the Assessee is entitled to the benefit of provisions u/s 80-IB(10) in respect of the relevant assessment year.

In these circumstances the Hon. Court held that the impugned order passed by the Tribunal dated 9th April, 2018 is required to be quashed and set aside. The appeal filed by the Revenue being ITA No. 868/ Mum/2016 is required to be restored and considered on its own merits after considering the documents/orders sought to be placed on record through rectification application.

The appeal and Writ Petition were accordingly disposed.

Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

7 LKP Securities Ltd. vs. The Deputy Commissioner of Income Tax Circle-4(3)(1)g & Ors.
[Writ Petition No. 2076 – 2077 of 2022, Bombay High Court]
Date of order: 4th July, 2022

Natural Justice – opportunity of hearing – Personal hearing through video conferencing denied – Matter Remanded

The Petitioner submits that in the course of reassessment proceeding on 23rd March, 2022, petitioner sought to make further submissions, and also submitted a request for personal hearing through video conferencing. It was found that e-proceedings had been closed on 21st March, 2022. The Petitioner informed the Respondent of this grievance vide communication dated 24th March, 2022, and also attached further submission dated 23rd March, 2022 with the said communication. Despite the same, the Respondent has gone ahead and passed the assessment order dated 30th March, 2022 without considering the request for personal hearing or the further submissions. It was submitted that the matter be remanded back, so that an assessment order can be passed after considering the further submissions and after hearing the Petitioner.

The Court observed from paragraph 11 of the assessment order dated 30th March, 2022 for A.Y. 2016-2017, that since the case was getting time barred the assessment order came to be passed on the basis of material available with the department. Paragraph 11 of the said order is quoted as under:

“11. Subsequently the assessee opted for video conference through JAO regarding which letter was uploaded by the JAO on 25.03.2022. In response the VC was scheduled on 28.03.2022 at 2.30 p.m. However during the VC conducted for the A.Y. 2017-18 scheduled at 12.45 p.m. in assessee’s own case the A/R of the assessee requested to take up the case for the A.Y. 2016-17 alongwith A.Y. 2017- 18 since the issue for both the years are similar and as such VC scheduled for 2016-17 was cancelled. In the course of Video conference the A/r of the assessee requested to stay the proceeding for A.Y. 2016-17 as they would be filing writ before the Hon’ble High Court. In response the A/R of the assessee was asked to upload the interim order of the Hon’ble High Court on or before 29.03.2022 to stay the proceedings. However the A/R of the assessee requested they would upload the interim order by 3.00 p.m. on 30.03.2022 but no such order was filed till 4.00 P.M. of 30.03.2022. Since the case is getting barred by limitation the case is disposed off on the basis of material available with the department.”

The Hon. Court observed that the assessment order has come to be passed without considering the further submissions or hearing the Petitioner. It was observed that similar assessment order has also been passed for A.Y. 2017-2018.

The Revenue fairly submitted that in several such matters, the Court has remanded the matters for fresh consideration in view of the provisions of Section 144B of the Act 1961.

Held: Set aside the assessment orders dated 30th March, 2022 for A.Ys. 2016-2017 and 2017-2018, and remanded the matters back to the Respondent for de novo consideration after granting an opportunity of personal hearing and, after taking into account the further submissions that the Petitioner may make, pass appropriate orders in accordance with law within four weeks.

S. 245 – Adjustment of refund – Intimation to assessee – Must

9 Greatship (India) Limited One International Centre vs. Assistant Commissioner of Income Tax – 5(1)(1) & Others
[Writ Petition No. 1476 of 2022
(Bombay High Court)]
Date of order: 18th July, 2022

S. 245 – Adjustment of refund – Intimation to assessee – Must

The petitioner challenges the action of respondent revenue of adjustment in the refund of Rs. 2,22,89,942 for A.Y. 2008-09 arising as consequence and effect of the order of the Income Tax Appellate Tribunal against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16.

The case set up is that Rs. 61,64,649 as refund for A.Y. 2008-09 came to be adjusted for A.Y. 2014-15, which came to the petitioner’s knowledge on 17th November, 2021, when the petitioner downloaded Form 26AS for A.Y. 2014-15, where ‘Part C’ provided details of tax paid (other than TDS/TCS).

The petitioner’s case further is that an amount of R1,61,25,293 came to be adjusted illegally by the respondent No. 2 from the refund determined in favour of the petitioner upon giving effect to the tribunal’s order for A.Y. 2008-09 against the alleged outstanding demand for A.Y. 2015-16. Knowledge of this illegal adjustment was also stated to have been acquired by the petitioner on 17th November, 2021 when the petitioner downloaded Form No. 26AS.

The petitioner urged that the action of Revenue in making adjustments of the refund due was illegal inasmuch as no intimation was given to the petitioner as was the requirement in terms of section 245.

The Hon. Court observed that the reply affidavit of Revenue does not specifically state as to whether before making such an adjustment, the petitioner had been given prior intimation in terms of section 245.

Section 245 envisages that when a refund is found to be due to any person under any of the provisions of the Act, the Revenue can set off/adjust the amount to be refunded or any part of that amount against the sum which remains payable under the Act by the person to whom the refund is due after giving an intimation in writing to such person of the action proposed to be taken under this section.

The Court observed that giving of prior intimation u/s 245 was mandatory. The purpose of giving prior intimation u/s 245 was to enable a party to point out factual errors or some further developments, for example, that there was a stay of the demand or that there was a Supreme Court’s decision covering the demand which is the subject matter of a pending appeal which would not warrant an adjustment of the refund against the pending demand. It was also held that where a party raises such issues in response to the intimation the officer of the Revenue exercising powers u/s 245, must record reasons why the objection was not sustainable and also communicate it to the said party, and that this would ensure that the power of adjustment u/s 245 is not exercised arbitrarily.

In the present case there was no prior intimation u/s 245 has remained unrebutted as no proof of any such prior intimation was placed on record by the Revenue.

The Hon. Court held that the impugned action of respondent No.2 in making adjustments of the amount of Rs. 61,64,649 and Rs. 2,22,89,942 for A.Y. 2008-09 against the alleged outstanding demands for A.Ys. 2014-15 and 2015-16 is bad and illegal, and accordingly, quashed.

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

6 Pr. Commissioner of Income Tax – 16 vs. M/s. Universal Music India Pvt. Ltd  [Income Tax Appeal No. 238 OF 2018; Date of order: 19th April, 2022  (Bombay High Court)]

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

The Respondent had filed a return of income on 27th October, 2010 declaring income of ‘Nil’ for A.Y. 2009-2010. Subsequently, an assessment was completed under section 143(3) of the Act. Thereafter, notice under section 263 was issued by CIT on two issues, namely,

(a) disallowance of Fringe Benefit Tax (FBT) paid of Rs. 10,72,532/- included in miscellaneous expenses and not allowed by the Assessing Officer and

(b) provision of Rs. 1,40,98,685/- in respect of slow moving and obsolete inventories.

The CIT directed Assessing Officer by an order dated 20th March, 2013 to make enquiry and examine the two issues and a third issue being particulars of payments made to persons specified under Section 40A(2)(b) of the Act of Rs. 7,00,22,680 allowed in the assessment order. The assessment order was set aside on this issue and to be examined afresh.

Aggrieved by the order dated 20th March, 2013 passed by CIT, Assessee filed an Appeal before ITAT. ITAT by an order dated 27th April, 2016 allowed the Appeal of the Assessee.

On the issue of payments made to persons specified under Section 40A(2)(b) of the Act, the ITAT gave a finding of fact that no such issue was ever raised by CIT in the notice served upon the assessee and the assessee was not even confronted by the CIT before passing the Order dated 20th March, 2013. ITAT concluded that the said ground therefore cannot form the basis for revision of the assessment order under Section 263 of the Act. It is only this finding of ITAT which is impugned in the Appeal. On the other two points, revenue has accepted the findings of ITAT that the Order under Section 263 was not warranted.

The Dept. submitted that Apex Court in its judgment dated 11th May, 2016 (after the impugned order was pronounced by ITAT) in Commissioner of Income-Tax, Mumbai vs. Amitabh Bachchan [2016] 384 ITR 200 (SC), has held that the provisions of Section 263 does not warrant any notice to be issued and what is required is only to give the assessee an opportunity of being heard before reaching his decision and not before commencing the enquiry. Therefore it was submitted that, the ITAT has erred in setting aside the Order of CIT on this issue.

The Hon. High Court observed that it is true that the Apex Court in Amitabh Bachchan (supra) has held, all that CIT is required to do before reaching his decision and not before commencing the enquiry, CIT must give the assessee an opportunity of being heard. It is true that the judgment also says no notice is required to be issued. But in the case at hand, there is a finding of fact by the ITAT that no show cause notice was issued and no issue was ever raised by the CIT regarding payments made to persons specified under Section 40A(2)(b) of the Act before reaching his decision in the Order dated 20th March, 2013. If that was not correct, certainly the Order of the CIT would have mentioned that an opportunity was given and in any case, if there were any minutes or notings in the file, revenue would have produced those details before the ITAT.

In Amitabh Bachchan (supra), the Apex Court came to a finding that ITAT had not even recorded any findings that in the course of the suo motu revisional proceedings opportunity of hearing was not offered to the assessee and that the assessee was denied an opportunity to contest the facts on the basis of which the CIT had come to its conclusions as recorded in his Order under Section 263 of the Act.

In the present case, there is a finding by the Tribunal, as noted earlier, that no issue was raised by the CIT in respect of particulars of payment made to persons specified under Section 40A(2)(b) of the Act and even the show cause notice is silent about that.

In view of the same, the Hon. Court dismissed the appeal of the Department.

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

5 Dinesh Vazirani vs. The Principal Commissioner of Income Tax-7 [Writ Petition No. 2475 Of 2015; Date of order: 8th April, 2022  (Bombay High Court)]

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

The Petitioner is an individual and resident of India. The Petitioner, along with two other individuals, and one company (collectively referred to as Promoters) was the promoter of a company by the name WMI Cranes Ltd (the Company). Petitioner held 2,35,900 equity shares out of 9,99,920 issued and paid up share capital of the company of Rs.10 each. Promoters entered into Share Subscription and Purchase Agreement (SPA) dated 11th October, 2010 with M/s Kone cranes Finance Corporation (Purchasers). Under the agreement, promoters agreed to sell 51% of the paid up and issued equity share capital of the company to the purchasers. Between the promoters, they held collectively 100% issued and paid up share capital of the company.

Simultaneously with SPA, the promoters and purchasers entered into second share purchase agreement (Second SPA) for the transfer of the remaining equity shares held by the promoters upon satisfaction of certain conditions under Second SPA so that at a future point of time, purchasers will hold 100% of the issued and paid up equity share capital of the company. SPA provided for a value of Rs. 155,00,00,000 as consideration to be paid to the promoters which effectively was working out to about Rs. 3212.31 per share. SPA also provided that out of Rs. 155,00,00,000 that was payable as sale consideration, a sum of Rs. 30,00,00,000 would be kept in escrow, based on which a separate escrow agreement was entered into between promoters, purchasers and the escrow agent. At the time of closure of the deal, promoters received Rs. 125,00,00,000 as sale consideration and the shares were transferred. Balance Rs. 30,00,00,000 was kept in escrow account. SPA provided for specific promoter indemnification obligations and it provides that if there is no liability as contemplated under the specific promoter indemnification obligations within a particular period, this amount of Rs. 30,00,00,000 would be released by the escrow agent to the promoters. SPA provides for escrow arrangement. The escrow account was to be in force for two years from the closing date.

Petitioner/Assessee filed his return of income for A.Y. 2011-2012 on 29th July, 2011 declaring income of Rs. 22,51,60,130. The return of income included Rs. 20,98,08,685 as long term capital gains on the sale of shares of the company. The capital gains was computed by Petitioner taking into account the proportion of the total consideration of Rs. 155,00,00,000, including the escrow amount of Rs. 30,00,00,000, which had not, by the time returns were filed, received by the promoters but still parked in the escrow account. The assessment was completed under section 143(3) of the Act and an order dated 15th January, 2014 was passed accepting total income as declared by the Petitioner.

It is Petitioner’s case and which has not been disputed that subsequent to the sale of the shares of the company, certain statutory and other liabilities arose in the company which was about Rs. 9,17,04,240, for the period prior to the sale of the shares. As per the agreement, this amount was withdrawn from the escrow account and promoters, therefore, did not receive this amount of Rs. 9,17,04,240.

As assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155,00,00,000 and without reducing the consideration by Rs. 9,17,04,240, Petitioner/Assessee made an application to PCIT under section 264 of the Act. Petitioner submitted that the amount of Rs. 9,17,04,240 has been withdrawn by the company from the escrow account and, therefore, what petitioner received was lesser than what was mentioned in the return of income and, therefore, the capital gains needs to be recomputed reducing the proportionate amount from the amount deducted from the escrow account. Petitioner also pointed out that the application was being made under Section 264 of the Act because the withdrawal of the amount from the escrow account happened after the assessment proceedings for A.Y. 2011-2012 was completed and it was not possible for Petitioner to make such a claim before the assessing officer or even file revised returns. Petitioner, therefore, requested respondent no. 1 to reduce the long-term capital gains by Rs. 1,31,44,274 and further prayed for directions to the assessing officer to refund the excess tax paid. Petitioner also explained that the amount from the escrow account was never going to be recovered by the promoters under any circumstances and this resulted in reduction in the total realisation towards sale of company.

The PCIT by an order dated 13th February, 2015 passed under section 264 of the Act rejected Petitioner’s application holding:

(a) The Petitioner was entitled to receive consideration at Rs. 3,213.31 per share as per the purchase price defined in the agreement. From the said amount, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer can be reduced to compute capital gains. The agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer cannot be considered for reduction from the consideration received i.e, at the rate of Rs. 3,213.31 per share in computing capital gains under Section 48 of the Act.

(b further held that in the absence of specific provision by which an assessee can reduce returned income filed by it voluntarily, the same cannot be permitted indirectly by resorting to provisions of Section 264 of the Act. PCIT further relied on the proviso to Section 240 of the Act which states that if an assessment is annulled the refund will not be granted to the extent of tax paid on the returned income. PCIT held that this shows that income returned by an assessee is sacrosanct and cannot be disturbed and even annulment of the assessment would not have impacted the suo motu tax paid on the return income.

(c) The contingent liability paid out of escrow account does not have the effect on “amount receivable” by the promoters as per the agreement which remains at Rs. 3,213.31 per share.

Aggrieved by the order the Petitioner filed Writ Petition before Hon. High Court.

The Hon. High Court held that the PCIT had erred in holding that the proportionate amount of Rs.9,17,04,240 withdrawn from the escrow account should not be reduced in computing capital gains of the petitioner. Capital gains is computed under Section 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. PCIT has erred in stating that only the cost of acquisition, cost of improvement and cost of transfer can be deducted from full consideration and, therefore, Petitioner is not entitled to the proportionate reduction. PCIT has failed to understand that the amount of Rs. 9,17,04,240 was neither received by the promoters nor accrued to the promoters, as the said amount was transferred directly to the escrow account and was withdrawn from the escrow account. When the amount has not been received or accrued to the promoters, the same cannot be taken as full value of consideration in computing capital gains from the transfer of the shares of the company.

The Hon. Court observed that PCIT had not understood the true intent and the content of the SPA. PCIT had not appreciated that the purchase price as defined in the agreement was not an absolute amount as the same was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. The full value of consideration for computing capital gains, will be the amount which was ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

PCIT had gone wrong in not appreciating that income or gain is chargeable to tax under the Act on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary.

In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. PCIT had proceeded on an erroneous understanding that the arrangement between the seller and buyer which results in some contingent liability that arises subsequently to the transfer, cannot be reduced from the sale consideration as per Section 48 of the Act. This is because the liability is contemplated in SPA itself and certainly the same should be taken into account to determine the full value of consideration. Therefore, if sale consideration specified in the agreement is along with certain liability, then the full value of consideration for the purpose of computing capital gains under Section 48 of the Act is the consideration specified in the agreement as reduced by the liability. PCIT observation that from the sale consideration only cost of acquisition, cost of improvement and cost of transfer can be reduced and the subsequent contingent liability does not come within any of the items of the reduction and the same cannot be reduced, is erroneous because full value of consideration under Section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability is to be regarded as subsequent event, then also the same ought to be taken into consideration in determining capital gain chargeable under Section 45 of the Act.

The Hon. Court did not agree with the findings of PCIT that the contingent liability paid out of escrow account does not affect the amount receivable as per the agreement for the purpose of computation of capital gains under Section 48 of the Act. Such reduced amount should be taken as full value of consideration for computing capital gains under Section 48 of the Act.

The Hon. Court further held that the assessee could file revised return of income within the prescribed period, to reduce the returned income or increase the returned income. Petitioner filed an application under Section 264 because the assessment under Section 143 had been completed by the time the amount of Rs. 9,17,04,240 was deducted from the escrow account. Section 264 of the Act, has been introduced to factor in such situation because if income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about hypothetical income which does not materialize. Section 264 of the Act does not restrict the scope of power of respondent no. 1 to restrict a relief to an assessee only up to the returned income. Where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry that might, in certain circumstances, have been made in the books of account. Therefore, PCIT ought to have directed the Assessing Officer to recompute income as per the provisions of the Act, irrespective of whether the computation results in income being less than returned income. It is the obligation of the revenue to tax an assessee on the income chargeable to tax under the Act and if higher income is offered to tax, then it is the duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The court further observed that reliance by PCIT on the provisions of Section 240 of the Act to hold that there is no power on respondent no.1 to reduce the returned income, is fraught with error because the circumstances provided in the provisio to Section 240 indisputably do not exist in the present case. Provisio to Section 240 provides that in case of annulment of assessment, refund of tax paid by the assessee as per the return of income cannot be granted to the assessee, which is not the case at hand. There is no provision in the Act which provides, if ultimately assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to such assessee. As regards the stand of PCIT that the income returned by petitioner is sacrosanct and cannot be disturbed, the only thing that is sacrosanct is that an assessee can be asked to pay only such amount of tax which is legally due under the Act and nothing more. If returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to a refund of excess tax paid by it.

The order dated 13th February, 2015 passed by PCIT was quashed and set aside. The petitioner be entitled to refund of excess tax paid on the excess capital gains shown earlier. The Assessing Officer was directed to pass fresh assessment order on the basis that the capital gains on the transfer of the shares of the company should be computed after reducing proportionate amount withdrawn from the escrow account from the full value of the consideration and allow the refund of additional tax paid with interest.

S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

4 The Commissioner of Income Tax, International Taxation-1 vs. Ashutosh Bhatt   [Income Tax Appeal No.1424 of 2017;  Date of order: 11th April, 2022  (Bombay High Court)]

S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

The assessee was an individual and non-resident so far as the assessment year under consideration was concerned. For A.Y. 2007-2008, the assessee had filed return of income on 31st July, 2007 declaring total income of R8,31,287. Thereafter the assessee revised his income and further offered an income of R1,76,68,508. A notice u/s 148 was issued thereafter on 29th March, 2012 as a consequence of which, the assessment was finalized u/s 143(3) r.w.s 147. Assessment order dated 21st March, 2013 came to be passed where total income was assessed at R1,85,69,800, which is the same amount as was declared by the assessee originally, plus the income revised subsequently.

Later, the Assessing Officer held the assessee guilty of concealment of income within the meaning of section 271(1)(c ) of the Act and levied a penalty of 200% of the tax sought to be levied on the amount of  R1,76,68,508 which was declared subsequent to the filing of original return of income. Consequently, a penalty of  R1,17,82,234 has been levied.

The CIT(A), vide order dated 26th March, 2014, deleted the entire penalty levied by the A.O. on the ground that the assessee has suo-moto and voluntarily offered additional income to tax and that the income which was offered for tax by the assessee in the revised returns of income was in any case, not chargeable to tax in India. Against the said decision, the Revenue filed an appeal before the Tribunal.

Subsequently, CIT (A) issued a notice u/s 148 of the Act on 10th November, 2014 requiring the assessee to show cause as to why earlier order passed by him on 26th March, 2014 to be not amended as it was passed without taking note of the fact that assessee had made supplementary affidavit declaring additional income of R1,03,49,908 which according to CIT(A) was not voluntary because summons dated 29th September, 2011 by ADIT (Inv) Unit-II(3), Mumbai had been issued u/s 131. CIT (A) rejected the reply of the assessee, and by an order dated 8th December, 2014, amended his earlier order dated 26th March, 2014 and upheld the levy of penalty to the extent it related to the additional income of R1,03,49,908 disclosed by the assessee in his second revisional declaration. Against that order, an appeal was preferred by the assessee before the Tribunal and Revenue also filed cross appeal to the extent of CIT(A) not adding R73,18,600 declared in the first revised declaration.

The Tribunal, after hearing the parties, dismissed the original appeal filed by Revenue and cross-appeal filed by Revenue and upheld the appeal filed by the assessee.

The Hon. Court observed that indisputable fact that during the period when the assessee was non-resident, from A.Y. 2000-2001 to the year in question, the assessee was in employment with a U.S. Company and was resident of United States of America. During that time, he had set up a business and was beneficial owner of a Company Jonah Worldwide Limited (JWL) and beneficiary of a Foundation, namely, Selinos Foundation (SF), both set up in Mauritius in 2003. Both these entities were non-residents as far as it is relevant for the purpose of the Act and did not have any source of income in India.

In the year 2011, the assessee decided to settle down in India and, after returning to India, filed an affidavit dated 7th September, 2011 offering to tax income of R73,18,600 being peak balance lying in the accounts of these two entities JWL and SF and for this purpose filed revised return on 20th September, 2011. Immediately thereafter, the assessee realised that he had committed a mistake in calculating the peak balance lying in bank accounts held by these two entities JWL and SF and, therefore, made a supplementary affidavit on 7th November, 2011 offering to tax additional income of R1,03,49,908. Consequent thereto, second revised return dated 15th November, 2011 was filed showing total additional income of Rs. 1,76,68,508 on account of funds lying in the bank accounts held by JWL and SF with HSBC Bank, Zurich. After receiving notice u/s 148 of the Act, as noted earlier, the Assessing Officer finalized assessment u/s 143 r.w.s 147 by accepting income as per revised return without making any further addition or raising any fresh demand. Even additional income assessed at R1,76,68,508 was exactly the same as returned by the assessee in the revised returns.

The Tribunal found that the second affidavit of 7th November, 2011 declaring an additional amount of Rs 1,03,49,908 due to a mistake in calculating bank peak balance was filed not because of any issue of summons and declaration, but was purely because of the mistake committed in the earlier calculation. The Tribunal came to a finding of fact that Revenue had no information of any undisclosed income in the hands of the assessee except the declarations made by the assessee. What also impressed the Tribunal was that at no stage it was the case of the Revenue that the funds that were lying in the bank accounts held by the two entities (JWL and SF) with HSBC Bank, Zurich could have been brought to tax in India. These monies have been offered to tax in India because the assessee made voluntary declarations, and considering that aspect, the Tribunal felt that levy of penalty u/s 271(1)(c ) of the Act was not justified.

The Hon. Court observed that the Tribunal has not committed any perversity or applied incorrect principles to the given facts. When the facts and circumstances are properly analysed, and the correct test is applied to decide the issue at hand, then, no substantial question of law arises for consideration. The appeal was dismissed.