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

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.

Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

3 The Principal Commissioner of Income Tax-25 vs. Aarhat Investments [Income Tax Appeal No. 156 of 2018; A.Y. 2009-10;  Date of order: 25th March, 2022  (Bombay High Court)]
 
Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

The assessee received a sum of R7,00,00,000 from Wall Street Capital Markets Pvt. Ltd., a sum of R6,50,00,000 from Novel Finvest Pvt. Ltd., a sum of R5,07,68,100 from one Ganesh Barter Pvt. Ltd. and a sum of R13,50,00,000 from one Asian Finance Services. Admittedly, the amount of R7,00,00,000 received from Wall Street was repaid in the same year. Likewise, the amount received from Novel Finvest was also repaid in the same year. So also in the case of Asian Finance Services. In the case of Ganesh Barter, there was an amount outstanding at the close of the assessment year. There seems to be no issue regarding the amount received and paid back to Asian Finance Services.

The Ld. Assessing Officer had added the remaining  three amounts mentioned above  u/s 68 of the Act, on the basis that substantial amounts have been received by the assessee as unsecured loans and without being charged any interest. Therefore, the Assessing Officer had proceeded on the assumption that this must be the assessee’s own money circulated through the three entities mentioned above.

The Commissioner of Income Tax (Appeals), in regards to the amount received from Wall Street and Novel Finvest, set aside the order of the Assessing Officer. The CIT(A), as regards the amount from Ganesh Barter, did not interfere with the order of the Assessing Officer.

The Revenue, as well as the Assessee, carried the matter in appeal to Income Tax Appellate Tribunal (ITAT), and ITAT disposed of both the appeals by order pronounced on 30th November, 2016. The Revenue’s appeal was dismissed, and the assessee’s appeal was allowed.

The ITAT  upheld the finding of CIT(A) with regard to the amounts received from Wall Street and Novel Finvest and set aside the order of CIT(A) as regards Ganesh Barter. The ITAT observed the factual position as noted by CIT(A) as well as that the amounts received from Wall Street and Novel Finvest were repaid during the year itself; that there was no dispute that the transactions were through banking channels and both these parties were assessed to income tax. Even their identity was not in dispute. The ITAT held that Section 68 of the Act casts the onus on the assessee to explain the nature and source of the credit appearing in the books of account. It can be discharged if the assessee is able to establish the identity and creditworthiness of the creditors and the genuineness of the transaction. The ITAT also observed that the Assessing Officer had issued commissions of enquiry u/s 131(1)(d) of the Act to the Investigating Wing in response to the independent enquiries made by the Assessing Officer wherein statements of the Director of Wall Street and Novel Finvest have been recorded, and nobody has disputed the transactions were in the nature of loans per se. The CIT (A) as well as ITAT were also satisfied with the creditworthiness of these two parties.

As regards Ganesh Barter, there was a credit balance outstanding as on 31st March, 2009. The Assessing Officer had accepted the identity of the creditor but was not satisfied with the credit worthiness of the creditor and the genuineness of the transaction. On the other hand, the CIT(A) was also satisfied with the creditworthiness of the creditor but was not satisfied with the genuineness of transaction. Hence, he had not interfered with the findings of the Assessing Officer so far as Ganesh Barter was concerned. The ITAT concluded that the implied view emanating from the order of CIT (A) that a transaction is to be held as not genuine if money is not returned when the purpose for which it was given was not achieved, would be simply based on suspicion and without properly evaluating the genuineness of transactions.

The Hon. High Court agreed with the conclusions of ITAT that just because in the end of the year money was yet to be repaid means the transaction itself has to be doubted is not correct particularly, when explanation rendered by the assessee has not been found to be false.

The Hon. High Court held that  the ITAT has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, no substantial questions of law arises for consideration. The appeal was dismissed.

S. 264 – Revision – Maintainability – Error / Mistake committed by assessee – Application maintainable

2 Hapag Lloyd India Pvt. Ltd. vs. Principal Commissioner of Income-Tax, Mumbai – 5;
[W.P. No. 2322 of 2021;
Date of order: 9th February, 2022
(Bombay High Court)]

S. 264 – Revision – Maintainability – Error / Mistake committed by assessee – Application maintainable

The Petitioner is a private limited company. It is a successor of United Arab Shipping Agency India Company Pvt. Limited (‘UASAC’), which amalgamated with the Petitioner with effect from 1st April, 2019, pursuant to an order by National Company Law Tribunal. The UASAC, the predecessor company, had distributed a dividend of Rs. 10,16,75,641 to its holding company, United Arab Shipping Company Limited, a company incorporated under the laws of Kuwait. The UASAC paid Dividend Distributed Tax (‘DDT’) at 16.91% (including surcharge and cess), aggregating to Rs. 2,06,99,127. A return of income for A.Y. 2016 – 2017 was filed by UASAC on 30th November, 2016. A revised return of income was filed on 23rd December, 2016.

In the original as well as revised return, the benefit of Article 10 of India – Kuwait DTAA was, however, not claimed. Under the said article, the dividend distributed during F.Y. 2015–2016, was taxable at 10%. The Petitioner was, thus, entitled to a refund of Rs. 84,61,650, being the excess tax paid. The Petitioner thus preferred an application u/s 264 of the Act before Pr.CIT / Respondent no. 1.

By the impugned order, Pr. CIT rejected the application as untenable primarily on the ground that the UASAC had not made a claim for the return of excess DDT at the time of filing original return of income as well as the revised return of income. Consequently, the assessment order u/s 143(3) was passed on 18th December, 2018. Thus, there was no apparent error on the record in the said assessment order which warranted exercise of jurisdiction u/s 264 of the Act.

The Petitioner has invoked the writ jurisdiction on the ground that Pr.CIT has completely misconstrued the scope of jurisdiction u/s 264. This incorrect approach of Pr.CIT has resulted in an unjustified refusal to exercise the jurisdiction vested in him by Section 264 of the Act.

The Petitioner submitted that Pr.CIT committed a grave error in law in holding that an application u/s 264 was not maintainable when the assessee had not made a claim for refund of excess tax paid in the original return. The Petitioner submitted that the view of Pr.CIT that, for the exercise of jurisdiction u/s 264 of the Act, the order impugned ought to be apparently erroneous, is completely misconceived. Under Section 264 of the Act, the Commissioner is empowered to call for the record of any proceeding and make an inquiry or cause an inquiry to be made and thereafter pass such order, as he thinks fit, but not being one prejudicial to the assessee. The scope is thus not restricted to correction of error apparent on the face of the record.

In opposition to this, the Respondent sought to justify the impugned order on the premise that the refund was not claimed in the original as well as revised return and thus the order passed u/s 143(3) by the Assessing Officer, which was sought to be revised cannot be said to be prejudicial to the assessee and, therefore, Respondent was well within his rights in refusing to exercise the revisional jurisdiction.

The Hon. Court observed that on the perusal of the aforesaid reasons, it becomes evident that two factors weighed with Respondent no. 1. First, the assessee had not claimed a refund in the original and revised return and, thus, there was no error in the assessment order passed u/s 143(3) on 18th December, 2018. Second, Respondent no. 1 was of the view that the jurisdiction u/s 264 was confined to correct the order, which is found to be apparently erroneous.

The Court observed that the Respondent no. 1 was justified in recording that the assessee had not claimed a refund of excess tax paid by it in the original and revised return. However, Respondent no. 1 committed an error in constricting the scope of revisional jurisdiction in the backdrop of the said undisputed factual position. In fact, the very foundation of the application u/s 264 was that the assessee had inadvertently failed to claim the benefit of Article 10 of the India – Kuwait DTAA, under which the dividend distribution was taxed at a lower rate. The Court held that the approach of Respondent no. 1 in refusing to exercise the jurisdiction u/s 264, on the premise that it can be lawfully exercised only where such a refund was claimed and considered by the Assessing Officer is neither borne out by the text of Section 264 nor the construction put thereon by the precedents.

The aforesaid reasoning indicates that Respondent no. 1 failed to appreciate the distinction between revisional and review jurisdiction. The principles which govern the exercise of review were sought to be unjustifiably imported to the exercise of power u/s 264 and thereby imposing limitations which do not exist on exercise of such power. Undoubtedly, revisional jurisdiction is not as wide as an appellate jurisdiction. At the same time, revisional jurisdiction cannot be confused with the power of review, which by its very nature is limited. The Division Bench Judgment of this Court in the case of Geekay Security Services (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle – 3(1)(2) [2019] 101 taxmann.com 192 (Bombay) wherein the Court considered an identical question as to whether the revisional authority was justified in rejecting the revision application solely on the ground that the applicant had not claimed the benefit in the original return. Section 264 does not limit the power to correct errors committed by the sub-ordinate authorities and could even be exercised where errors are committed by the assessee and there is nothing in Section 264 which places any restriction on the Commissioner’s revisional power to give relief to the assessee in a case where assessee detects mistakes after the assessment is completed.

The Court held that since Pr.CIT / Respondent no. 1 has not considered the revision application on merits, matter was remitted back to Pr.CIT for de novo consideration on merits.

S. 80IB (10) – Housing Project – commencement of development of residential project – Date of approval/ sanction – Developer – Eligibility

1 Commissioner of Income Tax-24 vs. Abode Builders;
[Income Tax Appeal No. 2020 of 2017;
Date of order : 16th February, 2022
(Bombay High Court)]

S. 80IB (10) – Housing Project – commencement of development of residential project – Date of approval/ sanction – Developer – Eligibility

Assessee Firm is a developer and builder who developed a residential project called ‘Trans Residency’ on a piece of land admeasuring 12,540 sq. metres in the Andheri Area of Mumbai. The assessee firm entered into a Joint Venture Agreement with another concern M/s. Vaman Estate to develop the property vide agreement dated 28th August, 2001. The residential project ‘Trans Residency’ has 7 wings in Building No. I (A to G) and 3 wings in building No. III (A to C). The construction activity was undertaken for Wings E & F first, and residential units were sold before 31st March, 2005. The project for E & F Wing was completed in 2005 and profits were offered for tax (deduction u/s 80IB was claimed on the same) in the return of income filed for A.Y. 2005-06, while the rest of the project was completed in March, 2007, and proceeds on sale of residential units was shown in the return of income filed for A.Y. 2007-08. The return of income was filed on 19th October, 2007, declaring a total income of Rs. 18,16,656. The only addition was made on account of disallowance of claim u/s 80IB(10) of the Income Tax Act, 1961, amounting to Rs. 17,94,05,681.

The Assessing Officer (AO) scrutinized the assessee’s claim keeping in view two major criteria having a direct bearing on the legitimacy of the claim. The AO observed that the land on which the Trans Residency Project had been built was not owned by the assessee but by Malad Satguru Sadan CHS Ltd. and that the Conveyance Deed for the said land had been executed in the name of the society in pursuance to the directions of the High Court vide Consent Decree passed on 18th July, 1995. The AO also noted that the assessee had been engaged as a ‘developer’ by the Malad Sadguru Sadan CHS and has made payment on behalf of the society. Based on this, the AO concluded that the assessee was not the owner of the said land. Then the AO proceeded to examine whether the assessee could be considered as a developer. The AO observed that the assessee entered into a Joint Venture Agreement with M/s. Vaman Estate on 28th August, 2001 and observed that as per the agreement, the development and construction of the building was to be done by M/s. Vaman Estate at its own cost, and both the parties were to share the gross sale proceeds in the ratio of 50:50. The AO concluded that the assessee did not incur any expenditure on the project, nor did he do any construction activity, and the proceeds from the project were its net profit. The AO observed that once the Joint Venture Agreement was entered into, the status of the assessee changed from that of a ‘developer’ to that of a ‘facilitator’. The AO, thus, observed that the assessee was neither ‘the owner’ nor ‘the Developer’ of the property, and accordingly, the assessee was not eligible for claiming deduction u/s 80IB(10).

A supplementary agreement had been executed between the assessee and M/s. Vaman Estate on 14th March, 2005. Based on various clauses of both the above-mentioned agreements, the AO concluded that the BMC had given sanction to the Plan submitted by the assessee through letter dated 21st September, 1996. He observed that the Explanation to section 80IB(10) of the Act stipulated that where the approval for the concerned project was given more than once, the date of initial approval would be the operative date of approval. Thus, the assessee was not eligible to claim deduction u/s 80IB(10). Accordingly, the AO rejected the assessee’s claim of deduction u/s 80IB(10) of the Act amounting to Rs. 17,94,05,681. The assessment was completed u/s 143(3) of the Act on 24th December, 2009, assessing the total income at Rs. 18,12,22,340.

The Respondent-Assessee firm challenged this order before the Commissioner of Income Tax (Appeals). The CIT (Appeals) allowed the claim of deduction under section 80IB(10) of the Act. Aggrieved by this order of CIT (Appeals), Revenue preferred an appeal before the Income Tax Appellate Tribunal, Mumbai (‘ITAT’). The ITAT dismissed the appeal by an order dated 26th August, 2016.

The Hon. Court observed that the Revenue had originally raised three points, namely, (a) lack of ownership of land on which the project was constructed; (b) Assessee not having invested in the construction activity or done construction, could not be considered as a developer; and (c) Project was approved and commenced before the stipulated date of 1st October,1998. On these three grounds, the claim of the assessee under section 80IB(10) of the Act was denied by the Assessing Officer.

The Court observed that as regards the first issue regarding the ownership of the land, though it was raised before the ITAT, has not been raised in this present appeal. The ITAT has given a finding of fact which is not disputed inasmuch as the ITAT has observed that Respondent through, its partner one Liaq Ahmed, has been involved in the project right from the beginning with the signing of the Principal Agreement and primary acquisition of the development rights for the land in question. The AO has not even disputed that Intimation of Disapproval (‘IOD’) issued by the Municipal Corporation was in the name of assessee. So also the Commencement Certificate (CC). It is also noted that all tax related to the land in question were paid by the assessee from 1998 onwards. It is also noted that assessee has even made payment for the development rights. What the AO has missed out is unless the Respondent had any role in the development of the project, the joint venture partner would not agree to share 50% profit in the project with the assessee. Therefore, on this issue, the Court agreed with the findings of ITAT.

As regards the other objection that the project was commenced much before the stipulated date of 1st October, 1998, it was argued that the assessee had submitted the original Plan to the concerned authorities on 7th November, 1996 for which the IOD was granted in 1997, and therefore, even if a subsequent IOD has been obtained, as per the Explanation to section 80IB(10), where the approval for the concerned project was given more than once, the date of final approval would be the operative date of approval.

The Court further observed that the ITAT has once again come to a finding of fact that the project, as completed, was different from the project for which initial approval had been obtained. It is true that the original plan which was submitted and for which IOD was granted was in 1997. The life of the IOD once granted as per the Maharashtra Regional Town Planning Act, 1966 is four years. This finding has not been disputed by the Revenue. The original Lay-out Plan became invalid after 7th January, 2001. The assessee applied for IOD for the second time on 22nd November, 2001 and was granted permission on 21st July, 2002. The ITAT has come to a conclusion on facts, which is also not disputed, that the second project proposal was for only three buildings as against the four for which the permission was sought earlier, and IOD for different buildings was granted on different dates. The ITAT has concluded that, therefore the project for which permission was granted on 24th July, 2002 was not the same as that, for which the IOD lapsed in 2001.

The Court held that Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed, and correct test is applied to decide the issue at hand, then, no substantial question of law arises in the matter. The appeal was accordingly dismissed.

S. 195 – Deduction at source – Non-resident – Lower deduction of tax – Indexation – Binding precedent – Order of Tribunal is binding on lower Authorities – Capital gains – Cost of acquisition of the property in the hands of seller is deemed to be the cost for which the said property was acquired by previous owner – Excess tax paid by the Petitioner was directed to be refunded with interest.

12 Rohan Developers Pvt. Ltd. vs. ITO (IT) (Bom.)(HC); [W.P No. 1005 of 2008; Date of order: 6th January, 2022 (Bombay High Court)]

S. 195 – Deduction at source – Non-resident – Lower deduction of tax – Indexation – Binding precedent – Order of Tribunal is binding on lower Authorities – Capital gains – Cost of acquisition of the property in the hands of seller is deemed to be the cost for which the said property was acquired by previous owner – Excess tax paid by the Petitioner was directed to be refunded with interest.

Petitioner filed an application under Section 195(2) of the Act requesting him to issue a low tax rate Certificate for Deduction of Tax at Source in respect of consideration for the purchase of immovable property from the seller. According to the Petitioner, the cost of acquisition under Section 49(1)(ii) of the Act in the hands of the seller is deemed to be the cost for which the said property was acquired by Late Mrs. Dolly Jehangir Gazdar. It is also Petitioner’s case that under clauses (29A) and (42A) of Section 2, the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee is also to be included in the period of holding of the seller for ascertaining whether the said property is held by him as a short-term capital asset or as a long-term capital asset. Therefore, in its application under Section 195(2) of the Act, Petitioner annexed a copy of the draft computation of long-term capital gains of the seller in respect of the transfer of the said property. While computing the capital gains, the Petitioner took the benefit of the option provided in the provisions of Section 55(2)(b)(ii) of the Act, which provides that where a capital asset became the property of the assessee by any of the modes specified in Section 49(1) of the Act and the capital asset became the property of the previous owner before the 1st day of April 1981, cost of acquisition means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April 1981 at the option of the assessee. Based on the scheme of the Act as is provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, Petitioner claimed that indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981- 82. The Petitioner relied on the Judgement of Special Bench in the case of DCIT vs. Manjula J. Shah (2009) 126 TTJ 145 (SB) (Mum.)(Trib). The application for lower tax was rejected. The Petitioner paid the tax under protest and filed the writ for rejection of application for lower rate of tax.

The Court held that the mere fact that the order of the appellate authority is not acceptable to the department or is the subject matter of an appeal cannot be a ground for not following it unless its operation has been suspended by a competent Court. This has been reiterated by this Court in its order Karanja Terminal & Logistic Private Limited vs. CIT (WP No. 1397 of 2020 dated 31st January, 2022) (Bom.)(HC).

The Court noted that the above decision of ITAT Spl Bench had been affirmed by the Bombay High Court; therefore, the issue is now settled in favour of the Petitioner and therefore directed the department to accept the computation of the capital gains after taking into consideration the index cost and cost of the previous owner. The Court following the Apex Court in Union of India vs. Tata Chemicals Limited [2014] 363 ITR 658 (SC) also directed the revenue to pay interest under Section 244A(1)(b) of the Act for the period from the date of payment of tax, i.e., 7th January, 2011 till date.

S. 179 r.w.s. 264 – Non speaking order – without any reasons – Orders set aside

11 Bhavesh Mohan Lakhwani vs. Pr. Commissioner of Income Tax-12 & Anr; [W.P. No. 560 of 2021;  Date of order: 31st January, 2022 (Bombay High Court)]  

S. 179 r.w.s. 264 – Non speaking order – without any reasons – Orders set aside

The Petitioner had challenged the order dated 3rd March, 2020 passed by the Pr. CIT  u/s 264 of the Act rejecting the Petitioner’s Application filed u/s 264. The Petitioner had filed an application u/s 264 of the Act before Pr.CIT challenging the order u/s 179 of the Act dated 28th September, 2018  passed by the  Assessing Officer, against the  Petitioner for recovery of tax demand of Rs. 2,77,01,520 arising out of the assessment of M/s. Laxmi Realty & Advisory Pvt Ltd. The Petitioner being one of the directors of the said M/s. Laxmi Realty & Advisory Pvt Ltd during the relevant A.Y. 2015-16, therefore the Assessing officer had initiated and passed order u/s 179 of the Act against the Petitioner for recovery of tax demand of the said company.

The Hon. Court observed that both the orders under Section 179(1) and Section 264 of the said Act are without giving any reasons. In the order passed u/s 179(1), the Income Tax Officer simply says that there was a reply received from Petitioner, but the same is not being accepted. In the order passed under Section 264 of the said Act, the Principal Commissioner of Income Tax has not even dealt with the submissions made by the Petitioner.

In the circumstances, the Hon. Court set aside both the orders, i.e., the order dated 27th February, 2020, passed under Section 264 of the said Act and the order dated 28th September, 2018, passed under Section 179(1).

The Hon. Court further directed that the Assessing Officer  consider afresh the response filed by Petitioner and pass an order under Section 179(1) of the said Act in accordance with law and before any order is passed, the Petitioner shall be given a personal hearing, and notice of personal hearing shall be communicated to Petitioner at least two weeks in advance. If the Assessing Officer wishes to rely on any judgments or order passed by any Court or Tribunal, he shall provide a copy thereof to the Petitioner and allow him an opportunity to deal with those judgments or distinguish those judgments and those submissions of the Petitioner shall also be dealt with in the order.

S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

10 M/s. Gemstar Construction Pvt. Ltd. vs. Union of India & 3 Ors. [W.P. No 1005 of 2008; Date of order: 6th January, 2022 (Bombay High Court)]

S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

The petitioner challenged the notice dated 12th December, 2007 issued u/s 148 of the Act, on the ground, inter-alia, that respondents are relying on the same material to take a different view. The Assessing Officer had passed the assessment order dated 17th March, 2005, and conclusively took one view. Therefore, it could not be open to reopen the assessment based on the very same material with a view to take another view.

The reasons for issuing notice u/s 148 is contained in a communication dated 27th December, 2007 and the same reads as under:-
“On close scrutiny of the assessment record, it is observed that the assessee company has claimed deduction u/s. 80IB(10) as it is engaged in the development and building approved housing project. Contrary to the provisions of the statute, the housing project includes shops. As a result, the company is not entitled to deduction u/s. 80IB(10). In the light of the aforesaid fact that I have reason to believe that the granting of deduction u/s. 80IB(10) of Rs.1,42,50,816/- has resulted escapement of income within the meaning of Section 147.”

In the assessment order itself, it was recorded that a show-cause notice was issued on 17th January, 2005 requiring the assessee to substantiate the claim of deduction. In paragraph 7.1 of the assessment order, it was recorded that the petitioner has filed detailed submissions vide letter dated 10th March, 2005 and has shown cause as to why it was entitled to the claim of deduction under section 80IB(10).

It is settled law that the Assessment Officer has no power to review an assessment that has been concluded. The Assessing Officer, before he passed the assessment order, had in his possession all primary facts necessary for assessment and then he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, the Assessing Officer is not entitled to a change of opinion to commence proceedings for reassessment. Where on consideration of the material on record, one view is conclusively taken by the Assessing Officer, it would not be open to reopen the assessment based on the very same material with a view to take another view.

The Court observed that this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped the assessment on account. This is a case wherein the assessment is sought to be reopened on account of change of opinion of the Assessing Officer about the manner of computation of deduction under section 80IB(10) of the Act.

The Court was satisfied that not only material facts were disclosed to the petitioner truly and fully, but they were carefully scrutinized, and figures of income, as well as deduction, were viewed carefully by the Assessing Officer.

In the circumstances, the petition was allowed and the notice under section 148 of the Act, dated 12th December, 2007, was quashed.

S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

9 Sharvah Multitrade Company Private Limited. v/s. Income Tax Officer Ward 4(3)(1) & Anr;  [W.P. No. 3581 of 2021; Date of order: 20th December, 2021; A.Y.: 2015-16 (Bombay High Court)]

S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

The Petitioner had challenged the issuance of notice for A.Y. 2015-2016 dated 31st March, 2021 issued u/s 148 of the Act, and the order rejecting the objections dated 23rd July, 2021.

The assessment had been completed u/s 143(3) of the said Act on 28th September, 2017. The Petitioner submitted that the reasons recorded for reopening indicate total non-application of mind in as much as in the tabular form, it is stated that Sharvah Multitrade Company Private Limited for F.Y. 2014-15 had been a beneficiary through fund trail of Rs. 3.72 Crores. Then again, it is mentioned that the above mentioned bogus entities managed, controlled and operated by M/s. Sharvah Multitrade Company Private Limited for providing bogus accommodation entries, hence, all the transactions entered into between the above-mentioned entities and the assessee/beneficiary are bogus accommodation entries in nature.

The Court observed how can a company provide bogus entry to itself. Sharvah Multitrade Company Private Limited is alleged to be a beneficiary identified through fund trail, and its PAN number is shown to be AAQCS2595H. Petitioner, who is the assessee, is also Sharvah Multitrade Company Private Limited, and its PAN number is AAQCS2595H. Therefore, this clearly shows total non-application of mind by the Assessing Officer Mr. Suryavanshi. His statement in the reasons “…………… and after careful application of mind ……..” is risible. Thus there was total non-application of mind by the A.O. while recording the reasons.

The Court further observed that there had been total non-application of mind while filing the affidavit in reply to the petition by the same officer – Mr. Shailendra Damodar Suryavanshi, Income Tax Officer, Ward 4(3)(1), Mumbai. In the affidavit in reply, the same Mr. Suryavanshi states, “as Annexure – 2 is the copy of the approval u/s 151 of the Act ”. There was no annexure – 1 mentioned anywhere. Moreover, in the affidavit filed in the Court, even this annexure was missing. This further displayed total non-application of mind by this officer.

The Department Counsel tendered a copy of the approval u/s 151 of the said Act, which he had in his file where it says “In view of reasons recorded, I am satisfied that it is a fit case to issue notice u/s 148 ”. PCIT, Mumbai Anil Kumar, signed this.

The Court observed that if this PCIT only read the reasons recorded, he would have raised a query about how can an entity provide bogus entry to itself. That shows total non-application of mind by the said Mr. Anil Kumar as well.

The Court further observed that one Vijay Kumar Soni, Range 4(3), Mumbai, has recommended a grant of approval. That shows non-application of mind even by this Vijay Kumar Soni. The Court wondered whether the officers of respondents ever bothered to read the papers before writing the reasons or recommending for approval or while granting approval.

The Court observed that in the objections filed by petitioner vide its letter dated 10th May, 2021, the petitioner raised these points and alleged lack of application of mind. The said Mr. Suryavanshi while rejecting the objections, by an order dated 23rd July 2021, first of all, makes a false statement that “the assessee’s above submissions and objections have been carefully considered and the same are dealt with as under ” but he does not deal with the objection of the assessee of lack of application of mind. The said Mr. Suryavanshi is totally silent about the objections raised on non-application of mind.

In view of the above, the Court allowed the petition and quashed the impugned reassessment proceedings for A.Y. 2015-16 as wholly without jurisdiction, illegal, arbitrary, and liable to be quashed.

A copy of this order was directed to be sent to the Chairman, CBDT, to formulate a scheme whereby the officers are trained on how to apply their minds and what all points should be kept in mind while recording the reasons. The Chairman, CBDT, may also advise the concerned Commissioners not to grant approval u/s 151 of the said Act mechanically but after considering the reasons carefully and scrutinizing the same.

Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

8 Conopco Inc. vs. UOI & Anr. [W.P. No. 7388 of 2008; Date of order: 17th December, 2021; A.Y.: 2004-05 (Bombay High Court)]

Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

The petitioner / assessee challenged the notice dated 13th March, 2008 issued u/s 148 and the order dated 14th October, 2008 passed by the A.O. rejecting its objections to the proposed reopening of the assessment.

The petitioner was issued 420,000 shares of Rs. 10 each in Ponds (India) Limited at the time of its incorporation in 1977. It was allotted a further 159,250 equity shares of Rs. 10 each by way of a rights issue at Rs. 90 per share in 1987. Further, 51,39,75,000 equity shares of Rs. 1 each were issued by way of bonus shares from time to time. Upon merger of Ponds (India) Ltd. with Hindustan Lever Ltd. and thereafter, the petitioner was holding 6,00,86,250 shares of Rs. 1 each of Hindustan Lever Ltd.

It filed a return of income for the A.Y. 2004-2005 on 14th October, 2004 declaring long-term capital gain of Rs. 10,108,653,163. It paid Rs. 1,010,865,316 as tax on long-term capital gain @ 10% as per the proviso to section 112 and surcharge of Rs. 25,271,633 @ 2.5%.

During the course of assessment proceedings, the petitioner vide letter dated 10th November, 2006 answered the questions raised by respondent No. 2 as to why the rate of tax on capital gains in its case should be computed @ 10% and the applicability of the first proviso to section 48. The petitioner submitted a without-prejudice working of capital gains without considering the benefit of the first proviso to section 48. The A.O. thereafter passed an assessment order dated 15th November, 2006 computing the income of the petitioner after accepting its contentions.

Thereafter, the petitioner received the impugned notice dated 13th March, 2008 proposing to reassess its income for A.Y. 2004-2005 on the alleged belief that its income had escaped assessment within the meaning of section 147.

The Court observed that in the reasons for reopening provided by the A.O. vide a letter dated 11th September, 2008, the main contentions of the A.O. were (i) the petitioner admitted to the working of capital gains without considering the benefit of the first proviso to section 48; and (ii) tax had to be calculated @ 20% against 10% determined while passing the assessment order.

It is settled law that before a proceeding u/s 148 can be validly initiated certain preconditions which are jurisdictional have to be complied with. One such condition is that the A.O. must have reason to believe that income chargeable to tax has escaped assessment and such reasons must be recorded in writing prior to the initiation of the proceedings. The second condition is that reassessment must not be based merely on change of opinion by a succeeding A.O. from the view taken by his predecessor.

The Court held that both these conditions have not been complied with. In the reasons recorded, the A.O. has opined that the rate of tax to be applied to the capital gains that arose to the petitioner was 20% in terms of section 112(1)(c) and not 10% as was determined whilst passing the order u/s 143(3).

Further, the Court observed that the A.O. had examined all the relevant provisions of the Act, including sections 48 and 112, and completed the assessment by applying the rate of income tax as per the proviso to section 112(1). It was also clear from the reasons that during the assessment proceedings the A.O. had asked why capital gain should not be taxed @ 20% as provided u/s 112(1)(c)(ii) and in response the petitioner vide letter dated 10th November, 2006 had submitted an explanation and revised (without prejudice) the working of the capital gain without considering the benefit of the first proviso to section 48. It was also clear from the reasoning given by respondent No. 2 that the issue now sought to be raised in the purported reassessment proceedings was very much examined by the A.O. and he had completed the assessment proceedings after giving due consideration to the submissions made by the petitioner.

Therefore, the reassessment proceedings are initiated purely on change of opinion with regard to the rate of tax payable by the petitioner on the long-term capital gain made by it on the sale of shares of Hindustan Lever Ltd. The issue of applicability of the first proviso to section 48 as well as the rate of tax u/s 112 were discussed and considered at the time of the said assessment proceedings u/s 143(3).

The Court further observed that the reasons of reopening the assessment have to be based / examined only on the basis of reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted, by an affidavit and / or oral submissions.

Once a query has been raised by the A.O. through the assessment proceeding and the assessee has responded to that query, it would necessarily follow that the A.O. has accepted the petitioner’s submissions so as not to deal with that issue in the assessment year. Even if the assessment order passed u/s 143(3) does not reflect any consideration of the issue, it must follow that no opinion was formed by the A.O. in the regular assessment proceedings. It is also settled law that once all the material was placed before the A.O. and he chose not to refer to the deduction / claim which was being allowed in the assessment order, it could not be contended that the A.O. had not applied his mind while passing the assessment order.

When a query has been raised, as has been done in this case, with regard to a particular issue during regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as is reflected in the assessment order. It is clear that once a query has been raised in the assessment proceedings with regard to the rate at which capital gains should be taxed u/s 112(1)(c)(ii) and the petitioner has responded to the query to the satisfaction of the A.O. as is evident from the facts in the assessment order dated 15th November, 2006, he accepts the petitioner’s submissions as to why taxation should be only 10% u/s 112 read with section 148, it must follow that there is due application of mind by the A.O. to the issue raised. Non-rejection of the explanation in the assessment order would amount to the A.O. accepting the view of the petitioner, thus taking a view / forming an opinion. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to reopen the assessment based on the very same material with a view to take another view.

Accordingly, the petition was allowed.

Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment

7 Bennett Coleman & Co. Ltd. vs. Dy. CIT & Ors. [ITA No. 100 of 2002; Date of order: 20th December, 2021; A.Y.: 1985-86; (Bombay High Court)] [Arising out of ITAT order dated 30th August, 2001]

Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment
    
On 4th September, 1985, the applicant filed its return of income for A.Y. 1985-86 disclosing a total income of Rs. 1,53,41,650. The A.O. passed an assessment order dated 28th March, 1988 u/s 143(3) and, after making various additions and disallowances, assessed a total income of Rs. 2,74,47,780. In the assessment order, he inter alia directed interest to be charged u/s 215. He levied interest of Rs. 13,67,999 u/s 215 vide the computation sheet.

Aggrieved by the action of the A.O. in charging interest u/s 215, the appellant filed an application dated 8th July, 1988 for waiver of interest u/s 215(4) read with Rule 40 of the Income-tax Rules, 1962 (the Rules). The DCIT passed an order dated 20th March, 1989 under Rule 40(1) holding that the delay in finalisation of the assessment was not attributable to the appellant and waived the interest u/s 215 beyond one year of the filing of the return of income. The DCIT accordingly recalculated the interest chargeable u/s 215 at Rs. 4,13,630 and waived the balance of Rs. 4,40,020.

The appellant received a show cause notice dated 6th March, 1990 u/s 263 from the Commissioner of Income-tax (CIT). It filed its objections by a letter dated 26th March, 1990 objecting to the proposed action. The CIT then passed an order dated 30th March, 1990 u/s 263 setting aside the assessment in its entirety with directions to the A.O. to reframe the assessment after proper verification and application of mind.

In compliance with this order u/s 263, the A.O. passed a fresh assessment order dated 9th March, 1992 u/s 143(3) r.w.s. 263. The A.O. gave effect to the order dated 30th March, 1990 by making certain additions and disallowances and computed the income of the appellant at Rs. 4,04,37,692. There was no direction in the said order regarding the charging of interest u/s 215. However, in the computation sheet annexed to the said order, interest of Rs. 23,91,413 u/s 215 had been charged. The A.O. had also charged interest u/s 139(8).

Aggrieved by the various additions and disallowances made and the interest under sections 215 and 139(8) levied by the A.O., the appellant filed an appeal before the CIT (Appeals). The said appeal was disposed of vide an order dated 28th September, 1992 holding that interest could not be charged under sections 215 or 139(8) unless it has been charged earlier or it falls within the meaning of sections 215(3) or 139(8)(b).

Being aggrieved by the order of the CIT (Appeals) with regard to the issue of levy of interest u/s 215, the A.O. filed an appeal before the Tribunal. While challenging the said order, the A.O. accepted that part of the order of the Commissioner (Appeals) which deleted the levy of interest u/s 139(8) and confined the appeal to the deletion of interest u/s 215(6). The Tribunal restored the interest levied by the A.O. by way of the computation sheet annexed to the said order.

It was contended on behalf of the appellant that the phrase ‘regular assessment’ in the ITA has been used in no other sense than the first order of assessment passed under sections 143 or 144 and any consequential order passed by the Income-tax Officer giving effect to subsequent orders passed by a higher authority cannot be treated as regular assessment. It was further submitted that in the regular assessment there was no direction to charge interest u/s 215 and therefore interest cannot be charged in the reassessment order.

The Department fairly accepted that the word ‘regular assessment’ needs to be interpreted as the original assessment. However, it was submitted that if the appellant was seeking waiver of interest, it was required to file a new application for waiver after the order of reassessment and in the absence of such application the Tribunal was justified in restoring the order of the A.O. directing the appellant to pay interest as per section 215.

The High Court observed that section 215 makes it clear that the assessee is required to pay interest where he has paid advance tax less than 75% of the assessed tax; the assessee is required to pay simple interest @ 15% p.a. from the first day of April following the financial year up to the date of regular assessment.
    
The Supreme Court has summed up in the case of Modi Industries Ltd. and Others vs. Commissioner of Income-Tax and Another ([1995] 216 ITR 759) by saying that the expression ‘regular assessment’ has been used in the ITA in no other sense than the first order of assessment under sections 143 or 144. Any consequential order passed by the ITO to give effect to an order passed by the higher authority cannot be treated as a regular assessment.

The Court observed that for A.Y. 1985-86, in the regular assessment proceeding completed on 28th March, 1988, the total income was determined at Rs. 2,74,47,780 and interest u/s 215 amounting to Rs. 13,67,999 was charged. In the facts of the case, since the interest u/s 215 was charged in the regular assessment order, the A.O. had the power to charge interest u/s 215 while carrying out the reassessment.

Further, the Court observed that section 215(4) empowers the A.O. to waive or reduce the amount of interest chargeable u/s 215 under circumstances prescribed in Rule 40 of the Income-tax Rules, 1962. One such prescribed circumstance is:
(1) When without any laches or delay on the part of assessee, the assessment is completed more than one year after the submission of the return; or…….

Finally, the Court observed that the order of the Dy. CIT, Bombay dated 20th March, 1989 held that the delay in finalisation of assessment is not attributable to the assessee and therefore it is not liable to pay interest u/s 215 beyond the period of one year from the date of filing of the return. Accordingly, the appellant was held to be liable to pay an amount of Rs. 4,40,020. The order of the Dy. CIT had not been challenged by the Revenue or the appellant, with the result that the said order attained finality. In the absence of a challenge to the order under Rule 40(1), the appellant is not entitled to the benefit of the judgment of the Division Bench of this Court in the case of CIT vs. Bennett Coleman & Co. Ltd. (217 ITR 216). Therefore, the appellant is not entitled to waiver of interest for a period of one year. The appellant is entitled to the benefit of the order dated 20th March, 1989 passed under Rule 40(1) only to the extent stated therein.

Therefore, it was held that the appellant was liable to pay an amount of Rs. 4,13,630as per the order dated 20th March, 1989.

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

3 Macrotech Developers Ltd. vs. Pr. Commissioner of Income Tax [Writ Appeal No. 79 of 2021, date of order: 25th March, 2021 (Bombay High Court)]

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

The assessee is a public limited company engaged in the business of land development and construction of real estate properties. Initially, Shreeniwas Cotton Mills Private Limited (‘Cotton Mills’ for short) was a subsidiary of the assessee company. Subsequently, it was merged with the assessee company on the strength of the amalgamation scheme sanctioned vide order dated 7th June, 2019 passed by the National Company Law Tribunal, Mumbai Bench. The merger had taken place with effect from 1st April, 2018. However, the pending tax demand against the cotton mills under the Act continued in the name of the cotton mills since migration of the permanent account number of the cotton mills to the permanent account number of the assessee company had not taken place. Therefore, it is pleaded that the tax demand of the cotton mills should be construed to be that of the assessee company and reference to the assessee company would mean and include the assessee company as well as the cotton mills.

For the A.Y. 2015-16, the assessee had filed return of income u/s 139(1) disclosing total income of Rs. 2,05,71,01,650. The self-assessment income tax payable on the returned income as per section 115JB was Rs. 69,92,08,851. At the time of filing of the return, an amount of Rs. 27,34,77,755 was shown to have been paid by way of tax deducted at source. The balance of the self-assessment tax of Rs. 42,57,31,096 (Rs.69,92,08,851 less Rs. 27,34,77,755) with interest thereon under sections 234A, 234B and 234C aggregating to Rs. 12,36,74,855 (totalling Rs. 54,94,05,951) was paid by the assessee after the due date for filing of the return.

The Pr. CIT issued notice to the assessee on 19th September, 2017 to show cause as to why prosecution should not be initiated against it u/s 276-C(2) for alleged wilful attempt to evade tax on account of delayed payment of the balance amount of the self-assessment tax. The assessee in its reply denying the allegations, made a request to the Pr. CIT to withdraw the show cause notice. The assessee did not apply for compounding u/s 279(2).

In the meanwhile, on 17th December, 2017, the A.O. passed the assessment order for the A.Y. 2015-16 u/s 143(3). In this order, he disallowed certain expenses claimed by the assessee towards workmen’s compensation and other related expenses. After disallowing such claim, the A.O. computed the tax liability of the assessee at Rs. 61.75 crores, inclusive of interest.

When the aforesaid assessment order was challenged by the assessee, the Commissioner (Appeals) dismissed it and upheld the assessment order vide order dated 27th December, 2018.

Aggrieved by this order, the assessee preferred further appeal before the ITAT which is pending before the Tribunal for final hearing.

While the appeal of the assessee was pending before the Tribunal, the Central Government enacted the Direct Tax Vivad se Vishwas Act, 2020 which came into force on and from 17th March, 2020. The primary objective of this Act is to reduce pending tax litigations pertaining to direct taxes and in the process grant considerable relief to the eligible declarants while at the same time generating substantial revenue for the Government.

Circular No. 9 of 2020 dated 22nd April, 2020 was issued whereby certain clarifications were given in the form of questions and answers. The Central Government vide a Notification dated 18th March, 2020 has made the Vivad se Vishwas Rules.

With a view to settling the pending tax demand, the assessee submitted a declaration in terms of the Vivad se Vishwas Act on 23rd September, 2020 in the name of the cotton mills in respect of the tax dues for the A.Y. 2015-16 which is the subject matter of the appeal pending before the Tribunal.

While the assessee’s declaration dated 23rd September, 2020 was pending, it came to know that the Pr. CIT had passed an order on 3rd May, 2019 authorising the Joint Commissioner of Tax (OSD) to initiate criminal prosecution against the cotton mills and its directors by filing a complaint before the competent magistrate in respect of the delayed payment of self-assessment tax for the A.Y. 2015-16. On the basis of such sanction, the Income-tax Department filed a criminal complaint under section 276-C(2) r/w/s 278B before the 38th Metropolitan Magistrate’s Court at Ballard Pier. However, no progress has taken place in the said criminal case.

The impugned Circular No. 21/2020 dated 4th December, 2020 was issued giving further clarifications in respect of the Vivad se Vishwas Act. Question No. 73 contained therein is: when in the case of a taxpayer prosecution has been initiated for the A.Y. 2012-13 with respect to an issue which is not in appeal, would he be eligible to file declaration for issues which are in appeal for the said assessment year and in respect of which prosecution has not been launched? The answer given to this is that ineligibility to file declaration relates to an assessment year in respect of which prosecution has been instituted on or before the date of declaration. Since for the A.Y. 2012-13 prosecution has already been instituted, the taxpayer would not be eligible to file a declaration for the said assessment year even on issues not relating to prosecution.

It is the grievance of the assessee company that on the basis of the answer given to Question No. 73 its declaration would be rejected since the declaration pertains to the A.Y. 2015-16 and prosecution has been launched against it for delayed payment of self-assessment tax for the A.Y. 2015-16. It is in this context that the assessee approached the High Court by a writ petition seeking the reliefs as indicated above.

The High Court held that the exclusion referred to in section 9(a)(ii) is in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Thus, what section 9(a)(ii) postulates is that the provisions of the Vivad se Vishwas Act would not apply in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Therefore, the prosecution must be in respect of tax arrears relating to an A.Y. The Court was of the view that there is no ambiguity insofar as the intent of the provision is concerned and a statute must be construed according to the intention of the Legislature and that the Courts should act upon the true intention of the Legislature while applying and interpreting the law. Therefore, what section 9(a)(ii) stipulates is that the provisions of the Vivad se Vishwas Act shall not apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrears relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrears which naturally is relatable to an assessment year.

The Court observed that a look at clauses (b) to (e) of section (9) shows that there is a clear demarcation in section 9 of the Act inasmuch as the exclusions provided under clause (a) are in respect of tax arrears, whereas in clauses (b) to (e) the thrust is on the person who is either in detention or facing prosecution under the special enactments mentioned therein. Therefore, if we read clauses (b) to (e) of section 9, it would be apparent that such categories of persons would not be eligible to file a declaration under the Vivad se Vishwas Act in view of their exclusion in terms of section 9(b) to (e).

Apart from this, the Court observed that under the scheme of the Act and the purpose of the Rules as a whole, the basic thrust is on settlement in respect of tax arrears. Under section 9 certain categories of assessees are excluded from availing the benefit of the Vivad se Vishwas Act. While those persons who are facing prosecution under serious charges or those who are in detention as mentioned in clauses (b) to (e) are excluded, the exclusion under clause (a) is in respect of tax arrears which is further circumscribed by sub-clause (ii) to the extent that if prosecution has been instituted in respect of tax arrears of the declarant relating to an A.Y. on or before the date of filing of declaration, he would not be entitled to apply under the Vivad se Vishwas Act. Now, tax arrears has a definite connotation under the Vivad se Vishwas Act in terms of section 2(1)(o) which has to be read together with sections 2(f) to 2(j).

Further, the High Court held that to say that the ineligibility u/s 9(a)(ii) relates to an assessment year and if for that assessment year a prosecution has been instituted, then the taxpayer would not be eligible to file declaration for the said A.Y. even on issues not relating to prosecution, would not only be illogical and irrational but would be in complete deviation from section 9(a)(ii) of the Act. Such an interpretation would do violence to the plain language of the statute and, therefore, cannot be accepted. On a literal interpretation or by adopting a purposive interpretation of section 9(a)(ii), the only exclusion visualised under the said provision is pendency of a prosecution in respect of tax arrears relatable to an assessment year as on the date of filing of declaration and not pendency of a prosecution in respect of an A.Y. on any issue. The debarment must be in respect of the tax arrears as defined u/s 2(1)(o) of the Vivad se Vishwas Act. Therefore, to hold that an assessee would not be eligible to file a declaration because there is a pending prosecution for the A.Y. in question on an issue unrelated to tax arrears would defeat the very purport and object of the Act. Such an interpretation which abridges the scope of settlement as contemplated under the Act cannot, therefore, be accepted.

Insofar as the prosecution against the petitioner is concerned, the same has been initiated u/s 276C(2) because of the delayed payment of the balance amount of the self-assessment tax. Such delayed payment cannot be construed to be a tax arrear within the meaning of section 2(1)(o). Therefore, such a prosecution cannot be said to be in respect of tax arrears. Since such a prosecution is pending which is relatable to the A.Y, 2015-16, it would be in complete defiance of logic to debar the petitioner from filing a declaration for settlement of tax arrears for the said A.Y. which is pending in appeal before the Tribunal.

Considering the above, the clarification given by way of answer to Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of the Vivad se Vishwas Act and, therefore, the same would stand to be set aside and quashed. The declaration of the petitioner dated 23rd September, 2020 was directed to be decided by the Pr. CIT in conformity with the provisions of the Vivad se Vishwas Act dehors the answer given to Question No. 73 which was set aside and quashed. The writ petition was allowed.

 

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

6. Anandkumar vs. Asst. CIT Tax, Circle-2, Salem [Tax Case Appeal No. 388 of 2019; 23rd December, 2020; Madras High Court] [‘A’ Bench, Chennai in I.T.A. No. 573/CHNY/2018; A.Y.: 2012-13; ITAT order dated 30th January, 2019]

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

 

The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers. The assessee filed his return of income for the A.Y. under consideration admitting a total income of Rs. 43,53,066. The assessment was finalised u/s 143(3) by an order dated 3rd March, 2015 disallowing the claim made by the assessee u/s 44AD. While filing the return, the assessee had applied the presumptive rate of tax at 8% u/s 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm. The A.O. did not agree with the assessee and opined that section 44AD is available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but was only a partner in the firm. Further, the assessee did not have any turnover and receipts of account of remuneration and interest from the firms cannot be construed as gross receipts mentioned in section 44AD.

 

On appeal, the CIT (Appeals), Salem dismissed the same by order dated 22nd December, 2017. The Tribunal also dismissed the assessee’s appeal.

 

The Hon. High Court observed that section 44AD is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993. At the outset, it needs to be noted that section 44AD is a special provision and it carves out an exception in respect of certain businesses, and from clause (b)(ii) of the Explanation u/s 44AD which prescribes the limit of Rs. 2 crores as total turnover or gross receipts, it is a clear indication that this provision is meant for small businesses. Further, section 44AD(1) commences with a non-obstante clause and states that notwithstanding anything to the contrary contained in sections 28 to 43C in the case of an eligible assessee engaged in an eligible business, a presumptive rate of tax at 8% can be adopted. One more important aspect is that 8% is computed on the basis of the total turnover or gross receipts of the assessee. Therefore, four important aspects to be noted in section 44AD are that the assessee who claims such a benefit of the presumptive rate of tax should an eligible assessee as defined in clause (a) of the Explanation to section 44AD, he should be engaged in an eligible business as defined in clause (b) of section 44AD and 8% of the presumptive rate of tax is computed on the total turnover or gross receipts. Therefore, to avail the benefit of such provision, the assessee has to necessarily satisfy the A.O. that he comes within the framework of section 44AD.

 

The assessee’s case is that he has received the remuneration and interest from the partnership firm and according to him this remuneration and interest received are gross receipts, and they being less than Rs. 1 crore arising from an eligible business, he is entitled to claim the benefit of the presumptive rate of tax. Further, the assessee’s contention is that he is an eligible assessee and the remuneration and interest received from the partnership firm being gross receipts from an eligible business, the A.O. ought to have allowed the benefit u/s 44AD.

 

The Revenue submitted that the assessee is not doing any business, but the firm is carrying on business in which the assessee is a partner and therefore the condition that it should arise from an eligible business is not satisfied. In the Statement issued by the ICAI, it has been stated that the word ‘turnover’ for the purpose of the clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise, whereas in the case of the assessee neither has he performed any sales nor rendered any services but merely received remuneration and interest from the firm and the partnership firm has already debited the remuneration and interest in their profit and loss account, and therefore it cannot be taken as turnover or gross receipts.

 

The assessee should be able to satisfy the four main criteria mentioned in sub-section (1) of section 44AD r/w Explanations (a) and (b) in the said provision. Therefore, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. Admittedly, the assessee who is an individual in the instant case, is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be the turnover of the assessee (individual). Similarly, it will also not qualify for gross receipts.

 

Admittedly, the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms. Therefore, the Revenue was right in the contention that remuneration and interest cannot be treated as gross receipts.

 

The Court noted that the Tribunal observed that the intention of section 40(b) is that the partner should not be disentitled from claiming reasonable remuneration where he is a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro-rata profits of the firm would be higher resulting in higher tax for the firm. Therefore, the payments have to be construed indirectly as a type of distribution of profits of a firm or otherwise the firm would have been taxed. Therefore, the Tribunal observed that the Legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that can never translate into gross receipts or turnover of a business of being a partner in a firm. The Tribunal took note of the position prior to the substitution of section 44AD by the Finance (No. 2) Act, 2009 with effect from 1st April, 2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for the business of civil construction or supply of labour for civil construction. By virtue of the substitution, the applicability of presumptive rate of tax was expanded to include any business which had turnover or gross receipts of less than Rs. 1 crore. The Tribunal noted the Explanatory notes to the provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3rd June, 2010 wherein the CBDT had explained why the scope of the said provision was enlarged.

 

The Court observed that section 44ADA is a special provision for computing profits and gains of profession on presumptive basis and uses the expression ‘Total gross receipts’. As already seen in section 44AD, the words used are ‘total turnover’ or ‘gross receipts’ and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if so done, the purpose of introducing section 44AD would stand defeated. That apart, the position becomes much clearer if we take note of sub-section (2) of section 44AD which states that any deduction allowable under the provisions of sections 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of section 44AD which deals with any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm.

 

Thus, the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the A.O. The appeal filed by the assessee was accordingly dismissed.

 

It is my great hope someday, to see science and decision makers rediscover what the ancients have always known. Namely that our highest currency is respect

– Nassim Nicholas Taleb

Section 220 – Collection and recovery of tax – Assessee contended that total demand was to be kept in abeyance till disposal of appeal by CIT(A) – It was noted that said addition was made primarily on basis of statement – No cross-examine granted – Thus making additions to income of assessee was highly questionable – Financial hardship to meet demand even to extent of 20% – The entire demand was to be kept in abeyance till disposal of appeal on merits by CIT(Appeals)

2. Mayur Kanjibhai Shah vs. ITO-25(3)(1) [Writ Petition No. 812 of 2020, dated 12th March, 2020 (Bombay High Court)]

Section 220 – Collection and recovery of tax – Assessee contended that total demand was to be kept in abeyance till disposal of appeal by CIT(A) – It was noted that said addition was made primarily on basis of statement – No cross-examine granted – Thus making additions to income of assessee was highly questionable – Financial hardship to meet demand even to extent of 20% – The entire demand was to be kept in abeyance till disposal of appeal on merits by CIT(Appeals)

The assessee had filed his return of income for A.Y. 2012-13 on 28th September, 2012 declaring a total income of Rs. 5,05,981.00, which was processed u/s 143(3).

Subsequently, it was decided to reopen the assessment u/s 147 for which notice u/s 148 was issued. Following assessment proceedings on re-opening culminating in the assessment order passed u/s 143(3) r/w/s 147, the A.O. held that an amount of Rs. 3.25 crores was extended by the petitioner to one Nilesh Bharani which was treated as unexplained money u/s 69A and was added to the total income of the assessee.

Pursuant to the order of assessment, the A.O. issued notice of demand dated 21st December, 2019 to the assessee u/s 156 calling upon him to pay an amount of Rs. 2,17,76,850 within the period prescribed.

An appeal was preferred before the CIT(A)-37. Simultaneously, the assessee filed an application before the A.O. for complete stay of demand. Under an order passed u/s 220(6) the A.O. rejected the stay application, giving liberty to the assessee to pay 20% of the demand in which event it was stated that the balance of the outstanding dues would be kept in abeyance.

Aggrieved by the above order, the assessee filed the writ petition.

Revenue filed a common affidavit. Reopening of the assessment in the case of the petitioner for A.Y. 2012-13 was justified and it was contended that the said re-assessment order suffers from no error or infirmity. In paragraph No. 17 it was stated that summons u/s 131 was issued to Nilesh Bharani, but he, instead, had sent a copy of a letter dated 14th October, 2014 addressed to the Director of Income Tax-2, Mumbai.

The Court observed that the assessment order on reopening had been made primarily on the basis of certain entries (in coded language) made in the diary recovered from the premises of Nilesh Bharani in the course of search and seizure u/s 132. The finding that the petitioner had lent / provided cash amount of Rs. 3.25 crores to M/s Evergreen Enterprises / Nilesh Bharani was also reached on the statement made by Nilesh Bharani. Nilesh Bharani was not subjected to any cross-examination by the petitioner; rather, in the affidavit of the Revenue it is stated that Nilesh Bharani has retracted his statement. Prima facie, on the basis of coded language diary entries and a retracted uncorroborated statement of an alleged beneficiary, perhaps the additions made by the A.O. are highly questionable. In such circumstances, instead of taking a mechanical approach by directing the petitioner to pay 20% of the tax demand or providing instalments, the Revenue ought to have considered the case prima facie, balance of convenience and financial hardship, if any, of the petitioner.

In such circumstances, in the interest of justice the demand raised was kept in abeyance till disposal of the appeal by the CIT(A). The appeal should be decided by the CIT(A) within a period of four months from the date of receipt of an authenticated copy of the order. Till disposal of the appeal within the said period, notice of demand shall be kept in abeyance. Accordingly, writ petition is allowed.

[DCIT vs. S.R.A. Systems Ltd.; ITA Nos. 1497 to 1499/Mds/2009, A.Y. 2000-01 to 2001-02 (Mds.) ITAT] Section 234D – Levy of interest u/s 234D came into force from 1st June, 2003 – Prospective nature – After the commencement of the assessment year – Interest could be levied only from 1st April, 2004, i.e., from the A.Y. 2004-05 – The law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

8. Commissioner of Income Tax, Chennai vs. S.R.A. Systems Ltd. [T.C. Appeal Nos. 1470 to 1472 of 2010, dated 19th January, 2021 (Bom.)]

[DCIT vs. S.R.A. Systems Ltd.; ITA Nos. 1497 to 1499/Mds/2009, A.Y. 2000-01 to 2001-02 (Mds.) ITAT]

Section 234D – Levy of interest u/s 234D came into force from 1st June, 2003 – Prospective nature – After the commencement of the assessment year – Interest could be levied only from 1st April, 2004, i.e., from the A.Y. 2004-05 – The law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date

Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

For the A.Y. 2000-01, the assessee had filed its return of income on 29th November, 2000. The assessee claimed that it was eligible for deduction u/s 10B. The return was processed on 28th March, 2002. Subsequently, the A.O. had reason to believe that income chargeable to tax had escaped assessment on account of the assessee company being ineligible for deduction u/s 10A. A notice dated 22nd March, 2007 was issued u/s 148 disallowing the entire claim of deduction u/s 10B. Further, the expenditure incurred for the renovation and repairs of the rented premises of the assessee company was disallowed by the A.O. on the ground that such expenses were in the nature of capital expenditure. The A.O. in his reassessment order noted that in terms of section 10B(ii) an undertaking in order to be eligible for deduction u/s 10B must not be formed by splitting up or reconstruction of a business already in existence. Further, he held that deduction u/s 10B was not available to the assessee in view of the provisions of section 10B(iii) which stipulate that eligible business is not formed by transfer to a new business of plant and machinery previously used for any purpose. The A.O. found that the assessee had not complied with both these conditions, hence it was not entitled to any deduction u/s 10B.

While completing the assessment u/s 143(3) r/w/s 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. Similar disallowance was made in A.Y 2002-03 while passing an order u/s 143(3) r/w/s 263. The A.O. levied interest u/s 234D.

For the A.Y. 2002-03, on challenge the Tribunal set aside the order of the CIT after taking into consideration the decision of the Apex Court reported in 107 ITR 195 [Textile Machinery Corporation Limited vs. CIT] that held as follows:

‘… This is not a case of setting up of a new business, but only transfer of business place of existing business to a new place located in STPI area and thereafter, getting the approval from the authorities, the assessee becomes entitled to deduction u/s 10A. Merely because by shifting the business from one place to another and keeping some of the plant and machinery as those are bearing charge of financial institution, does not violate clauses (ii) and (iii) of sub clause (2) to section 10A.’

The order passed by the Income-tax Appellate Tribunal was challenged by the Department in T.C.A. No. 1916 of 2008 and the Division Bench of this Court by its judgment dated 26th October, 2018 confirmed the order of the ITAT dated 16th May, 2008 made in I.T.A. No. 2255/Mds/06 for the A.Y. 2002-03 and dismissed the appeal.

Aggrieved by the assessment order for the A.Ys. 2000-01 and 2001-02, the assessee filed appeals before the CIT(A). The Appellate Authority allowed the appeals by following the order of the Tribunal for A.Y. 2002-03. The Appellate Authority, while dealing with the levy of interest u/s 234D, held that the said section comes into effect only after the commencement of the assessment year and interest could be levied only for the A.Y. 2004-05, and therefore deleted the interest for the A.Ys. 2000-01, 2001-02 and 2002-03.

Aggrieved over the order of the CIT(A), the Department filed appeals before the Appellate Tribunal which confirmed the CIT(A) order and dismissed the appeals. While dismissing the appeals, the Tribunal held that interest u/s 234D cannot be levied for the A.Ys. 2000-01, 2001-02 and 2002-03. Further, while dismissing the appeals, the Tribunal followed the order in I.T.A. No. 2255/Mds/06 dated 16th May, 2008.

Still aggrieved, the Department filed the appeals before the High Court. The Court held that, in view of the judgment of the Division Bench of this Court, it is clear that the applicability of clauses (ii) and (iii) of sub-clause (2) to section 10B, the impugned order passed by the ITAT is proper. In view of the order passed by the ITAT of 16th May, 2008 in I.T.A. No. 2255/Mds/06 and the judgment passed by the Division Bench of this Court on 26th October, 2018 in Tax Case Appeal No. 1916 of 2008, the assessee company would be entitled to deduction u/s 10A and the disallowance made by the A.O. was not correct. For A.Y. 2002-03, since the order passed u/s 263 itself had been set aside, the cause of action for reassessment does not survive.

So far as the levy of interest u/s 234D is concerned, the Court held that the section came to be inserted by the Finance Act, 2003 with effect from 1st June, 2003. Prior to that, no interest was payable on refund in the event of an order for refund being set aside and the assessee is made to pay the same from the date of rectification order or the orders passed by the Appellate Authorities. A reading of the provisions of section 234D makes it clear that there is no indication in the language employed in the entire section that the Parliament intended to make this levy of tax on excess refund retrospective. On the contrary, after inserting this provision in the Act it is specifically stated that it comes into effect from 1st June, 2003. Though the amendment is by insertion, the Parliament has expressly stated that the amendment comes into effect from 1st June, 2003. Parliament has made its intention clear and unambiguous. In other words, it is not retrospective. Merely because the order of assessment was passed subsequent to the insertion of the said provision in the Act, would not make the said provision retrospective. The provision providing imposition of interest is a substantive provision. It is settled law that in the absence of any express words used in the provision making levy of interest retrospective, it can only be prospective (i.e.) from the date on which it came into force, viz., 1st June, 2003.

The Constitution Bench of the Apex Court in the case of Karimthuravi Tea Estate Ltd. vs. State of Kerala reported in 1966 60 ITR 262 SC held as follows:

‘…It is well settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year would not apply to the assessment for that year even if the assessment is actually made after the amendments come into force.’

The amended provision shall come into force only after the commencement of the assessment year and cannot be applied retrospectively unless it is specifically mentioned. Therefore, the law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date. Section 234D having come into force only on 1st June, 2003, i.e., after the commencement of the assessment year, interest could be levied only from 1st April, 2004, that is, from the A.Y. 2004-05, and no interest u/s 234D could be chargeable prior to the A.Y. 2004-05. Since all the three assessment years are prior to the A.Y. 2004-05, the provisions of section 234D cannot be applied. Accordingly, the Revenue appeals were dismissed.

Revision u/s 264 – Offering income inadvertently – Not liable to be taxed – Revision provisions are meant for the benefit of the assessee and not to put him to inconvenience – Commissioner should have examined the existing material in the light of Circular No. 14 (XL – 35) of April, 1955 and Article 265 of the Constitution of India

5 Aafreen Fatima Fazal Abbas Sayed vs. Assistant Commissioner of Income Tax & Ors. [W.P. (L) No. 6096 of 2021, date of order: 08/04/2021 (Bombay High Court)]

Revision u/s 264 – Offering income inadvertently – Not liable to be taxed – Revision provisions are meant for the benefit of the assessee and not to put him to inconvenience – Commissioner should have examined the existing material in the light of Circular No. 14 (XL – 35) of April, 1955 and Article 265 of the Constitution of India

The petitioner challenged the order dated 12th February, 2021 passed by the Principal Commissioner of Income Tax, rejecting the revision petition filed by it u/s 264.

For the A.Y. 2018-19, the assessment year under consideration, the petitioner, who is an individual, declared a total income of Rs. 27,05,646 and after claiming deductions and set-off on account of TDS and advance tax, the refund was determined at Rs. 34,320. However, while filing the return of income on 20th July, 2018 for A.Y. 2018-19, the figure of long-term capital gain of Rs. 3,07,60,800 was purported to have been wrongly copied by the petitioner’s accountant from the return of income filed for the earlier A.Y., i.e., 2017-18, which had arisen on surrender of tenancy rights by the petitioner for that year. It is submitted that the assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. The petitioner has not transferred any capital asset and there can be no capital gains in the assessment year under consideration and therefore no tax can be imposed on such non-existent capital gains for A.Y. 2018-19.

The returns filed by the petitioner for A.Y. 2018-19 were processed u/s 143(1) vide order dated 2nd May, 2019 and a total income of Rs. 3,34,66,446, including long-term capital gains of Rs. 3,07,60,800 was purported to have been inadvertently shown in the return of income, thereby leading to a tax demand of Rs. 87,40,612. It is the case of the petitioner that the Central Processing Centre (‘CPC’) of the Department at Bengaluru accepted the aggregate income for the year under consideration at Rs. 25,45,650 as presented in column 14; however, the taxes were computed at Rs. 87,40,612 on the total income of Rs. 3,33,06,450 as described above. It is submitted that upon perusal of the order u/s 143(1) dated 2nd May, 2019, the petitioner realised that the amount of Rs. 3,07,60,800 towards long-term capital gains had been erroneously shown in the return of income for the year under consideration.

Realising the mistake, the petitioner filed an application u/s 154 on 25th July, 2019 seeking to rectify the mistake of the misrecording of long-term capital gains in the order u/s 143(1) as being an inadvertent error as the same had already been considered in the return for the A.Y. 2017-18, assessment in respect of which had already been completed u/s 143(3). It was submitted that the application for rectification was still pending and Respondent No. 1 had not taken any action with respect to the same, although it appears that the same has been rejected as per the statement in the Respondent’s affidavit in reply.

In the meanwhile, the petitioner also made a grievance on the E-filing portal of the CPC on 4th October, 2019 seeking rectification of the mistake where the taxpayer was requested to transfer its rectification rights to AST, after which the petitioner filed various letters with Respondent No. 1, requesting him to rectify the mistake u/s 154.

In order to alleviate the misery and bring to the notice of higher authorities the delay being caused in the disposal of the rectification application, the petitioner approached Respondent No. 2 u/s 264 on 27th January, 2021 seeking revision of the order dated 2nd May, 2019 passed u/s 143(1) narrating the aforementioned facts and requesting the Respondent No. 2 to direct Respondent No. 1 to recalculate tax liability for A.Y. 2018-19 after reducing the amount of long-term capital gains from the total income for the said year.

However, instead of considering the application on merits, vide order dated 12th February, 2021 the Respondent No. 2, Principal Commissioner of Income Tax-19, dismissed the application filed by the petitioner on the ground that the same was not maintainable on account of the alternate effective remedy of appeal and that the assessee had also not waived the right of appeal before the Commissioner of Income Tax (Appeals) as per the provisions of section 264(4).

Being aggrieved by the order of rejection of the application u/s 264, the petitioner moved the High Court.

The Court observed that in the petitioner’s return for A.Y. 2018-19, the figure of long-term capital gains of Rs. 3,07,60,800 on surrender of tenancy rights in respect of earlier A.Y. 2017-18 had inadvertently been copied by the petitioner’s accountant from the return for A.Y. 2017-18. The assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. In the financial year corresponding to A.Y. 2018-19, the petitioner declared a total income of Rs. 27,05,646 and after claiming deductions and set-off on account of TDS and advance tax, a refund of Rs. 34,320 was determined. No capital asset transfer had taken place during A.Y. 2018-19, therefore no tax on capital gains can be imposed. The error had crept in through inadvertence. There is neither any fraud nor malpractice alleged by the Revenue. The rectification application u/s 154 filed earlier was stated in the Respondent’s affidavit to have been rejected. The application u/s 264 has been dismissed / rejected on the ground that the application was not maintainable as an alternate effective remedy of appeal was available and there was no waiver of such appeal by the assessee.

The Court referred to the Delhi High Court decision in the case of Vijay Gupta vs. Commissioner of Income Tax [2016] 386 ITR 643 (Delhi), wherein the assessee in his return of income had erroneously offered to tax gains arising on sale of shares as short-term capital gains, instead of the same being offered as long-term capital gains exempt from tax, where the section 154 application of the assessee was refused / not accepted and when the assessee filed a revision application u/s 264, the same was rejected on the ground that section 143(1) intimation was not an order and was not amenable to the revisionary jurisdiction u/s 264. The Delhi High Court negated these contentions of the Revenue and further held in Paragraph 39 as under:

‘39:- When the Commissioner was called upon to examine the revision application u/s 264 of the Act, all the relevant material was already available on the record of the Assessing Officer, the Commissioner instead of merely examining whether the intimation was correct based on the material then available should have examined the material in the light of the Circular No. 14(XL-35) of 1955, dated April, 1955 and article 265 of the Constitution of India. The Commissioner has erred in not doing so and in failing to exercise the jurisdiction vested in him on mere technical grounds.’

The Court observed that in the facts of the present case, the Commissioner has failed to exercise the jurisdiction vested in him on fallacious grounds which cannot be sustained. In the facts of the present case also, the Commissioner has not considered the petitioner’s case on merits and simply on the ground of availability of an alternate remedy of filing appeal had rejected the application u/s 264. Therefore, on the basis of the above decision, the Commissioner’s order was liable to be set aside.

Under section 264, the Principal Commissioner is mandated not to revise any order in two situations: first, where an appeal that lies to the Commissioner (Appeals) but has not been made and the time within which such appeal may be made has not expired, and second, where the assessee has not waived his right of appeal. What emerges from this is that in a situation where there is an appeal that lies to the Commissioner (Appeals) and which has not been made and the time to make such an appeal has not expired, in that case the Principal Commissioner or Commissioner cannot revise any order in respect of which such appeal lies. The language is quite clear, that the two conditions are cumulative, viz., there should be an appeal which lies but has not been made and the time for filing such appeal has not expired; in such a case, the Principal Commissioner cannot revise. However, if the time for making such an appeal has expired, then it would be imperative that the Principal Commissioner would exercise his powers of revision u/s 264.

The other or second situation is when the petitioner assessee has not waived off his right of appeal; even in such a situation, the Commissioner cannot exercise his powers of revision u/s 264(4)(a). In clause (a) of section 264(4), in the language between filing of an appeal and the expiry of such period and the waiver of the assessee to his right of appeal, there is an ‘or’, meaning thereby that there is an option, i.e., either the assessee should not have filed an appeal and the period of filing the same should have expired, or he should have waived such right. Therefore, there are two situations which are contemplated in the said sub-section(4)(a) of section 264. The section cannot be interpreted to mean that for the Principal Commissioner to exercise his powers of revision u/s 264 not only that the time for filing the appeal should have expired but also that the assessee should have waived his right of appeal. In the facts of the case, the petitioner has not filed an appeal against the order u/s 143(1) u/s 246-A and the time of 30 days to file the same has also admittedly expired.

The Court held that a plain reading of the section suggests that it would not then be necessary for the petitioner to waive such right. That waiver would have been necessary if the time to file the appeal would not have expired. The Court also observed that in matters like these, where the errors can be rectified by the authorities, the whole idea of relegating or subjecting the assessee to the appeal machinery or even discretionary jurisdiction of the High Court was uncalled for and would be wholly avoidable. The provisions in the Income-tax Act for rectification, revision u/s 264 are meant for the benefit of the assessee and not to put him to inconvenience. That cannot and could not have been the object of these provisions.

The order dated 12th February, 2021 passed by Respondent No. 2 was set aside. The Writ Petition was allowed, directing the Pr.CIT to decide the application on merits.

Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

4 Bhupendra Harilal Mehta vs. Pr. Commissioner of Income Tax & Ors.
[W.P. No. 586 of 2021, date of order: 05/04/2021 (Bombay High Court)]

Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

The petitioner was an individual; his assessment for A.Y. 2015-16 was completed vide an order dated 27th December, 2017 u/s 143(3), wherein one addition of Rs. 84,25,075 was made u/s 68 and another addition of Rs. 11,75,901 u/s 69C. The additions were made by the A.O. on the basis that the petitioner had booked artificial long-term capital gains of Rs. 5,73,23,123 and claimed exemption u/s 10(38) thereon by selling shares of M/s Lifeline Drugs and Pharma Limited for a total consideration of Rs. 5,87,95,055. The case of the A.O. was that the price of this share was artificially rigged by certain operators; the details of this were divulged in the course of a search u/s 132 carried out by the Kolkata Investigation Wing of the Income-tax Department during which some statements were recorded u/s 132(4), and in the course of a survey action u/s 133A on the premises of M/s Gateway Financial Service Limited and Korp Securities Limited where also statements of directors were recorded. By an order dated 18th February, 2019 u/s 154, the addition u/s 68 was revised to Rs. 5,87,95,055. Aggrieved by both the aforesaid orders, the petitioner filed appeals to the Commissioner (Appeals).

While the aforesaid appeals were pending, the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act’) was passed, giving an option to taxpayers to settle their income tax disputes by making a declaration to the designated authority and paying varying percentages of the disputed tax as specified u/s 3 of the new Act.

On 22nd April, 2020, the Central Board of Direct Taxes issued Circular No. 9 of 2020 and on 4th December, 2020 another Circular, No. 21, making further clarifications in the form of Questions and Answers. While the petition was pending, the CBDT issued yet another Circular, No. 4/2021 dated 23rd March, 2021, further clarifying the answer to Q. No. 70.

The petitioner filed a declaration in Form No. 1 u/s 4(1) of the DTVSV Act read with Rule 3(1) of the DTVSV Rules on 16th December, 2020. The disputed income was declared to be Rs. 5,98,90,960 and the disputed tax thereon Rs. 2,02,69,581. The petitioner submitted that the gross amount payable by it was 100% of the disputed tax, i.e., Rs. 2,02,69,581, out of which a sum of Rs. 69,31,892 was declared to have been paid and the balance of Rs. 1,33,37,689 was declared to be payable by the petitioner.

By an order dated 26th January, 2021, the Designated Authority passed an order in Form No. 3 u/s 5(1) of the DTVSV Act read with Rule 4 of the DTVSV Rules, determining the tax payable by the petitioner to be Rs. 2,57,67,714, being 125% of the disputed tax as against Rs. 2,02,69,581 being 100% of the disputed tax declared by the petitioner.

Being aggrieved by the aforesaid order, the petitioner challenged it before the High Court by way of a Writ Petition including the Circular No. 21.

The petitioner submitted that for A.Y. 2015-16 the assessment was not made on the basis of any search but the addition was made only on the basis of certain information obtained in the course of a search conducted on the premises of other entities. The petitioner contended that he has not been subjected to any search action. As per section 3 of the DTVSV Act, sub-clause (a) is applicable to its case as the tax arrear is the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax, and penalty leviable or levied on such disputed tax and, therefore, the amount payable by the petitioner would be the amount of the disputed tax. Only in a case as contained in sub-clause (b) of section 3, where the tax arrears include tax, interest or penalty determined in any assessment on the basis of a search u/s 132 or section 132A of the Income-tax Act, only then would the amount payable under the DTVSV Act be 125% of the disputed tax and in no other case.

It was submitted that the Circular has been issued under sections 10 and 11. Sub-section (1) of section 11 states that an order can be passed by the Central Government to remove difficulties; however, the same cannot be inconsistent with the provisions of the Act. Although section 3 of the DTVSV Act states in unequivocal terms that 125% of the disputed tax is payable only in those cases where an assessment is made on the basis of a search, the impugned order based on the Circular would make it contrary to the provisions of the Income-tax Act and also to several judgments of the Supreme Court; to that extent, the Circular is liable to be quashed. In any event, in interpreting the scope of a provision of a statute, the Courts are not bound by the Circulars issued by the CBDT.

The petitioner further relied on Circular No. 4/2021 dated 23rd March, 2021 with respect to the clarifications issued by the CBDT with reference to FAQ No. 70 of Circular No. 21/2020. It was submitted that to remove any uncertainty it is clarified that a search case means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in sections 153A, 153C, 158BC or 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A, modifying FAQ No. 70 of Circular 21/2020 to that extent. It was submitted that the petitioner is not a person referred to in section 153A or 153C.

For their part, the respondents submitted that since the assessment order was framed based on search / survey inquiries conducted by the Directorate of Income Tax (Investigation), Kolkata on 2nd July, 2013, the designated authority has rightly computed the petitioner’s liability under the Vivad se Vishwas Act by adopting the rate of 125% of disputed tax applicable to a search case in accordance with section 3 of the DTVSV Act. The assessment order passed u/s 143(3) is on the basis of the search and seizure action and the statement recorded u/s 132(4), coupled with post-search inquiries, and as the petitioner had failed to demonstrate the genuineness of the transactions, the addition was made.

In other words, the Department submitted that as per the DTVSV Act, 2020 it is not material that a ‘search case’ essentially should be a case wherein a warrant is executed u/s 132. To emphasise this, it relied on FAQ No. 70 and stated that it was identical to section 153C wherein cases are considered as ‘search case’ even though a warrant is not executed but transaction or information is found from the person subjected to search action u/s 132.

The Court referred to the statement of objects and reasons of the DTVSV Act and observed that this Act is meant to provide a resolution for pending tax disputes which have been locked up in litigation. Taxpayers can put an end to tax litigation by opting for the scheme and also obtain immunity from penalty and prosecution by paying percentages of tax as specified therein. This would bring peace of mind, certainty, saving of time and resources for the taxpayers and also generate timely revenue for the Government.

Referring to the answer to Q. No. 70, it was observed that the said question and its answer in Circular No. 21 was clarified vide Circular No. 4/2021 dated 23rd March, 2021 that a ‘search case’ means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in section 153A, section 153C, section 158BC or section 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A. Thus, the answer to FAQ No. 70 of Circular No. 21/2020 has been replaced by the above meaning.

The Court observed that to be considered a search case, the assessment / reassessment should be:
(i) under sections 143(3)/144/147/153A/153C/153BC; and
(ii) be in respect of a person referred to in section 153A, section 153C, section 158BC or section 158BD; and
(iii) should be on the basis of a search initiated u/s 132, or a requisition made u/s 132A.

If all the three elements / criteria as above are satisfied, the case is a search case.

The Court held that it is not the case of the Revenue that action pursuant to sections 153A or 153C had been initiated in the case of the petitioner. These facts are not disputed. Therefore, criterion No. (ii) necessary for a case to be a search case is not satisfied. Admittedly, no search has been initiated in the case of the petitioner. The assessment order dated 22nd December, 2017 also suggests that the case of the petitioner was selected for scrutiny under ‘CASS’ selection and notices under the Act were issued to the petitioner not pursuant to any search u/s 132 or requisition u/s 132A. Assessment refers only to section 143(3) and is not read with any provision of search and seizure contained in Chapter XIV-B of the Income-tax Act where the special procedure for assessment of a search case is prescribed. The name of the petitioner figures nowhere in any of the statements u/s 132(4) of the searches referred to in the assessment order, nor in the statements pursuant to the survey action of persons under search or survey.

In view of Circular No. 4/2021 modifying / replacing the answer to FAQ No. 70 in Circular No. 21, the case of the petitioner would not be a search case. The Court further observed that these Circulars are to remove difficulties and to tone down the rigour of the law and cannot be adverse to the assessee, especially keeping in mind the beneficial nature of the legislation carrying a lot of weight. Since the petitioner’s case cannot be regarded as a search case, consequently the order dated 26th January, 2021 in Form No. 3, passed by the Designated Authority, would be unsustainable. The Writ Petition filed by the assessee was accordingly allowed.

Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

Peninsula Land Limited vs. Assistant Commissioner of Income Tax Central Circle-1(3), Mumbai & Ors. [Writ Petition No. 2827 of 2021; Date of order: 25th October, 2021 (Bombay High Court)]

Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

The petitioner challenged the notice u/s 148 dated 30th March, 2019 and the order dated 5th September, 2019 on the ground that the reasons recorded in support of the impugned notice do not indicate the manner in which the A.O. has come to the conclusion that income chargeable to tax has escaped assessment in the hands of the petitioner. It has also alleged that in the reasons for reopening, there is not even a whisper as to what was the tangible material in the hands of the A.O. which made him believe that income chargeable to tax has escaped assessment and in the notice issued four years after the assessment order, what was the material fact that was not fully and truly disclosed.

The Court observed that the law on this is well settled. To confer jurisdiction u/s 147(a), two conditions were required to be satisfied, firstly, the A.O. must have reasons to believe that income, profits or gains chargeable to income tax had escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions had to be satisfied before the A.O. could assume jurisdiction for issue of notice u/s 148 read with section 147(a). But under the substituted section 147 the existence of only the first condition suffices. In other words, if the A.O. has reason to believe that income has escaped assessment, it is enough to confer jurisdiction upon him to reopen the assessment.

Also, the reasons for reopening of assessment tested / examined have to be stated only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions. Moreover, the reasons for reopening an assessment should be that of the A.O. alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the A.O. comes to believe that income chargeable to tax has escaped assessment can come to him from any source; however, the reasons for the reopening have to be only of the A.O. issuing the notice.

It is also settled law that the A.O. has no power to review an assessment which has been concluded. If a period of four years has lapsed from the end of the relevant year, the A.O. has to mention what was the tangible material to come to the conclusion that there is an escapement of income from assessment and that there has been a failure to fully and truly disclose material facts. After a period of four years even if the A.O. has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

In the reasons for issuance of notice in this case it is recorded that the return of income for the assessment year under consideration was filed on 28th September 2012, further revised return of income was filed on 28th March, 2014 and on 9th May 2015 the return of income was processed u/s 143(1) and the assessment order u/s 143(3) read with section 153A was passed by the A.O. on 30th December, 2016. The entire basis for issuance of the notice is that information was received from the Deputy Director of Income Tax, Mumbai that a search and survey action u/s 132 was carried out in the case M/s Evergreen Enterprises and based on the statement recorded of the partner of M/s Evergreen Enterprises and documentary evidences found in the search of its premises, it unearthed an undisclosed activity of money-lending and borrowing in unaccounted cash being operated at the premises of M/s Evergreen Enterprises. It is also recorded in the reasons that based on the statements recorded of the partners of M/s Evergreen Enterprises and its employees, it came to light that one of the individuals / business concerns has lent cash of Rs. 30,00,000. It is alleged that the petitioner has lent cash loan of Rs. 30,00,000 in F.Y. 2011-12 and therefore the petitioner has been indulging in lending of cash loan and hence the amount of Rs. 30,00,000 has escaped assessment within the meaning of section 147.

The Court observed that there is absolutely no mention as to how either the partners of M/s Evergreen Enterprises or its employees or one Mr. Bharat Sanghavi are connected to the petitioner. The affidavit in reply of the respondent stated that Bharat Sanghavi was an employee of the  petitioner and, therefore, the reasons have been correctly recorded and the A.O. has reason to believe that income had escaped assessment.

As noted earlier, the reasons for reopening of assessment have to be tested / examined only on the basis of the reasons recorded and those reasons cannot be improved upon and / or much less substituted by an affidavit and / or oral submission. In the reasons for the reopening, the A.O. does not state anywhere that Bharat Sanghavi was an employee of the petitioner. Further, in the reasons for reopening, the A.O. does not even disclose when the search and survey action u/s 132 was carried out in the case of M/s Evergreen Enterprises, whether it was before the assessment order dated 30th December, 2016 in the case of the petitioner was passed or afterwards. The reasons for reopening are absolutely silent as to how the search and survey action on M/s Evergreen Enterprises or the statement referred to or relied upon in the reasons have any connection with the petitioner.

In the circumstances, the Court held that the impugned notice dated 30th March, 2019 and the impugned order dated 5th September, 2019 had been issued without jurisdiction and hence were quashed and set aside.

 

Reopening notice u/s 148 – Notice issued to non-existing entity – Notice could not be corrected u/s 292B

5 Implenia Services and Solutions Pvt. Ltd. vs. Deputy / Asst. Commissioner of Income Tax [Writ Petition (L) No. 14088 of 2021; Date of order: 25th October, 2021 (Bombay High Court)]

Reopening notice u/s 148 – Notice issued to non-existing entity – Notice could not be corrected u/s 292B

The impugned notice dated 27th March, 2021 has been issued to a non-existing entity. In the affidavit in reply, it is admitted that the notice has been issued to a non-existing entity but the respondents state that it ought to be treated as a mistake and the name in the notice could be corrected u/s 292B.

The respondents relied upon a judgment of the Delhi High Court in the case of Skylight Hospitality LLP vs. Assistant Commissioner of Income Tax, Circle-28(1), New Delhi (2018) 405 ITR 296 (Delhi) which has been subsequently affirmed on 6th April, 2018 by a two-Judge Bench of the Supreme Court.

The Court observed that this cannot be a general proposition as the Apex Court has expressly stated in Skylight Hospitality LLP (Supra) that ‘in the peculiar facts of this case, we are convinced that the wrong name given in the notice was merely a clerical error which could be corrected under section 292B of the IT Act (emphasis supplied)’.

The Apex Court in its recent judgment on this subject in Principal Commissioner of Income Tax vs. Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC) has considered the judgment of Skylight Hospitality and said that it has expressly mentioned that in the peculiar facts of that case the wrong name given in the notice was merely a clerical error. In Maruti Suzuki India Ltd. (Supra) the Court has also observed that what weighed in the dismissal of the Special Leave Petition was the peculiar facts of that case. It has reiterated the settled position that the basis on which jurisdiction is invoked is u/s 148 and when such jurisdiction was invoked on the basis of something which was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation, the notice is bad in law.

The High Court noted that the Apex Court in Maruti Suzuki India Ltd. (Supra) had observed that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved Scheme of amalgamation. Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. The stand now taken in the affidavit in reply is nothing but an afterthought by the respondent after having committed a fundamental error. Therefore, the stand of the respondent that it was an error which could be corrected u/s 292B was not acceptable to this Court.

The Court followed the decision in the case of Alok Knit Exports Ltd. vs. Deputy Commissioner of Income Tax in its order dated 10th August, 2021 in WP No. 2742 of 2019.

In the circumstances, notice dated 27th March, 2021 issued u/s 148 was quashed and set aside.

Vivad Se Vishwas – Pending appeal – Application for condonation of delay pending before CIT(A) – Notice of hearing issued – Application under VSV rejected by Pr. CIT on the ground that appeal was not admitted – Held not justified

4 Stride Multitrade Pvt. Ltd. vs. Asstt. CIT Circle – 13(2)(2) [Writ Petition (L) No. 12932 of 2021; Date of order: 21st September, 2021 (Bombay High Court)]

Vivad Se Vishwas – Pending appeal – Application for condonation of delay pending before CIT(A) – Notice of hearing issued – Application under VSV rejected by Pr. CIT on the ground that appeal was not admitted – Held not justified

The petitioner challenged the order of rejection passed by the Pr. CIT under the provisions of the Direct Tax Vivad Se Vishwas Act, 2020 (‘VSV’ Act).

The petitioner had filed its original return of income tax for A.Y. 2017-18 on 30th October, 2017 declaring total income at loss of Rs. 23,92,61,385. The case was selected for scrutiny and respondent No. 1 passed an assessment order dated 19th December, 2019 u/s 144. Aggrieved by this, the petitioner filed an appeal before respondent No. 3 u/s 246A on 6th February, 2020. The time limit for filing the appeal u/s 246A expired on 18th January, 2020 but the appeal was filed on 6th February, 2020 along with an application for condonation of delay. The delay was of 19 days. On 24th January, 2020 the petitioner had paid the filing fees for the appeal.

On 20th January, 2021, the petitioner received a communication from the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, inquiring with it whether it would wish to opt for the Vivad Se Vishwas Scheme, 2020, or would like to contest the appeal. The petitioner was told to furnish the ground-wise written submission in support of the grounds of appeal along with supporting documents and evidences if it was not opting for the VSV Scheme, 2020.

The Court observed that since this communication has come from the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) is asking the petitioner to furnish a ground-wise written submission on the grounds of appeal, it would mean that the condonation of delay application had been allowed by the Commissioner of Income Tax (Appeals). Therefore, for respondent No. 2 to say that there is no order condoning the delay and, hence, the application / declaration of the petitioner under the VSV Act is rejected, is incorrect.

Moreover, section 2(1)(a)(i) of the VSV Act provides for a person in whose case an appeal or a writ petition or special leave petition has been filed either by himself or by the Income Tax Authority, or by both, before an appellate forum and such appeal or petition is pending as on the specified date, is entitled to make a declaration under the Act. The petitioner has admittedly made its declaration in Form 1 on 21st January, 2021, i.e., within the prescribed period.

The Central Board of Direct Taxes issued a Circular dated 4th December, 2020 in which question 59 and the answer thereto reads as under:

‘Q.59. Whether the taxpayer in whose case the time limit for filing of appeal has expired before 31st January, 2020 but an application for condonation of delay has been filed is eligible?

Answer: If the time limit for filing appeal expired during the period from 1st April, 2019 to 31st January, 2020 (both dates included in the period), and the application for condonation is filed before the date of issue of this Circular, and appeal is admitted by the appellate authority before the date of filing of the declaration, such appeal will be deemed to be pending as on 31st January, 2020.’

Therefore, where the time limit for filing of appeal has expired before 31st January, 2020 but an appeal with an application for condonation is filed before the date of the Circular, i.e., 4th December, 2020, such appeal will be deemed to be pending as on 31st January, 2020. In the answer to question 59 the expression used is ‘an appeal is admitted by the appellate authority before the date of filing of the declaration’. This has been dealt with by a Division Bench of Delhi High Court in the case of Shyam Sunder Sethi vs. Pr. Commissioner of Income Tax-10 and Ors. in Writ Petition (C) 2291/2021 and CM APPL. 6677/2021 dated 3rd March, 2021 wherein it is held that an appeal would be ‘pending’ in the context of section 2(1)(a) of the VSV Act when it is first filed till its disposal and the Act does not stipulate that the appeal should be admitted before the specified date, it only adverts to its pendency. The Court opined that the respondent could not have wrongly equated admission of the appeal with pendency. The Court, therefore, held that the appeal would be pending as soon as it is filed and until such time that it is adjudicated upon and a decision is taken qua the same. The Court agreed with the view expressed by the Division Bench in Shyam Sunder Sethi (Supra).

The Court held that the Commissioner of Income Tax (Appeals) himself has addressed a letter dated 20th January, 2021 asking the petitioner to furnish ground-wise submissions on the grounds of appeal if he was not opting for the VSV Scheme, 2020. This itself would also mean that the delay has been condoned. The order of rejection dated 26th February, 2021 is bad in law and is accordingly set aside. The respondent is directed to process the forms filed by the petitioner under the provisions of the VSV Act.

Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

3 Ananta Landmark Pvt. Ltd. vs. Dy. CIT Central Circle 5(3)
[Writ Petition No. 2814 of 2019; Date of order: 14th September, 2021 (Bombay High Court)]

Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

The petitioner had filed its return for A.Y. 2012-13 u/s 139 along with its audited profit and loss account, balance sheet and auditor’s report. It received a notice u/s 143(2) and also u/s 142(1) calling upon it to furnish the documents mentioned as per the annexure to the notice. There were four relevant items mentioned in the annexure… By its letter dated 14th August, 2014, the petitioner submitted all the documents asked for and also clarified that the tax audit report in Form 3CD for the A.Y. 2012-13 was not applicable.

Thereafter, the petitioner received another notice calling upon it to provide certain details, one of which was ‘details of interest expenses claimed u/s 57’. These details were provided vide a letter dated 3rd December, 2014. A personal hearing was granted at which even further details were sought. The petitioner provided even more documents and details by its letter of 17th December, 2014.

After considering all the details supplied, an assessment order dated 20th February, 2015 was passed accepting the petitioner’s explanations and computation of income. But more than four years after this assessment order, the petitioner received yet another notice dated 26th March, 2019 u/s 148 stating as under:

‘I have reasons to believe that your income chargeable to tax for the A.Y. 2012-13 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961’.

In response, the petitioner, without prejudice to its rights and contentions, sought the reasons for this belief. The respondent by its letter dated 28th May, 2019 provided the reasons recorded for reopening of the assessment. In short, the issue raised in the reopening was in regard to deduction claimed u/s 57.

The petitioner responded by its letter dated 19th June, 2019 filing its objections to the reopening of the assessment. According to it, there was no failure to truly and fully disclose material facts and, in any case, it was a mere change of opinion and there was no fresh tangible material for initiating reassessment proceedings. Respondent No. 1 then passed an order dated 30th September, 2019 with reference to the objections raised by the petitioner to the issuance of notice u/s 148.

It was stated by the Department that subsequent to the assessment proceedings it was noticed that the assessee had wrongly claimed deduction u/s 57. Accordingly, the A.O. found reasons to decide on reopening the assessment. This issue had gone unnoticed by the A.O. during the course of the original assessment proceedings for A.Y. 2012-13 and therefore the jurisdictional requirement u/s 147 was fulfilled and reopening u/s 147 cannot be challenged. Further, the A.O. has not had any discussion in respect of the points on which assessment has been reopened, thus it can be hardly stated that the A.O. had formed an opinion on such points during the original assessment proceedings.

The High Court held that the A.O. had no jurisdiction to issue the notice u/s 148. It further observed as follows:

A) It is settled law that where the assessment is sought to be reopened after the expiry of a period of four years from the end of the relevant year, the proviso to section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all necessary material facts. Since in the present case the assessment is sought to be reopened after a period of four years, the proviso to section 147 is applicable.

B) It is also settled law that the A.O. has no power to review an assessment which has been concluded. If a period of four years has lapsed from the end of the relevant year, the A.O. has to mention what is the tangible material to come to the conclusion that there is an escapement of income from assessment and that there has been a failure to fully and truly disclose material facts.

C) After a period of four years even if the A.O. has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee. Considering the reasons for reopening, the Court noticed that except stating that a sum of Rs. 7,66,66,663 which was chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary, there is nothing else in the reasons. The Court held that a general statement that the escapement of income is by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment is not enough. The A.O. should indicate what is the material fact that was not truly and fully disclosed to him. In the affidavit in reply, it is stated that the reassessment proceedings was based on audit objections.

D) The Court held that the reason for reopening an assessment should be that of the A.O. alone and he cannot act merely on the dictates of any another person in issuing the notice. The Court said that in every case the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.

E) In the present case, the reasons which have been recorded by the A.O. for reopening of the assessment do not state that the assessee had failed to disclose fully and truly all material facts necessary for the purpose of assessment. The reasons for reopening an assessment have to be tested / examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen an assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions.

F) As regards the ground that the A.O. had not held any discussion in respect of those points on which assessment was reopened and hence he had not formed any opinion and thus the window of reopening of assessment would remain open for the A.O. on those points, these were not the grounds in the reasons for reopening. The entire case of the respondent while issuing the reason for reopening was ‘failure to disclose truly and fully material facts’.

G) As regards the ground that the disclosure of material facts with respect to the setting off of the interest expenses u/s 57 might be full but it cannot be considered as true, and hence it is failure on the part of the assessee, the mere production of books of accounts or other documents are not enough in view of Explanation 1 to section 147, etc., the words used are ‘omission or failure to disclose fully and truly all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for assessment. What facts are material, and necessary for assessment, will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences and ascertain the proper tax leviable on a correct interpretation of the taxing enactment..

Thus, when a question arises whether certain income received by an assessee is capital receipt or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together to decide what should be the legal inference. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee.

H) Whether it is a disclosure or not within the meaning of section 147 would depend on the facts and circumstances of each case and the nature of the document and circumstances in which it is produced. The duty of the assessee is to fully and truly disclose all primary facts necessary for the purpose of assessment. It is not part of his duty to point out what legal inference should be drawn from the facts disclosed. It is for the Income Tax Officer to draw a proper reference. In the case at hand, the petitioner had filed its annual return along with computation of taxable income along with MAT (minimum alternate tax) calculation as per provisions of section 115JB, audited annual financials including auditor’s report, balance sheet, profit and loss account and notes to accounts, annual tax statement in Form 26AS u/s 203AA in response to the notices received u/s 142(1) and 143(2). The petitioner also explained how the borrowing costs that are attributable to the acquisition or construction of assets have been provided for, what are the short-term borrowings and from whom have they been received. It also gave details of interest expenses claimed u/s 57 in response to the further notice of 10th October, 2014 u/s 142 (1), attended personal hearings and explained and gave further details as called for in the personal hearing vide its letter dated 17th December, 2014 – and after considering all this, the assessment order dated 20th February, 2015 was passed accepting the return of income filed by the assessee.

The A.O. had in his possession all primary facts and it was for him to make necessary inquiries and draw a proper inference as to whether from the interest paid of Rs. 75,79,35,292 an amount of Rs. 7,66,66,663 has to be allowed as deduction u/s 57 or the entire interest expenses of Rs. 75,79,35,292 should have been capitalised to the work in progress against claiming just Rs. 7,66,66,663 as deduction u/s 57.

The A.O. had had all the material facts before him when he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, he is not entitled to change of opinion to commence proceedings for reassessment. Even if the A.O. who passed the assessment order may have raised too many legal inferences from the facts disclosed, on that account the A.O. who has decided to reopen the assessment is not competent to reopen assessment proceedings. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to him to reopen the assessment based on the very same material in order to take another view. As noted earlier, the petitioner has filed the annual returns with the required documents as provided for u/s 139. There was nothing more to disclose and a person cannot be said to have omitted or failed to disclose something when he had no knowledge of such a thing. One cannot be expected to disclose a thing or said to have failed to disclose it, unless it is a matter which he knows or knows about. In this case, except for a general statement in the reasons for reopening, the A.O. has not disclosed what was the material fact that the petitioner had failed to disclose.

The Court observed that the petitioner had truly and fully disclosed all material facts necessary for the purpose of assessment. Not only material facts were disclosed truly and fully, but they were carefully scrutinised and figures of income as well as deduction were reworked carefully by the A.O. In the reasons for reopening, the A.O. has, in fact, relied on the audited accounts to say that the claim of deduction u/s 57 was not correct, and the figures mentioned in the reason for reopening of assessment are also found in the audited accounts of the petitioner. In the reasons for reopening, there is not even a whisper as to what was not disclosed. In the order rejecting the objections, the A.O. admits that all details were fully disclosed. Thus, this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped assessment on account of failure of the assessee to disclose truly and fully all material facts that were necessary for computation of income, but this is a case where the assessment is sought to be reopened on account of change of opinion of the A.O. about the manner of computation of the deduction u/s 57.

Consequently, the petition is allowed. The notice dated 26th March, 2019 issued by respondent No. 1 u/s 148 seeking to reopen the assessment for the A.Y. 2012-13 and the order dated 30th September, 2019 are quashed and set aside.

Reopening of assessment – Information of shell companies – Right to cross-examination – Violation of the principle of natural justice – These pleas to be raised at time of reassessment – Reopening justified

8 M/s Amber, Bhubaneswar vs. The Deputy Commissioner of Income-tax, Circle-2(1) & Others [Writ petition (C) No. 14369 of 2019; Date of order: 5th July, 2021; Orissa High Court]

Reopening of assessment – Information of shell companies – Right to cross-examination – Violation of the principle of natural justice – These pleas to be raised at time of reassessment – Reopening justified

The petitioner filed its return of income for the A.Y. 2012-13 electronically on 28th September, 2012 disclosing a total income of Rs. 34,80,490. These tax returns were subjected to scrutiny under CASS and an assessment order was passed u/s 143(3) on 15th November, 2014 by the A.O. purportedly being satisfied with the genuineness of the transactions and documents, etc., disclosed by the petitioner.

Being aggrieved by certain disallowances of expenses in the aforementioned assessment order, the petitioner filed an appeal before the Commissioner of Income-tax (Appeals). Thereafter, the impugned notice u/s 147 was issued to the petitioner by the A.O. on 29th March, 2019 pursuant to which the petitioner sought the reasons for such reopening. The petitioner filed objections on 18th June, 2019. On 26th June, 2019, the A.O. rejected the objections and on 26th July, 2019 issued a notice u/s 142(1) seeking further details from the petitioner. The petitioner then filed the writ petition against the rejection order.

The petitioner submitted that the reopening was based on a mere change of opinion of the A.O. and, therefore, was bad in law. The reasons for which the assessment was sought to be reopened had already been considered in detail by the A.O. in the original assessment order.

On behalf of the Income-tax Department, it was submitted that the objections of the petitioner had been considered
in sufficient detail by the A.O. and had been rightly rejected.

The Court observed that the reasons for reopening of the assessment, as disclosed by the Department in its communication dated 17th May, 2019, inter alia state how the DTIT Investigating Unit-1, Kolkata in its letter dated 15th January, 2019 passed on information in the case of beneficiaries identified in the ‘Banka Group of Cases’. Apparently, a search and seizure / survey operation was conducted in the case of the Banka Group on 21st May, 2018. It was found that there were various paper / shell companies controlled by one Mr. Mukesh Banka for the purpose of providing accommodation entries in the nature of unsecured loans or in other forms. It appeared that the petitioner firm was one of the beneficiaries who had obtained accommodation entries in the financial year 2013-14 from two such paper companies controlled by the said Mr. Mukesh Banka, the details of which had been set out in the reasons for reopening the assessment as furnished to the petitioner.

The said information appears to have been analysed by the Department vis-à-vis the case record of the petitioner for the A.Y. 2012-13. It transpired that in the original assessment proceedings the petitioner had furnished the ledger accounts of both the above ‘shell’ companies for the financial year 2011-12 and these showed that the petitioner had taken loans of Rs. 15 lakhs from them. The statement made by Mr. Mukesh Banka u/s 132(4) was also set out in the reasons for the reopening. It needs to be noted that while the original assessment u/s 143(3) was completed on 15th November, 2014 and an assessment order passed, the information gathered by the Department pursuant to the search and seizure operation on the Banka Group of Companies emerged only on 21st May, 2018 and thereafter. Clearly, this information was not available with the Department earlier. Prima facie, therefore, it does not appear that the reassessment was triggered by a mere change of opinion by the A.O. Further, it is not possible to accept the plea of the petitioner that such opinion was based on the very same material that was available with the A.O. The fact of the matter is that there was no occasion for the A.O. to have known of the transactions involving the petitioner and the shell companies controlled by Mr. Mukesh Banka.

It was then contended by the petitioner that despite the petitioner asking for copies of the statement of Mr. Mukesh Banka and seeking cross-examination, this was denied to him and, therefore, there was violation of the principle of natural justice.

The Court observed that the non-supply of the copy of Mr. Banka’s statement (which incidentally has been extracted in full in the reasons for reopening), or not providing an opportunity to cross-examine Mr. Banka at the stage of objections, shall not vitiate the reopening of the assessment. Such opportunity would be provided, if sought by the petitioner and if so permitted in law, in the reassessment proceedings. Consequently, the Court reserved the right of the petitioner to raise all the defences available to it in accordance with law in the reassessment proceedings, including the right to cross-examine the deponents of the statements relied upon by the Department in the reassessment proceedings, The writ petition is accordingly dismissed.

Section 147 – Reassessment – Oversight, inadvertence or mistake of A.O. or error discovered by him on reconsideration of same material is mere change of opinion and does not give him power to reopen a concluded assessment

7. Dell India (P) Ltd. vs. Joint Commissioner of Income Tax, Bangalore [Writ Appeal No. 1145 of 2015, dated 27th January, 2021 (Karnataka High Court)(FB)]

Section 147 – Reassessment – Oversight, inadvertence or mistake of A.O. or error discovered by him on reconsideration of same material is mere change of opinion and does not give him power to reopen a concluded assessment

By the order dated 2nd September, 2015, a Division Bench of the Court directed that this writ appeal should be placed before the Chief Justice for considering the issue of referring the following three questions to a larger Bench. The said three questions are as under:

‘1.        Whether the Division Bench judgment in the case of Commissioner of Income-tax vs. Rinku Chakraborthy [2011] 242 ITR 425 lays down good law?

2.        Whether the judgment in Rinku Chakraborthy (Supra) is per incurium in view of the fact that it relies upon the judgment of the Apex Court in the case of Kalyanji Mavji & Co. vs. Commissioner of Income-tax 1976 CTR 85, which has been specifically overruled by the Apex Court in the case of Indian & Eastern Newspaper Society vs. Commissioner of Income-tax [1979] 110 ITR 996?

3.        Whether “reason to believe” in the context of section 147 of the Income-tax Act can be based on mere “change of opinion” of the A.O.?’

The scope of the adjudication is limited to deciding the three questions of law framed by the Division Bench.

The assessee company manufactures and sells computer hardware and other related products. It provides warranty services to the customers and the price of the standard warranty period is covered by the sale price of the computer hardware and other products. The assessee company also provides extended or upsell warranty which covers the period beyond the standard warranty. It charges an additional amount as consideration for this. Although the assessee company recovers the consideration for extended warranty with the price of the products along with sales tax or service tax, as the case may be, the revenue in connection with extended warranty is recognised and offered to income-tax proportionately over the period of the service contract, which spreads beyond the financial year in which the sale in relation to the product concerned is made. The assessee has adopted the ‘deferred revenue’ system under the mercantile system of accounting.

During the assessment proceedings, the A.O. examined the issue of deferred revenue by calling for details from the assessee. He agreed with the accounting system followed by the assessee as regards accounting of the consideration for extended warranty.

A notice u/s 148 was issued to the assessee. While arriving at the net revenue of Rs. 31,10,85,96,000 for the A.Y. 2009-10, reduction of Rs. 2,16,89,00,773 was made as smart debits deferred revenue account. It is alleged in the reasons that the said income of Rs. 2,16,89,00,773 had escaped assessment for the A.Y. 2009-10.

The assessee replied to the notice u/s 148 and objected to the reasons recorded. It submitted that the reasons recorded for reopening the assessment for the A.Y. 2009-10 are based on mere change of opinion and hence cannot be termed as valid reasons. It was submitted that as the A.O. has taken a different view for different assessment years, it amounts to merely a change of opinion. The Joint Commissioner of Income-tax, by a letter dated 24th February, 2015, rejected the objections raised by the assessee and directed it to appear for the reassessment proceedings for the A.Y. 2009-10.

Being aggrieved by the said notice u/s 148 and the rejection of its preliminary objections to the said notice, a writ petition was filed before the learned single Judge of the High Court. The Judge rejected the petition on the ground that there was no error in initiation of the proceedings u/s 148.

The assessee submitted that in the case Rinku Chakraborthy [2011] 242 CTR 425 the Division Bench had concluded that where an A.O. erroneously fails to tax a part of the assessable income, there is an income escaping assessment and, accordingly, the A.O. has jurisdiction u/s 147 to reopen the assessment. In doing so, it relied on the observations of the Apex Court in the case of Kalyanji Mavji and Company [1976] 1 SCC 985. It is further submitted that the observations made in the case of Kalyanji Mavji and Company (Supra) are no longer good law in their entirety, in the light of the subsequent decision of the Apex Court in the case of Indian and Eastern Newspaper Society [1979] 4 SCC 248 where the Apex Court held that those particular observations in Kalyanji Mavji and Company did not lay down the correct position of law. In the light of the observations of the Apex Court in the case of Indian and Eastern Newspaper Society, it is clear that a mistake, oversight or inadvertence in assessing any income would not give the power to an A.O. to reopen the assessment by exercise of powers u/s 147. That would amount to a review, which is outside the scope of section 147.

The subsequent judgment of the Apex Court in the case of Indian and Eastern Newspaper Society was not brought to the notice of this Court in the case of Rinku Chakraborthy. He urged that there are specific provisions in the Act for correcting errors / mistakes such as the power of rectification u/s 154 and one cannot resort to section 147 to correct errors or to review an earlier order.

The Division Bench held that the decision in the case of Rinku Chakraborthy is based only on what is held in clause (2) of paragraph 13 of the decision in the case of Kalyanji Mavji and Company. The decision rendered in the latter case was by a Bench of two Judges. Subsequently, a larger Bench of three Judges in the case of Indian and Eastern Newspaper Society has clearly held that oversight, inadvertence or mistake of the A.O. or error discovered by him on the reconsideration of the same material does not give him power to reopen a concluded assessment. It was expressly held that the decision in the case of Kalyanji Mavji and Company on this aspect does not lay down the correct law. The decision in the case of Rinku Chakraborthy is based solely on the decision of the Apex Court in the case of Kalyanji Mavji and Company and in particular what is held in clause (2) of paragraph 13. The said part is held as not a good law by a subsequent decision of the Apex Court in the case of Indian and Eastern Newspaper Society.

The second question was answered in the affirmative, in view of the consistent decisions of the Apex Court holding that ‘reason to believe’ in the context of section 147 cannot be based on mere change of opinion of the A.O.

The third question was answered in the negative. The Court observed that in view of settled law, framing of question No. 3 was not warranted at all.

Offence and prosecution – Wilful attempt to evade tax – Section 276C, read with section 132

7 Income Tax Department vs. D.K. Shivakumar [Criminal Revision Petition No. 329 to 331 of 2019; Date of order: 5th April, 2021; Karnataka High Court]

Offence and prosecution – Wilful attempt to evade tax – Section 276C, read with section 132

During a search, the assessee tore a piece of paper containing details of alleged unaccounted loan transactions. It was found that the assessee had advanced huge amount of loan to these persons / entities. He did not disclose the said unaccounted financial transactions in his returns of income and further, the statements of several persons disclosed that the assessee had received huge amount of interest on the said unaccounted loan, which was not reflected in the books of accounts or in the returns of income.

The Revenue filed complaints before the Special Court; the only circumstance relied on by the Revenue / complainant in support of the alleged charges was that during the search action, certain unaccounted loan transactions with several persons / entities were detected and the said unaccounted financial transactions were not disclosed in the returns of income for the relevant years and that the assessee had received huge amount of interest on the said unaccounted loans. The Special Court discharged the assessee mainly on the ground that the ‘complaints filed by the complainant estimating the undisclosed income of the accused and launching the prosecution is without jurisdiction’ and that the piece of paper torn by the respondent / accused was not a document lawfully compelled to be produced as evidence and that the same was not ‘obliterated, nor rendered illegible’ making out the offences under sections 201 and 204 of IPC but reserved the Revenue’s liberty to launch fresh prosecution after estimating the undisclosed income of the assessee / accused by the jurisdictional A.O. on the basis of the materials produced by the authorised officer for the search and such other materials as were available with him. Accordingly, the Special Court had discharged the assessee of the charges.

On the criminal revision petition filed by the petitioner / Revenue, the High Court observed that the allegations, even if accepted as true, did not prima facie constitute offences u/s 276C(1). The gist of the offence under this section is the wilful attempt to evade any tax, penalty or interest chargeable or imposable or underreporting of income. What is made punishable is ‘attempt to evade tax, penalty or interest’ and not the ‘actual evasion of the tax’. The expression ‘attempt’ is nowhere defined under the Act or IPC. In legal parlance, an ‘attempt’ is understood to mean ‘an act or movement towards commission of an intended crime’. It is doing ‘something in the direction of commission of offence’. Viewed in that sense ‘in order to render the accused / respondent guilty of attempt to evade tax, penalty or interest, it must be shown that he has done some positive act with an intention to evade any tax, penalty or interest’ as held by the Supreme Court in Prem Dass vs. ITO [1999] 5 SCC 241 that a positive act on the part of the accused is required to be established to bring home the charge against the accused for the offence u/s 276C(2).

The Court further held that there is no presumption under law that every unaccounted transaction would lead to imposition of tax, penalty or interest. Until and unless it is determined that unaccounted transactions unearthed during search are liable for payment of tax, penalty or interest, no prosecution could be launched on the ground of attempt to evade such tax, penalty or interest. Therefore, the prosecution initiated against the assessee was bad in law and contrary to procedure prescribed under the Code of Criminal Procedure and the provisions of the Income-tax Act and, thus, the revision petitions were dismissed.

Faceless Assessment u/s 144B – Personal hearing demanded by assessee on receipt of show cause notice-cum-draft assessment order – No personal hearing granted – Final assessment order passed – Liable to be set aside

6 Sanjay Aggarwal vs. National Faceless Assessment Centre, Delhi [(2021) Writ Petition (C) 5741/2021, Date of order: 2nd June, 2021 (Delhi High Court)]

Faceless Assessment u/s 144B – Personal hearing demanded by assessee on receipt of show cause notice-cum-draft assessment order – No personal hearing granted – Final assessment order passed – Liable to be set aside

The petitioner, via a writ petition, challenged the assessment order dated 28th April, 2021 for the A.Y. 2018-19 and consequential proceedings. The grievance of the petitioner is that although a personal hearing was sought, on account of the fact that the matter was complex and required explanation, the respondent / Revenue chose not to accord the same. Thus, the respondent / Revenue had committed an infraction of the statutory scheme encapsulated in section 144B.

The petitioner claimed that in respect of the A.Y 2018-19 the return was filed on 27th October, 2018, declaring its income at Rs. 33,43,690.

On 22nd September, 2019, a notice was issued u/s 143(2) read with Rule 12E of the Income-tax Rules, 1962, whereby the petitioner’s return was selected for scrutiny. Two issues were flagged by the A.O.; first, deductions made under the head ‘income from other sources’, and second, the aspect concerning unsecured loans.

A notice u/s 142(1) was served on the petitioner on 6th December, 2020 which was followed by various communications issued by the respondent / Revenue and replied by the petitioner.

The respondent / Revenue served a show cause notice-cum-draft assessment order dated 13th April, 2021 on the petitioner, proposed for a disallowance of Rs. 1,00,26,692 u/s 57. Consequently, a proposal was made to vary the income, resulting in the enhancement of the declared income to Rs. 1,33,70,380. The petitioner contended that, thereafter, several requests were made to the respondent / Revenue for grant of personal hearing. However, the respondent / Revenue did not pay heed to the requests and proceeded to issue a second show cause notice along with a draft assessment order dated 23rd April, 2021. Furthermore, the petitioner was directed to file its response / objections by 23:59 hours of 25th April, 2021.

According to the petitioner, although the time frame for filing the response / objections to the aforementioned show cause notice-cum-draft assessment order was very short, he filed the response / objections on 24th April, 2021. The respondent / Revenue, without according a personal hearing to the petitioner, passed the impugned assessment order dated 28th April, 2021. The petitioner submitted that the impugned assessment order, passed u/s 143(3) read with section 144B, is contrary to the statutory scheme incorporated u/s 144B. It is also contended that such assessment proceedings are non est in the eyes of the law.

The Revenue contended that the expression used in clause (vii) of sub-section (7) of section 144B is ‘may’ and not ‘shall’, and therefore there is no vested right in the petitioner to claim a personal hearing. Thus, according to the Revenue, failure to grant personal hearing to the petitioner did not render the proceedings non est as the same was not mandatory.

The High Court observed the following facts:
• That prior to the issuance of the show cause notice-cum-draft assessment order dated 23rd April, 2021, a show cause notice-cum-draft assessment order was issued on 13th April, 2021. Between these two dates, the petitioner had, on two occasions, asked for personal hearing in the matter.
• After the show cause notice-cum draft assessment order dated 23rd April, 2021 was issued, via which the petitioner was invited to file his response / objections, the petitioner, once again, while filing his reply, asked for being accorded personal hearing in the matter.

Thus, in sum and substance of the requests made, the petitioner continued to press the respondent / Revenue to accord him a personal hearing, before it proceeded to pass the impugned assessment order. According to the petitioner, the request was made as the matter was complex and therefore required some explanation.

The Court also observed that the respondent / Revenue made proposals for varying the income, both via the show cause notice dated 13th April, 2021 as well as the show cause notice-cum-draft assessment order dated 23rd April, 2021. As noticed above, the declared income was proposed to be substantially varied.

The Court referred to the provision of section 144B as to why the Legislature had provided a personal hearing in the matter:

‘144B. Faceless assessment –
(1)…………

(7) For the purposes of faceless assessment —
………….
(vii) in a case where a variation is proposed in the draft assessment order or final draft assessment order or revised draft assessment order, and an opportunity is provided to the assessee by serving a notice calling upon him to show cause as to why the assessment should not be completed as per such draft or final draft or revised draft assessment order, the assessee or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the income-tax authority in any unit;
(viii) the Chief Commissioner or the Director General, in charge of the Regional Faceless Assessment Centre, under which the concerned unit is set up, may approve the request for personal hearing referred to in clause (vii) if he is of the opinion that the request is covered by the circumstances referred to in sub-clause (h) of clause (xii);
…………
(xii) the Principal Chief Commissioner or the Principal Director General, in charge of the National Faceless Assessment Centre shall, with the prior approval of the Board, lay down the standards, procedures and processes for effective functioning of the National Faceless Assessment Centre, Regional Faceless Assessment Centres and the unit setup, in an automated and mechanised environment, including format, mode, procedure and processes in respect of the following, namely:—
………..
(h) circumstances in which personal hearing referred to in clause(viii) shall be approved;

[Emphasis]

The Court observed that a perusal of clause (vii) of section 144B(7) would show that liberty has been given to the assessee, if his / her income is varied, to seek a personal hearing in the matter. Therefore, the usage of the word ‘may’ cannot absolve the respondent / Revenue from the obligation cast upon it to consider the request made for grant of personal hearing. Besides this, under sub-clause (h) of section 144B(7)(xii) read with section144B(7)(viii), the respondent / Revenue has been given the power to frame standards, procedures and processes for approving the request made for according personal hearing to an assessee who makes a request qua the same. The Department counsel informed the court that there are no such standards, procedures and processes framed yet.

Therefore, in the facts and circumstances of the case, it was held that it was incumbent upon the respondent / Revenue to accord a personal hearing to the petitioner. The impugned order was set aside.

Section 148 read with section 148-A – Notice u/s 148 issued post 1st April, 2021 – Conditional legislation – The Notifications dated 31st March, 2021 and 27th April, 2021 whereby the application of section 148, which was originally existing before the amendment was deferred, meaning the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification

2 Palak Khatuja, W/o Vinod Khatuja vs. Union of India [Writ Petition (T) No. 149 of 2021; date of order: 23rd August, 2021 (Chhattisgarh High Court)]

Section 148 read with section 148-A – Notice u/s 148 issued post 1st April, 2021 – Conditional legislation – The Notifications dated 31st March, 2021 and 27th April, 2021 whereby the application of section 148, which was originally existing before the amendment was deferred, meaning the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification

The petitioners filed their income tax return for A.Y. 2015-16 and F.Y. 2014-15. Subsequently, on the basis of some information available, an initial scrutiny was done; however, no concealment was found but again a notice u/s 148 was issued. It was submitted that on 30th June, 2021 when the notice u/s 148 was issued, the power to issue the notice was preceded by a new provision of law and thereby section 148 is to be read with section 148A. It was contended that as per the amended Finance Act, 2021, which was published in the Gazette on 28th March, 2021, sections 2 to 88 were notified to come into force on the first day of April, 2021 and accordingly the new section 148A was inserted which prescribed that before issuing the notice u/s 148, the A.O. was bound to conduct an inquiry giving an opportunity of hearing to the assessee with the prior approval of the specified authority and a show cause notice in detail was necessary specifying a particular date for hearing.

It was further submitted that since the operation of section 148A came into effect on 1st April, 2021, as such, the notice issued to the petitioner on 30th June, 2021 u/s 148, without following the procedure u/s 148A, that is, without giving an opportunity of hearing, would be illegal and contrary to the provisions of section 148A and it cannot be sustained. It was further submitted that although the Revenue has placed reliance on a certain Notification of the Ministry of Finance, but when the law has been enacted by the Parliament then in such a case the Notification issued by the Ministry of Finance would not override even to extend the period of operation of the section of the old Act of section 148. It was therefore submitted that the impugned notice is illegal and is liable to be quashed.

On its part, the Revenue contended that because of the pandemic and lockdown of all activities, including the normal working of the office, a lot of people could not file their returns and submit the necessary papers. As such, the Ministry of Finance, in exercise of its power under the Finance Act, issued the Notification whereby the application of the old provisions of section 148 was extended initially up to 30th April, 2021 and thereafter up to the 30th day of June, 2021. Therefore, the notice dated 30th June, 2021 would be within the ambit of the power of the Department in the extended time of its operation till 30th June, 2021. Thus, the notice u/s 148 is legal and valid.

The Court observed that the notice u/s 148 was issued for A.Y. 2015-16 on 30th June, 2021. The grievance of the petitioners was that the notice of like nature could have been issued till the cut-off date of 30th March, 2021 as subsequent thereto the new section 148A intervened before the issuance of notice directly u/s 148. The Finance Act, 2021 was Notified on 28th March, 2021 which purports that sections 2 to 88 shall come into force on the first day of April, 2021 and sections 108 to 123 shall come into force on such date as the Central Government notifies in the Official Gazette. The relevant part wherein section 148A is enveloped is covered u/s 42 of the Finance Act, 2021. By introduction of section 148A, it was mandated that the A.O. before issuing any notice u/s 148 shall conduct an inquiry, if required, with the prior approval of the specified authority, provide an opportunity of being heard, serve a show cause notice and prescribe the time. The question raised for consideration was whether, with the promulgation of the Act on the 1st day of April, 2021, the notice directly issued u/s 148 on 30th June, 2021 is valid or not as the bar of 148A was created by insertion of the section on 1st April, 2021.

The Court further observed that on account of the pandemic, Parliament had enacted the Taxation & Other Laws (Relaxation & Amendment of Certain Provisions) Act, 2020. In the Act, any time limit specified, prescribed or notified between 20th March, 2020 and 31st December, 2021 or any other date thereafter, after December, 2021, gave the Central Government the power to notify. The necessity occurred because of the Covid pandemic lockdown in the backdrop of the fact that few of the assessees could not file their returns. Likewise, since the offices were closed, the Department also could not perform the statutory duty under the Income-tax Act. Considering the complexity, the Parliament thought it proper to delegate to the Ministry of Finance the date of applicability of the amended section. The delegation is not a self-contained and complete Act and was only made in the interest of flexibility and smooth working of the Act, and the delegation therefore was a practical necessity. The Ministry of Finance having been delegated with such power, this delegation can always be considered to be a sound basis for administrative efficiency and it does not by itself amount to abdication of power.

Reading both the Notifications, dated 31st March and 27th April, 2021, whereby the application of section 148 which was originally existing before the amendment was deferred, meant thereby that the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification. The Notification is made by the Ministry of Finance, Central Government considering the fact of lockdown all over India and it can be always assumed that the deferment of the application of section 148A was done in a controlled way. It is a settled proposition that any modification of the Executive’s decision implies a certain amount of discretion and has to be exercised with the help of the legislative policy of the Act and cannot travel beyond it and run counter to it, or change the essential features, the identity, structure or the policy of the Act. Therefore, the legislative delegation exercised by the Central Government by Notification to uphold the mechanism as it prevailed prior to March, 2021 is not in conflict with any Act and Notification by the Executive, i.e., the Ministry of Finance, and would be a part of legislative function.

The Court relied on the principle as laid down in the case of A.K. Roy vs. Union of India reported in AIR 1982 SC 710, wherein the Supreme Court held that the Constitution (Forty-Fourth) Amendment Act, 1978, which conferred power on the Executive to bring the provisions of that Act into force did not suffer from excessive delegation of legislative power. The Court observed that the power to issue a Notification for bringing into force the provisions of a constitutional amendment is not a constituent power, because it does not carry with it the power to amend the Constitution in any manner. Likewise, in this case, by the delegation to the Executive of the power to the Central Government to specify the date by way of relaxation of time limit, the main purpose of the Finance Act is not defeated. Therefore, it would be a conditional legislation. The Legislature has declared the Act and has given the power to the Executive to extend its implementation by way of Notification. The Legislature has resorted to conditional legislation to give the power to the Executive to decide under what circumstances the law should become operative or when the operation should be extended and this would be covered by the doctrine of the conditional legislation.

Thus, by the aforesaid Notifications, the operation of section 148 was extended, and thereby deferment of section 148A was done by the Ministry of Finance by way of conditional legislation in the peculiar circumstances which arose during the pandemic and lockdown and the Central Government cannot be said to have encroached upon the turf of Parliament.

By effect of such Notification, the individual identity of section 148, which was prevailing prior to the amendment and insertion of section 148A, was insulated and saved till 30th June, 2021.

Considering the situation for the benefit of the assessee and to facilitate individuals to come out of the woods, the time limit framed under the IT Act was extended. Likewise, certain rights which were reserved in favour of the Department were also preserved and extended at parity. Consequently, the provisions of section 148 which were prevailing prior to the amendment of the Finance Act, 2021 were also extended. The power to issue notice u/s 148 which was there prior to the amendment was also saved and the time was extended. As a result, the notice issued on 30th June, 2021 would also be saved. The petitions were dismissed accordingly.

Immunity u/s 270AA – No bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270 AA – Application u/s 264 against rejection of such application maintainable

1 Haren Textiles Private Limited vs. Pr. CIT 4 & Ors. [Writ Petition No. 1100 of 2021; Date of order: 8th September, 2021 (Bombay High Court)]

Immunity u/s 270AA – No bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270 AA – Application u/s 264 against rejection of such application maintainable

The petitioner, engaged in the business of manufacturing and selling fabrics and a trading member of the National Stock Exchange, filed its return for the A.Y. 2017-2018 on 31st October, 2017 declaring a total income of Rs. 2,27,11,320. The A.O. initiated scrutiny assessment by issuing statutory notices under sections 143(2) and 142(1) of the Act. He passed an assessment order dated 19th December, 2019 u/s 143(3) determining the total income of the petitioner at Rs. 7,41,84,730. He determined book profit under the provisions of section 115(JB) at Rs. 2,19,33,505. Following this, the A.O. issued a demand notice dated 19th December, 2019 u/s 156 raising a demand of Rs. 1,80,14,619. The petitioner noted that the A.O. had not correctly allowed the Minimum Alternate Tax (MAT) credit available to it while determining the tax liability. Hence it filed an application dated 6th January, 2020 u/s 154 seeking rectification of the assessment order. The A.O. accepted the submission of the petitioner and granted the MAT credit available and issued a revised Computation Sheet dated 14th January, 2020 determining the correct amount of tax liability of the petitioner. He also issued a revised notice of demand dated 14th January, 2020 u/s 156 raising a demand of Rs. 57,356 payable within 30 days from the service of the said notice.

The petitioner accepted the order passed by the A.O. u/s 154 and on 29th January, 2020 paid fully the tax demand of Rs. 57,356. Thereafter, on 30th January, 2020 it filed an application u/s 270AA in the prescribed Form No. 68 before the A.O. seeking immunity from penalty, etc. This application was rejected by the A.O. by an order dated 28th February, 2020. Aggrieved by this order, the petitioner filed an application dated 18th December, 2020 before the Pr. CIT under the provisions of section 264. The Pr. CIT rejected this application on the ground that sub-section 6 of section 270AA specifically prohibits revisionary proceedings u/s 264 against the order passed by the A.O. u/s 270AA(4). This order was challenged by the petitioner before the High Court.

The Court observed that under sub-section 6 of section 270AA, no appeal under section 246(A) or an application for revision u/s 264 shall be admissible against the order of assessment or reassessment referred to in clause (a) of sub-section 1, in a case where an order under sub-section 4 has been made accepting the application. This only means that when an assessee makes an application under sub-section 1 of section 270AA and such an application has been accepted under sub-section 4 of section 270AA, the assessee cannot file an appeal u/s 246(A) or an application for revision u/s 264 against the order of assessment or reassessment passed under sub-section 3 of section 143 or section 147. This does not provide for any bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270AA. The application before the Pr. CIT was an order challenging an order of rejection passed by the A.O. of an application filed by the petitioner under sub-section 1 of section 270AA seeking grant of immunity from imposition of penalty and initiation of proceedings under sub-section 276C or section 277CC.

Therefore, the Pr. CIT was not correct in rejecting the application on the ground that there is a bar under sub-section 6 of section 270AA in filing such application. The impugned order was set aside and the matter was remanded back to the Pr. CIT to consider de novo.

Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

10 Principal Commissioner of Income Tax vs. M/s Brahma Centre Development Pvt. Ltd. [Income Tax Appeal No. 116 & 118 of 2021; Date of order: 5th July, 2021 (Delhi High Court)] [Arising from ITA Nos. 4341/Del/2019 and 4342/Del/2019; A.Ys.: 2012-2013 and 2013-2014]

Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

The PCIT vide his orders dated 28th March, 2019, interfered with the assessment orders dated 31st January, 2017 and 27th September, 2017 passed by the A.O. concerning the respondent / assessee pertaining to A.Ys. 2012-13 and 2013-14, respectively.

The PCIT had interfered with the original assessment orders because of a view held by him that interest earned by the assessee against fixed deposits was adjusted, i.e., deducted from the value of the inventory and not credited to the Profit & Loss account. The PCIT noted that the tax auditor, in the report filed in Form 3CD, had observed that interest earned on fixed deposits pertained to ‘other income’ and had not been credited to the P&L account. The interest earned on fixed deposits in A.Y. 2012-13 was Rs. 9,47,04,585, whereas in A.Y. 2013-14 it was Rs. 4,32,91,517.

Consequently, after the PCIT had issued two separate show cause notices to the assessee concerning the aforementioned A.Ys. dated 20th February, 2019 and had received replies against the same, he proceeded to pass two separate orders of even date, i.e., 28th March, 2019 concerning A.Ys. 2012-13 and 2013-14. The PCIT interfered with the orders of assessment on the ground that they had been passed without making any inquiries as to whether the interest earned by the assessee had any nexus with the real estate project the construction of which was undertaken by the assessee. Thus, according to the PCIT, the assessment orders were ‘erroneous’ insofar as they were prejudicial to the interests of the Revenue. In the appeals preferred before the Tribunal by the assessee, the view held by the PCIT was reversed. Thus, the Revenue approached the High Court by way of the instant appeals.

The High Court observed that it is not in dispute that the assessee was engaged, inter alia, in the business of promotion, construction and development of commercial projects. It is also not in dispute that the assessee had undertaken construction / development of a project allotted to it by the Haryana State Industrial and Infrastructure Development Corporation (‘HSIIDC’). It was observed that on 11th August, 2016, the Chartered Accountants of the assessee, i.e., BSR and Co. LLP, filed their response to certain queries raised by the A.O. at a hearing held before him on 9th August, 2016 concerning A.Y. 2013-14. One of the queries raised concerned the exclusion of interest received on fixed deposits from the category / head ‘income from other sources’. Likewise, in response to a notice dated 14th September, 2017 issued by the A.O. under sections 154 and 155 in respect of A.Y. 2012-13, a reply was submitted by the assessee on 12th October, 2017. In the notice dated 14th September, 2017, inter alia, it was brought to the attention of the assessee that audit scrutiny had, amongst others, raised objections regarding the interest earned on fixed deposits in A.Y. 2012-13 which was not credited to the P&L account and had been deducted from the value of inventory. The assessee had filed an appropriate reply.

The Court observed that having regard to the aforesaid documents, it cannot be said that the inquiry or verification was not carried out by the A.O. The Tribunal has recorded findings of fact concerning the inquiry made by the A.O.

The fact that the A.O. has not given reasons in the assessment order is not indicative, always, of whether or not he has applied his mind. Therefore, scrutiny of the record is necessary and while scrutinising the record the Court has to keep in mind the difference between lack of inquiry and perceived inadequacy in inquiry. Inadequacy in conduct of inquiry cannot be the reason based on which powers u/s 263 can be invoked to interdict an assessment order. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately.

The Income-tax Officer had made inquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ‘erroneous’ simply because in his order he did not offer an elaborate discussion in that regard. The A.O., having received a response to his query about the adjustment of interest in the A.Y.s concerned, against inventory, concluded that there was a nexus between the receipt of funds from investors located abroad and the real estate project, which upon being invested generated interest. Thus, it cannot be said that the conclusion arrived at by the A.O., that such adjustment was permissible in law, was erroneous.

The Court observed that in the instant cases, it was not as if the funds were surplus and therefore invested in a fixed deposit. The funds were received for the real estate project and while awaiting their deployment, they were invested in a fixed deposit which generated interest.

Furthermore, the Court observed that it need not examine whether Clauses (a) and (b) of Explanation 2 appended to section 263 could have been applied to the A.Y.s in question since, on facts, it has been found by the Tribunal that an inquiry was, indeed, conducted by the A.O.

Thus, for the reasons stated, the Revenue appeals are dismissed.

Direct tax Vivad se Vishwas – Appellant – Communication of assessment order – Order must be served in accordance with section 282 of the Act – Time limit to file appeal had not expired as petitioner had not received the assessment order

9 Ashok G. Jhaveri vs. Union of India & Others [Writ petition No. 722 of 2021; Date of order: 28th July, 2021 (Bombay High Court)]

Direct tax Vivad se Vishwas – Appellant – Communication of assessment order – Order must be served in accordance with section 282 of the Act – Time limit to file appeal had not expired as petitioner had not received the assessment order

The petitioner had filed a return of income for A.Y. 2012-13 in March, 2013, declaring a total income of Rs. 7,02,170. The respondent issued a notice u/s 148 reopening the assessment for the said A.Y. 2012-13 in March, 2019.

According to the petitioner, he received a notice u/s 274 r/w/s 271 (1)(c) on 25th December, 2019 via e-mail and the said notice was also uploaded on his e-filing portal account. He had responded to the same through the e-filing portal on 23rd January, 2020, pointing out that he had not received the assessment order u/s 143(3) r/w/s 147, nor had the same been uploaded on the e-filing portal and therefore he was unable to reply to the show cause notice.

The petitioner had requested the respondent to send the assessment order to the address mentioned in his letter dated 29th January, 2020 filed on 3rd February, 2020. The petitioner was issued a letter by respondent No. 4, referring to the outstanding demand and directed to pay 20% of the outstanding demand amount. The petitioner once again, by an on-line response dated 8th February, 2020, communicated that the assessment order has not been received at his end; neither was the order uploaded on the e-filing portal nor was it served with the Notice of Demand u/s 156.

In the meantime, the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act, 2020’) came into force under a Notification dated 17th March, 2020 to help settle matters in respect of disputed tax. The petitioner once again approached the respondents to issue the assessment order. He received the assessment order on 15th December, 2020 – which had been passed on 22nd December, 2019.

Now, u/s 2(1)(a)(ii) of the DTVSV Act, the term ‘appellant’ is defined as being an assessee in whose case the assessment order is passed by the A.O. and the time limit to file an appeal against such order has not expired on 31st January, 2020. The petitioner had opted for the DTVSV scheme by filing an application on 23rd December, 2020 in Forms 1 and 2 of the DTVSV Act and Rules thereunder. However, the status of the application filed by him under the DTVSV scheme showed that the application had been rejected for the reason that he had not filed any appeal against the order in respect of which he wished to avail benefit (an assessee has to file an appeal on or before 31st January, 2020) and since the appeal had not been filed, it did not fulfil the criteria prescribed under the DTVSV Act.

According to the petitioner, while the time limit to file appeal is 30 days from the date of communication of notice of demand u/s 249(2)(b), the benefit of the scheme under the DTVSV Act, 2020 would be available to him as the time limit to file an appeal had not expired because he had not received the assessment order despite repeated requests.

The respondents contended that the petitioner had been given an intimation letter through the e-proceedings on 22nd December, 2019 and, thus, it has to be presumed that the assessment order has been issued and served. It was submitted that the petitioner’s claim of non-receipt of assessment order through the on-line filing portal is difficult to be appreciated as there is no such grievance by any other assessee. Ordinarily, the assessment order is sent alongside. As such, non-receipt of assessment order through on-line filing portal is not probable; therefore, it cannot be said that the order was not issued to the assessee.

On verification, the respondents informed the Court that it does not appear that attachment of assessment order had accompanied the intimation.

In this context, the Court referred to section 282 which refers to service of notice. On perusal of the same, the Court observed that it is clear that the service of an order ought to have been made by delivering or transmitting a copy thereof in the manner contained in section 282, which admittedly had not been done until 15th December, 2020.

The Court observed that this was a peculiar case where the assessment order of 22nd December, 2019 had not been served upon the petitioner till he obtained a copy on 15th December, 2020 and as can be seen from the aforesaid discussion, the petitioner was handicapped from lodging an appeal before the specified date, i.e., 31st January, 2020 for no fault of his. In the circumstances, it would emerge that the petitioner would be able to avail benefit of the term ‘appellant’ under section 2(1)(a)(ii) of the DTVSV Act.

The Court also noted that in Circular No. 9 of 2020 dated 22nd April, 2020 in its reply to Question Nos. 1 and 23, it has been stated that where any order has been passed under the Act and the time limit to file an appeal has not expired on 31st January, 2020, then the assessee can very well opt for the said scheme. The purpose and object behind bringing in the DTVSV Act is to provide resolution of disputed tax matters and to put an end to litigation and unlock revenue detained under litigation.

The respondents were directed to consider the petitioner’s application in accordance with the provisions of the DTVSV Act and Rules. The petition was allowed.

Sections 153A, 153C search assessments – A statement recorded u/s 132(4) has evidentiary value but cannot justify the additions in the absence of corroborative material – No opportunity to cross-examine the said witness

1. PCIT (Central) – 3 vs. Anand Kumar Jain (HUF) [Income-tax Appeal No. 23 of 2021 and other appeals; order dated 12th February, 2021 (Delhi High Court)]
[Arising from Anand Kumar Jain (HUF) vs. ACIT; ITA No. 5947/Del/2018, ITA No. 4723/Del/2018, ITA No. 5954/Del/2018, ITA No. 5950/Del/2018, ITA No. 5948/Del/2018 and ITA No. 5955/Del/2018, dated 30th July, 2019, Del. ITAT]

Sections 153A, 153C search assessments – A statement recorded u/s 132(4) has evidentiary value but cannot justify the additions in the absence of corroborative material – No opportunity to cross-examine the said witness

The assessee purchased shares of an unlisted private company in 2010. This unlisted company then merged with another unlisted company, M/s Focus Industrial Resources Ltd., and shares of this merged entity were allotted to the assessee. Subsequently, the merged entity allotted further bonus shares and thereafter it was listed on the Bombay Stock Exchange. The assessee sold these shares on the stock exchange in 2014 and earned a huge profit which was claimed as exempt income on account of being long-term capital gain.

A search was conducted u/s 132 on 18th November, 2015 at the premises of the assessee [being Anand Kumar Jain (HUF), its coparceners and relatives] as well as at the premises of one Pradeep Kumar Jindal. During the search, a statement of Pradeep Jindal was recorded on oath u/s 132(4) on the same date, wherein he admitted to providing accommodation entries to Anand Kumar Jain (HUF) and his family members through their Chartered Accountant. The A.O. framed the assessment order detailing the modus operandi as to how cash is provided to the accommodation entry operator in lieu of allotment of shares of a private company. Thereafter, when the matter was carried in appeal before the CIT(A), the findings of the A.O. were affirmed. However, in further appeal before the ITAT the said findings were set aside.

On further appeal before the High Court, the Revenue submitted that the ITAT has erred by holding that the assessee’s premises were not searched and therefore notice u/s 153A could not have been issued. It submitted that the ITAT ignored that the assessment order itself revealed that a common search was conducted at various places on 18th November, 2015 including at the premises of the entry provider and the assessee and thus assessment u/s 153A has been rightly carried out. It further said that the ITAT erred in setting aside the assessment order on the ground that no right of cross-examining Pradeep Jindal was afforded to the assessee. Further, there is no statutory right to cross-examine a person whose statement is relied upon by the A.O. so long as the assessee is provided with the statement and given an opportunity to rebut the statement of the witness. The assessee has been provided with a copy of the statement of Pradeep Jindal and the ITAT has wrongly noted to the contrary.

Furthermore, the assessee has failed to bring in any evidence to dispute the factual position emerging therefrom and has therefore failed to establish any prejudice on account of not getting the opportunity to cross-examine the witness. In view of the statement of Pradeep Jindal, it was incumbent upon the assessee to discharge the onus of proof which had been shifted on him. The Revenue has sufficient material in hand in the nature of the statements recorded during the search and, therefore, the assessee ought to have produced evidence to negate or to contradict the evidence collected by the A.O. during the course of the search and assessment proceeding which followed thereafter. It was also emphasised that the statement recorded u/s 132(4) can be relied upon for any purpose in terms of the language of the Act and thus action u/s 153A was justified.

The Court held that the assessment has been framed u/s 153A consequent to the search action. The scope and ambit of section 153A is well defined. This Court, in CIT vs. Kabul Chawla (2016) 380 ITR 573 concerning the scope of assessment u/s 153A, has laid out and summarised the legal position after taking into account the earlier decisions of this Court as well as the decisions of other High Courts and Tribunals. In the said case, it was held that the existence of incriminating material found during the course of the search is a sine qua non for making additions pursuant to a search and seizure operation. In the event no incriminating material is found during search, no addition could be made in respect of the assessments that had become final. Revenue’s case is hinged on the statement of Pradeep Jindal, which according to them is the incriminating material discovered during the search action. This statement certainly has evidentiary value and relevance as contemplated under the explanation to section 132(4). However, this statement cannot, on a standalone basis, without reference to any other material discovered during search and seizure operations, empower the A.O. to frame the block assessment. This Court in Principal Commissioner of Income Tax, Delhi vs. Best Infrastructure (India) P. Ltd. [2017] 397 ITR 82 2017 has inter alia held that:

‘38. Fifthly, statements recorded under section 132(4) of the Act do not by themselves constitute incriminating material as has been explained by this Court in Commissioner of Income Tax vs. Harjeev Aggarwal (2016) 290 CTR 263.’

Further, the Court noted that the A.O. has used this statement on oath recorded in the course of search conducted in the case of a third party (i.e., search of Pradeep Jindal) for making the additions in the hands of the assessee. As per the mandate of section 153C, if this statement was to be construed as an incriminating material belonging to or pertaining to a person other than the person searched (as referred to in section 153A), then the only legal recourse available to the Department was to proceed in terms of section 153C by handing over the same to the A.O. who has jurisdiction over such person. Here, the assessment has been framed u/s 153A on the basis of alleged incriminating material [being the statement recorded u/s 132(4)]. As noted above, the assessee had no opportunity to cross-examine the said witness, but that apart, the mandatory procedure u/s 153C has not been followed. The Court didn’t find any perversity in the view taken by the ITAT. Accordingly, the appeals, were dismissed.

[Income Tax Appellate Tribunal, Chennai ‘A’ Bench; dated 24th July, 2006, passed in I.T.A. Nos. 490/MDS/2000, 352/MDS/2000 and 353/MDS/2002 for A.Ys. 1996-1997, 1997-1998 and 1998-1999] Business expenditure – Provision made for site restoration – Contingent liability – Commercial expediency – Allowable expenditure u/s 37

5. M/s Vedanta Limited vs.
The Jt. CIT, Special Range-I [Tax
Case Appeal Nos. 2117 to 2119 of 2008; Date of order: 23rd January,
2020] (Madras High Court)

 

[Income
Tax Appellate Tribunal, Chennai ‘A’ Bench; dated 24th July, 2006,
passed in I.T.A. Nos. 490/MDS/2000, 352/MDS/2000 and 353/MDS/2002 for A.Ys.
1996-1997, 1997-1998 and 1998-1999]

 

Business
expenditure – Provision made for site restoration – Contingent liability –
Commercial expediency – Allowable expenditure u/s 37

 

The
assessee is engaged in the business of oil exploration in India and as per the
Product Sharing Contract between the Government of India, Oil and Natural Gas
Corporation Limited (ONGC), Videocon Petroleum Limited, Command Petroleum
(India) Pte. Limited, Ravva Oil (Singapore) Pte. Ltd. with respect to the
contract area identified as Ravva Oil & Gas Fields. The assessee company
undertaking the oil exploration is obligated under Clauses 1.77 and 14.9 of the
contract to restore the site by filling up the pits after the oil exploration
work is over.

 

The provision for such expenditure to be incurred in future for site
restoration work was made on a scientific and rational basis depending upon the
quantum of oil expected to be explored, based on production of the oil which
was worked out depending upon the share of the oil of various companies of
which the assessee had 22.5% of the total oil explored, and over the expected
production of the oil in barrels and abandonment costs computed by the company.
The assessee company computed the said expected liability of site restoration
charges and accordingly made provisions for the three A.Ys. in question.

 

The
Tribunal disallowed the provisions made by the assessee for site restoration
cost for the A.Ys. in question by holding that ‘an expenditure which is
deducted for income-tax purpose is one which is towards a liability actually
existing at the time, but putting aside some money which may become an
expenditure on the happening of an event is not an expenditure.’ In other
words, the Tribunal held that since the provision made under site restoration
fund is a contingent liability incurred by the assessee, the same is not an
allowable expenditure. The Tribunal held that the provision for site
restoration fund cannot be allowed even u/s 37(1) of the Act.

 

The
Tribunal also referred to the provisions of section 33ABA inserted by the
Finance (No. 2) Act, 1998 with effect from 1st April, 1999 from
which date such a provision for site restoration made by the assessee cannot be
allowed unless an actual deposit is made in the Site Restoration Fund u/s
33ABA. But the A.Ys. in question before the Court are prior to this amendment
of law.

 

Before the
Hon’ble High Court the only question left for deciding the controversy on hand
was whether such deduction of ‘Provision made for Site Restoration’ by the
assessee can be allowed as a business expenditure u/s
37(1).

 

Section
37(1) of the Act is a residual provision and apart from various deductions for
business expenditure prescribed under sections 32 to 36 which are specific in
nature, section 37(1) provides that any expenditure (not being expenditure of
the nature described in sections 30 to 36 and not being in the nature of
capital expenditure or personal expenses of the assessee), ‘laid out or expended’ ‘wholly and exclusively’
for the purposes of the business or profession shall be allowed in computing
the income chargeable under the head ‘Profits and gains of business or
profession’. Thus, the expenditure incurred by the assessee or a provision made
for the same are both allowable u/s 37(1), provided such expenditure is
incurred wholly and exclusively for the purpose of business and is laid out or
expended for the purpose of business.

 

The
assessee urged that the Supreme Court in the case of Calcutta Company Limited vs. CIT (1959) 37 ITR 1 (SC)
has laid down that inasmuch as the liability which had accrued during the
accounting year was to be discharged at a future date, the amount to be
expended in the discharge of that liability would have to be estimated in order
that under the mercantile system of accounting the amount could be debited
before it was actually disbursed.

 

Further,
relying upon another judgment of the Supreme Court in the case of Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC),
it was submitted that the law is settled – if a
business liability has definitely arisen in the accounting year, the deduction
should be allowed although the liability may have to be quantified and
discharged at a future date.

 

It was
further submitted that the three yardsticks, criteria or parameters for
allowing the ‘Provisions made for future expenditure’ were discussed by the
Supreme Court in the case of Rotork Controls India
(P) Ltd. vs. Commissioner of Income-tax reported
in 2009 314 ITR 0062. Thus,
the three criteria of the provision are recognised when (a) an enterprise has a present obligation as a result of a past
event; (b) it is probable that an outflow of resources will be required to
settle the obligation; and (c) a reliable estimate can be made of the amount of
the obligation.

 

It was
urged that all the three criteria are satisfied by the assessee in the present
cases and there is no dispute from the side of the Revenue that the assessee
has incurred an obligation under the contract. The question of restoring the
site of exploration after the work is over for which the said provision is made
is based on a scientific method and relevant materials.

 

The High
Court observed that for the three assessment years in question the provision
made by the assessee was clearly an allowable expenditure u/s 37(1). The only
ingredient required to be complied with for section 37(1) is that the
expenditure in question should be laid out or expended wholly for the purpose
of the business of the assessee. There is no dispute that the provision in
question was made wholly and exclusively for the purpose of business. The only
dispute was that the expenditure was not actually incurred in these years and
the amount was to be spent in future out of the provisions made during those
assessment years, viz., 1996-1997 to 1998-1999.

 

The Court
observed that there was no prohibition or negation for making a provision for
meeting such a future obligation and such a provision being treated as a
revenue expenditure u/s 37(1). The Supreme Court in the case of Calcutta Company Limited (Supra) had
clearly held that the words ‘Lay’ (laid out) or ‘Expend’ include expendable in
future, too. The making of a provision by an assessee is a matter of good
business or commercial prudence and it is to set apart a fund computed on
scientific basis to meet the expenditure to be incurred in future. There is no
time frame or limitation prescribed for the said provisions to be actually
spent. Merely because in the context like the one involved in this case the
contract period is long, viz., 25 years, which, too, now stands extended by a
period of ten years or more, and therefore the actual work of site restoration
may happen after 35 years depending upon the actual exploration of oil reserves
and the site restoration would be undertaken only if there is no longer some
oil to be explored or drawn out, therefore, it cannot be said that the
provision made for the three assessment years at the beginning of the contract
period was irrational or a disallowable expenditure.

 

The
question of commercial expediency is a usual business and economic decision to
be taken by the assessee and not by the Revenue authorities, therefore the
provision made on a reasonable basis cannot be disallowed u/s 37(1) unless it
can be said to have no connection with the business of the assessee. The words
‘wholly and exclusively for the purpose of business’ is a sufficient safeguard
and check and balance by the Revenue authorities to test and verify the
creation of provisions for meeting a liability by the assessee in future and its
connectivity with the business of the assessee. Assuming that such set-apart
provision is not actually spent in future or something less is spent on site
restoration, nothing prevents the Revenue authorities and the assessee himself
from offering it back for taxation in such future year, the unspent provision
to be thus brought back to tax as per section 41(1).

 

In view of the aforesaid facts, the appeals
filed by the assessee were allowed.

[Income Tax Appellate Tribunal, ‘C’ Bench, Chennai, dated 20th April, 2017 made in ITA Nos. 1871/Mds/2016, 2759/Mds/2016 and 1870/Mds/2016; A.Ys. 2007-2008 and 2008-2009] Reassessment – Reopening beyond four years – Original assessment 143(3) – TDS not deducted – Auditor responsibility vis-a-vis audit report – failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment

4. Pr. CIT vs. M/s Bharathi Constructions Pr. CIT vs. M/s URC Construction (P) Ltd. [Tax Case (Appeal) Nos. 772 to 774 of 2017;
Date of order: 11th September, 2020] (Madras High Court)

 

[Income Tax Appellate Tribunal, ‘C’ Bench,
Chennai, dated 20th April, 2017 made in ITA Nos. 1871/Mds/2016,
2759/Mds/2016 and 1870/Mds/2016; A.Ys. 2007-2008 and 2008-2009]

 

Reassessment – Reopening beyond four years
– Original assessment 143(3) – TDS not deducted – Auditor responsibility vis-a-vis
audit report – failure on the part of the assessee to disclose fully and truly
all material facts necessary for assessment

 

The Revenue stated
that there was failure on the part of the assessee to disclose truly and fully
the machine hire charges on which TDS u/s 194-I was required to be done by the
assessee company which utilised the plants and equipment of the contractors
during the construction works carried out by it; therefore on such payment of
rent made by the assessee to such contractors for use of such plant and
equipment, TDS u/s 194-I was required to be done by the assessee. In the absence
of the same, the amounts in question paid to the contractors were liable to be
added back as income of the assessee u/s 40(a)(ia). An audit objection was also
raised for those A.Ys. by the Audit Team of the Department and in the
subsequent A.Ys. 2010-11 and 2011-12, the assessee himself deducted tax at
source on such machine hire charges u/s 194-I and deposited the same; in the
year 2015, the Assessing Authority had ‘reason to believe’ that for A.Ys.
2007-2008 and 2008-2009 it was liable to reopen and reassessment was required
to be done for those A.Ys.

 

The appeals
preferred by the assessee were dismissed by the CIT(Appeals) but in the appeal
before the Tribunal the assessee succeeded when it held that reassessment was
bad in law as the notice u/s 147/148 was issued after the expiry of four years
after the relevant assessment year and there was no failure on the part of the
assessee; therefore, the extended period of limitation cannot be invoked by the
Authority concerned and the reassessment order was set aside.

 

The assessee
submitted that during the course of the original assessment proceedings itself
it had made true and full disclosure of the tax deducted and amount paid by it
to various contractors vide letter dated 7th December, 2009,
filed before the Deputy Commissioner of Income Tax, Circle-I, Erode through the
Chartered Accountant M. Chinnayan & Associates, and in reply to the Deputy
Commissioner of Income Tax for the Audit Objection, the said Chartered Accountant,
vide its communication for the A.Y. 2007-2008, it was contended before
the Assessing Authority that such amounts paid to the contractors did not
amount to payment of rentals as there was no lease agreement, and therefore
section 194-I could not apply to such payments. He further submitted that the
Assessing Authority had disallowed a part of the said amounts towards machine
hire charges u/s 40a(ia) and the Tax Deducted at Source during the course of
the original assessment proceedings itself and therefore there was no reason
for the Assessing Authority to reopen the original assessment order on a mere
‘change of opinion’ subsequently in the year 2015 and the reassessment
proceedings could not be undertaken. In particular, attention was drawn to the
order sheet entry drawn on 30th December, 2009 passed by the Deputy
Commissioner, the Assessing Authority.

 

The Court held that
no substantial question of law arises in the present appeal filed by the
Revenue as the law is well settled in this regard and unless, as a matter of
fact, the Revenue Authority can establish a failure on the part of the assessee
to truly and fully disclose the relevant materials during the course of the
original assessment proceedings, the reassessment proceedings, on mere change
of opinion, cannot be initiated, much less beyond the period of four years
after the expiry of the assessment years in terms of the first proviso
to section 147 of the Act.

 

In the present
case, the machine hire charges paid by the assessee to various contractors or
sub-contractors were fully disclosed not only in the Books of Accounts and
Audit Reports furnished by the Tax Auditor, but by way of replies to the notice
issued by the Assessing Authority, particularly vide letter dated 7th
December, 2009 of the assessee during the course of the original assessment
proceedings, and it was also contended while replying to the audit objection
that the payments, having been made as machine hire charges, do not amount to
rentals and thereby do not attract section 194-I. But despite that the
Assessing Authority appears to have made additions to the extent of Rs.
44,45,185 in A.Y. 2007-2008 u/s 40(a)(ia) in case of one of the assessees,
viz., URC Construction (Private) Limited.

 

The facts in both the assessees’ cases are said to be almost similar and
they were represented by the same Chartered Accountant, M/s Chinnayan &
Associates, Erode.

 

Thus, there is no
failure on the part of the assessee to truly and fully disclose the relevant
materials before the Assessing Authority during the course of the original
assessment proceedings. Therefore, the extended period of limitation beyond
four years after the end of the relevant assessment years cannot be invoked for
the reassessment proceedings under sections 147/148 in view of the first proviso
to section 147.

 

However, the Court
disagreed with the observations made by the Tribunal in paragraph 11 of its
order to the extent where the Tribunal has stated that if there is negligence
or omission on the part of the auditor to disclose correct facts in the Audit
Report prepared u/s 44AB, the assessee cannot be faulted.

 

The Court opined
that even if the relevant facts are not placed before the auditors by the
assessee himself, they may qualify their Audit Report u/s 44AB. If the
Auditor’s Report does not specifically disclose any relevant facts, or if there
is any omission or non-disclosure, it has to be attributed to the assessee only
rather than to the Auditor. The observations made in paragraph 11 of the
order are not sustainable though they do not affect the conclusion that has
been arrived at on the basis of the other facts placed, that there was really a
disclosure of full and complete facts by the assessee before the Assessing
Authority during the course of the original assessment proceedings itself u/s
143(3); and therefore, even if anything is not highlighted in the Audit Report,
the assessee has shown that this aspect, viz., non-deduction of TDS on the
machine hire charges attracting section 194-I was very much discussed by the
Assessing Authority during the original assessment proceedings.

 

Therefore, on a
mere change of opinion, the Assessing Authority could not have invoked the
reassessment proceedings u/s 147/148 beyond the period of four years after the
end of the relevant A.Ys.

 

Thus, the appeals filed by the Revenue were dismissed.

 

[ITAT, Chennai ‘B’ Bench, dated 20th March, 2008 in ITA Nos. 1179/Mds/2007, 1180/Mds/2007 and 1181/Mds/2007; Chennai ‘B’ Bench, dated 18th May, 2009 in ITA No. 998/Mds/2008 for the A.Ys. 1999-2000, 2000-2001, 2001-2002 and 2005-2006, respectively] Letting of immovable property – Business asset – Rental income – ‘Income from Business’ or ‘Income from House Property’

3.  M/s PSTS Heavy Lift and Shift Ltd. vs. The
Dy. CIT Company Circle – V(2) Chennai M/s CeeDeeYes IT
Parks Pvt. Ltd. vs. The Asst. CIT Company Circle I(3) [Tax Case Appeal
Nos. 2193 to 2195 of 2008 & 979 of 2009; Date of order: 30th
January, 2020] (Madras High Court)

 

[ITAT, Chennai ‘B’
Bench, dated 20th March, 2008 in ITA Nos. 1179/Mds/2007,
1180/Mds/2007 and 1181/Mds/2007; Chennai ‘B’ Bench, dated 18th May,
2009 in ITA No. 998/Mds/2008 for the A.Ys. 1999-2000, 2000-2001, 2001-2002 and
2005-2006, respectively]

Letting of
immovable property – Business asset – Rental income – ‘Income from Business’ or
‘Income from House Property’

 

There were two
different appeals before High Court for different A.Ys. In both cases the
substantial question of law raised was as under:

 

Whether the
income earned by the assessees during the A.Ys. in question from letting out of
their warehouses or property to lessees is taxable under the head ‘Income from
Business’ or ‘Income from House Property’?

 

M/s PSTS Heavy Lift and Shift Limited –
For the A.Y. 1999-2000, the Assessing Authority held that the assessee owned
two warehouses situated near SIPCOT, Tuticorin with a total land area of 3.09
acres and built-up area of approximately 32,000 sq.ft. each. The assessee
earned income of Rs. 21.12 lakhs during A.Y. 
2000-2001 by letting out the warehouses to two companies, M/s W.
Hogewoning Dried Flower Limited and M/s Ramesh Flowers Limited, and out of the
total rental income of Rs. 21.12 lakhs it claimed depreciation of Rs. 6.02
lakhs on the said business asset in the form of warehouses. The assessee
claimed that warehousing was included in the main objects of the company’s
Memorandum of Association and not only warehouses were utilised for storing
their clients’ cargo, but other areas were used to park their equipment such as
trucks, cranes, etc., and amenities like handling equipment like pulleys,
grabs, weighing machines were fixed in the corners and such facilities were
also provided to the clients. The assessee claimed it to be business income and
said such income ought to be taxed as ‘Income from Business’. But the Assessing
Authority as well as the Appellate Authority held that the said income would be
taxable under the head ‘Income from House Property’. The Assessing Authority
also inter alia relied upon the judgment in the case of CIT vs.
Indian Warehousing Industries Limited [258 ITR 93].

 

M/s CeeDeeYes IT Parks Pvt. Ltd. – As
per the assessment order passed in the said case, the assessee company was
incorporated to carry out the business of providing infrastructure amenities
and work space for IT companies; it constructed the property in question and
let it out to one such IT company, M/s Cognizant Technology Solutions India
Ltd. The assessee claimed the rental income to be taxable as its ‘Business
Income’ and not as ‘Income from House Property’, but the Assessing Authority as
well as the Appellate Authorities held against the assessee and held such
income to be ‘Income from House Property’.

 

The assessee
contended that it will depend upon the facts of each case and if earning of
rental income by letting out of a business asset or the properties of the
assessee is the sole business of the assessee, then the income from such
rentals or lease money cannot be taxed as ‘Income from House Property’ but can
be taxed only as ‘Income from Business’. He submitted that the Assessing
Authorities below, in order to deny deductions or depreciation and other
expenditure incurred by the assessee to earn such business income, deliberately
held that such rental income was taxable under the head ‘Income from House
Property’ so that only limited deductions under that head of ‘Income from House
Property’ could be allowed to the assessee and a higher taxable income could be
brought to tax.

 

The assessee relied
upon the following case laws:

(a) Chennai Properties Investments Limited
vs. CIT [(2015) 373 ITR 673 (SC)];

(b)        Rayala Corporation Private Limited
vs. Asst. CIT [(2013) 386 ITR 500 (SC)]; and

(c) Raj Dadarkar & Associates vs. Asst.
CIT [(2017) 394 ITR 592 (SC)].

 

The Revenue, apart
from relying on the Tribunal decision, also submitted that as far as the
separate income earned by the assessee from the amenities provided to the
clients in the warehouses or the property of the assessee was concerned, such
portion of income deserved to be taxed under the head ‘Income from Other
Sources’ u/s 56 and not as ‘Income from Business’.

 

But the High Court
observed that the Tribunal as well as the authorities below were under the
misconceived notion that income from letting out of property, which was the
business asset of the assessee company and the sole and exclusive business of
the assessee, was to earn income out of such house property in the form of
business asset, was still taxable only as ‘Income from House Property’. Such
misconception emanated from the judgment in the case of CIT vs. Chennai
Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685], which was
reversed by the Hon’ble Supreme Court in Chennai Properties Investments
Limited vs. Commissioner of Income Tax (Supra), wherein it is held that
where the assessee is a company whose main object of business is to acquire
properties and to let out those properties, the rental income received was
taxable as ‘Income from Business’ and not ‘Income from House Property’,
following the ratio of the Constitution Bench judgment of the Supreme
Court in Sultans Brothers (P) Ltd. vs. Commissioner of Income Tax [(1964)
51 ITR 353 (SC)]; therein, it was held that each case has to be looked
at from the businessman’s point of view to find out whether the letting was
doing of a business or the exploitation of the property by the owner.

 

The said decision
subsequently was followed by the Supreme Court in the cases of Rayala
Corporation (Supra) and Raj Dadarkar & Associates (Supra).

 

The Court further
observed that once the property in question is used as a business asset and the
exclusive business of the assessee company or firm is to earn income by way of
rental or lease money, then such rental income can be treated only as the
‘Business Income’ of the assessee and not as ‘Income from House Property’. The
heads of income are divided in six heads, including ‘Income from House
Property’, which defines the specific source of earning such income. The income
from house property is intended to be taxed under that head mainly if such
income is earned out of idle property, which could earn the rental income from
the lessees. But where the income from the same property in the form of lease
rentals is the main source of business of the assessee, which has its business
exclusively or substantially in the form of earning of rentals only from the
business assets in the form of such landed properties, then the more
appropriate head of income applicable in such cases would be ‘Income from
Business’.

 

A bare perusal of
the scheme of the Income Tax Act, 1961 would reveal that while computing the
taxable income under the Head ‘Income from Business or Profession’, the various
deductions, including the actual expenditure incurred and notional deductions
like depreciation, etc., are allowed vis-a-vis incentives in the form of
deductions under Chapter VIA. But the deductions under the Head ‘Income from
House Property’ are restricted to those specified in section 24 of the Act,
like 1/6th of the annual income towards repairs and maintenance to
be undertaken by landlords, interest on capital employed to construct the
property, etc. Therefore, in all cases such income from property cannot be
taxed only under the head ‘Income from House Property’. It will depend upon the
facts of each case and where such income is earned by the assessee by way of
utilisation of its business assets in the form of property in question or as an
idle property which could yield rental income for its user, from the lessees.
In the earlier provisions of income from house properties, even the notional
income under the head ‘Income from House Property’ was taxable in the case of
self-occupied properties by landlords, is a pointer towards that.

 

The Court observed
that in both the present cases it is not even in dispute that the exclusive and
main source of income of the assessee was only the rentals and lease money
received from the lessees; the Assessing Authority took a different and
contrary view mainly to deny the claim of depreciation out of such business
income in the form of rentals without assigning any proper and cogent reason.
Merely because the lease income or rental income earned from the lessees could
be taxed as ‘Income from House Property’, ignoring the fact that such rentals
were the only source of ‘Business Income’ of the assessee, the authorities
below have fallen into the error in holding that the income was taxable under
the head ‘Income from House Property’. The said application of the head of
income by the authorities below was not only against the facts and evidence
available on record, but also against common sense.

 

The amended
definition u/s 22 now defines ‘Income from House Property’ as the annual value
of property as determined u/s 23 consisting of 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 on by him, the profits of which are chargeable to income tax, shall be
chargeable to income tax under the head ‘Income from House Property’. Thus,
even the amended definition intends to tax the notional income of the
self-occupied portion of the property to run the assessee’s own business
therein as business income. Therefore, the other rental income earned from
letting out of the property, which is the business of the assessee itself,
cannot be taxed as ‘Income from House Property’.

 

The Court also observed that the heads of income, as defined in section
14 do not exist in silos or in watertight compartments under the scheme of tax
and, thus, these heads of income, as noted above, are fields and heads of
sources of income depending upon the nature of business of the assessee. Therefore,
in cases where the earning of the rental income is the exclusive or predominant
business of the assessee, the income earned by way of lease money or rentals by
letting out of the property cannot be taxed under the head ‘Income from House
Property’ but can only be taxed under the head ‘Income from Business income’.

 

In view of the
aforesaid, both the assessees in the present case carry on the business of
earning rental income as per the memoranda of association only and the fact is
that they were not carrying on any other business; therefore, the appeals of
both the assessees were allowed. The question of law framed above was answered
in favour of the assessees and against the Revenue.

 

Revision – Limited scrutiny case – CIT cannot exercise the power of revision u/s 263 to look into any other issue which the A.O. himself could not look at

2. CIT vs. Smt. Padmavathi
[dated 6th October, 2020; TCA/350/2020] [Income Tax Appellate Tribunal, Madras
‘C’ Bench, Chennai in ITA No. 1306/Chny/2019; Date of order: 2nd
December, 2019 for A.Y.: 2014-2015] (Madras
High Court)

 

Revision
– Limited scrutiny case – CIT cannot exercise the power of revision u/s 263 to
look into any other issue which the A.O. himself could not look at

 

The assessee is an
individual and a partner in a firm under the name and style of Sri Ram
Associates. She filed her return of income declaring a total income of Rs.
2,58,110. The return was processed u/s 143(1). Subsequently, the case was
selected under Computer Aided Scrutiny Selection for ‘Limited Scrutiny’ with
regard to purchase of a property by the assessee. The A.O., after hearing the
assessee, verifying the source of funds, completed the assessment by an order
dated 28th December, 2016 u/s 143(3) and made an addition of Rs.
8,00,000.

 

The PCIT issued a show
cause notice u/s 263 dated 26th October, 2018 to the assessee for
the reason that the assessee had purchased the immovable property by a sale
deed registered for a consideration of Rs. 41,50,000, whereas the guideline
value fixed by the State Government was Rs. 77,19,000 and there was a
difference of Rs. 35,69,000 which was not properly inquired into by the A.O.
and also not considered during the course of assessment. For this reason, the
PCIT proposed to invoke his powers u/s 263.

 

The assessee submitted her
reply dated 11th January, 2019. The PCIT considered the explanation
and held that in the first place a request has to be made by the assessee for
valuation of the property and nothing is discernible from the records that the
assessee made any request, which leads to an inference that the A.O. did not
apply his mind to the fair market value and the consequential taxability of the
investment as ‘unexplained investment’ u/s 56(2)(vii)(b)(ii). The PCIT further
held that though the A.O. verified the source of funds, he failed to apply the
said provision, namely, section 56(2)(vii)(b)(ii). Thus, the PCIT rejected the
explanation given by the assessee and set aside the assessment and referred
back the same to the A.O. to re-do the assessment.

 

The assessee challenged the
revision order dated 18th March, 2019 passed u/s 263 by filing an
appeal before the Tribunal. The Tribunal held that the value adopted for stamp
duty purposes is taken as ‘deemed consideration’ u/s 56(2)(vii)(b) and this is
only a deeming provision and there is no occasion for the assessee to explain
the source for deemed consideration. Further, the Tribunal held that since the
assessment was under limited scrutiny, it would be beyond the powers of the
A.O. to look into any other issue which has come to his notice during the
course of assessment and also faulted the PCIT for invoking his power u/s 263.
The Revenue filed an appeal before the High Court.

 

The High Court considered
the issue as regards the power of the PCIT u/s 263 and whether he could have
set aside the assessment on the ground that the A.O. did not invoke section
56(2)(vii)(b).

 

Further, the Court observed
that the assessment order shows that the case was selected for limited scrutiny
only on the aspect regarding the sale consideration paid by the assessee for
purchase of the immovable property and the source of funds. The A.O. has noted
that the sale consideration paid by the assessee was Rs. 41,50,000 and she has
paid stamp duty and incurred other expenses of Rs. 5,75,000. The source of
funds was verified and the A.O. was satisfied with the same. The PCIT, while
invoking his power u/s 263, faults the A.O. on the ground that he did not make
proper inquiry. It is not clear as to what in the opinion of the PCIT is
‘proper inquiry’. By using such an expression, it presupposes that the A.O. did
conduct an inquiry. However, in the opinion of the PCIT, the inquiry was not
proper. In the absence of not clearly stating as to why, in the opinion of the
PCIT, the inquiry was not proper, the Court held that the invocation of the
power u/s 263 was not justified.

 

The Court further observed
that the only reason for setting aside the scrutiny assessment was on the
ground that the guideline value of the property, at the relevant time, was
higher than the sale consideration reflected in the registered document. The
question would be as to what is the effect of the guideline value fixed by the
State Government. There is a long list of decisions of the Supreme Court
holding that guideline value is only an indicator and the same is fixed by the
State Government for the purposes of calculating stamp duty on a deal of
conveyance. Therefore, merely because the guideline value was higher than the
sale consideration shown in the deed of conveyance, cannot be the sole reason
for holding that the assessment is erroneous and prejudicial to the interest of
Revenue.

 

The A.O. in his limited
scrutiny has verified the source of funds, noted the sale consideration paid
and the expenses incurred for stamp duty and other charges. Furthermore, the
assessee in her reply dated 11th January, 2019 to the show cause
notice dated 26th October, 2018 issued by the PCIT, has specifically
stated that the assessment was getting time-barred; the A.O. took upon himself
the role of a valuation officer u/s 50(C)(2) and found that the guideline value
was not the actual fair market value of the property and the actual
consideration paid was the fair market value and therefore, he did not choose to
make any addition u/s 50(C). The PCIT has not dealt with this specific
objection, but would fault the A.O. for not invoking section 56(2)(vii)(b)(ii)
merely on the ground that the guideline value was higher. The guideline value
is only an indicator and will not always represent the fair market value of the
property and, therefore, the invocation of power u/s 263 by the PCIT was not
sustainable in law.

 

In the result, the Revenue appeal was
dismissed.

 

 

In the morning when thou risest
unwillingly, let this thought be present – I am rising to the work of a human
being

 

Why then am I dissatisfied if I
am going to do the things for which I exist and for which I was brought into
the world?

 —  Marcus Aurelius

 

 

The sage acts without taking
credit.

She accomplishes without
dwelling on it.

She does not want to display her
worth

 —  Lao Tzu, Tao Te Ching, Ch.
77

 

Section 28(iv) – Waiver of loan

1. M/s Essar Shipping Limited vs. Commissioner of
Income-tax, City-III, Mumbai [Income-tax Appeal (IT) No. 201 of 2002 Date of order: 5th March, 2020 [Order dated 16th August, 2001
passed by the ITAT ‘A’ Bench, Mumbai in Income-tax Appeal No. 144/Ban/91 for
the A.Y. 1984-85] (Bombay High Court)

 

Section 28(iv) – Waiver of loan

 

The appellant company earlier was known as
M/s Karnataka Shipping Corporation Limited and carrying on the business of
shipping. During the relevant previous year, because of certain developments it
was amalgamated with M/s Essar Bulk Carriers Limited, Madras, whereafter it
came to be known as M/s Essar Shipping Limited.

 

In the assessment proceedings for the A.Y.
1984-85 following amalgamation, it filed a revised return of income wherein an
amount of Rs. 2,52,00,000 was claimed as a deduction being the amount of loan
given by the Government of Karnataka which was subsequently waived. It was
claimed on behalf of the appellant that the Government of Karnataka had written
off the said loan advanced to the appellant as the said amount had become
irrecoverable. The A.O. did not accept the claim of the appellant and observed
that waiver of loan benefited the appellant in carrying on its business and in
terms of the provisions contained in section 28, the said benefit enjoyed by
the appellant should constitute income in its hand. Accordingly, the aforesaid
amount was added to the total income of the assessee.

 

Aggrieved
by this, the assessee preferred an appeal before the CIT(Appeals)-III,
Bangalore. The first appellate authority considered the requirement of section
28(iv) of the Act and held that waiver of loan could not be treated as a
benefit or perquisite because it was clearly a cash item. The amount would be
includible u/s 28(iv) only if it was a non-cash item and that cash item cannot
be treated as a perquisite. It was further held that what can be assessed u/s
28 are only items of revenue nature and not items of capital nature. Therefore,
waiver of loan cannot partake the character of income to be includible for
assessment. Accordingly, the addition made by the A.O. was deleted.

 

On further appeal by Revenue, the Tribunal
took the view that writing off of the loan was inseparably connected with the
business of the assessee and therefore this benefit had arisen out of the
business of the assessee. The amount written off was nothing but an incentive
for its business. It was held that the benefit was received by the assessee in
the form of writing off of the liability to the extent of the loan. Therefore,
it could not be said that the assessee received cash benefit. The Tribunal
opined that the A.O. had correctly made the addition considering the waiver of
loan as revenue receipt of the assessee and, therefore, set aside the finding
of the first appellate authority, thereby restoring the order of the A.O.

 

The appellant contended that to be an income
chargeable to income tax under the head ‘profits and gains of business and
profession’, the value of any benefit or perquisite has to arise from business
or the exercise of a profession and it should not be in cash. He submitted that
this court in Mahindra & Mahindra vs. CIT, 261 ITR 501 has
held that the income which can be taxed u/s 28(iv) must not only be referable
to a benefit or perquisite, but it must be arising from business. Secondly,
section 28(iv) would not apply to benefits in cash or money. The Supreme Court
in CIT vs. Mahindra & Mahindra Ltd., 404 ITR 1 had affirmed
the finding of the Bombay High Court and declared that for applicability of
section 28(iv) of the Act, the income should arise from the business or
profession and that the benefit which is received has to be in some other form
rather than in the shape of money.

 

On the other hand, the Department contended
that after a loan is waived or written off, it partakes the character of a
subsidy, more particularly an operational subsidy. Emphasis was laid on the
expression ‘operational subsidy’ to contend that the action of the Government
of Karnataka in writing off of the loan provided was an act of providing
operational subsidy to the assessee, thus extending a helping hand to the
assessee to salvage its losses thereby benefiting the assessee to the extent of
the waived loan and it is in this context that he placed reliance on the
decision of Sahney Steel & Press Works Limited (Supra) and
Protos Engineering Company Private Limited vs. CIT, 211 ITR 919.

 

The Court observed that section 28 deals with profits and gains of
business or profession. It says that the incomes mentioned therein shall be
chargeable to income tax under the head ‘profits and gains of business or
profession’. Clause (iv) refers to the value of any benefit or perquisite
whether or not convertible into money arising from business or the exercise of
a profession. The Court relied on the decision in the case of  Mahindra & Mahindra Limited (Supra)
wherein the Supreme Court was examining whether the amount due by Mahindra
& Mahindra to Kaiser Jeep Corporation which was later on waived off by the
lender constituted taxable income of Mahindra & Mahindra or not. The
Supreme Court held as under:

 

‘On a plain reading of section 28(iv) of
the Income-tax Act, prima facie, it appears that
for the applicability of the said provision, the income which can be taxed
shall arise from the business or profession. Also, in order to invoke the
provisions of section 28(iv) of the Income-tax Act, the benefit which is
received has to be in some other form rather than in the shape of money.’

 

In the above case, according to the Supreme
Court, for applicability of section 28(iv) of the Act the income which can be taxed has to arise from the business or profession. That apart,
the benefit which is received has to be in some other form rather than in the
shape of money. Therefore, it was held that section 28(iv) was not satisfied
inasmuch as the prime condition of section 28(iv) that any benefit or
perquisite arising from the business or profession shall be in the form of
benefit or perquisite other than in the shape of money, was absent. Therefore,
it was held that the said amount could not be taxed u/s 28(iv) in any circumstances.

 

The Court observed that the facts and issue
in the present case are identical to those in Mahindra & Mahindra
(Supra). Here also, a loan of Rs. 2.52 cores was given by the Karnataka
Government to the assessee which was subsequently waived off. Therefore, this
amount would be construed to be cash receipt in the hands of the assessee and
cannot be taxed u/s 28(iv). In view of the Supreme Court decision in Mahindra
& Mahindra, the earlier decision of this court in Protos
Engineer Comp. would no longer hold good.

 

The Court further observed that in the
decision in Sahney Steel & Press Works Limited (Supra) the
issue pertained to subsidy received by the assessee from the Andhra Pradesh
Government. The question was whether or not such subsidy received was taxable
as revenue receipt. In the facts of that case, it was held that such subsidies
were of revenue nature and not of capital nature.

 

Insofar as the argument of the Department,
that upon waiver of loan the amount covered by such loan would partake the
character of operational subsidy, the Court is unable to accept such a
contention. Conceptually, ‘loan’ and ‘subsidy’ are two different concepts.

 

In Sahney Steel and Press Works Ltd.
(Supra), the Supreme Court held that the subsidy provided by the Andhra Pradesh Government was basically an endeavour of the state to extend
a helping hand to newly-set up industries to enable them to be viable and
competitive.

 

Thus, the Court held that there is a
fundamental difference between ‘loan’ and ‘subsidy’ and the two cannot be
equated. While ‘loan’ is a borrowing of money required to the repaid with
interest, ‘subsidy’ being a grant, is not required to be repaid. Such grant is
given as part of a public policy by the state in furtherance of the public
interest. Therefore, even if a ‘loan’ is written off or waived, which may be
for various reasons, it cannot partake the character of a ‘subsidy’.

 

The substantial question of law therefore is
answered in favour of the assessee by holding that waiver of loan cannot be
brought to tax u/s 28(iv) of the Act. The appeal is accordingly allowed.

 

 

 

BCAJ:
Positive impact of COVID-19 on number of pages

 

Month

2019

2020

%  change

May

112

148

32%

June

124

132

6%

July

136

148

9%

August

116

124

7%

September

140

156

11%

Total

628

708

13%

 

 

Do not dwell in the past, do not
dream of the future, concentrate the
mind on the present moment

— 
Buddha

 

 

God doesn’t dwell in the wooden,
stony or earthen idols.
His abode is in our feelings, our thoughts

 — 
Chanakya

Reopening – Capital gains arising on conversion of the land into stock-in-trade – Closing stock has to be valued at cost or market price whichever is lower – No reason to believe income had escaped assessment – Reopening bad in law: Sections 45(2) and 147 of the Act

9. M/s. J.S. & M.F. Builders vs. A.K. Chauhan and others [Writ Petition
No. 788 of 2001 A.Ys.: 1992-93, 1993-94, 1994-95 and 1995-96 Date of order: 12th
June, 2020 (Bombay High Court)

 

Reopening – Capital gains arising on conversion of the land into
stock-in-trade – Closing stock has to be valued at cost or market price
whichever is lower – No reason to believe income had escaped assessment –
Reopening bad in law: Sections 45(2) and 147 of the Act

 

The petitioner had challenged the legality and validity of the four
impugned notices, all dated 25th February, 2000 issued u/s 148 of
the Act, proposing to re-assess the income of the petitioner for the A.Ys.
1992-93, 1993-94, 1994-95 and 1995-96 on the ground that income chargeable to
tax for the said assessment years had escaped assessment.

 

The case of the petitioner is that it is a partnership firm constituted by
a deed of partnership dated 21st October, 1977. The object of the
firm is to carry out business as builders and developers.

 

An agreement was entered into on 8th November, 1977 between one
Mr. Krishnadas Kalyanji Dasani and the petitioner whereby and whereunder Mr.
Dasani agreed to sell, and the petitioner agreed to purchase, a property
situated at Borivali admeasuring approximately 6,173.20 square metres. The
property consisted of seven structures and two garages. The property was
mortgaged and all the tenements were let out. The aggregate consideration for
the purchase was Rs. 3,00,000 and a further expenditure of Rs. 44,087 was
incurred by way of stamp duty and registration charges. The said property was
purchased subject to all encumbrances. The purchased property was reflected in
the balance sheets of the petitioner drawn up thereafter as a fixed asset. For
almost a decade after purchase, the petitioner entered into various agreements
with the tenants to get the property vacated. In the process, they incurred a
further cost of Rs. 9,92,427.

 

In the balance sheet as on 30th September, 1987 the Borivali
property was shown as a fixed asset the value of which was disclosed at Rs.
13,36,514; a detailed break-up of it was furnished. With effect from 1st
October, 1987, the petitioner converted a portion of the property into
stock-in-trade and continued to retain that part of the property which still
remained tenanted as a fixed asset. The market value of the entire Borivali
property as on 1st October, 1987 was arrived at Rs. 69,38,000 out of
which the value of the property that was converted into stock-in-trade was
determined at Rs. 66,29,365.

 

The petitioner thereafter demolished the vacant structures and commenced
construction of a multi-storied building. In the balance sheet as on 31st
March, 1989, the petitioner reflected the tenanted property as a fixed asset at
a cost of Rs. 2,86,740 and the stock-in-trade at a value of Rs. 66,29,365.. A
revaluation reserve of Rs. 55,58,759 was also credited. In the Note
accompanying the computation of income it was clearly mentioned that the
conversion of a part of the Borivali property was made into stock-in-trade and
the liability to tax u/s 45(2) of the Act would arise as and when the flats
were sold. During the previous year relevant to the A.Y. 1992-93, the
petitioner had entered into 14 agreements for sale of 14 flats, the total area
of which admeasured 10,960 square feet (sq. ft.).

 

For the A.Y. 1992-93 the petitioner declared income chargeable under the
head ‘profits and gains of business or profession’ at Rs. 9,37,385 and the
income chargeable under the head ‘capital gains’ at Rs. 8,10,993. The ‘capital
gains’ was arrived at by determining the difference between the market value of
the land converted into stock-in-trade as on 1st October, 1987 and
the cost incurred by the petitioner which came to a figure of Rs. 55,87,591.
Having regard to the total built-up area of 37,411 sq. ft., the ‘capital gains’
per sq. ft. was computed at Rs. 149.36 on a pro-rata basis. Accordingly,
having regard to the area of 10,960 sq. ft. sold, the ‘capital gains’ was
determined at Rs. 16,36,986. Along with the return of income, a computation of
income as well as an audit report in terms of section 44AB of the Act were also
filed. The A.O. completed the assessment u/s 143(3) of the Act assessing the
petitioner at the income of Rs. 17,85,560.

 

For the A.Y. 1993-94, as in the previous A.Y., income was computed both
under the head ‘profits and gains of business or profession’ as well as under
the head ‘capital gains’ for 12 flats sold during the relevant previous year.
The return was accompanied by the tax audit report as well as the profit and
loss account and balance sheet. The A.O. completed the assessment u/s 143(3)
assessing the petitioner at an income of Rs. 17,30,230. It is stated that in
the assessment order the A.O. specifically noted that income from ‘long-term
capital gains’ was declared in terms of section 45(2) of the Act.

 

The petitioner’s return of income for the A.Y. 1994-95 was processed u/s
143(1)(a) of the Act and an intimation was issued on 30th March,
1995.

 

For the A.Y. 1995-96, the petitioner filed its return declaring income
under both heads, i.e., ‘income from business’ and ‘capital gains’. The income
of the petitioner was computed in a similar manner as in the earlier years with
similar disclosures in the tax audit report, profit and loss account and
balance sheet furnished along with the return. In the course of the assessment
proceedings, the petitioner furnished details of flats sold as well as the
manner of computing profit in terms of section 45(2). The assessment for the
A.Y. 1995-96 was completed u/s 143(3) of the Act determining the taxable income
at Rs. 1,32,930.

 

According to the petitioner, it received on 8th March, 2000  four notices, all dated 25th
February, 2000, issued u/s 148 of the Act for the four assessment years, i.e.,
1992-93 to 1995-96.

 

The reasons recorded for each of the assessment
years were identical save and except the assessment details and figures. The
A.O. broadly gave four reasons to justify initiation of re-assessment
proceedings. Firstly, the petitioner was not justified in assuming that the
market value of the stock adopted as on 1st October, 1987 would
continue to remain static in the subsequent years. In other words, the closing
stock of the land should have been valued at the market price as on the date of
closing of accounts for the year concerned. This resulted in undervaluation of
closing stock and consequent reduction of profit.

 

Secondly, even though the petitioner might have entered into agreements and
sold certain flats, the ownership of the land continued to remain with the
petitioner. The whole of the land under the ownership of the petitioner
constituted its stock-in-trade and it should have been valued at the market
price as on the date of closing of accounts for the year concerned. Thus, the
assessee had suppressed the market price of the closing stock, thereby reducing
the profit.

 

Thirdly, for the purpose of computing the ‘capital gains’ in terms of
section 45(2) of the Act, the petitioner was not justified in taking the cost
of the entire land; rather, the petitioner ought to have taken only a fraction
of the original cost of Rs. 3,00,000. Thus, there was inflation of cost.
Lastly, in terms of section 45(2), the ‘capital gains’ arising on conversion of
the land into stock-in trade ought to have been assessed only in the year in
which the land was sold or otherwise transferred. As the land was not conveyed
to the co-operative society, the petitioner was not justified in offering to
tax the ‘capital gains’ in terms of section 45(2) of the Act on the basis of
the flats sold during each of the previous years relevant to the four A.Y.s
under consideration.

 

The Court admitted the writ petition for final hearing.

 

The petitioner submitted that it had fully complied with the requirement of
section 45(2) of the Act and the capital gains arising on the conversion of the
land into stock-in-trade was offered and rightly assessed to tax in the years
in which the flats were sold on the footing that on the sale of the flat there
was also a proportionate sale of the land. This methodology adopted by the
petitioner is in accordance with law. It was also submitted that it is not
correct to think that any profit arises out of the valuation of the closing
stock. In this connection, reliance was placed on a decision of the Supreme
Court in Chainrup Sampatram vs. CIT, 24 ITR 481.

 

The Petitioner also referred to a decision of this Court in CIT vs.
Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred
for having the land vacated would certainly amount to cost of improvement which
is an allowable expenditure.

 

The case of the Revenue was that the A.O. after recording the sequence of
events from acquiring the property vide the deed of conveyance dated 23rd
April, 1980 noted that the assessee had converted part of the property
into stock-in-trade on 1st October, 1987 with a view to construct
flats. On the date of conversion into stock-in-trade, the value thereof was
determined at Rs. 66,29,365. Up to A.Y.1991-92 there was no construction. After
the building was constructed, the constructed flats were sold to various
customers. On the sale of flats, the assessee reduced the proportionate market
value of the land as on 31st March, 1989, in the same ratio as the
area of the flat sold bore to the total constructed area. However, the assessee
valued the closing stock at market price prevailing as on 1st
October, 1987. According to the A.O., the closing stock should have been valued
at the market price on the close of each accounting year. This resulted in
undervaluation of closing stock and consequent reduction of profit.

 

Secondly, land as an asset is separate and distinct from the building. The
building was shown as a work in progress in the profit and loss account
prepared by the assessee and filed with the return. Even after construction of
the building and sale of flats, the stock, i.e., the land was still under the
ownership of the assessee. Ownership of land was not transferred. As the land
continued under the ownership of the assessee, its value could not be reduced
on the plea that a flat was sold. The whole of the land under ownership of the
assessee constituted its stock-in-trade and it should have been valued at the
market price as on the date of closing of the accounts for the year under
consideration. Therefore, the A.O. alleged that the assessee had suppressed the
market price of the closing stock, thus reducing the profit.

 

The third ground given was regarding computation of ‘capital gains’
furnished with the return of income. The A.O. noted that the total capital
gains as on 1st October, 1987 was arrived at by deducting the cost
of the land as on 1st October, 1987, i.e., Rs. 10,41,774, from the
fair market value of the land, i.e., Rs. 66,29,365, which came to Rs.
55,87,591. According to the A.O., the assessee made deduction of the cost
incurred for the entire land whereas only a fraction of the said land was
converted into stock-in-trade where construction was done.

 

The A.O. worked out that the cost of the converted piece of land was only
Rs. 13,260. He arrived at this figure by deducting Rs. 2,86,740, which was the
value of the tenanted property from the cost of the property, i.e., Rs.
3,00,000. Thus, he alleged that there was inflation of cost by Rs. 10,28,514
(Rs. 10,41,774 – Rs.13,260).

 

The last ground given by the A.O. was regarding offering of long-term
capital gain by the assessee. He noted that for the purpose of computation of
long-term capital gain, the assessee estimated the fair market value of the
land converted to stock as on 1st October, 1987 at Rs. 66,29,365
which was reduced by the cost incurred as on 1st October, 1987,
i.e., Rs. 10,74,774. However, the A.O. also noted that the method of
computation of cost was not clear in view of the fact that the whole of the
land with tenanted structures was purchased for Rs. 3,00,000. The A.O. further
noted the methodology adopted by the assessee for computation of long-term
capital gain. According to him, the assessee had worked out the difference
between the fair market value of the land converted to stock and the cost and
thereafter divided it by the total permissible built-up area. The quotient was
identified by the assessee as capital gains per sq. ft. The assessee thereafter
multiplied the built-up area of individual flats sold with such quotient and
claimed it to be the ‘capital gains’ for the year under consideration. By
adopting such a computation, the assessee was claiming sale of land in
different years in the same ratio as the area of flat sold bore to the total
permissible FSI area. But this calculation was not accepted by the A.O.
primarily on the ground that land as a stock was different from the flats.
Selling of flats did not amount to selling of proportionate quantity of land.

 

The Court held that u/s 45(2) of the Act, ‘capital gains’ for land should
be considered in the year when land was sold or otherwise transferred by the
assessee. Though flats were sold, ownership of the land continued to remain
with the assessee. ‘Capital gains’ would be chargeable to tax only in the year
when the land was sold or transferred to the co-operative society formed by the
flat purchasers and not in the year when individual flats were sold.

 

The Court accepted the contention of the petitioner that the A.O. proceeded
on the erroneous presumption that stock-in-trade had to be valued at the
present market value. In Chainrup Sampatram (Supra), the Supreme
Court had held that it would be wrong to assume that the valuation of the
closing stock at market rate has for its object the bringing into charge any
appreciation in the value of such stock. The true purpose of crediting the
value of unsold stock is to balance the cost of those goods entered on the
other side of the account so that the cancelling out of the entries relating to
the same stock from both sides of the account would leave only the transactions
on which there had been actual sales in the course of the year showing the
profit or loss actually realised on the year’s trading. While anticipated loss
is taken into account, anticipated profit in the shape of appreciated value of
the closing stock is not brought into the account as no prudent trader would
care to show increased profit before its actual realisation. This is the theory
underlying the rule that the closing stock has to be valued at cost or market
price whichever is lower and it is now generally accepted as an established
rule of commercial practice and accountancy. In such circumstances, taking the
view that profits for income tax purposes are to be computed in conformity with
the ordinary principles of commercial accounting unless such principles have
been superseded or modified by legislative enactments, the Supreme Court held
that it would be a misconception to think that any profit arises out of
valuation of the closing stock.

 

With regard to the third ground, i.e., computation of ‘capital gains’, the
Court held that the cost incurred included not only the sale price of the land,
i.e., Rs. 3,00,000, but also the expenditure incurred by way of stamp duty and
registration charges amounting to Rs. 44,087. That apart, the assessee had
incurred a further sum of Rs. 9,92,427 in getting the entire property vacated.
The contention of the A.O. that there was inflation of cost is not correct.
Thus, for computing the income under the head ‘capital gains’, the full value
of consideration received as a result of transfer of the capital asset shall be
deducted by the expenditure incurred in connection with such transfer, cost of
acquisition of the asset and the cost incurred in improvement of the asset. The
expression ‘the full value of the consideration’ would mean the fair market
value of the asset on the date of such conversion. The meaning of the
expressions ‘cost of improvement’ and ‘cost of acquisition’ are explained in
sections 55(1) and 55(2) of the Act, respectively.

 

The expression ‘capital asset’ occurring in sub-section (1) of section 45
is defined in sub-section (14) of section 2. ‘Capital asset’ means property of
any kind held by an assessee whether or not connected with his business or
profession as well as any securities held by a foreign institutional investor,
but does not include any stock-in-trade, consumable stores or raw materials,
personal effects, etc.

 

Again, the word ‘transfer’ occurring in sub-section (1) of section 45 has
been defined in section 2(47) of the Act. As per this definition, ‘transfer’ in
relation to a capital asset includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein, or compulsory acquisition of
the asset, or in case of conversion of the asset by the owner into
stock-in-trade of the business carried on by him, such conversion or any
transaction involving the allowing of possession of any immovable property to
be taken or retained in part performance of a contract, or any transaction
whether by way of becoming a member of or acquiring shares in a co-operative
society, etc. which has the effect of transferring or enabling the enjoyment of
any immovable property.

 

In the case of Miss Piroja C. Patel (Supra), the court held
that on eviction of the hutment dwellers from the land in question, the value
of the land increases and therefore the expenditure incurred for having the
land vacated would certainly amount to cost of improvement.

 

Thus, the cost incurred on stamp duty, etc., together with the cost
incurred in carrying out eviction of the hutment dwellers would certainly add
to the value of the asset and thus amount to cost of improvement which is an
allowable deduction from the full value of consideration received as a result of
the transfer of the capital asset for computing the income under the head
‘capital gains’.

 

Insofar as the fourth ground is concerned, the A.O. has taken the view that
long-term capital gains arising out of sale or transfer of land would be
assessed to tax only in the year in which the land is sold or otherwise
transferred by the assessee. Opining that land as a stock is a different item
of asset than a flat, the A.O. held that ownership of land continued to remain
with the assessee notwithstanding the sale of flats. Therefore, he was of the view
that ‘capital gains’ would be chargeable to tax only in the year when the land
is sold or otherwise transferred to the co-operative society formed by owners
of the flats and not in the year when individual flats are sold.

 

According to the A.O., the assessee had erred in
offering to tax ‘capital gains’ in the year when the individual flats were
sold, whereas such ‘capital gains’ could be assessed to tax only when the land
was transferred to the co-operative society formed by the flat purchasers. If
the assessee had offered to tax as ‘capital gains’ in the assessment years
under consideration that which should have been offered to tax in the
subsequent years, it is beyond comprehension as to how a belief can be formed
that income chargeable to tax for the assessment year under consideration had
escaped assessment. That apart, the flat purchasers by purchasing the flats had
certainly acquired a right or interest in the proportionate share of the land
but its realisation is deferred till the formation of the
co-operative society by the owners of the flats and eventual transfer of the
entire property to the co-operative society.

 

The Court also referred to various other decisions, namely, Prashant
S. Joshi [324 ITR 154 (Bom)], Additional CIT vs. Mohanbhai Pamabhai, 165 ITR
166 (SC), Sunil Siddharthbhai vs. CIT, 156 ITR 509 (SC) and
Addanki Narayanappa vs. Bhaskara Krishnappa, AIR 1966 SC 1300, wherein
the Court held that what is envisaged on the retirement of a partner is merely
his right to realise his interest and to receive its value. What is realised is
the interest which the partner enjoys in the assets during the subsistence of
the partnership by virtue of his status as a partner and in terms of the
partnership agreement. Therefore, what the partner gets upon dissolution of the
partnership or upon retirement from the partnership is the realisation of a
pre-existing right or interest. The Court held that there was nothing strange
in the law that a right or interest should exist in praesenti but
its realisation or exercise should be postponed. Applying the above principle,
the Court held that upon purchase of the flat, the purchaser certainly acquires
a right or interest in the proportionate share of the land but its realisation
is deferred till formation of the co-operative society by the flat owners and
transfer of the entire property to the co-operative society.

 

Thus, on an overall consideration of the entire matter, the Court held
that there was no basis or justification for the A.O. to form a belief that any
income of the assessee chargeable to tax for the A.Y.s under consideration had
escaped assessment within the meaning of section 147 of the Act. The reasons
rendered could not have led to formation of any belief that income had escaped
assessment within the meaning of the aforesaid provision.

 

Therefore, in the facts and circumstances of the case, the impugned
notices issued u/s 148 of the Act dated 25th February, 2000 were set
aside and quashed.

 

 

 

ITP-3(1)(4) vs. M/s Everlon Synthetics Pvt. Ltd. [ITA No. 6965/Mum/2013; Date of order: 23rd May, 2016; A.Y.: 2006-07; Mum. ITAT] Section 147: Reassessment – Within four years – Regular assessment u/s 143(3) – Issue of one-time settlement with bank and consequential relief granted by the bank was discussed and deliberated by the AO – Reopening notice issued on same ground is bad in law

12. The Pr.
CIT-3 vs. M/s Everlon Synthetics Pvt. Ltd. [Income tax Appeal No. 1039 of 2017] Date of order:
4th November, 2019 (Bombay High
Court)

 

ITP-3(1)(4) vs.
M/s Everlon Synthetics Pvt. Ltd. [ITA No. 6965/Mum/2013; Date of order: 23rd
May, 2016; A.Y.: 2006-07; Mum. ITAT]

 

Section 147:
Reassessment – Within four years – Regular assessment u/s 143(3) – Issue of
one-time settlement with bank and consequential relief granted by the bank was
discussed and deliberated by the AO – Reopening notice issued on same ground is
bad in law

 

The assessee is
engaged in the business of manufacture of polyester and texturised / twisted
yarn and management consultancy. The assessee filed its return of income on 29th
November, 2006. The AO completed the assessment on 24th November,
2008 u/s 143(3) of the Act, accepting ‘Nil’ return of income as filed by the
assessee. Thereafter, on 28th March, 2011, a notice was issued u/s
148 of the Act to the assessee, seeking to re-open the assessment. The reason
in support of the re-opening notice was in regards to cessation of liability
u/s 41 of the Act.

 

The assessee
objected to the re-opening notice on the ground that it was based on ‘change of
opinion’ and, therefore, without jurisdiction. However, this contention was not
accepted by the AO. This resulted in the assessment order dated 30th
August, 2011 u/s 143(3) r/w/s 147 of the Act, adding the sum of Rs. 1.37 lakhs
to the income of the assessee by holding it to be a revenue receipt.

 

Aggrieved by
this order, the assessee company filed an appeal to the CIT(A). The CIT(A)
recorded a finding of fact that during the course of regular scrutiny
proceedings u/s 143(3), the issue of the assessee’s one-time settlement with
the bank and consequential relief granted by the bank was discussed and
deliberated by the AO. In fact, queries were raised by the AO with regard to
the one-time settlement; the assessee, by its communication dated 11th
November, 2008, responded with complete details of the one-time settlement with
its bankers, including the details of relief / waiver obtained. The CIT(A) held
the settlements to the extent of Rs. 2.06 crores as revenue receipt, as
reflected in the Profit and Loss Account, and the fact that the amount of Rs.
1.37 crores was transferred to the capital account was deliberated upon by the
AO before passing an order u/s 143(3) of the Act. Thus, the CIT(A) held that
the re-opening notice was without jurisdiction as it was based on a mere change
of opinion.

 

Being aggrieved
by the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal held that the issue of one-time settlement with the bank and the
treatment being given to the benefit received on account of settlement, was a
subject matter of consideration by the AO. It found on facts that during the
regular assessment proceedings, the issue of one-time settlement was inquired
into by the AO and the appellant had furnished all details in its letter dated
11th November, 2008. It also records the fact that the impugned
notice was only on the basis of audit objection and the AO had not applied his
mind before issuing a re-opening notice and merely acted on the dictate of the
audit party. In the circumstances, the Tribunal upheld the view of the CIT(A)
that the re-opening notice is without jurisdiction.

 

Aggrieved by
the order of the ITAT, the Revenue filed an Appeal to the High Court. The
Revenue submitted that the issue of one-time settlement found no mention in the
assessment order passed u/s 143(3). Thus, no opinion was formed by the AO while
passing the regular assessment order. Therefore, there was no bar on him on
issuing the re-opening notice. It was, thus, submitted that the issue requires
consideration and the appeal be admitted.

 

The Court
observed that during the scrutiny assessment proceedings, queries were raised
and the petitioner filed a detailed response on 11th November, 2008
giving complete details to the AO of the one-time settlement and the manner in
which it was treated. This finding of fact was not shown to be perverse in any
manner. The re-opening notice is not based on any fresh tangible material but
proceeds on the material already on record with the AO and also considered before
passing the order u/s 143(3). The submission
of Revenue that consideration of an issue by the AO must be reflected in the
assessment order, is in the face of the decision of the Court in GKN
Sinter Metals Ltd. vs. Ms Ramapriya Raghavan 371 ITR 225 which approved
the view of the Hon’ble Gujarat High Court in CIT vs. Nirma Chemicals
Ltd., 305 ITR 607, to the effect that an assessment order cannot deal
with all queries which the AO had raised during the assessment proceedings. The
AO restricts himself only to dealing with those issues where he does not agree
with the assessee’s submission and gives reasons for it. Otherwise, it would be
impossible to complete all the assessments within the time limit available.

 

Thus, the Court held that once a query is raised during assessment
proceedings and the assessee has responded to the query to the satisfaction of
the AO, then there has been due consideration of the same. Therefore, issuing
of the re-opening notice on the same facts which were considered earlier,
clearly amounts to a change of opinion and is, thus, without jurisdiction.
Accordingly, the Revenue appeal is dismissed.

 

 

Reopening – Beyond four years – Assessment completed u/s 143(3) – A mere bald assertion by the A.O. that the assessee has not disclosed fully and truly all the material facts is not sufficient – Reopening is not valid

6. M/s. Anand Developers vs. Asst.
Commissioner of Income Tax Circle-2(1) [Writ Petition No. 17 of 2020] Date of order: 18th February,
2020 Bombay High Court (Goa Bench)

 

Reopening –
Beyond four years – Assessment completed u/s 143(3) – A mere bald assertion by
the A.O. that the assessee has not disclosed fully and truly all the material
facts is not sufficient – Reopening is not valid

 

The petition challenged the
notice dated 29th March, 2019 issued u/s 148 of the Income-tax Act,
1961 and the order dated 17th December, 2019 disposing of the
assessee / petitioner’s objections to the reopening of the assessment in
pursuance of the notice dated 29th March, 2019.

 

The
petitioner had submitted its return of income within the prescribed period for
A.Y. 2012-13 declaring total income of Rs. 62,233. The case was selected for
scrutiny through CASS and notice was issued u/s 143(2) of the Act and served
upon the petitioner on 28th August, 2013. Based on the details
furnished by the petitioner, the A.O. passed the assessment order dated 16th
March, 2015 u/s 143(2).

 

It was the case of the
petitioner that vide its own letter dated 20th February, 2015
in the course of the assessment proceedings before the A.O., it had itself
submitted that a few flats may have been allotted to persons in violation of
Clause 10(f) of section 80IB. It was also contended that this ought not to be
regarded as any breach of the provisions of section 80IB; in any case, this
ought not to be regarded as any breach of the provisions of section 80IB in
its entirety and at the most benefit may be denied in respect of the
transfers made in breach of Clause 10(f) of section 80IB.

 

The petitioner submitted that
through this letter it had made true and complete disclosures in the course of
the assessment proceedings itself. It was upon consideration of these
disclosures that the A.O. finalised the assessment order of 16th
March, 2015 u/s 143(3). Under the circumstances, merely on the basis of a
change of opinion, the A.O. lacked jurisdiction to issue notice u/s 148 seeking
to reopen the assessment. Since there was absolutely no failure to make true
and full disclosures, there was no jurisdiction to issue such notice u/s 148
after the expiry of four years from the date of assessment.

 

The Department submitted that
since the petitioner had admitted vide its letter dated 20th
February, 2015 that it had violated the provisions of section 80IB and further
failed to make true and full disclosures, there was absolutely no
jurisdictional error in issuing the impugned notice or making the impugned
order.

 

The High Court observed that
the factum of the address of the letter dated 20th February,
2015 is indisputable because the respondents had themselves not only referred
to it but also quoted from it in the show cause notice dated 17th December,
2019 issued to the petitioner along with the impugned order of the same date by
which the objections of the petitioner to the reopening of the assessment came
to be rejected. Even the impugned order dated 17th December, 2019
rejecting the petitioner’s objections makes a specific reference to the
petitioner’s letter of 20th February, 2015 submitted during the
assessment proceedings u/s 143(3). Both the show cause notice dated 17th
December, 2019 and the impugned order of the same date specifically state that
the petitioner in the course of the assessment proceedings had furnished a list
of flat-owners to whom flats were sold in the project ‘Bay Village’.

 

The notice and the impugned
order proceed to state that upon perusal of this list, coupled with the letter
dated 20th February, 2015, it transpires that there was non-compliance
on the part of the petitioner with the provisions of section 80IB at least
insofar as some of the sales were concerned. Since it is virtually an admitted
fact that the petitioner had submitted a list of the flat-owners and vide
its letter dated 20th February, 2015 pointed out that there may be
breach insofar as the sale of some of the flats are concerned, it cannot be
said by the respondents that there was no truthful or complete disclosure on
the part of the petitioners in the course of the assessment proceedings itself.

 

The Court observed that
merely making of a bald statement that the assessee had not disclosed fully and
truly all the material facts is really never sufficient in such matters. In the
present case as well, apart from such a bald assertion, no details have been
disclosed as to the material which was allegedly not disclosed either truly or
fully. Rather, the record indicates that the entire list of flat-owners was
disclosed. Further, vide the same letter disclosures were made in
relation to the sale transactions and it was even suggested that some of the
transactions may not be compliant with the provisions of Clause 10(f) of
section 80IB. Clearly, therefore, the Department had failed to make out any
case that there was no true and full disclosure.

 

Further, section 147 of the
IT Act empowers the A.O. who has reason to believe that any income chargeable
to tax has escaped assessment for any A.Y. to reassess such income, no doubt
subject to the provisions of sections 148 to 153 of the Act. The proviso
to section 147, however, makes clear that where an assessment under sub-section
(3) of section 143 has been made for the relevant A.Y., no action shall be
taken u/s 147 after the expiry of four years from the end of the relevant
assessment year unless any income chargeable to tax has escaped assessment for
such assessment year by reason of failure on the part of the assessee, inter
alia ‘to disclose fully and truly all material facts necessary for its
assessment for that assessment year’. This means that normally, the limitation
period for re-assessment u/s 147 is four years. However, in a case where the
assessment has been made u/s 143(3) where, inter alia, the assessee
fails to disclose fully and truly all material facts necessary for assessment
for that assessment year, re-assessment can be made even beyond the period of
four years in terms of section 148. Therefore, in order to sustain a notice
seeking to reopen assessment beyond the normal period of four years it is
necessary for the respondents to establish, at least prima facie, that
there was failure to disclose fully and truly all material facts necessary for
the assessment for that assessment year.

 

In the present case, the
respondents have failed to establish this precondition even prima facie.
Rather, the material on record establishes that there were full and true
disclosures of all material facts necessary for the assessment for the A.Y.
2012-13. Despite this, the impugned notice seeking to reopen the assessment for
that year has been issued beyond the normal period of four years. On this short
ground, the impugned notice dated 29th March, 2019 and the impugned
order dated 17th December, 2019 were quashed and set aside. The
Court relied on the decisions of the Division Bench of this Court in the case
of Mrs. Parveen P. Bharucha [(2012) 348 ITR 325] and Zuari Foods and
Farms Pvt. Ltd. (WP No. 1001 of 2007 decided on 11th April, 2018).

 

The Court
observed that the decision in Calcutta Discount Co. Ltd. [(1961) 41 ITR
191 (SC)] in fact assists the case of the petitioner rather than the
respondents. In that decision, the Hon’ble Supreme Court has held that it is
the duty of the assessee to disclose fully and truly all primary relevant
facts, and once all primary facts are before the assessing authority, he
requires no further assistance by way of disclosure and it is for him to decide
what inference of facts can be reasonably drawn and what legal inferences have
ultimately to be drawn. However, if there are some reasonable grounds for
thinking that there had been under-assessment as regards any primary facts
which could have a material bearing on the question of under-assessment, that
would be sufficient to give jurisdiction to the ITO to issue notice for
re-assessment. In the present case, as noted earlier, there is absolutely no
reference to any alleged material facts which the petitioner failed to disclose
in the course of the assessment proceedings. Rather, the impugned notice refers
to the list as well as the letter issued by the petitioner itself which is
sought to be made the basis for the reopening of the assessment. For the
aforesaid reasons the petition is allowed and the impugned notice dated 29th
March, 2019 and the impugned order dated 17th December, 2019
are quashed and set aside. 

 

M/s JSW Steel Ltd. vs. Dy. CIT; [ITA Nos. 33, 34 & 35/Mum/2015; Date of order: 28th September, 2016; A.Y.: 2008-09; Mum. ITAT] Section 153A – Once the assessment gets abated, the original return filed u/s 139(1) is replaced by the return filed u/s 153A – It is open to both parties, i.e., the assessee and Revenue, to make claims for allowance or disallowance – (Continental Warehousing Corporation 374 ITR 645 Bom. referred)

16. The Pr. CIT-2 vs.
M/s JSW Steel Ltd. (Successor on amalgamation of JSW Ispat Steel Ltd.) [Income
tax Appeal No. 1934 of 2017] Date of order: 5th
February, 2020 (Bombay High Court)

 

M/s JSW Steel Ltd. vs.
Dy. CIT; [ITA Nos. 33, 34 & 35/Mum/2015; Date of order: 28th
September, 2016; A.Y.: 2008-09; Mum. ITAT]

 

Section
153A – Once the assessment gets abated, the original return filed u/s 139(1) is
replaced by the return filed u/s 153A – It is open to both parties, i.e., the
assessee and Revenue, to make claims for allowance or disallowance – (Continental
Warehousing Corporation 374 ITR 645 Bom. referred)

 

The assessee is a widely-held public
limited company engaged in various activities, including production of sponge
iron, galvanised sheets and cold-rolled coils through its steel plants located
at Dolve and Kalmeshwar in Maharashtra. The company filed its original return
of income on 30th September, 2008 for A.Y. 2008-09 declaring loss at
Rs. 104,17,70,752 under the provisions of section 139(1) of the Act.

 

During pendency of the assessment
proceedings, a search was conducted u/s 132 on the ISPAT group of companies on
30th November, 2010. Following the search, a notice u/s 153A was
issued. In response, the assessee filed return of income declaring total loss
at Rs. 419,48,90,102 on 29th March, 2012. In this return, the
assessee made a new claim for treating gain on pre-payment of deferred VAT /
sales tax on the Net Present Value (NPV) basis for an amount of Rs.
318,10,93,993 as ‘capital receipt’.

 

This new / fresh claim of the assessee
was disallowed by the A.O. while finalising the assessment u/s 143(3) r/w/s
153A of the Act by considering the same as ‘revenue receipt’ instead of
‘capital receipt’. The reasoning given by the A.O. was that the assessee had
availed of the sales tax deferral scheme and the State Government had permitted
premature re-payment of deferred sales tax liability on the NPV basis.
Therefore, according to the A.O., the assessee treated this as capital receipt
even though the same was credited to the assessee’s profit and loss account
being the difference between the deferred sales tax and its NPV.

 

However, the
primary question that arose before the A.O. was whether the claim which was not
made in the earlier original return of income filed u/s 139(1) could be filed
and considered in the subsequent return filed by the assessee in pursuance of
notice u/s 153A of the Act (which was consequent to the search action conducted
u/s 132). The A.O. held that the assessee could not raise a new claim in the
return filed u/s 153A which was not raised in the original return of income
filed u/s 139(1). Thereafter, the claim was disallowed and was treated as
‘revenue receipt’.

 

Aggrieved by the aforesaid order, the
assessee preferred an appeal before the CIT(A) who upheld the order passed by
the A.O.

 

Still aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal held that the assessee could lodge new
claims, deductions, exemptions or relief (which the assessee had failed to
claim in his regular return of income) which came to be filed by the assessee
under the provisions of section 153A of the Act.

 

But the Revenue, aggrieved by the order
of the ITAT, filed an appeal to the High Court. The Court held that in view of
the second proviso to section 153A of the Act, once assessment got
abated, it meant that it was open for both the parties, i.e., the assessee as
well as Revenue, to make claims for allowance, or to make disallowance, as the
case may be. That apart, the assessee could lodge a new claim for deduction,
etc. which remained to be claimed in his earlier / regular return of income.
This is so because assessment was never made in the case of the assessee in
such a situation. It is fortified that once the assessment gets abated, the
original return which had been filed loses its originality and the subsequent return
filed u/s 153A of the Act (which is in consequence to the search action u/s
132) takes the place of the original return. In such a case, the return of
income filed u/s 153A(1) would be construed to be one filed u/s 139(1) and the
provisions of the said Act shall apply to the same accordingly. If that be the
position, all legitimate claims would be open to the assessee to raise in the
return of income filed u/s 153A(1).

 

The Court further emphasised on the
judgment passed by it in the case of Continental Warehousing (Supra) which
also explains the second proviso to section 153A(1). The explanation is
that pending assessment or reassessment on the date of initiation of search if
abated, then the assessment pending on the date of initiation of search shall
cease to exist and no further action with respect to that assessment shall be
taken by the A.O. In such a situation, the assessment is required to be
undertaken by the A.O. u/s 153A(1) of the Act.

 

In view of the second proviso to
section 153A (1), once assessment gets abated, it is opened both ways, i.e.,
for the Revenue to make any additions apart from seized material, even regular
items declared in the return can be subject matter if there is doubt about the
genuineness of those items, and similarly the assessee also can lodge new
claims, deductions or exemptions or relief which remained to be claimed in the
regular return of income, because assessment was never made in the case /
situation. Hence, the appeal filed by the Revenue is liable to be dismissed.

 

DCIT-1(1) vs. M/s Ami Industries (India) Pvt. Ltd. [ITA No. 5181/Mum/2014; Date of order: 28th August, 2016; A.Y.: 2010-11; Mum. ITAT] Section 68 – Share application money – The assessee had furnished PAN, ITR of the investors to prove genuineness of the transactions – For credit worthiness of the creditors, the bank accounts of the investors showed that they had funds – Not required to prove ‘source of the source’ – Addition is justified [PCIT vs. NRA Iron & Steel 412 ITR 161 (SC) distinguished]

15. The Pr. CIT-1 vs. M/s Ami
Industries (India) Pvt. Ltd. [Income tax Appeal No. 1231 of 2017] Date of
order: 29th January, 2020 (Bombay High Court)

 

DCIT-1(1) vs. M/s Ami Industries
(India) Pvt. Ltd. [ITA No. 5181/Mum/2014; Date of order: 28th
August, 2016; A.Y.: 2010-11; Mum. ITAT]

 

Section 68 – Share application money –
The assessee had furnished PAN, ITR of the investors to prove genuineness of
the transactions – For credit worthiness of the creditors, the bank accounts of
the investors showed that they had funds – Not required to prove ‘source of the
source’ – Addition is justified [PCIT vs. NRA Iron & Steel 412 ITR 161
(SC) distinguished]

 

In the assessment proceedings, the A.O.
noted that the assessee had disclosed funds from three Kolkata-based companies
as share application money amounting to Rs. 34.00 crores (Parasmani Merchandise
Pvt. Ltd. Rs. 13.50 crores; Ratanmani Vanijya Pvt. Ltd. Rs. 2.00 crores and
Rosberry Merchants Pvt. Ltd. Rs. 18.50 crores).

The A.O. issued a
notice to the assessee on the ground that the whereabouts of the above
companies were doubtful and their identity could not be authenticated. Thus,
the genuineness of the companies became questionable.

 

After considering the reply submitted
by the assessee, the A.O. treated the aforesaid amount of Rs. 34 crores as
money from unexplained sources and added the same to the income of the assessee
as unexplained cash credit u/s 68 of the Act.

 

Aggrieved by the order, the assessee
preferred an appeal before the CIT(A). The CIT(A) held that the assessee had
discharged its burden u/s 68 by proving the identity of the creditors; the
genuineness of the transactions; and the credit worthiness of the creditors.
Consequently, the first appellate authority set aside the addition made by the
A.O.

 

Being aggrieved by the order of the
CIT(A), the Revenue filed an appeal to the Tribunal. The Tribunal noted that
the A.O. had referred the matter to the investigation wing of the Department at
Kolkata for making inquiries about the three creditors from whom share
application money was received. Though the report from the investigation wing
was received, the Tribunal noted that the same was not considered by the A.O.
despite mentioning of the same in the assessment order; besides, he had not
provided a copy of the same to the assessee. In the report by the investigation
wing, it was mentioned that the companies were in existence and had filed income
tax returns for the previous year under consideration but the A.O. recorded
that these creditors had very meagre income as disclosed in their returns of
income and, therefore, he doubted the credit-worthiness of the three creditors.

 

Finally, the Tribunal held that as per
the provisions of section 68 of the Act, for any cash credit appearing in the
books of an assessee, the assessee is required to prove the following: (a)
Identity of the creditor, (b) Genuineness of the transaction, and (c)
Credit-worthiness of the party. In this case, the assessee had already proved
the identity of the share applicants by furnishing their PAN and copies of
their IT returns filed for the A.Y. 2010-11.

 

Regarding the genuineness of the
transaction, the assessee had filed a copy of the bank accounts of the three
share applicants from which the share application money was paid and the copy
of the account of the assessee in which the said amount was deposited and which
had been received by RTGS. Regarding the credit-worthiness of the parties, it
has been proved from the bank accounts of the three companies that they had the
funds to make payments for the share application money and a copy of the
resolution passed in the meetings of their Boards of Directors. Regarding ‘the source
of the source’, the A.O. has already made inquiries through the DDI
(Investigation), Kolkata and collected all the materials required which proved
‘the source of the source’, though as per the settled legal position on this
issue the assessee need not prove ‘the source of the source’. The A.O. has not
brought any cogent material or evidence on record to indicate that the
shareholders were benamidars or fictitious persons, or that any part of
the share capital represented the company’s own income from undisclosed
sources. Accordingly, the order of the CIT(A) was upheld.

 

Aggrieved by the order of the ITAT, the
Revenue filed an appeal to the High Court. The Revenue submitted that it cannot
be said that the assessee had discharged the burden to prove the
credit-worthiness of the three parties. Further, it contented that the assessee
is also required to prove ‘the source of the source’. In this connection, the
Department placed reliance on a decision of the Supreme Court in Pr. CIT
vs. NRA Iron & Steel Pvt. Ltd.

 

The assessee submitted that from the
facts and circumstances of the case, it is quite evident that the assessee has
discharged its burden to prove the identity of the creditors, the genuineness
of the transactions and the credit-worthiness of the creditors. The legal
position is very clear inasmuch as the assessee is only required to explain the
source and not ‘the source of the source’. The decision of the Supreme Court in
NRA Iron & Steel Pvt. Ltd. (Supra) is not the case law for
the aforesaid proposition. In fact, the said decision nowhere states that the
assessee is required to prove ‘the source of the source’. Further, it is also a
settled proposition that the assessee is not required to prove ‘the source of
the source’. In fact, this position has been clarified in the recent decision
in Gaurav Triyugi Singh vs. Income Tax Officer-24(3)(1)2 dated 22nd
January, 2020.

 

The Court found that the identity of
the creditors was not in doubt. The assessee had furnished the PAN, copies of
the income tax returns of the creditors, as well as copies of the bank accounts
of the three creditors in which the share application money was deposited in
order to prove the genuineness of the transactions. Insofar as the
credit-worthiness of the creditors was concerned, the Tribunal had recorded
that the bank accounts of the creditors showed that they had funds to make
payments for share application money and, in this regard, resolutions were also
passed by the Board of Directors of the three creditors. Although the assessee
was not required to prove ‘the source of the source’, nonetheless, the Tribunal
took the view that the A.O. had made inquiries through the investigation wing
of the Department at Kolkata and collected all the materials which proved ‘the
source of the source’.

 

In NRA Iron & Steel Pvt. Ltd.
(Supra), the A.O. had made an independent and detailed inquiry,
including survey of the investor companies. The field report revealed that the
shareholders were either non-existent or lacked credit-worthiness. It is in
these circumstances that the Supreme Court had held that the onus to establish
the identity of the investor companies was not discharged by the assessee. The
aforesaid decision is, therefore, clearly distinguishable on the facts of the
present case. Therefore, the first appellate authority had returned a clear
finding of fact that the assessee had discharged its onus of proving the
identity of the creditors, the genuineness of the transactions and the
credit-worthiness of the creditors, which finding of fact stood affirmed by the
Tribunal. There are, thus, concurrent findings of fact by the two lower
appellate authorities. Under these circumstances, the appeal is dismissed.

 

[Appellate Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January, 2017; A.Y.: 2003-04; Bench ‘F’ Mum.] Appeal u/s 260A – Penalty u/s 271(1)(c) – The question relating to non-striking off of the inapplicable portion in the section 271(1)(c) show cause notice goes to the root of the lis and is a jurisdictional issue – Issue can be raised first time before High Court – Penalty cannot be imposed for alleged breach of one limb of section 271(1)(c) of the Act while proceedings are initiated for breach of the other limb of section 271(1)(c) – Penalty deleted

7. Ventura Textiles Ltd. vs. CIT –
Mumbai-11 [ITA No. 958 of 2017 Date
of order: 12th June, 2020 (Bombay
High Court)

 

[Appellate
Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January,
2017; A.Y.: 2003-04; Bench ‘F’ Mum.]

 

Appeal u/s 260A – Penalty u/s 271(1)(c) – The question relating to
non-striking off of the inapplicable portion in the section 271(1)(c) show
cause notice goes to the root of the lis and is a jurisdictional issue –
Issue can be raised first time before High Court – Penalty cannot be imposed
for alleged breach of one limb of section 271(1)(c) of the Act while
proceedings are initiated for breach of the other limb of section 271(1)(c) –
Penalty deleted

 

The issue involved in the
above appeal related to the imposition of penalty of Rs. 22,08,860 u/s
271(1)(c) of the Act by the A.O. on account of disallowance of Rs. 62,47,460
claimed as a deduction u/s 36(i)(vii) on account of bad debt and subsequently
claimed as a deduction u/s 37 as expenditure expended wholly and exclusively
for the purpose of business.

 

The assessee company filed
its ROI declaring total loss at Rs. 4,66,68,740 for A.Y. 2003-04. During the
assessment proceedings, it was found amongst other things that the assessee had
debited Rs. 62,47,460 under the head ‘selling and distribution expenses’ and
claimed it as bad debt in the books of accounts, thus claiming it as a
deduction u/s 36(1)(vii). Subsequently it was found that the aforesaid amount
was paid to M/s JCT Ltd. as compensation for the supply of inferior quality of
goods. Thus, the A.O. held that the amount of Rs. 62,47,460 claimed as bad debt
was not actually a debt and therefore it was not allowable as a deduction u/s 36(1)(vii).
The A.O. further held that the said claim was also not admissible even u/s
37(1), with the observation that payment made to M/s JCT Ltd. was not wholly
and exclusively for business purposes but for extraneous considerations. In
view thereof, the assessee’s claim was rejected. The A.O. initiated penalty
proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of
income.

The A.O. issued notice u/s
274 r/w/s 271 on the same day, i.e., on 28th February, 2006, to the
assessee to show cause as to why an order imposing penalty should not be made
u/s 271. It may, however, be mentioned that in the pertinent portion of the
notice the A.O. did not strike off the inapplicable portion.

 

The assessee had challenged
the disallowance of bad debt along with other disallowances in the assessment
order by filing an appeal before the CIT(A) who, by an order dated 14th
November, 2012, confirmed the disallowance of bad debt while deleting other
disallowances.

 

In the penalty proceedings,
the A.O. took the view that the assessee’s claim was not actually bad debt but
represented payment made to M/s JCT Ltd. which was also not incurred wholly and
exclusively for the purposes of business. Thus, by the order dated 14th
February, 2014, the A.O. held that by making an improper and unsubstantiated
claim of bad debt of Rs. 62,47,460, the assessee had wilfully reduced its
incidence of taxation, thereby concealing its income as well as furnishing
inaccurate particulars of income. Therefore, the A.O. imposed the minimum
penalty quantified at Rs. 24,99,200 which included penalty on another
disallowance.

 

The CIT(A) deleted the
penalty on the other disallowance. Regarding the penalty levied on Rs.
62,47,460 claimed as bad debt in the assessment proceedings, the CIT(A) held
that the assessee had made a wrong claim by submitting inaccurate particulars
of income by claiming bad debt which was not actually a debt and also not an
expenditure allowable u/s 37(1). Thus, it was held that the assessee had
wilfully submitted inaccurate particulars of income which had resulted in
concealment. Therefore, the penalty amount of Rs. 62,47,460 levied was upheld.

 

The Tribunal upheld the order
of the CIT(A) and rejected the appeal of the assessee. According to the
Tribunal, it was rightly held by the CIT(A) that the assessee had made a wrong
claim by submitting inaccurate particulars of income by claiming a bad debt
which was not actually a debt and also not an expenditure allowable u/s 37(1).
Therefore, the finding recorded by the CIT(A) that the assessee had wilfully
submitted inaccurate particulars of income which had resulted in concealment
was affirmed.

 

Before the High Court the
first contention was raising a question of law for the first time before the
High Court though it had not been raised before the lower authorities; the
Court referred to a series of decisions, including of the Supreme Court in
Jhabua Power Limited (2013) 37 Taxmann.com 162 (SC) and of the Bombay
High Court in Ashish Estates & Properties (P) Ltd. (2018) 96
Taxmann.com 305 (Bom.) wherein it is observed that it would not
preclude the High Court from entertaining an appeal on an issue of jurisdiction
even if the same was not raised before the Tribunal.

 

The Court further noted and
analysed the two limbs of section 271(1)(c) of the Act and also the fact that
the two limbs, i.e., concealment of particulars of income and furnishing
inaccurate particulars of income, carry different connotations. The Court further
noted that the A.O. must indicate in the notice for which of the two limbs he
proposes to impose the penalty and for this the notice has to be appropriately
marked. If in the printed format of the notice the inapplicable portion is not
struck off, thus not indicating for which limb the penalty is proposed to be
imposed, it would lead to an inference as to non-application of mind.

 

Therefore, the question
relating to non-striking off of the inapplicable portion in the show cause
notice which is in printed format, thereby not indicating therein as to under
which limb of section 271(1)(c) the penalty was proposed to be imposed, i.e.,
whether for concealing the particulars of income or for furnishing inaccurate
particulars of such income, would go to the root of the lis. Therefore,
it would be a jurisdictional issue. Being a jurisdictional issue, it can be
raised before the High Court for the first time and adjudicated upon even if it
was not raised before the Tribunal.

 

The Hon. Court relied on
decisions of SSA’s Emerald Meadows (2016) 73 Taxmann.com 241 (Karnataka);
Manjunath Cotton & Ginning Factory 359 ITR 565 (Kar.); and
Samson Pernchery (2017) 98 CCH 39 (Bom.) wherein the issue was
examined, i.e. the question as to justification of the Tribunal in deleting the
penalty levied u/s 271(1)(c). It was noted that the notice issued u/s 274 was
in a standard proforma without having struck off the irrelevant clauses
therein, leading to an inference as to non-application of mind.

 

A similar view had been taken
in Goa Coastal Resorts & Recreation Pvt. Ltd. (2019) 106 CCH 0183
(Bom.); New Era Sova Mine (2019) SCC OnLine Bom. 1032; as well as Shri
Hafeez S. Contractor (ITA Nos.796 and 872 of 2016 decided on 11th
December, 2018).

 

On the facts of the present
case, the Court noticed that the statutory show cause notice u/s 274 r/w/s 271
of the Act proposing to impose penalty was issued on the same day when the
assessment order was passed, i.e., on 28th February, 2006. The said
notice was in printed form. Though at the bottom of the notice it was mentioned
‘delete inappropriate words and paragraphs’, unfortunately, the A.O. omitted to
strike off the inapplicable portion in the notice. Such omission certainly
reflects a mechanical approach and non-application of mind on the part of the
A.O. However, the moot question is whether the assessee had notice as to why
penalty was sought to be imposed on it?

 

The Court observed that in
the present case, the assessment order and the show cause notice were both
issued on the same date, i.e., on 28th February, 2006, and if they
are read in conjunction, a view can reasonably be taken that notwithstanding
the defective notice, the assessee was fully aware of the reason as to why the
A.O. sought to impose penalty. It was quite clear that the penalty proceedings
were initiated for breach of the second limb of section 271(1)(c), i.e., for
furnishing inaccurate particulars of income. The purpose of a notice is to make
the noticee aware of the ground(s) of notice. In the present case, it would be
too technical and pedantic to take the view that because in the printed notice
the inapplicable portion was not struck off, the order of penalty should be set
aside even though in the assessment order it was clearly mentioned that penalty
proceedings u/s 271(1)(c) had been initiated separately for furnishing
inaccurate particulars of income. Therefore, this contention urged by the
appellant / assessee was rejected.

 

Having held so, the Court
went on to examine whether in the return of income the assessee had furnished
inaccurate particulars. As already discussed above, for the imposition of
penalty u/s 271(1)(c) either concealment of particulars of income or furnishing
inaccurate particulars of such income are the sine qua non. In the
instant case, the penalty proceedings u/s 271(1)(c) were initiated on the
ground that the assessee had furnished inaccurate particulars of income.

 

The Court observed that in
the assessment proceedings the explanation of the assessee was not accepted by
the A.O. by holding that the subsequent payment made to M/s JCT Ltd. would not
be covered by section 36(1)(vii) since the amount claimed as bad debt was
actually not a debt. Thereafter, the A.O. examined whether such payment would
be covered u/s 37(1) as per which an expenditure would be allowable as a
deduction if it pertains to that particular year and has been incurred wholly
and exclusively for the purpose of business. The A.O. held that the assessee’s
claim was not admissible even u/s 37(1) as the circumstances indicated that the
payments were not made wholly and exclusively for business purposes. While
disallowing the claim of the assessee, the A.O. took the view that since the
assessee had furnished inaccurate particulars of income, penalty proceedings
u/s 271(1)(c) were also initiated separately.

 

The Court noticed that in the
statutory show cause notice the A.O. did not indicate as to whether penalty was
sought to be imposed for concealment of income or for furnishing inaccurate
particulars of income, although in the assessment order it was mentioned that
penalty proceedings were initiated for furnishing inaccurate particulars of
income. In the order of penalty, the A.O. held that the assessee had concealed
its income as well as furnished inaccurate particulars of income.

 

But concealment of
particulars of income was not the charge against the appellant, the charge was
of furnishing inaccurate particulars of income. As discussed above, it is trite
that penalty cannot be imposed for alleged breach of one limb of section 271(1)(c)
while penalty proceedings are initiated for breach of the other limb of the
same section. This has certainly vitiated the order of penalty. In the appeal,
the CIT(A) took a curious view, that submission of inaccurate particulars of
income resulted in concealment, thus upholding the order of penalty. This
obfuscated view of the CIT(A) was affirmed by the Tribunal.

 

While the charge against the
assessee was of furnishing inaccurate particulars of income whereas the penalty
was imposed additionally for concealment of income, the order of penalty as
upheld by the lower appellate authorities could be justifiably interfered with,
yet the Court went on to examine whether there was furnishing of inaccurate
particulars of income by the assessee in the first place because that was the
core charge against the assessee.

 

The Court referred to the
decision of the Supreme Court in Reliance Petroproducts Pvt. Ltd. 322 ITR
158 (SC) wherein it was held that mere making of a claim which is not
sustainable in law by itself would not amount to furnishing inaccurate
particulars regarding the income of the assessee. Therefore, such claim made in
the return cannot amount to furnishing inaccurate particulars of income.

The Court noted that this
decision was followed by the Bombay High Court in CIT vs. M/s Mansukh
Dyeing & Printing Mills, Income Tax Appeal No. 1133 of 2008, decided on 24th
June, 2013. In CIT vs. DCM Ltd., 359 ITR 101, the Delhi
High Court applied the said decision of the Supreme Court and further observed
that law does not debar an assessee from making a claim which he believes is
plausible and when he knows that it is going to be examined by the A.O. In such
a case, a liberal view is required to be taken as necessarily the claim is
bound to be carefully scrutinised both on facts and in law. Threat of penalty
cannot become a gag and / or haunt an assessee for making a claim which may be
erroneous or wrong. Again, in CIT vs. Shahabad Co-operative Sugar Mills
Ltd., 322 ITR 73, the Punjab & Haryana High Court held that the
making of a wrong claim is not at par with concealment or giving of inaccurate
information which may call for levy of penalty u/s 271(1)(c) of the Act.

 

In view of the above, in the
present case it is quite evident that the assessee had declared the full facts;
the full factual matrix of facts was before the A.O. while passing the
assessment order. It is another matter that the claim based on such facts was
found to be inadmissible. This is not the same thing as furnishing inaccurate
particulars of income as contemplated u/s 271(1)(c).

 

Thus, on an overall
consideration, the appeal was allowed and the order of penalty as affirmed by
the appellate authorities was set aside. 

 

 

 

 

 

Section 69C – Unexplained expenditure – Bogus purchases – Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus

5. Pr. CIT-13 vs. Vaman International Pvt. Ltd. [Income tax Appeal
No. 1940 of 2017]

Date of order: 29th January, 2020

ACIT vs. Vaman International Pvt.
Ltd. [ITA No. 794/Mum/2015; Date of order: 16th November, 2016;
A.Y.: 2010-11; Bench ‘F’]

 

Section 69C – Unexplained
expenditure – Bogus purchases – Mere reliance by the A.O. on information
obtained from the Sales Tax Department, or the statements of two persons made
before the Sales Tax Department, would not be sufficient to treat the purchases
as bogus

 

The assessee is a company engaged
in the business of trading and sale of furniture and allied items on wholesale
basis. The A.O. doubted the expenditure of Rs. 4,75,42,385 stated to be on
account of purchases from two parties, viz., Impex Trading Co. (for an amount
of Rs. 2,90,80,292) and Victor Intertrade Pvt. Ltd. (Rs. 1,84,62,093). The A.O.
acted on the basis of information received from the office of the
Director-General of Income Tax (Investigation), Mumbai and from the Sales Tax
Department that in the list of bogus sales parties the names of the two
aforesaid parties were included which rendered the purchase transaction
doubtful.

 

The A.O. observed that the
assessee did not produce lorry receipts and other related documents to reflect
the movement of goods sold and purchased which were crucial for determining the
genuineness of the purchase transaction. In the absence thereof, the A.O. added
the said amounts to the total income of the assessee u/s 69C by treating the
expenditure as bogus purchases.

 

The first appellate authority
held that such addition by the A.O. could not be sustained. Accordingly, he deleted
the addition of Rs. 4,75,42,385. The Tribunal, by an order dated 16th
November, 2016, upheld the order of the first appellate authority and dismissed
the appeal of the Revenue.

 

On further appeal, the Hon. High
Court observed that section 69C deals with unexplained expenditure. But it also
contains a deeming provision which states that if an assessee incurs any
expenditure in the relevant previous year but offers no explanation about the
source of such expenditure or part thereof, or if the explanation provided is
not satisfactory to the A.O., then the amount covered by such expenditure or
part thereof shall be deemed to be the income of the assessee; and once it is
so deemed, the same shall not be allowed as a deduction under any head of
income.

 

The Court relied on the Gujarat
High Court decision in Krishna Textiles vs. CIT, 310 ITR 227  wherein it has been held that u/s 69C the
onus is on the Revenue to prove that the income really belongs to the assessee.

 

The Hon. Court observed that the
A.O. did not doubt the sales and stock records maintained by the assessee. By
submitting confirmation letters, copies of invoices, bank statements, payment
orders, payment by account payee cheques, etc., the assessee had proved that
the sales and purchases had taken place. By highlighting the fact that all the
payments against the purchases were made through banking channels by way of
account payee cheques, the first appellate authority held that the source of
expenditure was fully established by the assessee beyond any doubt. He had
further recorded that during the appellate proceedings the assessee had
furnished complete quantitative details of the items of goods purchased during
the year under consideration and their corresponding sales. Mere reliance by
the A.O. on information obtained from the Sales Tax Department, or the
statements of two persons made before the Sales Tax Department, would not be
sufficient to treat the purchases as bogus and thereafter to make the addition
u/s 69C.

 

The Tribunal also held that if
the A.O. had doubted the genuineness of the purchases, it was incumbent upon
him to have caused further inquiries in the matter to ascertain the genuineness
or otherwise of the transactions and to have given an opportunity to the
assessee to examine / cross-examine those two parties vis-a-vis the
statements made by them before the Sales Tax Department. Without causing such
further inquiries in respect of the purchases, it was not open to the A.O. to
make the addition u/s 69C of the Act. 


_____________________________________________________________________________________________________

 

 

Errata

IN THE HIGH COURTS, March 2020 

 

We regret to point out a typographical error
on Page 51 of the caption issue in respect of the following decision:

The Pr CIT -1 v/s M/s. Ami Industries (India)
P Ltd [ Income tax Appeal no 1231 of 2017 dt : 29/01/2020
(Bombay HighCourt)].

where “Addition is
not justified “ should be replaced in place of “Addition is justified” and be
read accordingly.

Condonation of delay – 458 days – Belated appeal against section 263 order before ITAT – Appeal filed after consequential assessment order and dismissal of appeal – Delay condoned on payment of costs

4. Procter & Gamble Hygiene and Healthcare Ltd. vs.
Commissioner of Income Tax-8 [Income tax Appeal No. 1210 of 2017]

Date of order: 4th February, 2020

 

Procter & Gamble Hygiene
& Healthcare Ltd. vs. CIT, Range-8 [ITA No. 4866/Mum/2015; Date of order:
30th November, 2016; A.Y.: 2008-09; Bench ‘H’ Mum.]

 

Condonation of delay – 458 days –
Belated appeal against section 263 order before ITAT – Appeal filed after
consequential assessment order and dismissal of appeal – Delay condoned on
payment of costs

 

The issue involved in the appeal
is condonation of delay in filing of the appeal u/s 254 of the Act by the
appellant before the Tribunal. The A.O. passed the assessment order on 1st
February, 2012 in which certain deductions were allowed u/s 80IC. The
CIT-8, Mumbai was of the view that the A.O. had wrongly allowed deduction u/s
80IC. He was of the further view that the assessment order so made was
erroneous and prejudicial to the interest of the Revenue. Accordingly, he
invoked jurisdiction u/s 263 and vide an order dated 31st
March, 2014 set aside the assessment order by directing the A.O. to pass a
fresh assessment order by taxing the interest income earned by the petitioner
on the amount covered by the deduction sought for u/s 80IC under the head
‘income from other sources’. The A.O. passed the consequential assessment order
dated 9th June, 2014. It was against this assessment order that the
assessee preferred an appeal before the CIT(A)-17.

 

However, by
the appellate order dated 28th August, 2015 the first appellate
authority dismissed the appeal of the assessee, holding that it was not
maintainable as the A.O. had only given effect to the directions given to him
by the CIT, relying on the decision in Herdillia Chemicals Ltd. vs. CIT
[1997] 90 Taxman 314 (Bom.). Aggrieved by this, the petitioner
preferred an appeal before the Tribunal which was registered as ITA No.
5096/Mum/2015. In the meanwhile, the assessee, having realised that the order
passed by the jurisdictional administrative commissioner u/s 263 of the Act had
remained unchallenged, belatedly filed an appeal before the Tribunal which was
registered as ITA No. 4866/Mum/2015. In the process there was a delay of 450
days. The assessee filed an application before the Tribunal for condonation of
delay in filing ITA No. 4866/Mum/2015 and in support thereof also filed an
affidavit dated 12th September, 2016 explaining the delay. The
assessee stated in its affidavit that the appellant did not prefer an appeal as
the Learned CIT had set aside the assessment so that the issues involved would
be agitated before the A.O. or the appellate authorities, i.e., against the
order of the A.O.

 

Both the appeals were heard
together and by a common order dated 30th November, 2016 both the
appeals were dismissed. The appeal ITA No. 5096/Mum/2015 was dismissed on the
ground that there was no question of any consequential assessment as per the
revision order. The assessee’s appeal was rightly dismissed by the CIT(A).

 

Insofar as
ITA No. 4866/Mum/2015 was concerned, the same was dismissed as being
time-barred as the delay in filing the appeal was not condoned. The ITAT
observed that the assessee had clearly, and presumably only on the basis of a
legal opinion, taken a conscious decision not to appeal against the revision
order. No reasonable, much less sufficient, cause had been advanced for
condonation of delay. It also stated that there was no basis for the said bona
fide belief which is stated as the reason for the assessee having not
preferred an appeal against the revision order.

 

The
Hon. High Court observed that when the Tribunal had entertained the appeal
arising out of the consequential assessment, it was not justified on the part
of the Tribunal to have rejected the appeal filed by the appellant against the
order passed by the jurisdictional administrative commissioner u/s 263 of the
Act because that was the very foundation of the subsequent assessment
proceedings. Therefore, in the interest of justice the delay in filing appeal
was condoned and the said appeal was directed to be heard on merit by the
Tribunal. The appellant was directed to pay costs of Rs. 25,000 to the
Maharashtra State Legal Services Authority.

Complaint filed u/s 276C (1) of the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal proceedings kept in abeyance

3. M/s Beaver Estates Pvt.
Ltd vs. The Assistant Commissioner of Income Tax Corporate Circle 1(1);
OP(Crl.) No. 400 of 2019

Date of order: 23rd
October, 2019

(Kerala High Court)

 

[Complaint filed CC No. 65/2015
of Additional Chief Judicial Magistrate (E&O), Ernakulam]

 

Complaint filed u/s 276C (1) of
the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal
proceedings kept in abeyance

 

In the instant case, the
prosecution was launched u/s 276C(1) of the Act for wilful attempt to evade tax
before the Additional Chief Judicial Magistrate’s Court (Economic Offences),
Ernakulam. The first petitioner is a company and the second petitioner is the
Managing Director of the said company.

 

The plea of the petitioners was
that they have filed an appeal before the statutory authority challenging the
assessment and that the decision in the appeal has got a bearing on the
prosecution against them; therefore, the criminal proceedings pending against
them may be kept in abeyance till the disposal of the appeal. The petitioners
contended that if the statutory appeal filed by them under the Act is allowed,
it would knock down the very basis of the prosecution against them and,
therefore, the criminal proceedings may be ordered to be kept in abeyance.

 

The Hon. Court noticed that
section 276C provides the punishment for wilful attempt to evade tax, penalty
or interest. Section 278B provides for offences by companies. In the instant
case, the prosecution is u/s 276C(1) for wilful attempt to evade tax. The
decision of the statutory appellate authority regarding the assessment and
computation of tax would have a bearing on the prosecution against the
petitioners.

 

The Court relied on the decision
of the Apex Court in the case of K.C. Builders vs. Assistant Commissioner
of Income Tax (2004) 2 SCC 731 wherein it held that the levy of
penalties and prosecution u/s 276C are simultaneous and, hence, once the penalties
are cancelled on the ground that there is no concealment, the quashing of
prosecution u/s 276C is automatic. In the instant case, the prosecution is u/s
276C(1) for wilful attempt to evade tax. The decision of the statutory
appellate authority regarding the assessment and computation of tax would have
a bearing on the prosecution against the petitioners.

 

Similarly, in Commissioner
of Income Tax vs. Bhupen Champak Lal Dalal AIR 2001 SC 1096, the Court
had observed that the prosecution in criminal law and proceedings arising under
the Act are undoubtedly independent proceedings and, therefore, there is no
impediment in law for the criminal proceedings to proceed even during the
pendency of the proceedings under the Act. However, a wholesome rule will
have to be adopted in matters of this nature where courts have taken the view
that when the conclusions arrived at by the appellate authorities have a
relevance and bearing upon the conclusions to be reached in the case,
necessarily one authority will have to await the outcome of the other
authority.

 

The Department relied on the
decision of the Apex Court in Sasi Enterprises vs. Assistant Commissioner
of Income Tax (2014) 5 SCC 139. The Court held that the decision in Sasi
Enterprises (Supra) has got no application to the present case because
the prosecution against the petitioners is for committing the offence u/s 276C
and not for the offence u/s 276CC.


The
Court held that the decision of the statutory appellate authority regarding the
assessment and computation of tax would have a bearing on the prosecution
against the petitioners for wilful attempt to evade tax. Therefore, the
Additional Chief Judicial Magistrate (Economic Offences), Ernakulam was
directed to keep in abeyance all further proceedings against the petitioners in
the criminal case till the disposal of the appeal filed before the Commissioner
of Income Tax (Appeals), Kochi.

VVF Ltd. vs. DCIT-39; [ITA. No. 9030/Mum/2010; Date of order: 31st August, 2016; A.Y.: 2007-08; Bench: F; Mum. ITAT] Section 37 – Business expenditure – Salary paid to director – The expenditure may be incurred voluntarily and without any necessity – So long as it is incurred for the purposes of business, the same is allowable as deduction

The Pr. CIT-3 vs. VVF Ltd.
[Income tax Appeal No. 1671 of 2017]

Date of order: 4th
March, 2020

(Bombay High Court)

 

VVF Ltd. vs. DCIT-39; [ITA. No.
9030/Mum/2010; Date of order: 31st August, 2016; A.Y.: 2007-08;
Bench: F; Mum. ITAT]

 

Section 37 – Business expenditure
– Salary paid to director – The expenditure may be incurred voluntarily and
without any necessity – So long as it is incurred for the purposes of business,
the same is allowable as deduction

 

A search and seizure action u/s
132(1) of the Act was carried out by the Department in the case of the assessee
and its group associates, including its directors, on 3rd January,
2008. In A.Y. 2002-03, the A.O. made an addition of Rs. 13,00,000 which
represented the salary paid to Shri Faraz G. Joshi, its Director.

 

The A.O. disallowed the salary
paid to Shri Joshi primarily relying on a statement recorded during the course
of the search u/s 132(4) of the Act. The A.O. noted that in the course of the
search it was gathered that Shri Joshi was not attending office on a day-to-day
basis and no specific duties were assigned to him except some consultation.

 

The assessee had pointed out
before the A.O. that Shri Joshi was a whole-time Director and was performing
his duties as Director of the assessee-company and was being paid remuneration
in accordance with the limits prescribed under the Companies Act, 1956.

 

The A.O. disagreed with the
assessee and concluded that the payment made to Shri Joshi in the form of
salary was an expenditure not expended wholly and exclusively for the purposes
of business and, therefore, disallowed the same u/s 37(1) of the Act.

 

The CIT(A) also sustained the
action of the A.O. by noting that Shri Joshi had specifically admitted in the
statement recorded at the time of the search that he was not attending office
for the last six years and no specific duties were assigned to him.

 

The Tribunal held that the
assessee has appropriately explained the statement rendered by Shri Joshi. His
answer has to be understood in the context of the question raised. In this
context, attention has been drawn to the relevant portion of the statement,
which reads as under:

 

‘Q.9: What is the nature of
business conducted by the company, i.e., M/s VVF Ltd.?

A.9:  The company deals in Oleo-Chemicals. We also
work on contract basis for Jhonson & Jhonson (sic)
& Racket – Colman (sic). (Johnson & Johnson; Reckitt-Coleman.)

Q.10: Who looks after the day to
day activity of that company and what are the duties assigned to you?

A.10: I am not aware about the
person who looks after the day to day business activity. Since last 6 years I
am not attending the office nor any duty is assigned to me except
consultation.’

 

It has been explained that the
answer by Shri Joshi was in response to the question put to him which was as to
whether he was involved in the day-to-day management of the company. It was in
this context that the answer was given. However, it is sought to be pointed out
that the said Director was rendering consultation and advisory services which,
in fact, is the role of a Director. Therefore, it has to be understood that
services were indeed being rendered by the said Director to the assessee
company. The Tribunal observed that the overemphasis by the Revenue on the
wordings of the reply of Shri Joshi has led to a wrong conclusion.

 

Further, Shri
Joshi was one of the two main Directors of the assessee company and that
historically such salary payments had been allowed as a deduction. In fact,
there is no negation to the plea of the assessee that for A.Ys. 2009-10 to
2012-13, such salary payments stood allowed and such assessments have been
completed even after the search carried out on 3rd January, 2008. It
is judicially well settled that it is for the assessee to decide whether any
expenditure should be incurred in the course of carrying on of its business. It
is also a well-settled proposition that expenditure may be incurred voluntarily
and without any necessity and so long as it is incurred for the purposes of
business, the same is allowable as deduction even though the assessee may not
be in a position to show compelling necessity of incurring such expenditure. In
support of the aforesaid proposition, reliance can be placed on the judgment of
the Hon’ble Supreme Court in the case of Sasoon J. David & Co. P.
Ltd., 118 ITR 261 (SC).

 

Being aggrieved, the Revenue
filed an appeal to the High Court. The Court held that in response to the
specific query the answer given by Shri Joshi was quite reasonable and no
adverse inference could be drawn therefrom. Besides, the Tribunal also found that
in all the assessments made up to the date of the search, the salary payment to
Shri Joshi was allowed. Even post-search, from A.Y. 2009-10 onwards where
assessments have been made u/s 143(3) of the Act, salary paid to Shri Joshi was
not disallowed.

 

The Supreme Court in the case of Sassoon
J. David & Co. Pvt. Ltd. vs. CIT (Supra), examined the expression
‘wholly and exclusively’ appearing in section 10(2)(xv) of the Income tax Act,
1922 which corresponds to section 37 of the Act. Sub-section (1) of section 37
says that any expenditure not being expenditure of the nature described in
sections 30 to 36 and not being in the nature of capital expenditure or
personal expenses of the assessee, laid out or expended wholly and exclusively
for the purposes of the business or profession, shall be allowed in computing
the income chargeable under the head ‘Profits and gains of business or
profession’.

 

It was observed that the expression ‘wholly
and exclusively’ appearing in the said section does not mean ‘necessarily’.
Ordinarily, it is for the assessee to decide whether any expenditure should be
incurred in the course of his business. Such expenditure may be incurred
voluntarily and without any necessity. If it is incurred for promoting the
business and to earn profits, the assessee can claim deduction u/s 10(2)(xv)
even though there was no compelling need for incurring such expenditure. The
fact that somebody other than the assessee is also benefited by the expenditure
should not come in the way of an expenditure being allowed by way of deduction
u/s 10(2)(xv) of the Act. In the light of the above, the Revenue appeal was
dismissed.

 


M/s Sunshine Import and Export Pvt. Ltd. vs. DCIT; [ITA No. 4347/Mum/2015; Date of order: 9th September, 2016; Bench: B; A.Y.: 2008-09 to 2010-11; Mum. ITAT] Section 133A – Survey – Statement of directors of company recorded u/s 133A – No incriminating evidence and material – No evidentiary value – Any admission made in course of such statement cannot be made basis of addition

The Pr. CIT-4 vs. M/s Sunshine Import and Export Pvt. Ltd. [Income
tax Appeal Nos. 937, 1121 & 1135 of 2017]

Date of order: 4th March, 2020

(Bombay High Court)

 

M/s Sunshine Import and Export
Pvt. Ltd. vs. DCIT; [ITA No. 4347/Mum/2015; Date of order: 9th September,
2016; Bench: B; A.Y.: 2008-09 to 2010-11; Mum. ITAT]

 

Section 133A – Survey – Statement
of directors of company recorded u/s 133A – No incriminating evidence and
material – No evidentiary value – Any admission made in course of such
statement cannot be made basis of addition

 

The assessee is engaged in the
business of manufacturing and trading in precious and semi-precious stones and
jewellery. It has two Directors, Shri Paras Jain and Shri Saurabh Garg. A
survey u/s 133A of the Act was carried out in respect of the assessee. During
the post-survey proceedings, the statement of one of the Directors, Shri
Saurabh Garg, was recorded. He was reported to have stated that the assessee
company provided only bill entries and there was no actual transaction of
purchase and sale. Subsequently, the statement of the other Director, Shri
Paras Jain, was also recorded. From the latter statement, the A.O. came to the
conclusion that he was a person of no means and drew the inference that the
assessee was engaged in the activity of issuing accommodation bills for the
sale and purchase of diamonds, apart from acting as a dummy for importers.
Holding the transactions as not reliable, the A.O. rejected the books of
accounts of the assessee company. He assessed 2% as the rate of commission of
the assessee on account of import purchases, i.e., for acting as a dummy. That
apart, commission @ 0.75% on sales bills was also assessed.

 

The CIT(A) confirmed the action
of the A.O., whereupon the assessee filed an appeal to the Tribunal.

 

The Tribunal held that the
assessee is mainly engaged in the import of diamonds and their sale in local
markets to exporters. The import of diamonds is done through customs
authorities and banking channels in India. The import of diamonds undergoes the
appraisal process by appraisers appointed by the custom authorities. The officers
appointed by the Government of India verify physically each and every parcel of
diamonds in order to ascertain the quality, quantity, rate, value and place of
origin against the declaration made by the importers. Further, all the
transactions of purchase, sales, import are made through account payee cheques
and not a single payment is made to any party by way of cash. All the purchase
and sales transactions are carried out with reputed parties in the diamond
trade and all the payments received from debtors are through account payee
cheques; similarly, all payments to creditors are through account payee
cheques.

 

As such, the A.O. cannot
allegedly consider the import of goods as providing accommodation bills in the
market when physical delivery of goods was confirmed by the other arm of
government, i.e., the custom authorities. From the record it is noted that the
sales were made to reputed exporters who are assessed to tax and their
identities are known to the Income Tax Department. The customers are registered
under state VAT laws. The company has received payments against sales proceeds
by account payee cheques. The company has also purchased from local parties to
whom payment was made by account payee cheques. To discharge the onus of
proving the transactions as genuine and to substantiate that all purchases and
sales made are genuine, the assessee has submitted various documents and
submissions; copies of bank statement for the relevant year; ledger copies of
various purchases from parties for A.Y. 2008-09 and 2009-10; photo copies of
purchase invoices of parties for A.Y. 2008-09 and 2009-10; the relevant copies
of the daily stock register; confirmation from various sale parties; details of
interest received from various parties; details of unsecured loans along with
confirmation; and so on. These documents prove that the assessee is not engaged
in issuing accommodation bills and acting as a dummy for importing diamonds.
Thus, the contention of the A.O. that the bills issued by the assessee are all
accommodation bills is wrong. Just on the basis of one recorded statement he
cannot reach the conclusion that the assessee has issued accommodation bills
and reject the books of accounts of the assessee.

 

Being aggrieved by the order of
the ITAT, the Revenue filed an appeal to the High Court. The Court held that in
arriving at such a finding, the Tribunal had noted that the survey party did
not find any incriminating evidence and material that could establish the stand
taken by the A.O. There was no disputing the fact that no incriminating
evidence was found on the day of the survey. It was also noted that merely on
the basis of the statement of one of the directors, Shri Saurabh Garg, and
that, too, recorded after 20 to 25 days of the survey, could not be sufficient
for bringing into assessment and making any addition to the income without
further supporting or corroborative evidence. The statement recorded u/s 133A
of the Act not being recorded on oath, cannot have any evidentiary value and no
addition can be made on the basis of such a statement.

 

In CIT
vs. S. Khader Khan Son 300 ITR 157, the Madras High Court had concluded
that a statement recorded u/s 133A of the Act has no evidentiary value and that
materials or information found in the course of survey proceedings could not be
a basis for making any addition; besides, materials collected and statements
obtained u/s 133A would not automatically bind the assessee. This was affirmed
by the Supreme Court by dismissing the civil appeal of the Revenue in CIT
vs. S. Khader Khan Son (Supra). In view of the above, the Revenue
appeal fails and is accordingly dismissed.

Rakesh Kumar Agarwal vs. ACIT-24(1); [ITA. No. 2881/Mum/2015; Date of order: 14th May, 2015; A.Y.: 2010-11; Mum. ITAT] Section 263 – Revision of orders prejudicial to Revenue – No revenue loss – Assessment was completed after detailed inquiry – Revision on same issue is not valid

17. The Pr. CIT-10 vs. Rakesh Kumar
Agarwal [Income tax Appeal No. 1740 of 2017] Date of order: 22nd January
2020 (Bombay High Court)

 

Rakesh Kumar Agarwal vs. ACIT-24(1);
[ITA. No. 2881/Mum/2015; Date of order: 14th May, 2015; A.Y.:
2010-11; Mum. ITAT]

 

Section 263 – Revision of orders
prejudicial to Revenue – No revenue loss – Assessment was completed after
detailed inquiry – Revision on same issue is not valid

 

The assessee is a builder and sells
plots of land on short-term as well as on long-term basis. For the A.Y. under
consideration, the assessee filed a return of income showing total income of
Rs. 7,47,25,768. During the assessment proceedings u/s 143 (3) of the Act, the
A.O. inquired into the accounts of the assessee and analysed the various claims
that had been made. The assessment proceedings were concluded by determining
the total assessed income of the assessee at Rs. 7,66,68,582.

 

However, the CIT invoked jurisdiction
u/s 263 of the Act on various discrepancies in the assessment order. Taking the
view that the order was erroneous inasmuch as it was prejudicial to the
interest of Revenue, the Commissioner of Income Tax set aside the assessment
order u/s 263 of the Act and directed the A.O. to pass a fresh order in the
light of the discussions made in the order passed u/s 263.

 

Aggrieved by this, the assessee
preferred an appeal before the Tribunal. The Tribunal took the view that the
CIT was not justified in invoking jurisdiction u/s 263 of the Act and set aside
the said order, allowing the appeal. Of the three issues, the Tribunal held
that the first issue did not result in any revenue loss and, therefore,
assumption of jurisdiction u/s 263 of the Act was not justified.

 

On the second issue relating to
non-disclosure of unaccounted cash of Rs. 6,85,000, the Tribunal held that the
said amount was already disclosed in the return of income filed by the
assessee. The said sum of Rs. 6.85 lakhs is part of the gross total amount of
Rs. 7,83,17,777. At the end of the assessment, the said amount was taxed by the
A.O. under the head ‘income from other sources’. Therefore, the Tribunal stated
that the Commissioner of Income Tax was not justified in treating the said
amount as part of undisclosed income and assuming jurisdiction u/s 263 when it
was already disclosed and assessed.

 

On the third issue, as regards
applicability of section 45(2), the Tribunal noticed that the CIT had accepted
applicability of the said provision and, therefore, it was held that there is
no error in the order of the A.O.

 

The Tribunal further held that an
inquiry was made by the A.O. into the disclosures made during the course of the
assessment proceedings by the assessee. When the issue was inquired into by the
A.O., the Commissioner ought not to have invoked jurisdiction u/s 263 of the
Act.

 

Being aggrieved by the order of the
ITAT, the Revenue filed an appeal to the High Court. The Court held that on a
thorough consideration of the matter and considering the provisions of section
263 of the Act, the impugned order passed by the Tribunal does not suffer from
any error or infirmity to warrant interference. The Department’s appeal was
dismissed.

 



Reopening of assessment – Beyond four years – Information from Investigation Wing – Original assessment completed u/s 143(3) – Primary facts disclosed – Reasons cannot be substituted

8. Gateway
Leasing Pvt. Ltd. vs. ACIT (1)(2) & Ors. [Writ Petition No. 2518 of 2019] A.Y.: 2012-13 Date of order: 11th March, 2020 (Bombay High Court)

[Appellate
Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January,
2017; A.Y.: 2003-04; Bench ‘F’ Mum.]

 

Reopening of assessment – Beyond four years
– Information from Investigation Wing – Original assessment completed u/s
143(3) – Primary facts disclosed – Reasons cannot be substituted

 

The petitioner is a company registered under
the Companies Act, 1956 engaged in the business of financing and investing
activities as a non-banking financial company registered with the Reserve Bank
of India.

 

Through this petition, the petitioner sought
quashing of the notice dated 31st March, 2019 issued u/s 148 of the
Act by the ACIT Circle 1(1)(2), Mumbai as well as the order dated 26th
August, 2019 passed by the DCIT Circle 1(1)(2), Mumbai, rejecting the
objections raised by the petitioner to the re-opening of its assessment.

 

For the A.Y. 2012-13 the petitioner had
filed return of income on 20th September, 2012 declaring total
income of Rs. 90,630. Initially, the return was processed u/s 143(1) of the
Act. But the case was later selected for scrutiny. During the course of
assessment proceedings, details of income, expenditure, assets and liabilities
were called for and examined. After examination of these details, the A.O.
passed an order u/s 143(3).

 

On 31st March, 2019 the A.O.
issued a notice u/s 148 stating that he had reasons to believe that the
petitioner’s income chargeable to tax for the A.Y. 2012-13 had escaped
assessment within the meaning of section 147. The petitioner sought the reasons
for issuing the said notice. It also filed return of income u/s 148, returning
the income at Rs. 90,630 as originally assessed by the A.O. u/s 143(3). By a
letter dated 31st May, 2019, the A.O. furnished the reasons for
re-opening of the assessment.

 

It was stated that information was received
from the Investigation Wing (I/W) of the Income Tax Department that a search
and seizure action was carried out on the premises of one Mr. Naresh Jain which
revealed that a syndicate of persons was acting in collusion and managing
transactions in the stock exchange, thereby generating bogus long-term capital
gains / bogus short-term capital loss and bogus business loss entries for
various beneficiaries.

 

From the materials gathered in the course of
the said search and seizure action, it was alleged that the petitioner had traded
in the shares of M/s Scan Steel Ltd. and was in receipt of Rs. 23,98,014 which
the A.O. believed had escaped assessment within the meaning of section 147. It
was also alleged that the petitioner had failed to disclose fully and truly all
material facts necessary for the assessment for the A.Y. 2012-13 for which the
notice u/s 148 was issued.

 

The petitioner submitted objections to
re-opening of assessment proceedings on 26th June, 2019. Referring
to the reasons recorded, it was contended on behalf of the petitioner that the
original assessment was completed u/s 143(3) where all the details of purchase
and sale of shares of M/s Scan Steels Ltd., also known as Clarus Infrastructure
Realties Ltd. (earlier known as Mittal Securities Finance Ltd.), were disclosed.
While denying that the petitioner had any dealing with the parties whose names
cropped up during the said search and seizure action, it was stated that the
purchase and sale of shares were done by the petitioner through a registered
broker of the Bombay Stock Exchange. Payment for the purchase of the shares was
made by cheque through the BSE at the then prevailing market price. Thus, there
was no apparent reason to classify the receipt of Rs. 23,98,014 as having
escaped assessment. Therefore, it was contended that the decision to re-open
assessment was nothing but change of opinion, which was not permissible in law.

 

The A.O. by his letter dated 26th
August, 2019 rejected the objections raised by the petitioner and stated that
the petitioner had furnished the details of purchase and other material facts
before the A.O. and the latter, in his assessment order, had totally relied on
the said submissions and accepted the same without cross-verification. It was
further stated that the challenge to the impugned notice was untenable.
Besides, the Act provided for a host of remedial measures in the form of
appeals and revisions. Finally, the Department justified issuance of the
impugned notice and re-opening of the assessment and made a reference to the
report of the I/W. As per the I/W, the petitioner had diluted its income by
adopting manufactured and pre-arranged transactions which were never disclosed
to the A.O. Such action was a failure on the part of the petitioner to make
full and true disclosure of all material facts. The petitioner’s contention
that all primary facts were disclosed were thus disputed. That apart, it was
contended that the Pr. CIT-1 had applied his mind and thereafter granted
approval to the issuance of notice u/s 148.

 

In its rejoinder, the petitioner submitted
that all details about the purchase and sale of shares of Mittal Securities
Ltd. were furnished. The A.O. was not required to give findings on each issue
raised during the course of the assessment proceedings. The A.O. had applied
his mind and granted relief to the petitioner in the assessment order.
Normally, when the submission of an assessee is accepted, no finding is given in
the assessment order.

 

The Hon’ble Court, after referring to
various decisions, observed that the grounds or reasons which led to formation
of the belief that income chargeable to tax has escaped assessment must have a
material bearing on the question of escapement of income of the assessee from
assessment because of his failure or omission to disclose fully and truly all
material facts. Once there exist reasonable grounds for the ITO to form the
above belief that would be sufficient to clothe him with jurisdiction to issue
notice.

 

However, sufficiency of the grounds is not
justifiable. The expression ‘reason to believe’ does not mean a purely
subjective satisfaction on the part of the ITO. The reason must be held in good
faith. It cannot be merely a pretence. It is open to the Court to examine
whether the reasons for the formation of the belief have a rational connection
with or a relevant bearing on the formation of the belief and are not
extraneous or irrelevant. To this limited extent, initiation of proceedings in
respect of formation of the belief that income chargeable to tax has escaped
assessment must have a material bearing on the question of escapement of income
of the assessee from assessment because of his failure or omission to disclose
fully and truly all material facts.

 

The Court further observed that it would be
evident from the material on record that the petitioner had disclosed the above
information to the A.O. in the course of the assessment proceedings. All
related details and information sought by the A.O. were furnished. Several
hearings took place in this regard after which the A.O. had concluded the
assessment proceedings by passing the assessment order u/s 143 (3). Thus it
would appear that the petitioner had disclosed the primary facts at its
disposal for the purpose of assessment. He had also explained whatever queries
were put to it by the A.O. with regard to the primary facts during the
hearings.

 

In such circumstances, it cannot be said that the petitioner did not
disclose fully and truly all material facts necessary for the assessment.
Consequently, the A.O. could not have arrived at the conclusion that he had
reasons to believe that income chargeable to tax had escaped assessment. In the
absence of the same, the A.O. could not have assumed jurisdiction and issued
the impugned notice u/s 148 of the Act. That apart, the A.O. has tried to
traverse beyond the disclosed reasons in the affidavit which is not
permissible. The same cannot be taken into consideration while examining the validity
of the notice u/s 148. The reasons which are recorded by the A.O. for re-opening an
assessment are the only reasons which can be considered when the formation of
the belief is impugned; such reasons cannot be supplemented subsequently by
affidavit(s). Therefore, in the light of the discussions, the attempt by the
A.O. to re-open the concluded assessment is not at all justified and
consequently the impugned notice cannot be sustained and the impugned order
dated 26th August, 2019 is also quashed.

 

DCIT (OSD)-8(2) vs. Hotel Leela Venture Ltd.; Date of order: 28th July, 2016; [ITA No. 617/Mum/2014; A.Y.: 2009-10; Mum. ITAT] Section 115JB of the Act – MAT – Forward foreign exchange contract entered into by assessee could not be considered as contingent in nature as it creates a continuing binding obligation on date of contract against assessee

14. The Pr. CIT-10 vs. Hotel Leela Venture Ltd. [Income tax Appeal No.
1097 of 2017] Date of order: 5th November, 2019 (Bombay High Court)

 

DCIT (OSD)-8(2) vs. Hotel Leela Venture Ltd.; Date of order: 28th
July, 2016; [ITA No. 617/Mum/2014; A.Y.: 2009-10; Mum. ITAT]

 

Section 115JB of the Act – MAT – Forward foreign exchange contract
entered into by assessee could not be considered as contingent in nature as it
creates a continuing binding obligation on date of contract against assessee

The assessee is
a company engaged in the business of five star deluxe hotels. The AO made an
addition of Rs. 10,47,08,044 to the book profit on account of foreign currency
transaction difference.

 

Being aggrieved
by the order, the assessee filed an appeal to the CIT(A). The CIT(A) partly
allowed the appeal, deleting the addition on the ground that the liability was
not a contingent liability.

 

Aggrieved by
the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal found that after considering various judicial pronouncements, the
CIT(A) reached the conclusion that the said liability is not contingent. As per
the CIT(A), a contingent liability depends purely on occurrence and
non-occurrence of an event, whereas if an event has already taken place, which
in the present case is of entering into a contract and undertaking of
obligation to meet the liability, and only the consequential effect of the same is to be determined, then it cannot
be said that it is in the nature of a contingent liability.

 

After applying
the proposition of law laid down by the Hon’ble Supreme Court in the cases of Woodward
Governor India and Bharat Earth Movers, the CIT(A)
recorded a finding to the effect that it was not a contingent liability. Accordingly,
the appeal of the Revenue was dismissed.

 

Being aggrieved
by the order of the ITAT, the Revenue filed an appeal to the High Court. The
Court held that the Tribunal and the CIT(A) had held that the forward foreign
exchange contract entered into by the assessee to buy or sell foreign currency
at an agreed price at a future date cannot be considered as contingent in
nature as it creates a continuing binding obligation on the date of the
contract against the assessee. The view taken by the Tribunal was correct, that
in the present case where an obligation was undertaken to meet a liability and
only the consequential effect was to be determined, it could not be said that
the amount in question was in the nature of contingent liability.

 

Further, the
Revenue sought to urge an additional question of law to the effect that the
Tribunal erred in not treating the amount of Rs. 10,47,08,044 as capital
expenditure for computation of book profit u/s 115JB of the Act when this
amount was treated by the AO and accepted by the assessee as a capital
expenditure.

 

The Court
observed that this point was not urged before the Tribunal nor had it found
reference in the present appeal memo. The appeal was filed before the Tribunal
on the sole ground of the amount in question being a contingent liability. In
view of such a single, focused approach before the Tribunal, the decision of
the Tribunal was restricted only to that ground.

 

The argument of
Revenue that there was only a mistake in choosing the words, that instead of
capital expenditure, the words contingent liability were used, cannot be
accepted because the reason for the amount being treated as contingent in
nature had also been specified in the said ground, stating that the loss was on
account of foreign exchange fluctuation. It is not permissible for the
appellant to urge the said question for the first time before the Court and
that, too, during the course of the oral arguments.

 

Accordingly,
the appeal was dismissed.  

 

 

 

 

The Pr. CIT vs. M/s. Realvalue Realtors (P.) Ltd.; [ITA No. 4836/Mum/2011; Date of order: 30th June, 2016; A.Y.: 2007-08; Mum. ITAT] Section 68 – Cash credit (share capital) – Substantial part share application money was received in earlier assessment year and, thus, it could not be added in impugned A.Y. – Addition deleted

13. The Pr. CIT vs. M/s. Realvalue Realtors (P.) Ltd. [Income tax Appeal
No. 957 of 2017] Date of order: 4th November, 2019 (Bombay High Court)

 

The Pr. CIT vs. M/s. Realvalue Realtors (P.) Ltd.; [ITA No.
4836/Mum/2011; Date of order: 30th June, 2016; A.Y.: 2007-08; Mum.
ITAT]

 

Section 68 – Cash credit (share capital) – Substantial part share
application money was received in earlier assessment year and, thus, it could
not be added in impugned A.Y. – Addition deleted

 

The assessee company is engaged in the business of dealing in property
and trading in shares and stocks. The AO, during the assessment proceedings,
noted that in the relevant previous year the assessee had received an amount
from one Mr. Mushtaq Ahmed Vakil as share application money. The assessee
company had allotted 24,21,788 shares to him. The AO held that the assessee had
failed to discharge the onus of establishing the genuineness of the transaction
and the creditworthiness of the shareholder and added an amount of Rs.
8,12,44,700 as income from other sources.

 

The assessee filed an appeal before the CIT(A). The CIT(A) called for a
remand report from the AO. The Commissioner, after going through this remand
report, concluded that out of the total share application money of Rs.
8,12,44,700, an amount of Rs. 5,18,44,700 was received in the A.Y. 2006-07 and
could not be added in the impugned assessment year. Accordingly, the
Commissioner directed the AO to take necessary action if required. In respect
of the remaining amount of Rs. 2.94 crores, the Commissioner observed that
sufficient evidence was produced in respect of the identity and genuineness of
the share application money and of Mr. Vakil and accordingly deleted the said
addition.

 

Being aggrieved by the order of the CIT(A), the Revenue filed an appeal
to the Tribunal. The Tribunal upheld the order as regards Rs. 5,18,44,700 not
pertaining to the relevant assessment year. As regards the amount of Rs. 2.94
crores, the Tribunal set aside that part of the order of the Commissioner and
remanded the matter to the AO to examine the genuineness of the investment of
Rs. 2.94 crores by Mr. Vakil. Accordingly, the appeal was partly allowed by the
impugned order.

 

Aggrieved by the order of the ITAT, the Revenue went before the High
Court. The Court found that as far as the amount of Rs. 5,18,44,700 was
concerned, both the Commissioner (Appeals) and the Tribunal had, after
considering the records, categorically held that this amount was relevant for
the A.Y. 2006-07. In fact, the AO in his remand report dated 16th
September, 2010 had accepted this position. As regards the amount of Rs. 2.94
crores, the Tribunal has sent the same for verification by the AO. The
contentions of the parties regarding this amount about its genuineness, etc.
would be considered on remand. In the circumstances, the appeal was dismissed.

 

M/s Reliance Fresh Ltd. vs. ACIT-7(2); date of order: 13th July, 2016; [ITA. No. 1661/Mum/2013; A.Y.: 2008-09; Mum. ITAT] Section 37(1) – Business expenditure – Capital or revenue – Assessee wrongly entered the amount as capital in nature in the books – But in its return of income, rightly claimed it as revenue expenditure – Merely because a different treatment was given in books of accounts could not be a factor which would deprive the assessee from claiming entire expenditure as a revenue expenditure

5.  The Pr. CIT-8 vs. M/s Reliance Fresh Ltd.
[Income tax Appeal No. 985 of 2017] Date of order: 17th
September, 2019 (Bombay High Court)

 

M/s Reliance Fresh Ltd.
vs. ACIT-7(2); date of order: 13th July, 2016; [ITA. No.
1661/Mum/2013; A.Y.: 2008-09; Mum. ITAT]

 

Section 37(1) – Business
expenditure – Capital or revenue – Assessee wrongly entered the amount as
capital in nature in the books – But in its return of income, rightly claimed
it as revenue expenditure – Merely because a different treatment was given in
books of accounts could not be a factor which would deprive the assessee from
claiming entire expenditure as a revenue expenditure

The assessee company was
engaged in the business of organised retail. Its main business was sourcing and
selling fruits, vegetables, food articles, groceries, fast-moving goods and
other goods of daily use and provisions of various related services as a
neighbourhood convenience store. However, in order to expand business, the assessee
was setting up new stores. In its return of income, the expenditure incurred
for setting up new stores had been claimed as revenue expenditure to the extent
the expenditure was revenue in nature and where capital expenditure was
incurred, the same was not claimed as revenue expenditure. However, the
assessee in its books of accounts showed the entire expenditure, i.e., even the
expenditure which was claimed in the income tax return as revenue expenditure,
as capital expenditure. The AO disallowed the same on the ground that the
assessee had itself capitalised the same under the head ‘Project Development
Expenditure’.

 

The CIT(A) held that
since the assessee himself had claimed that these expenses pertained to a
project which had not been implemented, therefore, it could not be allowed as
revenue expenditure and confirmed the order of the AO.

 

Being aggrieved with
this order, the assessee filed an appeal before the Tribunal. The Tribunal held
that all the expenses were purely revenue in nature. None of the expenses
pertained to acquisition of any capital asset. It was also well settled law
that ‘normally’, the manner of accounting shall not determine the taxability of
income or allowability of any expenditure. The taxability of income and
allowability of an expense shall be determined on the basis of the provisions
of the income-tax law as contained in the Income-tax Act, 1961 and as explained
by various courts from time to time. It was further noticed that nothing had
been brought out by the lower authorities to show that any of these expenses
were capital in nature, except the fact that the assessee had debited the same
under the head ‘Project Development Expenditure’. The assessment of the return
had to be made on the basis of the return filed by the assessee supported with
accounts. While examining the accounts, the return could not be ignored. The
return had to take precedence over the accounts in respect of legal claims. The
accounts had to be seen only to verify the facts. The admissibility of a claim
or otherwise should be primarily and predominantly on the basis of claims made
by the assessee in the return of income, unless the assessee claimed otherwise
subsequently during the course of assessment proceedings.

These expenses were
revenue in nature and should be allowed as such. There was no estoppel
against the statute and the Act enabled and entitled the assessee to claim the
entire expenditure in the manner it could be claimed under the law.

 

Being
aggrieved with the order of the ITAT, the Revenue filed an appeal before High
Court. The High court relied on the case of Reliance Footprint Ltd.
being Income tax Appeal No. 948/2014. The Court had, vide order dated 5th
July, 2017, dismissed the above appeal filed by the Revenue on an identical question
as framed herein. Revenue agreed with the position that the decision of the
Court in Reliance Footprint Ltd. (Supra) would cover the issue
arising herein. In the above view, the appeal was, therefore, dismissed.  

 

KPMG vs. ACIT; date of order: 18th March, 2016; [ITA No. 1918 & 1480/M/2013; A.Y.: 2008-09; Mum. ITAT]

4.  The Commissioner
of Income Tax-16 vs. KPMG [Income tax Appeal No. 690 of 2017] Date of order: 24th September, 2019 (Bombay High Court)

 

KPMG vs. ACIT; date of order: 18th
March, 2016; [ITA No. 1918 & 1480/M/2013; A.Y.: 2008-09; Mum. ITAT]

 

Section 40(a)(ia) – Deduction at source – Fee for
professional services in nature of audit and advisory outside India without
deduction of tax at source – Payment made outside India was not sum chargeable
to tax in India – Hence, provisions of section 195 were not applicable

 

The assessee is engaged in providing taxation services,
advisory, audit-related and other consultancy services. During the previous
year relevant to the subject assessment year, the assessee had paid fees for
professional services outside India without TDS deduction.

 

During the course of assessment proceedings for the subject
assessment year, the AO disallowed the professional fees paid u/s 40(a)(i) of
the Act to the service providers outside India. This was on account of the fact
that no tax had been deducted at source. The assessee contended that no tax was
liable to be deducted in view of the fact that the payments made to service
providers for service outside India were governed by the Double Taxation
Avoidance Agreement (DTAA) entered into between India and the countries in
which the service providers rendered service.

 

The CIT(A) held that the amounts paid to the service
providers in various countries (except China) were governed by the DTAA. Thus,
the disallowance for not deducting tax was not justified. Thus, the entire amount of Rs. 7 crores which was disallowed was deleted, except the payment of
Rs. 33. 54 lakhs made to KPMG, China.

 

Being aggrieved, both the Revenue and the assessee filed
appeals before the Tribunal. The Revenue was aggrieved with the deletion of
disallowance for non-deduction of tax at source to service providers in all
countries (save China); and the assessee was aggrieved with the extent of the
disallowance for non-deduction of tax at source in respect of payment made to
service providers in China.

 

In the Revenue’s appeal it was found that services received
by the assessee outside India were audit and advisory in nature. It was held
that none of the services had attributes of making available any technical
knowledge to the assessee in India. It was further held that none of the
service providers had a Permanent Establishment (PE) in India. Therefore, the
payment made to the service providers outside India was covered by the DTAA.
Consequently, the same would be outside the scope of taxation in India.

 

So far as the assessee’s appeal in respect of China was
concerned, the Tribunal found that the nature of services was professional and
the service providers had no PE in India. Thus, it was covered by the
Indo-China DTAA and hence not taxable in India.

At the relevant time there was no obligation to deduct tax
at source in respect of fees paid to service providers on the basis of its
deemed income u/s 9(1)(vii) of the Act. It was only by the amendment made by
the Finance Act, 2010 with retrospective effect by adding an Explanation to
section 9(1)(vii) of the Act, that the requirement of the service providers
providing the same in India was done away with for its application; thus making
it deemed income subject to tax in India and required tax deduction at source
by the assessee. However, the Tribunal held that the obligation to deduct tax
cannot be created with the aid of an amendment made with retrospective effect
when such obligation was absent at the time of making payment to the service
providers.

 

Being aggrieved with the Tribunal order the Revenue filed
an appeal to the High Court. The Court held that in terms of section 90(2) of
the Act it was open to an assessee to adopt either the DTAA or the Act as may
be beneficial to it. The Revenue having accepted that the service providers
during the relevant period did not receive any income in view of the DTAA, the
occasion to deduct tax at source would not arise. Therefore, disallowance u/s
40(a)(i) of the Act would also not arise. In the above view, the Revenue was
academic in these facts as the application of DTAA which resulted in no income
arising for the service providers in India was a concluded issue. Thus, the
occasion to examine section 195 of the Act in these facts would not arise. In
view of the above, the questions proposed by the Revenue were academic, as the
basis of the Tribunal’s order was that the amounts paid to the service
providers was not income taxable in India in terms of the DTAA. Accordingly,
the appeal was dismissed.

 

 

DCIT-4 vs. M/s Khushbu Industries; Date of order: 19th October, 2016; [ITA. No. 371/Lkw/2016; A.Y.: 2008-09; Lucknow ITAT] Section 151 – Income escaping assessment – Sanction for issue of notice – Section 151(2) mandates that sanction to be taken for issuance of notice u/s 148 in certain cases has to be of Joint Commissioner, reopening of assessment with approval of Commissioner is unsustainable

11.Pr.
CIT-2 vs. M/s Khushbu Industries [Income tax Appeal No. 1035 of 2017] Date
of order: 11th November, 2019 (Bombay
High Court)

 

DCIT-4
vs. M/s Khushbu Industries; Date of order: 19th October, 2016; [ITA.
No. 371/Lkw/2016; A.Y.: 2008-09; Lucknow ITAT]

 

Section
151 – Income escaping assessment – Sanction for issue of notice – Section
151(2) mandates that sanction to be taken for issuance of notice u/s 148 in
certain cases has to be of Joint Commissioner, reopening of assessment with
approval of Commissioner is unsustainable

 

The
assessee filed the return of income u/s 139(1) of the Act on 30th
September, 2008 declaring an income of Rs. 7,120. The notice u/s 148 was issued
by the Income Tax Officer-1(2), Lucknow who did not have jurisdiction over the
assessee. The jurisdiction lay with the Dy. C.I.T., Range-4, Lucknow, who
completed the assessment proceedings u/s 147 read with section 143(3) of the
Act.

 

Being aggrieved by
the order of the AO, the assessee company filed an appeal to the CIT(A). The
CIT(A) held that the AO has not taken approval in accordance with the provisions of section 151(2) before issue of
notice u/s 148 of the Act. In the present case, as per section 151(2) of the
Act, if the case is to be reopened after the expiry of four years the approval
/ satisfaction should be only of the Joint Commissioner of Income Tax. But here
it was reopened and notice u/s 148 issued on the approval of the Commissioner
of Income Tax who is a different authority than the Joint Commissioner of
Income Tax as per section 2 of the Act. For this reason, the notice issued u/s
148 is bad in law and liable to be quashed. The approval granted by the
administrative authorities under whom the said AO worked also did not have
valid jurisdiction over the appellant to grant the said approval u/s 151.
Hence, it was held that the reassessment on the basis of an illegal notice u/s
148 was not sustainable.

 

Aggrieved
by the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal held that the reopening proceedings u/s 148 are bad because the
necessary sanction / approval had not been obtained in terms of section 151 of
the Act. The impugned order of the Tribunal records that the sanction for
issuing the impugned notice had been obtained from the Commissioner of Income
Tax when, in terms of section 151, the sanction had to be obtained from the Joint
Commissioner of Income Tax. Thus, in the absence of sanction / approval from
the appropriate authority as mandated by the Act, the reopening notice itself
was without jurisdiction.

 

Now
aggrieved by the order of the ITAT, the Revenue appealed to the High Court. The
Court observed that the Commissioner of Income Tax is a higher authority;
therefore the sanction obtained from him would meet the requirement of
obtaining sanction from the Joint Commissioner of Income Tax in terms of
section 151 of the Act will no longer survive. This is in view of the decision
of the Court in Ghanshyam K. Khabrani vs. Asst. CIT (2012) 346 ITR 443
(Bom.) which held that where the Act provides for sanction by the Joint
Commissioner of Income Tax in terms of section 151, then the sanction by the
Commissioner of Income Tax would not meet the requirement of the Act and the
reopening notice would be without jurisdiction. In view of the above, the
appeal was dismissed.  

 

M/s Rohan Projects vs. Dy. CIT-2(2); [ITA No. 306/Pun/2015; Date of order: 9th February, 2017; A.Y.: 2012-13; Mum. ITAT] Income accrual – The income accrues only when it becomes due, i.e., it must also be accompanied by corresponding liability of the other party to pay the amount

10.  The Pr. CIT-2 vs. M/s Rohan Projects [Income
tax Appeal No. 1345 of 2017] Date
of order: 18th November, 2019 (Bombay
High Court)

 

M/s
Rohan Projects vs. Dy. CIT-2(2); [ITA No. 306/Pun/2015; Date of order: 9th
February, 2017; A.Y.: 2012-13; Mum. ITAT]

 

Income
accrual – The income accrues only when it becomes due, i.e., it must also be
accompanied by corresponding liability of the other party to pay the amount


The assessee is in
the business of promoter and developer of land. It had sold land to M/s
Symboisis in a transaction that took place in the previous year relevant to the
subject assessment year. The land was sold under a Memorandum of Understanding
(MOU) dated 2nd February, 2012 for a total consideration of Rs. 120
crores. However, the assessee offered only a sum of Rs. 100 crores for tax in
the return for the A.Y. 2012-13. This was because the MOU provided that a sum
of Rs. 20 crores would be paid by the purchaser (M/s Symboisis) on execution of
the sale deed after getting the plan sanctioned and on inclusion of the name of
the purchaser in the 7/12 extract. However, as the assessee was not able to
meet these conditions during the subject assessment year, a sum of Rs. 20
crores, according to the assessee, could not be recognised as income for the
subject assessment year. The AO did not accept the same and held that the
entire sum of Rs. 120 crores was taxable in the subject assessment year.

 

Aggrieved by this
order, the assessee company filed an appeal to the CIT(A). The CIT(A) dismissed
the appeal, upholding the order of the AO. On further appeal, the Tribunal,
after recording the above facts and relying upon the decision of the Supreme
Court in Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835, held
that the income accrues only when it becomes due, i.e., it must also be
accompanied by corresponding liability of the other party to pay the amount. On
the facts of the case it was found that the amount of Rs. 20 crores was not
payable in the previous year relevant to the subject assessment year as the
assessee had not completed its obligation under the MOU entirely. Moreover, it
also found that Rs. 20 crores was offered to tax in the subsequent assessment
year and also taxed. Thus, the appeal of the assessee was allowed.

 

But the Revenue was
aggrieved by this order of the ITAT and filed an appeal to the High Court. The
Court found that the assessee was not able to comply with its obligations under
the MOU in the previous year relevant to the subject assessment year so as to
be entitled to receive Rs. 20 crores is not shown to be perverse. In fact, the
issue is covered by the decision of the Apex Court in CIT vs. Shoorji
Vallabdas & Co. (1962) 46 ITR 144 (SC) wherein it is held that ‘Income
tax is a levy on income. No doubt, the Income-tax Act takes into account two
points of time at which the liability to tax is attracted, viz., the accrual of
the income or its receipt; but the substance of the matter is the income, if
income does not result at all, there cannot be a tax…’


Similarly, in Morvi
Industries Ltd. (Supra) the Supreme Court has held that income accrues
when there is a corresponding liability on the other party. In the present
case, in terms of the MOU there is no liability on the other party to pay the
amount. In any event, the amount of Rs. 20 crores has been offered to tax in
the subsequent assessment year and also taxed. The Bombay High Court in the
case of C.I.T. vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom.)
held that the question as to the year in which a deduction is allowable may be
material when the rate of tax chargeable on the assessee in two different years
is different; but in the case of income of a company, tax is attracted at a
uniform rate, and whether the deduction in respect of bonus was granted in the
A.Y. 1952-53 or in the assessment year corresponding to the accounting year
1952, that is, in the A.Y. 1953- 54, should be a matter of no consequence to
the Department; and one should have thought that the Department would not
fritter away its energies in fighting matters of this kind.

 

In the aforesaid
circumstances, the tax on the amount of Rs. 20 crores has been paid in the next
year. Therefore, the appeal is dismissed.

 

 

ACIT-3 vs. Shree Rajlakshmi Textile Park Pvt. Ltd.; Date of order: 18th October, 2016; [ITA No. 4607/Mum/2012; A.Y.: 2008-09; Mum. ITAT] Section 68: Cash credits – Share application money and share premium – Identity, genuineness of transaction and creditworthiness of persons from whom assessee received funds is proved – Addition u/s 68 is not justified

9.  The Pr. CIT-2 vs. Shree Rajlakshmi Textile
Park Pvt. Ltd. [Income tax Appeal No. 991 of 2017] Date of order: 4th
November, 2019 (Bombay High Court)

 

ACIT-3 vs. Shree
Rajlakshmi Textile Park Pvt. Ltd.; Date of order: 18th October,
2016; [ITA No. 4607/Mum/2012; A.Y.: 2008-09; Mum. ITAT]

 

Section
68: Cash credits – Share application money and share premium – Identity,
genuineness of transaction and creditworthiness of persons from whom assessee
received funds is proved – Addition u/s 68 is not justified

 

The
assessee company is in the business of construction of godowns. In the course
of scrutiny, the AO noticed that the assessee had received share application money,
including share premium of Rs. 19.40 crores. The AO added the same to the
assessee’s returned income as cash credit, determining its income at Rs. 19.40
crores.

 

Aggrieved
by this order, the assessee company filed an appeal to the CIT(A). The CIT(A)
deleted the addition of Rs. 19.40 crores after calling for a remand report from
the AO. The remand report indicated that all 20 parties who had subscribed to
the shares of the assessee appeared before the AO and submitted confirmation
letter of purchase of shares, copy of audited balance sheet and profit &
loss account, copy of bank statement along with return of income, as well as
Form 23AC filed with the Registrar of Companies. It also found that Rs. 4.90
crores represented an amount received in the earlier assessment year and from
promoters. Therefore, it could not be added as cash credit for the subject
assessment year. So far as the balance amount of Rs. 14.50 crores is concerned,
the CIT(A) examined the issue and concluded that the shareholders had clearly
established their identity, capacity and genuineness of the transactions on the
basis of the documents submitted.

 

The
Revenue filed an appeal to the Tribunal against the order of the CIT(A). It
stated that during the assessment and also remand proceedings, the letters sent
through RPAD to the companies who invested in the respondent’s company were
returned back with an endorsement ‘No such company exists in the given
address’. This by itself, according to him, establishes the perversity of the
impugned order.

 

The
Tribunal found that the identity and capacity of the shareholders as well as
the genuineness of the transactions stood established. Further, it records that
the Revenue is not able to submit anything in support of its challenge to the
order of the CIT(A), except stating that the order of the AO requires to be
restored.

 

Aggrieved
by the order of the ITAT, the Revenue filed an appeal to the High Court. The
Court observed that in the report the officer indicates that notices sent to
some of the companies came back un-served, yet, thereafter, the companies
appeared before him through a representative and made submissions in support of
their investments. Further, the change of address was given to the AO and yet
it appears that notice was served on an incorrect address. Further, one of the
directors of a company which has subscribed to the shares, has also given an
affidavit stating that the company has paid Rs. 30 lakhs for 30,000 equity
shares of Rs.10 each at a premium of Rs. 90 to the assessee company. Thus, the
amounts received for share subscription is not hit by section 68 of the Act as
the identity and the capacity of the shareholder is proved. Besides, the
genuineness of the transactions also stands established. Accordingly, the appeal
is dismissed.

 

Section 40A(9) – Business disallowance – Contribution to a fund created for the healthcare of the retired employees – The provision was not meant to hit genuine expenditure by an employer for the welfare and benefit of the employees

15.  The Pr. CIT-2 vs. M/s State Bank of India
[Income tax Appeal No. 718 of 2017;

Date of order: 18th June,
2019

(Bombay High Court)]

 

M/s State Bank of India vs. ACIT
Mum., ITAT

 

Section 40A(9) – Business
disallowance – Contribution to a fund created for the healthcare of the retired
employees – The provision was not meant to hit genuine expenditure by an
employer for the welfare and benefit of the employees

 

The assessee
claimed deduction of expenditure of Rs. 50 lakhs towards contribution to a fund
created for the healthcare of retired employees. The Revenue contented that
such fund not being one recognised u/s 36(1)(iv) or (v), the claim of
expenditure was hit by the provisions of section 40A(9) of the Income-tax Act.
The CIT(A) upheld the AO’s order.

 

On appeal, the
Tribunal held that the assessee had made such contribution to the medical
benefit scheme specially envisaged for the retired employees of the bank.
Sub-section (9) of section 40A of the Act, in the opinion of the Tribunal, was
inserted to discourage the practice of creation of bogus funds and not to hit
genuine expenditure for welfare of the employees. The AO had not doubted the bona
fides of the assessee in the creation of the fund and that such fund was
not controlled by the assessee-bank. The Tribunal proceeded on the basis that
the AO and the CIT(A) had not doubted the bona fides in creation of the
trust or that the expenditure was not incurred wholly and exclusively for the
employees. The Tribunal thus allowed the assessee’s appeal on this ground and
deleted the disallowance.

 

Aggrieved with
the ITAT order, the Revenue filed an appeal in the High Court. The Court held
that sub-section (9) of section 40A disallows deduction of any sum paid by an
assessee as an employer towards setting up of or formation of or contribution
to any fund, trust, company, etc. except where such sum is paid for the
purposes and to the extent provided under clauses (iv) or (iva) or (v) of
sub-section (1) of Section 36, or as required by or under any other law for the
time being in force. It is clear that the case of the assessee does not fall in
any of the above-mentioned clauses of sub-section (1) of section 36. However,
the question remains whether the purpose of inserting sub-section (9) of
section 40A of the Act was to discourage genuine expenditure by an employer for
the welfare activities of the employees. This issue has been examined by the
Court on
multiple occasions.

 

The very
purpose of insertion of sub-section (9) of section 40A thus was to restrict the
claim of expenditure by the employers towards contribution to funds, trusts,
associations of persons, etc. which was wholly discretionary and did not impose
any restriction or condition for expanding such funds which had possibility of
misdirecting or misuse of such funds, after the employer claimed benefit of
deduction thereof. In plain terms, this provision was not meant to hit genuine
expenditure by an employer for the welfare and the benefit of the employees.

 

In the case of
Commissioner of Income Tax vs. Bharat Petroleum Corporation Limited (2001) Vol.
252 ITR 43, the Division Bench of this Court considered a similar issue
when the assessee had claimed deduction of contribution towards staff sports
and welfare expenses. The Revenue opposed the claim on the ground that the same
was hit by section 40A(9) of the Act. The High Court had allowed the assessee’s
appeal.

 

In the case of
Commissioner of Income-tax-LTU vs. Indian Petrochemicals Corporation
Limited (2019) 261 Taxman 251 (Bombay), the Division Bench of the
Bombay High Court considered the case where the assessee-employer had
contributed to various clubs meant for staff and family members and claimed
such expenditure as deduction. Once again the Revenue had resisted the
expenditure by citing section 40A(9) of the Act. The Court had confirmed the
view of the Tribunal and dismissed Revenue’s appeal.

 

In view of same, the Revenue appeal was dismissed.

14. Section 271(1)(c) – Penalty – Concealment – Two views are possible – When two views are possible, penalty cannot be imposed

14.  Section 271(1)(c) – Penalty – Concealment –
Two views are possible – When two views are possible, penalty cannot be imposed

 

The assessee is a co-operative
bank. It had incurred expenditure for acquisition of three co-operative banks.
Claiming directives of the RBI contained in its circular, the bank amortised
such expenditure over a span of five years. The Revenue was of the opinion that
the expenditure was capital in nature and that the claim of expenditure would
be governed by the Income-tax Act, 1961 and not by the directives of RBI. The
expenditure was therefore disallowed.

 

The AO initiated proceedings for
imposition of penalty u/s 271(1)(c) and held that the assessee has deliberately
made a wrong claim of deduction which is otherwise inadmissible. Accordingly,
the AO proceeded to pass an order imposing a penalty of Rs. 1,41,30,553 u/s
271(1)(c).

 

Being aggrieved at the penalty
order so passed, the assessee preferred an appeal before the CIT(A). The CIT(A)
observed that the AO had taken a view that the expenditure is capital in nature
due to the enduring benefit accruing to the assessee, but as per the RBI
circular the assessee is allowed to amortise 1/5th of the expenditure over a
period of five years. He, therefore, inferred that there exist two different
views with regard to the assessee’s claim. Accordingly, he held that the issue
on which the addition was made being a debatable one, it cannot be said that
the claim made by the assessee is totally inadmissible. The assessee has
furnished all requisite particulars of income, so it cannot be said that the
assessee has furnished inaccurate particulars of income or concealed its
income. The Commissioner (A), relying upon the decision of the Hon’ble Supreme
Court in CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158
(SC), deleted the penalty imposed by the AO.

 

But Revenue, now aggrieved by the
order of the CIT(A) preferred an appeal before the ITAT. The Tribunal held that
the addition on the basis of which penalty was imposed by the AO as on date
does not survive. Moreover, on a perusal of the circular issued by the RBI as
referred to by the CIT(A), it is seen that the acquirer bank is permitted to
amortise the loss taken over from the acquired bank over a period of not more
than five years, including the year of merger. It is also noticed that in the
case of Bank of Rajasthan, the Tribunal has allowed it as revenue expenditure.
Therefore, the claim made by the assessee cannot be said to be totally
inadmissible, or amounts to either furnishing of inaccurate particulars of
income or misrepresentation of facts. It is possible to accept that the
assessee being guided by the RBI circular has claimed the deduction. In such
circumstances, the assessee cannot be accused of furnishing inaccurate
particulars of income, more so when the assessee has furnished all relevant
information and material before the AO in relation to the acquisition of three
urban co-operative banks.

 

The
High Court held that, in relation to the assessee’s claim of expenditure, two
views were possible. Even otherwise, the Revenue has not made out any case of
concealment of income or concealment of particulars of any income. As is well
laid down through a series of judgements of the Supreme Court, raising a bona
fide claim even if ultimately found to be not sustainable, is not a ground
for imposition of penalty. In the result, the Revenue Appeal was dismissed.

Jalaram Enterprises Co. P. Ltd. vs. DCIT [ITA No. 4289/Mum./2014; Bench: J; Date of order: 29th April, 2016; Mum. ITAT] Section 68 – Cash credits – Unsecured loans received – The assessee has proved identity, genuineness of the transaction and the creditworthiness of the lenders – no addition can be made

13.  Pr. CIT-15 vs. Jalaram Enterprises Co. P.
Ltd. [Income tax Appeal No. 671 of 2017;

Date of order: 7th
June, 2019;

A.Y.: 2010-11 (Bombay High
Court)]

 

Jalaram Enterprises Co. P. Ltd. vs.
DCIT [ITA No. 4289/Mum./2014; Bench: J; Date of order: 29th April,
2016; Mum. ITAT]

 

Section 68 – Cash credits –
Unsecured loans received – The assessee has proved identity, genuineness of the
transaction and the creditworthiness of the lenders – no addition can be made

 

The assessee is a private limited
company engaged in the business of trading in real estate and grains. The
assessee had shown borrowings of Rs. 3 crores. The AO verified the same and was
of the opinion that the transactions were not genuine. He made addition of Rs.
2,66,00,000 out of the said sum of Rs. 3 crores u/s 68 of the Act.

 

The CIT(A) in his detailed order
allowed the assessee’s appeal and deleted the addition. He noted that out of 12
lenders, nine were parties to whom the assessee had allotted the shares of the
company on 1st April, 2010. The amounts deposited by these parties
therefore were in nature of share application money. He also noted that in
response to summons issued by the AO, the assessee had submitted the reply and
response of all the lenders with supporting material. He noted that all 12
parties had confirmed the transactions, produced their bank statements and a
majority of them had filed their income tax returns, in which computation of
their income for A.Y. 2010- 11 was also available. The CIT(A) therefore held
that the transactions were genuine and that the assessee had established the
source and the creditworthiness of the lenders.


The Revenue took the matter before
the Tribunal. The Tribunal held that the AO made addition u/s 68 of the Act in
respect of 12 parties holding that the creditors had not appeared in response
to the summons issued u/s 131 of the Act; he also held that the genuineness of
the transaction and creditworthiness of the creditors was not established.

 

The assessee has proved the
identity and genuineness of the transaction and the creditworthiness of the
lenders by furnishing the requisite details, like confirmations, PAN details,
return of income, bank statements, etc. It is the finding of the CIT(A) that
first deposits were received through bank transfers from the lenders’ accounts
and thereafter they were given to the assessee company by account payee cheque.
In the circumstances, the order of the CIT(A) in deleting the addition made u/s
68 of the Act was upheld.

 

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the entire issue is based on appreciation of evidence. The
CIT(A) and the Tribunal had come to the concurrent conclusions on facts which
were shown not to be perverse. The Revenue appeal was dismissed.

ACIT-2(3) vs. M/s Tata Sons Ltd.; date of order: 9th December, 2015; [ITA. No. 1719/Mum/2012, A.Y.: 2004-05; Mum. ITAT]

3.      
The Pr. CIT-2 vs. M/s Tata Sons
Ltd. [Income tax Appeal No. 639 of 2017] Date of order: 19th August, 2019 (Bombay High Court)

 

ACIT-2(3) vs. M/s Tata Sons Ltd.; date of
order: 9th December, 2015; [ITA. No. 1719/Mum/2012, A.Y.: 2004-05;
Mum. ITAT]

 

Section 147 – Reassessment – The reopening
notice was issued before the reasons were recorded for reopening the assessment
– Reopening notice is bad in law [S. 148]

 

On 6th
March, 2009 the AO issued a notice u/s 148 of the Act seeking to re-open the
assessment. The assessee company contended that the reopening notice was issued
much before the reasons for doing so were recorded, thus the reopening notice
was without jurisdiction. However, the AO did not accept the assessee’s
contention and passed an order of assessment u/s 143(3) r/w/s 148 of the Act.

 

Being aggrieved with the order, the assessee
company carried the issue in appeal to the CIT(A). The CIT(A) held that the
reopening notice had been issued without having recorded the reasons which might
have led the AO to form a reasonable belief that income chargeable to tax had
escaped assessment. The reasons were recorded on 19th March, 2009
while the impugned notice issued is dated 6th March, 2009. The
CIT(A) held that the entire proceeding of reopening is vitiated as notice u/s
148 of the Act is bad in law.

 

Aggrieved with this, the Revenue filed an
appeal before the Tribunal. The Tribunal specifically asked the Revenue to
produce the assessment record so as to substantiate its case that the impugned
notice u/s 148 of the Act was issued only after recording the reasons for
reopening the assessment. The Revenue produced the record of assessment for
A.Y. 2004-05 before the Tribunal. The Tribunal on facts found from the entries
made in the assessment record produced an entry as regards issue of notice u/s
148 dated 6th March, 2009.

 

However, no
entries prior to 6th March, 2009 were produced before the Tribunal
so as to establish that the reasons were recorded prior to the issue of notice
dated 6th March, 2009 u/s148 of the Act. Thus, the Tribunal
concluded that there was nothing in the records which would indicate that any
reasons were recorded prior to the issue of notice. Therefore, the order of the
CIT(A) was upheld.

 

Still aggrieved, this time with the order of
the Tribunal, the Revenue carried the issue in appeal to the High Court. The
High Court held that both the CIT(A) and the Tribunal had concurrently come to
a finding of fact that no reasons were recorded by the AO prior to issuing the
reopening notice dated 6th March, 2009.

 

Further,
section 292B of the Act would have no application in the present facts as the
condition precedent for issuing of the reopening notice, namely, recording of
reasons, has not been satisfied by the AO. Thus, it is not a case of clerical
error but the substantial condition for a valid reopening notice, viz.,
recording of reasons to form a reasonable belief, is not satisfied. Accordingly
the appeal was dismissed.



Sandu Pharmaceuticals Ltd. vs. Asst. CIT-10(2); date of order: 23rd March, 2016; [ITA. No. 2087/Mum/2012; A.Y.: 2009-10; Mum. ITAT] Section 194H – Tax deduction at source – Manufacture the goods as per the specification – Discount vis-a-vis commission – No principal-agent relationship, hence not liable to deduct tax at source – Consistent view accepted over years

2.      
Pr. CIT-14 vs. Sandu
Pharmaceuticals Ltd. [ITA No. 953 of 2017] Date of order: 27th August, 2019 (Bombay High Court)

 

Sandu Pharmaceuticals Ltd. vs. Asst.
CIT-10(2); date of order: 23rd March, 2016; [ITA. No. 2087/Mum/2012;
A.Y.: 2009-10; Mum. ITAT]

 

Section 194H – Tax deduction at source –
Manufacture the goods as per the specification – Discount vis-a-vis commission
– No principal-agent relationship, hence not liable to deduct tax at source –
Consistent view accepted over years

 

The assessee company is engaged in the
manufacture of Ayurvedic medicines. During the assessment proceedings the AO
noted that on the sales turnover of Rs.14.25 crores, the assessee had given
discount of Rs. 7.27 crores. The AO called upon the assessee to furnish details
of the discount given. In response, the respondent pointed out that it was
selling its Ayurvedic medicines to a company called Sandu Brothers Private
Limited (SBPL) at a discount of 51%. This, after taking into account the cost
of distribution, field staff salary, travelling expenses, incentives,
marketing, etc. However, the AO held that 10% was on account of discount and
the balance 41% was the commission involved in selling its product through
SBPL. He therefore held that tax had to be deducted on the commission of Rs.
5.84 crores u/s 194H of the Act. This not being done, the entire amount of Rs.
5.84 crores being the commission at 41% was disallowed in terms of section
40(a)(ia) of the Act.

 

Being aggrieved, the assessee filed an
appeal before the CIT(A). But the CIT(A) dismissed the appeal.

 

Being aggrieved by the order, the assessee
filed an appeal to the Tribunal. The Tribunal observed that the assessee had
entered into an agreement with SBPL on 1st April, 1997 for the sale
of its products. As per clause 1 of the agreement, the assessee is to
manufacture and process certain Ayurvedic drugs and formulations by utilising
the secret formulation given by SBPL and pack them in bulk or in such other
packs as may be stipulated or specified by SBPL to enable them to market the
same by buying the said products on its account. Clause 11 of the agreement
stipulates that the sale of goods to SBPL is on principal-to-principal basis
and none of the parties to the agreement shall hold oneself as agent of the
other under any circumstances. It further stipulates that SBPL shall sell the
products on its own account only and not as an agent or on behalf of the
assessee.

 

Clause 10(a) of the agreement provides that
the assessee shall manufacture the goods as per the specifications of SBPL and
if the products are not in accordance with the standard, SBPL shall have the
right to reject the products. However, clause 10(b) provides that once SBPL
accepts certain products manufactured by the assessee, any loss suffered by
SBPL subsequently, due to handling, transportation of storage shall be borne by
SBPL itself. Thus, on overall consideration of the agreement between the
parties, it becomes clear that once certain goods are sold to SBPL after
certification by them, ownership of such goods is transferred from the assessee
and vests with SBPL. Thus, once the goods are certified by SBPL and sold to
them the contract of sale concludes as far as the assessee is concerned, as
goods cannot be returned back to the assessee. Therefore, examined in the
aforesaid perspective, it has to be concluded that it is a transaction of sale
between the assessee and SBPL on principal-to-principal basis and there is no
agency between them. Further, on a perusal of the invoices raised, it is clear
that the assessee has given a discount of 51% on the MRP of the goods sold.

 

These evidences clearly demonstrate that
there is no relationship of principal and agent between the assessee and SBPL.
The Departmental authorities have failed to demonstrate that SBPL was acting as
an agent on behalf of the assessee to satisfy the condition of section 194H. It
is also relevant to note, though, that the agreement with SBPL is subsisting
from the year 1997 and similar trade discount has been given to SBPL on sales
effected over the years; but the Department has not made any disallowance
either in the preceding assessment years or in the subsequent assessment years.
This fact is evident from the assessment orders passed for A.Ys. 2005-06 and
2006-07 u/s 143(3) of the Act. That being the case, when the Department is
following a consistent view by not treating the discount given in the nature of
commission over the years under identical facts and circumstances, a different
approach cannot be taken in the impugned A.Y.

 

Being aggrieved
by the order, the Revenue filed an appeal before the High Court. The Court
observed that the Tribunal has on facts come to the conclusion that the sale of
goods to Sandu Brothers Private Limited was on principal-to-principal basis and
not through an agent. Thus, no amount of the discount aggregating to Rs. 7.27
crores can be classified as commission. Therefore, section 194H of the Act
calling for deduction of tax of such a commission would have no application to
the present facts. The Revenue has not been able to show that the finding of
fact arrived at by it on the basis of the terms of the agreement is in any
manner perverse, or capable of a different interpretation. Therefore, the
department appeal was dismissed.

 

M/s Siemens Nixdorf Information Systemse GmbH vs. Dy. Dir. of Income Tax (Int’l Taxation) 2(1); [ITA No. 3833/M/2011; date of order: 31st March, 2016; A.Y.: 2002-03; Mum. ITAT] Section 2(14) – Capital asset – Advance given to subsidiary – Loss arising on sale of said asset was held to be treated as short-term capital loss [S. 2(47)]

1.      
The CIT (IT)-4 vs. M/s Siemens
Nixdorf Information Systemse GmbH [Income tax Appeal No. 1366 of 2017 Date of
order: 26th August, 2019 (Bombay
High Court)

 

M/s Siemens Nixdorf Information Systemse
GmbH vs. Dy. Dir. of Income Tax (Int’l Taxation) 2(1); [ITA No. 3833/M/2011;
date of order: 31st March, 2016; A.Y.: 2002-03; Mum. ITAT]

 

Section 2(14)
– Capital asset – Advance given to subsidiary – Loss arising on sale of said
asset was held to be treated as short-term capital loss [S. 2(47)]

 

The assessee company has a subsidiary by the
name Siemens Nixdorf Information Systems Limited (SNISL) to which it had lent
an amount of Euros 90 lakhs under an agreement dated 21st September,
2000. When SNISL ran into serious financial troubles and was likely to be wound
up, the assessee company sold this debt of Euros 90 lakhs to one Siemens AG.
This was done on the basis of the valuation carried out by M/s Infrastructure
and Leasing Finance Ltd. The assessee company claimed the difference in the
amount which was invested / lent to SNISL and the consideration received when
sold / assigned to Siemens AG as a short-term capital loss.

 

However, the AO disallowed the short-term
capital loss, pointing out that the amount lent by the assessee company to its
subsidiary was not a capital asset u/s 2(14) of the Act and also that no
transfer in terms of section 2(47) of the Act took place on the assignment of a
loss.

 

Being aggrieved, the assessee company
carried the issue in appeal to the CIT(A). But even the CIT(A) did not accept
the contention that the amount of Euros 90 lakhs lent to SNISL was a capital
asset and upheld the order of the AO. However, it also held that although the
assignment of a loss was a transfer u/s 2(47) of the Act, but it is of no avail
as the loan being assigned / transferred is not a capital asset.

 

On further appeal, the Tribunal held that
section 2(14) defines the term ‘capital asset’ as ‘property of any kind held by
an assessee, whether or not connected with his business or profession’, except
those which are specifically excluded in the said section. It further records
the exclusion is only for stock-in-trade, consumables or raw materials held for
purposes of business. It thereafter examined the meaning of the word ‘property’
to conclude that it has a wide connotation to include interest of any kind. It
placed reliance upon the decision of the Bombay High Court in the case of CWT
vs. Vidur V. Patel [1995] 215 ITR 30 rendered in the context of the
Wealth Tax Act, 1957 which, while considering the definition of ‘asset’, had
occasion to construe the meaning of the word ‘property’. It held the word
‘property’ to include interest of every kind. On the aforesaid basis, the
Tribunal held that in the absence of loan being specifically excluded from the
definition of capital assets under the Act, the loan of Euros 90 lakhs would
stand covered by the meaning of the word ‘capital asset’ as defined u/s 2(14)
of the Act. It also held that the transfer of the loan, i.e., capital asset,
will be covered by section 2(47) of the Act. The Revenue had not filed any
appeal on this issue, thus holding that the assessee company would be entitled
to claim loss on capital account while assigning / transferring the loan given
to SNISL to one to Siemens AG.

 

Being aggrieved with the order of the ITAT,
the Revenue carried the issue in appeal to the High Court. The Court observed
that section 2(14) of the Act defined the word ‘capital asset’ very widely to
mean property of any kind. However, it specifically excludes certain properties
from the definition of ‘capital asset’. The Revenue has not been able to point
out any of the exclusion clauses being applicable to an advancement of a loan.
It is also relevant to note that it is not the case of the Revenue that the
amount of Euros 90 lakhs was a loan / advance income of its trading activity.
The meaning of the word ‘property’ as given in the context of the definition of
asset in the Wealth Tax Act is that ‘property’ includes every interest which a
person can enjoy. This was extended by the Tribunal to understand the meaning
of the word ‘property’ as found in the context of capital asset u/s 2(14) of
the Act. The High Court in the case of Vidur Patel (Supra) has
observed
as under:

 

‘…So far as the meaning of “property” is
concerned, it is well settled that it is a term of widest import and, subject
to any limitation which the context may require, it signifies every possible
interest which a person can hold or enjoy. As observed by the Supreme Court
in Commissioner, Hindu Religious Endowments vs. Shri Lakshmirudra Tirtha Swami
of Sri Shirur Mutt (1954) SCR 1005, there is no reason why this word should
not be given a liberal or wide connotation and should not be extended to those
well-recognised types of interests which have the insignia or characteristic of
property right.’

 

The only objection of the Revenue to the
above decision being relied upon was that it was rendered under a different
Act. In this context, the Court relied on another decision in case of Bafna
Charitable Trust vs. CIT 230 ITR 846. In this case, the Court observed
as under:

 

‘Capital asset has been defined in clause
(14) of section 2 to mean property of any kind held by an assessee, whether or
not connected with his business or profession, except those specifically
excluded. The exclusions are stock-in-trade, consumable stores or raw materials
held for the business or profession, personal effects, agricultural land and
certain bonds. It is clear from the above definition that for the purposes of
this clause property is a word of widest import and signifies every possible
interest which a person can hold or enjoy except those specifically excluded.’

The Bombay High Court noted that the Revenue
had not been able to point out why the above decision of this Court rendered in
the context of capital assets as defined in section 2(14) of the Act was
inapplicable to the present facts; nor, why the loan given to SNISL would not,
in the present facts, be covered by the meaning of ‘capital asset’ as given u/s
2(14) of the Act. In the above view, as the issue raised herein stands
concluded by the decision of this Court in Bafna Charitable Trust (Supra),
and also by the self-evident position as found in section 2(14) of the Act, the
Revenue appeal accordingly stands dismissed.

DCIT CC-44 vs. M/s Shreya Life Sciences Pvt. Ltd. [ITA No. 2835/Mum./2014; Bench E; Date of order: 20th November, 2015] Penalty u/s 221(1) r/w/s 140A(3) of the Act – Default on payment of self-assessment tax – Acute financial constraints – Good and sufficient reasons – Penalty deleted

18.  The Pr.
CIT-Central-4 vs. M/s Shreya Life Sciences Pvt. Ltd. [Income tax Appeal No. 180
of 2017]; Date of order: 19th March, 2019; A.Y.: 2010-11

 

DCIT CC-44 vs. M/s Shreya Life Sciences Pvt. Ltd. [ITA No. 2835/Mum./2014;
Bench E; Date of order: 20th November, 2015]

 

Penalty u/s 221(1) r/w/s 140A(3) of the Act – Default on payment of
self-assessment tax – Acute financial constraints – Good and sufficient reasons
– Penalty deleted

 

The assessee is a pharmaceutical company manufacturing a wide range of
medicines and formulations. It filed its e-return on 15th October,
2010 and was liable to pay self-assessment tax of Rs. 2,61,19,300. But the
assessee did not pay the tax and merely uploaded the e-return. Asked the
reasons for not depositing the tax, it was submitted before the AO that the
assessee company was in great financial crisis.

 

However, the assessee’s contention was not accepted and the AO issued
notice u/s 221(1) r/w/s 140A(3) of the Act holding that the assessee had failed
to deposit self-assessment tax due to which a penalty was imposed u/s 221(1) of
the Act.

The CIT(A) deleted the penalty to the extent of Rs. 10 lakhs and upheld
the balance amount of Rs. 40 lakhs.

 

Both the assessee as well as the Department went in appeal before the
ITAT. The Tribunal, while deleting the penalty referred to relied upon the
further proviso to sub-section (1) of section 221 of the Act which provides
that where the assessee proves to the satisfaction of the AO that the default
was for good and sufficient reasons, no penalty shall be levied under the said
section.

 

The Tribunal accepted the assessee’s explanation that due to acute
financial constraints the tax could not be deposited. The assessee pointed out
that even the other dues such as provident fund, ESIC and bank interest could
not be paid. The assessee also could not deposit the government taxes such as
sales tax and service tax. In fact, the recoveries of the tax could be made only
upon adjustment of the bank accounts.

 

The financial crisis was because of non-receipt of proceeds for its
exports. Attention was drawn to the amount of outstanding receivables which had
increased from Rs. 291,96,24,000 to Rs. 362,54,82,000 during the year under
consideration.

 

On further appeal to the High Court, the Revenue appeal was dismissed.   

 

 

Dy. Commissioner of Income-tax, Circle-6(3) vs. M/s Graviss Foods Pvt. Ltd. [ITA No. 4863/Mum./2014] Pre-operative expense – New project unconnected with the existing business – Deductible u/s 37(1) of the Act

17.  The Pr. CIT-7 vs. M/s Graviss
Foods Pvt. Ltd. [Income tax Appeal No. 295 of 2017]; Date of order: 5th April, 2019; A.Y.: 2010-11

 

Dy. Commissioner of Income-tax, Circle-6(3) vs. M/s Graviss Foods Pvt.
Ltd. [ITA No. 4863/Mum./2014]

 

Pre-operative expense – New project unconnected with the existing
business – Deductible u/s 37(1) of the Act

 

The assessee is a private limited company engaged in the business of
manufacturing ice cream and other milk products. For the AY 2010-11 the
assessee had incurred an expenditure of Rs. 1.80 crores (rounded off) in the
process of setting up a factory for production of ‘mawa’, which project the
assessee was forced to abandon.

 

The AO was of the opinion that the expenditure was incurred for setting
up of a new industry. The expenditure was a pre-operative expenditure and could
not have been claimed as revenue expenditure.

 

The AO held that the assessee had entered a new field of business of
producing and supplying ‘mawa’ (or ‘khoa’) which is entirely different from the
business activity carried on by it. The AO completed the assessment and
disallowed the expenditure on the ground that it was incurred in connection
with starting a new project, that the expenditure was incurred for setting up a
new factory at Amritsar and thus not for the expansion and extension of the
existing business but for an altogether new business. The CIT(A) allowed the
appeal. The Tribunal relied upon its earlier decision for A.Y. 2009-10 and
confirmed the view of the CIT(A) and dismissed the Revenue’s appeal.

 

Before the Hon’ble High Court counsel for Revenue submitted that the
assessee was previously engaged in the business of manufacturing ice cream. The
assessee desired to set up a new plant at a distant place for production of
‘mawa’. This was, therefore, a clear case of setting up of a new industry.

The High Court observed that there was interlacing of the accounts,
management and control. The facts on record as culled out by the Tribunal are
that the assessee company was set up with the object to produce or cause to be
produced by process, grate, pack, store and sell milk products and ice cream.
In furtherance of such objects, the assessee had already set up an ice cream
producing unit. Using the same management control and accounts, the assessee
attempted to set up another unit for production of ‘mawa’, which is also a milk
product. The Tribunal, therefore, rightly held that the expenditure was
incurred for expansion of the existing business and it was not a case of
setting up of new industry, therefore it was allowable as revenue expenditure.

 

The High Court relied on the decision of the Supreme Court in the case
of Alembic Chemical Works Co. Ltd. vs. CIT, Gujarat, [1989] 177 ITR 377,
and the Bombay High Court decision in the case of CIT vs. Tata Chemicals
Ltd. (2002) 256 ITR 395 Bom.

 

The Department’s appeal was dismissed.

 

The DCIT vs. Mrs. Supriya Suhas Joshi [ITA No. 6565/Mum./2012; Bench: L; Date of order: 31st May, 2016; Mum. ITAT] Income from salary vis-a-vis income from contract of services – Dual control – Test of the extent of control and supervision

16.  The Pr. CIT-27 vs. Mrs.
Supriya Suhas Joshi [Income tax Appeal No. 382 of 2017]; Date of order: 12th April, 2019; A.Y.: 2009-10

 

The DCIT vs. Mrs. Supriya Suhas Joshi [ITA No. 6565/Mum./2012; Bench: L;
Date of order: 31st May, 2016; Mum. ITAT]

 

Income from salary vis-a-vis income from contract of services – Dual
control – Test of the extent of control and supervision

 

The assessee is the sole proprietor of M/s Radiant
Services, engaged in Manpower Consultancy and Recruitment Services in India and
overseas. The said Radiant Services had entered into an agreement with M/s
Arabi Enertech, a Kuwait-based company, in 2007-08 for providing manpower to it
as per its requirements. Individual contracts were executed for providing the
personnel. As per the contract, the Kuwait-based company paid a fixed sum out
of which the assessee would remunerate the employee.

 

The AO treated the payments made by the assessee to
the persons recruited abroad as not in the nature of salaries and applied the
provisions of section 195 r/w/s 40(a)(ia) and disallowed the same as no TDS was
done by the assessee. The AO concluded that there was no master and servant
relationship between the assessee and the recruited persons and therefore the
payments could not be held to be salaries. He did not accept the assessee’s
stand that the persons so employed worked in the employment of the assessee and
were only loaned to the Kuwait-based company for carrying out the work as per
the requirements of the said company. It is undisputed that in case of payment
to a non-resident towards salary, it would not come within the scope of section
195 of the Act, and hence this controversy. The assessee carried the matter in
appeal. The CIT(A) took note of the documents from the records, including the contract
between the assessee and the Kuwait-based company and the license granted by
the Union Government to enable the assessee to provide such a service. The
Commissioner was of the opinion that the assessee had employed the persons who
had discharged the duties for the Kuwait-based company. The assessee was,
therefore, in the process making payment of salary and, therefore, there was no
requirement of deducting tax at source u/s 195 of the Act.

 

The Tribunal confirmed the view of the CIT(A) upon
which an appeal was filed before the High Court.

 

The Hon’ble High Court observed that the contract
between the assessee and the Kuwait-based company was sufficiently clear,
giving all indications that the concerned person was the employee of the
assessee. The preamble to the contract itself provided that as per the contract
the assessee would supply the Commissioning Engineer to the said company on
deputation basis for its ongoing project. Such deputation would be on the terms
and conditions mutually discussed between the assessee and the said company.
The contract envisaged payment of deputation charges which were quantified at
US$ 5,500 per month. Such amount would be paid to the assessee out of which the
assessee would remunerate the employee. The mode of payment was also specified.
The same would be released upon the assessee submitting invoices. The record
suggested that the assessee after receiving the said sum from the Kuwait-based
company would regularly pay to the employee US$ 4,000 per month, retaining the
rest. In clear terms, thus, the concerned employee was in the employment of the
assessee and not of the Kuwait-based company, contrary to what the Department
contended.

 

The Department argued that looking to the
supervision and control of the Kuwait-based company over the employee, it must
be held that he was under the employment of the said company and not of the
assessee. In this regard, it placed heavy reliance on the decision of the
Supreme Court in the case of Ram Prashad vs. Commissioner of Income tax
(1972) 86 ITR 122 (SC). The Court observed that the test of the extent
of control and supervision of a person by the engaging agency was undoubtedly a
relevant factor while judging the question whether that person was an agent or
an employee. However, in a situation where the person employed by one employer
is either deputed to another or is sent on loan service, the question of dual
control would always arise. In such circumstances, the mere test of on-spot
control or supervision in order to decide the correct employer may not succeed.
It is inevitable that in a case such as the present one, the Kuwait-based
company would enjoy considerable supervising powers and control over the
employee as long as the employee is working for it.

Nevertheless, the assessee company continued to
enjoy the employer-employee relationship with the said person. For example, if
the work of such person was found to be wanting or if there was any complaint
against him, as per the agreement it would only be the assessee who could
terminate his services. Under the circumstances, no question of law arises. The
Department’s appeal was dismissed.

 

Rectification of mistake – Debatable issue –Adjusting the business loss against capital gain in terms of provisions of section 71(1) of the Act –View once allowed by the AO could not be rectified by him if the issues is debatable. [Section 154]

1.     3.  
Pr.CIT-6 vs. Creative
Textile Mills Pvt. Ltd. [Income tax Appeal no 1570 of 2016 Dated: 13th February, 2019 (Bombay High Court)]


[Creative Textile Mills Pvt. Ltd vs.
ACIT-6(2); dated 28th October, 2015; ITA. No 7480/Mum/2013, AY : 2005-06,
Bench:C  Mum. ITAT]

 

Rectification
of mistake – Debatable issue –Adjusting the business loss against capital gain
in terms of provisions of section 71(1) of the Act –View once allowed by the AO
could not be rectified by him if the issues is debatable. [Section 154]

 

The
assessee is engaged in the business of Processing, Manufactures and Export of
Readymade Garments & Fabric, filed its return of income on 30.10.2005
declaring total loss of Rs. 4,37,23,576/-. The assessment order was passed on
31.12.2007 declaring total loss of Rs. 2,29,98,454/-. However, the AO made a
rectification of the assessment order u/s. 154 of the I.T. Act in its order on
the pretext that computation of loss has not been adjusted against the capital
gain and that excess loss has been allowed to the assessee and thus a sum of
Rs. 1,82,65,501/- was added on account of LTCG, against which an appeal was filed
before the CIT(A) on the ground, the order u/s. 154 was bad in law, void, ab
initio and was impermissible under the law.However, the ld. CIT(A) upheld
the order of AO.

 

Being aggrieved with the CIT(A) order, the assessee filed an appeal to
the ITAT. The Tribunal held that the assessee relied upon the judgment in case
of T.S.Balaram, ITO vs. Vokart Brothers & Others 82 ITR 50 (SC)
wherein it was held “that mistake apparent from the record must be an obvious
and patent mistake and not something which can be established by a long drawn
process and of reasoning on points on which there may be conceivably two
opinions. A decision on a debatable point of law is not a mistake apparent from
the record. The Ld AR further relied upon the cases of CIT vs. Victoria
Mills Ltd. [153 ITR 733], CIT vs. British Insulated Calender’s Ltd. [202
ITR 354], Addl. Second ITO vs. C.J. Shah [10 ITD 151 (TM)] and DCIT
vs. Shri Harshavardan Himatsingka [ITA No. 1333 to 1335/Kol/2012] (Bom. High
Court). In DCIT (Kol.) vs. Harshavardan Himatsingka, it was held
that the order passed by the AO u/s. 154 of the Act adjusting the business loss
against capital gain in terms of provisions of section 71(1) of the Act,
wherein assessee is entitled to carry forward the business loss without
adjusting the same from capital gain or the same is mandatory required to be
adjusted. It was further held by co-ordinate bench that this aspect of
provision of section 71(1) of the Act is also a subject matter of dispute and
there are case law both in favour and against the said proposition as
canvassed. Hence issue is debatable cannot be said that there was a mistake
apparent on record which could be rectified u/s. 154 of the Act, hence the
order passed by AO u/s. 154 of the Act is not sustainable. It was  further seen that in the regular assessment,
certain disallowance/additions were made by the AO which was deleted by ld.
CIT(A) in further appeal and the appeal filed by the department against the
order of CIT(A) has also been dismissed by the Tribunal and the case had
already travelled up to the ITAT till then no such interference was drawn at
the time of regular assessment or during the appellate stage. In view of the
above, ITAT held that  the order passed
by the AO u/s. 154 which was subsequently upheld by CIT(A) is void, ab
initio and the same is liable tobe set-aside and is not permissible under
the law.

 

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
sub-section (1) of section 71 of the Act provides that where in respect of any
assessment year the net result of the computation under any head of income
other than “capital gains’ is a loss and the assessee has no income under the
head ‘capital gains’ he shall, subject to the provisions of this Chapter, be
entitled to have the amount of such loss set off against his income, if any,
assessable for that assessment year under any other head. This provision came
up for consideration before this Court in the case of Commissioner of Income
Tax vs. British Insulated Calendar’s Ltd. [202 ITR 354] in which it was
held that under sub-section (1) of section 71 of the Act the assessee has no
option in setting off the business loss against the heads of other income as
long as there was no capital gain during the year under consideration. The case
of the assessee does not fall under sub-section (1) of section 71 of the Act
since the assessee had declared capital gain. Such a situation would be covered
by subsection (2) of section 71 of the Act which reads as under;

“(2) Where in respect
of any assessment year, the net result of the computation under any head of
income, other than “Capital gains”, is a loss and the assessee has income
assessable under the head “Capital gains”, such loss may, subject to the
provisions of this Chapter, be set off against his income, if any, assessable
for that assessment year under any head of income including the head “Capital
gains” (whether relating to short-term capital assets or any other capital
assets)”.

 

In case of British
Insulated Calender’s (supra) this Court had in respect to sub-section 2 of
section 71 observed that “

in case of the assessee
declaring capital gain, he had an option to set off the business loss, whereas
no such option is given for sub-section (1)”. Before the High Court, of course,
the provision of sub-section 2 of section 71 of the Act was somewhat different
and the expression “ or, if the assessee so desires, shall be set off only
against his income, if any, assessable under any head of income other than
‘capital gains’” has since been deleted. Nevertheless, the question that would
arise is, whether even in the unamended form sub-section (2) of section 71 of
the Act mandates the assessee to set off its business loss against the capital
gains of the same year when this provision used an expression “may” as compared
to the expression “shall” used in s/s. (1).

 

In the present case, the Hon’ble Court was  not called upon to judge the correctness of
interpretation of either the revenue or the assessee. However the court
observed that issue  was far from being
clear. It was clearly debatable. In this position, the A.O, as per the settled
law, could not have exercised the rectification powers. The Income Tax Appeal
was dismissed.   

 

 

Section 45 – Capital gains – Non-compete clause – Transfer of business – Amount is liable to be bifurcated and apportioned – Attributed to the non- compete clause is revenue receipts and remaining was to be treated as the capital receipt taxable as capital gains.

1.    2.   
Pr CIT-17 vs. Lemuir Air
Express [ ITA no 1388 of 2016 Dated: 6th February, 2019 (Bombay High
Court)]

 

[ACIT-12(3)
vs. Lemuir Air Express; dated 9th October, 2015 ; ITA. No
3245/Mum/2008, AY : 2004-05 Bench: G 
Mum.  ITAT ]

 

Section
45 – Capital gains – Non-compete clause – Transfer  of 
business – Amount is liable to be bifurcated and apportioned –
Attributed to the non- compete clause is revenue receipts and remaining was to
be treated as the  capital receipt
taxable as capital gains.

 

The
assessee is a partnership firm. The assessee was engaged in the business as
custom house agent, as also an air cargo agent. The activities of the assessee
would involve assisting the clients in air freight, forwarding for export etc.
During the year, the assessee transferred its business of international cargo
to one DHL Danzar Lemuir Pvt Ltd (“DHL” for short) as a going concern
for consideration of Rs. 54.73 crore. The assessee offered such receipt to tax
as capital gain. The A O did not accept this stand of the assessee. He noticed
that in the deed of transfer of business, there was a clause that the assessee
would not involve into carrying on the same business. According to the A.O,
therefore, in view of such non-compete clause in the agreement, the receipt could
be the assessee’s income in terms of section 28(va) of the Act and
consequentially taxable under the head ‘Profits and Gains of Business and
Profession’.

 

The
assessee carried the matter in appeal. The CIT(A) was of the opinion that the
entire sum of Rs. 54.73 crore was not paid for non-compete agreement. He
apportioned the total consideration into two parts namely a sum of Rs. 4.5
crore was attributed to the non-compete clause, the rest i.e Rs. 50.23 crore
(after deducting costs) was treated as the assessee’s capital receipt taxable
as capital gains. On this apportionment, the CIT(A) arrived at after taking
into consideration the profit of the firm for last two years from said
business.

 

Revenue
carried the matter in appeal before the Tribunal. The Tribunal, by the impugned
judgment, upheld the view of the CIT(A) inter alia observing that the
assessee had under the agreement in question transferred the entire business
and the non-compete clause was merely consequent to the transfer of business.

 

Being aggrieved with the
ITAT order, the revenue filed an appeal to the High Court. The Court observed
that the entire sale consideration of Rs. 54.73 crore could never have been
attributed to the non-compete clause contained in such agreement. The CIT(A)
applied logical formula to arrive at the apportionment between the value for
the sale of business and of non-compete clause in the agreement. No perversity
is pointed out in this approach of the CIT(A). The assessee which was engaged
in highly specialised business, transferred the entire business for valuable
consideration. Non-compete clause in such agreement was merely a part of the
understanding between the parties. What purchaser received under such agreement
was entire business of the assessee along with non-compete assurance. We notice
that Clause (va) of section 28 pertains to any sum whether received or
receivable, in cash or kind, under an agreement, inter alia for not carrying
out any activity in relation to any business or profession. A non-compete agreement
would therefore fall in this clause. Proviso to said Clause (va), however,
provides that the said clause would not apply, to any sum whether received or
receivable, in cash or kind, on account of transfer of right to manufacture,
produce or process any article or thing or right to carry on any business or
profession which is chargeable under the head Capital Gains. The assessee’s
receipt attributable to the transfer of business was correctly taxed by the
CIT(A) as confirmed by the Tribunal as giving rise to capital gain. It was only
residual element of receipt relatable to the non-compete agreement which was
brought within fold of Clause (va) of section 28 of the Act. In the result, the
appeal was dismissed.

 

Section 68 – Cash credits – Share application money – Identity, genuineness of transaction and creditworthiness of persons from whom assessee received funds – Allegation by AO about evasion of tax without any supporting evidence, is not justified.

1.  1.    
The Pr. CIT-1 vs. Pushti
Consultants Pvt Ltd [Income tax Appeal no 1332 of 2016 Dated: 6th February, 2019 (Bombay High Court)]. 

 

[Pushti
Consultants Pvt Ltd vs. DCIT-1(2); dated 23rd March, 2015 ; ITA. No
4963/Mum/2012, AY 2008-09, Bench : C , Mum. 
ITAT ]

 

Section
68 – Cash credits – Share application money – Identity, genuineness of
transaction and creditworthiness of persons from whom assessee received funds –
Allegation by AO about evasion of  tax
without any supporting evidence, is not justified.

During
the course of the scrutiny proceedings, the A.O noticed that the assessee had
received share application money of Rs. 2.20 crore during the year under
assessment. The assessee substantiated its claim of share application money of
Rs. 2.20 crore received from Speed Trade Securities Pvt Ltd (“STSPL”
for short) by filing Board resolution and a letter from STSPL. The assessee
also filed details consequent to the summons issued u/s. 131 of the Act to the
director of STSPL. However, the A.O was not convinced with the same on the
ground that the board resolution of STSPL mentions that it will pay 50% of the
share application money i.e Rs. 2.20 crore and if the balance 50% of share
application money is not paid before 30.9.2008, the amount paid as share application
money will stand forfeited by the assessee. The A.O noted that STSPL has
sufficient funds to the extent of Rs. 14.33 crore available with it on
31.3.2009 (the extended period within which the balance amount of the share
application money has to be paid). In spite of having such huge funds at its
disposal, STSPL has allowed its investment to go in waste and claim loss in its
profit and loss account.

 

The A.O held that the
entire act of obtaining share application money and having it forfeited was an attempt
to evade tax. Thus, AO came to the conclusion that the share application money
was in fact the assessee’s own funds which were introduced under the garb of
share application money. Therefore,made an addition of Rs. 2.20 crore to
assessee’s income.

 

Being
aggrieved by the order of the A.O, the assessee filed an appeal to the CIT(A).
The CIT(A) dismissed the appeal upholding the view of the A.O and inter alia
placing reliance upon a decision of the Apex Court in the case of McDowell
& Co Ltd vs. Commercial Tax Officer1 (1985) 154 ITR 148 (SC) as being
applicable to the  facts of this case,
thus, dismissing the assessee’s appeal.

 

On
further appeal of the assessee, the Tribunal held that the evidence on record
established the identity, capacity and genuineness of the share application
money received from STSPL. This is on the basis of the fact that the amounts
were received through proper banking channels, the ledger accounts, bank
statement and audited annual accounts of STSPL were also submitted which
supported the case of the assessee. Further the valuation report/certificate of
a Chartered Accountant to the effect that the valuation of shares would be Rs.
20.83 per share and therefore, the receipt of share application money at the aggregate
price of Rs. 20 i.e Rs. 10 as face value and Rs. 10 as premium was perfectly in
order. It also recorded the fact that the application money had been paid by
STSPL by selling its own investments/shares in the stock exchange through its
broker Satco Securities and Financial Ltd (Satco) and had received the money
from Satco for sale of its investments/shares. The statement of Bank of Baroda,
the banker of Satco reflected the payments to STSPL for sale of its own
investments/shares of stock exchange was also produced. In the aforesaid view,
the impugned order held that the investment of Rs. 2.20 crore by STSPL on the
basis of evidence on record was established, as the identity, capacity and
genuineness stood proved. In the above view, the impugned order allowed the
assessee’s appeal.

 

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee has gone beyond the requirement of the law as
existing in the subject assessment year 2008-09 by having explained the source
in terms of section 68 of the Act. Besides, the reliance by the CIT (A) on the
decision of McDowell (supra) is not applicable to the facts of the
present case. The Apex Court in decisions in the cases of Union of India
& Anr. vs. Azadi Bachao Andolan & 
Anr2 and Vodafone International Holdings 2 (2003) 263 ITR 706
(SC) B.V. vs. Union of India & Anr.3 also held that principles laid
down in the case of McDowell (supra) is not applicable across the board
to discard an act which is valid in law upon some hypothetical assessment of
the real motive of the assessee. Thus, imputing a plan on the part of the
assessee and STSPL to evade tax without any supporting evidence in the face of
the detailed facts recorded by the impugned order of the Tribunal, is not
justified. We find that the impugned order of the Tribunal being essentially a
finding of fact which is not shown to be perverse does not give rise to any
substantial of law. Hence, not entertained. Accordingly, the appeal is
dismissed.

 

M/s Lokhandwala Construction Industries Pvt. Ltd. vs. DCIT-9(2); Date of order: 29th April, 2016; [ITA. No. 4403/Mum/2013; A.Y.: 2007-08; Bench: Mum. ITAT] Section 271(1)(c): Penalty – Inaccurate particulars of income – Method of accounting – Project completion method – Dispute is on the year of allowability of claim – Levy of penalty not justified

8.  CIT vs. M/s
Lokhandwala Construction Industries Pvt. Ltd. [Income tax Appeal No. 992 of
2017] Date of order: 17th September, 2019 (Bombay High Court)]

 

M/s Lokhandwala Construction Industries Pvt. Ltd. vs.
DCIT-9(2); Date of order: 29th April, 2016; [ITA. No. 4403/Mum/2013; A.Y.:
2007-08; Bench: Mum. ITAT]

 

Section 271(1)(c): Penalty – Inaccurate particulars of
income – Method of accounting – Project completion method – Dispute is on the
year of allowability of claim – Levy of penalty not justified

 

The
assessee is in the activity of building and construction. In filing the return
of income for the A.Y. 2007-2008, the assessee followed the Project Completion
Method. The AO by his assessment order dated 24th December, 2009,
disallowed the expenditure claimed towards advertisement and sales promotion on
the ground that the expenses would be claimed only in the year the project is
completed and income offered to tax. In penalty proceedings, the AO held that
the assessee was guilty of filing inaccurate particulars of income within the
meaning of section 271(1)(c) of the Act and levied penalty. The assessee filed
an appeal before the CIT(A) who dismissed the same.

 

Being
aggrieved by the order, the assessee filed an appeal to the Tribunal. The
Tribunal held that the claim was disallowed in the instant year on the ground
that such advertisement / sales promotion expenses should be allowed in the
year in which the sale of flats was undertaken in respect of which such
expenses were incurred. Pertinently, in A.Ys. 2009-10 and 2010-11 such expenses
were allowed following the methodology devised by the AO in the instant
assessment year. The aforesaid factual matrix goes to amply demonstrate that
the difference between the assessee and the Revenue does not hinge on
allowability or genuineness of expenditure but merely on the year of
allowability. In fact, the methodology devised by the AO in the A.Y. 2006-07
for the first time only seeks to postpone the allowability of expenses but does
not reflect any disagreement on the merit of the expenses claimed.

 

In the
years starting from A.Y. 1990-91 and up to 2005-06, the claim for deduction of
expenses has been allowed in the manner claimed by the assessee following the
‘project completion’ method of accounting. Therefore, if in a subsequent period
the AO re-visits an accepted position and makes a disallowance, the same would
not be construed as a deliberate attempt by the assessee to furnish inaccurate
particulars of income or concealment of particulars of his income. Therefore,
where the difference between the assessee and the Revenue is merely on account
of difference in the year of allowability of claim, and in the absence of any
finding or doubt with regard to the genuineness of the expenses claimed, the
penal provisions of section 271(1)(c) of the Act are not attracted. The penalty
levied u/s 271(1)(c) of the Act deserves to be deleted.

 

Being
aggrieved by the order, the Revenue filed an appeal to the High Court. The
Court observed that the AO adopted a methodology to postpone allowability of
claim for deduction of expenses in the year in which the income is offered to
tax. The question, therefore, is whether making such a claim on the basis of
accepted practice would amount to furnishing inaccurate particulars of income
within the meaning of section 271(1)(c) of the Act. In the case of CIT
vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158, the Supreme
Court observes that a mere making of a claim, which is not sustainable in law,
by itself will not amount to furnishing inaccurate particulars regarding the
income. Therefore, mere making of a claim which is disallowed in quantum
proceedings cannot by itself be a ground to impose penalty u/s 271(1)(c) of the
Act. The fact was that the assessee was following the above method since
1990-1991 till the subject assessment year and there was no dispute in respect
thereof save for the A.Y. 2006-07 and the subject assessment year. This fact
itself would militate against imposition of any penalty upon the assessee on
the ground of furnishing inaccurate particulars of income. Accordingly, the
Revenue appeal was dismissed.  

 

 

Section 147: Reassessment – Notice issued after four years – Original assessment u/s 143(3) – Reopening is based on change of opinion – Reassessment was held to be not valid

7.  Sutra Ventures
Private Limited vs. The Union of India and others [Writ Petition No. 2386 of
2019] Date of order: 9th October, 2019 (Bombay High Court)

 

Section 147: Reassessment – Notice issued after four
years – Original assessment u/s 143(3) – Reopening is based on change of
opinion – Reassessment was held to be not valid

 

The
assessee is a company engaged in the business of providing marketing support
services and consultancy in sports. For the A.Y. 2012-13, it filed a return of
income declaring total income of Rs. 6,44,390. The AO issued a notice for
scrutiny assessment. The assessee company replied to the queries; the scrutiny
proceedings were concluded and the assessment order was passed on 13th
March, 2015; the AO accepted the return of income filed by the assessee without
making any disallowance or additions.

 

After
the scrutiny assessment for the A.Y. 2012-13 was concluded, the Income Tax
Department conducted audit and certain objections were raised regarding purchases.
The assessee company filed its reply to the audit objections, submitting its
explanations. On 28th March, 2019 the assessee company received a
notice from the AO u/s 147 of the Act on the ground that there was reason to
believe that income chargeable to tax for the A.Y. 2012-13 had escaped
assessment. The AO provided the reasons to which the assessee company filed
objections. The objections raised by the assessee company were rejected by the
AO.

 

Being
aggrieved by the order of the AO, the assessee filed a Writ Petition before the
High Court. The Court held that in this case assessment is sought to be
reopened after a period of four years. The significance of the period of four
years is that if the assessment is sought to be reopened after a period of four
years from the end of the relevant assessment year, then as per section 147 of
the Act an additional requirement is necessary, that is, there should be
failure on the part of the assessee to fully and truly disclose material facts.
The reason of reopening was that the assessee company, in the profit and loss
account has shown sale of services at Rs. 1,87,56,347 under the head revenue
from operations and an amount of Rs. 20,46,260 was debited as purchase of
traded goods / stock-in-trade. The AO had opined that the goods were neither
shown as sales nor as closing stock because of which the income had escaped
assessment because of the omission on the part of the assessee.

 

The
Court observed that the assumption of jurisdiction on the basis of the reasons
given by the AO is entirely unfounded and unjustified. In the original
assessment the petitioner was called upon to produce documents in connection
with the A.Y. 2012-13, namely, acknowledgment of return, balance sheet, profit
and loss account, tax audit report, etc. The petitioner was also called upon to
submit the return of income of the directors along with other documents such as
shareholding pattern, bank account details, etc. The assessment order dated 13th
March, 2015 pursuant to the production of profit and loss account and other
documents referred to these documents. In the assessment order dated 13th
March, 2015 it is stated that the assessee company produced all the material
that was called for and it remained present through its chartered accountant to
submit the documents. The total income of the assessee company was computed
with reference to the profit and loss account. Therefore, the profit and loss
account was called for, was submitted by the assessee and was scrutinised.

 

Thus,
it cannot be said that there was any failure on the part of the assessee
company to produce all the material particulars. After considering the entire
material the assessment order was passed. The AO is now seeking to proceed on a
mere change of opinion. All these factors and the need for jurisdictional
requirement were brought to the notice of the AO by the assessee company. Yet,
the AO ignored the same and proceeded to dismiss the objections and reiterated
his decision to reopen the assessment. In these circumstances, the impugned
notice and the impugned order issued / passed by the AO were quashed and set
aside.

The Janalaxmi Co-operative Bank Ltd. vs. The Pr. CIT-1; date of order: 20th May, 2016; [ITA No. 1955/PN/2014; A.Y.: 2010-11; Bench: ‘B’ Pune ITAT] Section 263: Revision – Assessee filed detailed reply to the query raised by AO in respect of interest on NPA – Revision not possible if the AO had taken a view after due consideration of assessee’s submissions

6.  The Pr. CIT-1
vs. The Janalaxmi Co-operative Bank Ltd. [Income tax Appeal No. 683 of 2017] Date of order: 26th August, 2019 (Bombay High Court)

 

The Janalaxmi Co-operative Bank Ltd. vs. The Pr. CIT-1;
date of order: 20th May, 2016; [ITA No. 1955/PN/2014; A.Y.: 2010-11;
Bench: ‘B’ Pune ITAT]

 

Section 263: Revision – Assessee filed detailed reply to
the query raised by AO in respect of interest on NPA – Revision not possible if
the AO had taken a view after due consideration of assessee’s submissions

 

The
assessee is a co-operative society engaged in the banking business. It filed
its return of income for the A.Y. 2010-11 declaring Nil income. During the
course of scrutiny assessment, the AO issued a questionnaire to the assessee
who replied to the same. One of the queries was with respect to interest on
non-performing assets, Rs. 2,64,59,614, debited to profit and loss account. The
AO was satisfied with the reply of the assessee and did not make any addition
with regard to the interest on NPAs.

 

However,
the CIT issued a notice u/s 263 of the Act on the ground that no proper inquiry
/ verification was carried out by the AO in respect of interest expenses and
the NPAs claimed by the assessee. The CIT held that any provision towards any
unascertained liability is not an allowable deduction under the provisions of
the Act, therefore, the entire provision towards interest expenditure,
amounting to Rs. 2,64,59,614, needs to be disallowed. The CIT vide the impugned
order set aside the assessment order and directed the AO to pass fresh orders
after conducting proper inquiries / verification on the aforementioned issue.

 

Being
aggrieved by the order, the assessee filed an appeal to the Tribunal. The
assessee submitted that the issue relating to interest arising on NPAs has been
settled by the Supreme Court in the case of UCO Bank vs. CIT [154 CTR 88
(SC)]. The Bombay High Court had also, in the case of Deogiri
Nagari Sahakari Bank Ltd. in Income Tax Appeal No. 53 of 2014 on 22nd
January, 2015, decided the issue in favour of the assessee. The assessee
further submitted that the Co-ordinate Bench of the Tribunal, in the case of
similarly situated other assessees vide common order dated 4th
February, 2016, has deleted the addition made on account of interest accrued on
NPAs.

 

The
Tribunal held that a perusal of the submissions made by the assessee before
ACIT shows that during the course of assessment proceedings, the assessee has
given detailed reply to the query raised by the AO in respect of interest on
the NPAs. Therefore, once the issue has been considered by the AO in scrutiny
assessment proceedings, provisions of section 263 of the Act cannot be invoked
unless two conditions are satisfied, that is, (i) the assessment order is erroneous;
and (ii) it is prejudicial to the interest of Revenue. In the present case the
reason/s given by CIT to hold that the assessment order is erroneous is not
tenable.

 

Being
aggrieved by the order, the Revenue filed an appeal to the High Court. The Court
held that during the regular assessment proceedings leading to the assessment
order, specific queries with respect to interest for NPAs / sticky loans being
chargeable to tax were raised and the assessee had given detailed replies to
them. The AO, on consideration, did not make any addition with regard to it in
the return, i.e., on account of interest on sticky loans. In CIT vs. Fine
Jewellery (India) Ltd., 372 ITR 303 rendered in the context of section
263 of the Act, it was held that once inquiries are made during the assessment
proceedings and the assessee has responded to the queries, then non-mentioning
of the same in the assessment order would not lead to the conclusion that the
AO had not inquired into this aspect. In the result, the appeal of the Revenue
was dismissed.

Section 194C, r.w.s. 194-I – Deduction of tax at source – Contractors payment to – Payment was made to agencies towards lounging and catering services provided to customers of airlines as a part of single arrangement – Same would fall under generalised contractual category u/s. 194C

9

CIT (ITD)-1 vs. Jet Airways (India)
Ltd. [Income-tax Appeal No. 628 of 2018; (Bombay High Court) Dated 23rd
April, 2019]

 

[ACIT vs. Jet Airways
(India) Ltd.; Mum ITAT]

 

Section
194C, r.w.s. 194-I – Deduction of tax at source – Contractors payment to –
Payment was made to agencies towards lounging and catering services provided to
customers of airlines as a part of single arrangement – Same would fall under
generalised contractual category u/s. 194C

 

The assessee is an airlines company. As part of
its business, the assessee would provide lounge services to select customers at
various airports. In a typical case, a lounge would be rented out by an agency,
in the nature of an intermediary from the airport authority. The assessee
airlines company and other airlines as well as, in some cases, credit card
companies, would provide the lounge facility to premier class customers. As is
well known, a lounge is an exclusive secluded hall or a place at the airport
where a comfortable sitting arrangement and washrooms are provided to the
flying customers. Most of these lounges would have basic refreshments for which
no separate charge would be levied. According to the assessee, the assessee
would pay the agency for use of such lounge space by its customers as per
pre-agreed terms. While making such payment, the assessee used to deduct tax at
source in terms of section 194C of the Act, treating it as a payment to a
contractor for performance of a work.

 

The
Revenue contends that the assessee had paid rent to the agency and, therefore,
while paying such rental charges, tax at source u/s. 194-I of the Act should
have been deducted.

 

The
Tribunal by the impugned judgement referred to and relied upon a decision of
the coordinate Bench in the case of ACIT vs. Qantas Airways Ltd.,
reported in (2015) 152 ITD 434 and held that the department was not
right in insisting on deduction of tax at source u/s. 194-I of the Act.

 

Being aggrieved with the ITAT order, the Revenue
filed an appeal to the High Court. The Court held that the A.O. in the present
case had placed reliance on a decision of the Delhi High Court in the case of Japan
Airlines Ltd., reported in (2009) 325 ITR 298 and United Airlines
(2006) 287 ITR 281. The Court, however, noted that the Supreme Court in
the case of Japan Airlines Company Limited reported in (2015) 377 ITR 372
had overruled such decision of the Delhi High Court. The Supreme Court approved
the view of the Madras High Court in the case of CIT vs. Singapore
Airlines Ltd. reported in (2013) 358 ITR 237.

 

The issue
before the Supreme Court was regarding the nature of payments made by the
international airlines to the Airport Authority of India for availing the
services for the purpose of landing and take-off of aircrafts. The Revenue was
of the opinion that the charges paid for such purposes were in the nature of
rent for use of land, a view which was accepted by the Delhi High Court in the
above-noted judgment. The Supreme Court, in the judgement in case of Japan
Airlines (supra), held that the charges paid by the international
airlines for landing and take-off services, as also for parking of aircrafts
are in substance not for use of the land but for various other facilities such
as providing of air traffic services, ground safety services, aeronautical
communication facilities, etc. The Court, therefore, held that the payment of
such charges did not invite section 194-I of the Act. The Court observed that
this decision of the Supreme Court does not automatically answer the question
at hand.

 

Reference
to this decision was made for two purposes. Firstly, to record that the
reliance placed by the A.O. on the decision of the Delhi High Court is no longer
valid. Secondly, for the purpose of drawing an analogy that the payment for
certain services need not be seen in isolation. The real character of the
service provided and for which the payment is made would have to be judged. In
the present case, as noted, the assessee would enter into an agreement with the
agency which has rented out the lounge space at the airport from the Airport
Authority. Under such agreement, the assessee would pay committed charges be it
on a lump sum basis or on the basis of customer flow to such an agency. This,
in turn, would enable the passengers of the airlines to utilise the lounge
facilities while in transit.

 

The Court accepted the suggestion of Revenue
that service of providing beverages and refreshments was not the dominant part
of the service. It may only be incidental to providing a quiet, comfortable and
clean place for customers to spend some spare time. However, the Court did not
see any element of rent being paid by the assessee to the agency. The assessee
did not rent out the premises. The assessee did not have exclusive use to the
lounge for its customers. The customers of the airlines, along with customers
of other airlines of specified categories, would be allowed to use all such
facilities. Section 194-I of the Act governs the situation where a person is
responsible for paying any rent. In such a situation, deduction of tax at
source while making such payment is obligated. The Revenue wrongly invoked
section 194-I of the Act. In the result, the appeal was dismissed. 

Section 271(1)(c) – Penalty – Filing inaccurate particulars of income – Revised income filed voluntarily – before detection – Reason stated: accountant error – Human error – Bona fide mistake – penalty not leviable

8

Pr. CIT-18 vs. Padmini Trust [ITA No.
424 of 2017; (Bombay High Court) Dated 30th April, 2019]

 

[Padmini Trust vs.
ITO-14(1)(4); Bench: C; Mum TAT ITA No. 5188/Mum/2013]

Dated 28th
January, 2016;

A.Y. 2009-10.

 

Section
271(1)(c) – Penalty – Filing inaccurate particulars of income – Revised income
filed voluntarily – before detection – Reason stated: accountant error –  Human error – Bona fide mistake –
penalty not leviable

 

The assessee
is a Trust. The assessee had filed a return of income for the A.Y. 2009-10. The
return was taken for scrutiny by the A.O. by issuing notice of scrutiny
assessment on 27.09.2010. When the assessment proceedings were pending, the
assessee tried to rectify the return by making a declaration and enlarging
certain liability. Commensurate additional income tax of Rs. 99,05,738 was also
paid on 26.09.2011. This was conveyed to the A.O. by letter dated 15.11.2011.
While completing the assessment, the A.O. held that the revised return was not
acceptable since it was filed after the last day for filing such a revised
return. He, however, made no further additions over and above the declaration
made by the assessee in the return. On the ground that the assessee had not
disclosed the income in the original return, he initiated the penalty
proceedings. He imposed a penalty which was confirmed by the CIT(A).

 

Being
aggrieved with the CIT(A) order, the assessee filed an appeal to the ITAT. The
Tribunal held that there is wrong categorisation of capital gains and loss and
the same are evident from the papers filed. It is a case of wrong
categorisation of the income under the wrong head. The revised computation of
income basically corrects the mistake in such wrong categorisation. It is a
case where the assessee paid taxes on the extra income computed by virtue of
the revised computation along with the statutory interest u/s. 234A, 234B and
234C as the case may be. It is a settled issue that penalty cannot be excisable
in a case where the income was disclosed but under the wrong head of income.
Accordingly, levy of penalty u/s. 271(1)(c) of the Act was deleted.

 

The Revenue was aggrieved with the ITAT order and
hence filed an appeal to the High Court. The Revenue submitted that the
assessee had filed a false declaration in the original return. But after the
return was taken in scrutiny, he attempted to revise the return. Such attempt
would not give immunity to the assessee from the penalty. The counsel relied on
the decision of the Supreme Court in the case of Union of India and Ors.
vs. Dharmendra Textiles Processors and Ors. (2008) 306 ITR 277 (SC) to
contend that mens rea is not necessary for imposition of the penalty and
the penalty is a civil consequence. He also relied on the decision of the Delhi
High Court in the case of CIT vs. Zoom Communication (P) Limited (2010)
327 ITR 510 (Delhi) in which, highlighting the fact that very few
returns filed by assessees are taken in scrutiny, the Court held that merely
because the assessee had later on surrendered the income to tax would not mean
that the penalty should not be initiated, failing which the deterrent effect of
the penalty would disappear.

 

The assessee opposed the appeal contending that
there was a bona fide error in claiming short-term capital gain as
dividend income. This error was committed by the accountant of the assessee.
All such errors were corrected, whether the returns were taken in scrutiny or
not, demonstrating bona fide on the part of the assessee. He pointed out
that the tax on the additional income was paid even before the A.O. issued
specific queries in relation to the return filed. He relied on the decision of
the Supreme Court in the case of Price Waterhouse Coopers (P) Ltd. vs.
CIT, Kolkata to contend that mere bona fide error in claiming
reduced tax liability would not give rise to penalty proceedings.

 

The Court agreed with the submission of Revenue
that once the assessee is served with a notice of scrutiny assessment,
corrections to the declaration of his income would not grant immunity from
penalty. Especially in a case where the assessee during such scrutiny
assessment is confronted with a legally unsustainable claim which he thereafter
forgoes, may not be a ground to delete penalty. However, in the present case
the facts are glaring. The assessee made a fresh declaration of revised income
voluntarily before he was confronted with the incorrect claim. The assessee had
blamed the accountant for an error in filing the return. An affidavit of the accountant
was also filed. As stated by the counsel, such error was committed by other
group assessees also. Some of them corrected the error even before the scrutiny
notices. In view of such facts, the Court agreed with the conclusion of the
Tribunal that the original declaration of income suffered from a bona fide
unintended error. The Income-tax appeal was dismissed.

Section 28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space – Deal failed and could not get refund – Object clause of the assessee covered this as business activities – Allowable as deduction

7

Pr. CIT-6 vs. Khyati Realtors Pvt.
Ltd. [Income-tax Appeal No. 291 of 2017; (Bombay High Court)

Dated 30th April, 2019]

 

[Khyati Realtors Pvt. Ltd.
vs. ACIT-6(2); Bench: “A”; ITA. No. 129/Mum/2014, Mum ITAT]

Dated 4th
March, 2016;

A.Y. 2009-10.

 

Section
28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space
– Deal failed and could not get refund – Object clause of the assessee covered
this as business activities – Allowable as deduction

 

The assessee,
who is a private limited company, had advanced a sum of Rs. 10 crore to one
Bhansali Developers for booking commercial space in an upcoming construction
project. For some reason, the deal failed. The assessee, despite full efforts,
could not get refund of the said advance amount. In the return of income for
the A.Y. 2009-2010, the assessee had claimed the said sum of Rs. 10 crore as a
bad debt. The A.O. disallowed the same saying that the amount could not be
claimed by way of business loss because buying and selling commercial space was
not the business of the assessee.

 

On
appeal, the CIT(A) confirmed the disallowance. The assessee suggested before
the CIT(A) an alternate plea, that deduction should be allowed u/s. 37 of the
Act if the write-off of the advance did not fall u/s. 36(2) of the Act. But the
CIT(A) declined the assessee’s claim u/s. 36(2) on the plea that the assessee
did not have a money-lending licence or an NBFC licence; therefore, the
assessee was covered by explanation to section 37(1) of the Act. The CIT(A)
also declined the claim of the assessee u/s. 37 on the plea that the claim of
bad debts fell u/s. 30 to 36 of the Act.

 

Aggrieved
with the CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal
held that it is not in dispute that the expenditure claimed by the assessee is
not covered by any of the provisions of sections 30 to 36 of the Act and being
neither a capital nor personal expenditure, and having been incurred for the
purpose of carrying on of business, is eligible for deduction u/s. 37(1) of the
Act. The amount so advanced was not in the nature of capital expenditure or
personal expenses of the assessee, but was in the nature of advance given for
reserving / booking of commercial premises in the ordinary course of the
assessee’s business of real estate development and which could not be
recovered; therefore, there is no reason to decline the assessee’s claim as a
business loss u/s. 37(1) r.w.s. 28 of the I.T. Act. Accordingly, the claim was
allowed as a business loss.

 

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee was engaged in the business of real estate and
financing. The object clause for incorporation of the company reads as under:

 

“1. To
carry on the business of contractors, erectors, constructors of buildings,
houses, apartments, structures for residential, office, industrial,
institutional or commercial purposes and developers of co-operative housing
societies, developers of housing schemes, townships, holiday resorts, hotels,
motels, farms, holiday homes, clubs, recreation centres and in particular
preparing of building sites, constructing, reconstructing, erecting, altering,
improving, enlarging, developing, decorating, furnishing and maintenance of
structures and other properties of any tenure and any interest therein and
purchase, sale and dealing in freehold and leasehold land to carry on business
as developers of land, buildings, immovable properties and real estate by
constructing, reconstructing, altering, improving, decorating, furnishing and
maintaining offices, flats, houses, factories, warehouses, shops, wharves,
buildings, works and conveniences and by consolidating, connecting and
sub-dividing immovable properties and by leasing and disposing off the same.”

 

This clause is thus widely
worded and would cover within its fold a range of activities such as erection,
construction of buildings and houses, as also purchase, sale and dealing in
freehold and leasehold land to carry on business as developers of land,
buildings, and immovable properties. It was in furtherance of such an object
that the assessee had entered into a commercial venture by booking commercial
space with a developer in the upcoming construction of the commercial building,
the payment being an advance for the booking. The sum was not refunded. This
was thus clearly a business loss. It was also noticed that later when, due to
continued efforts, the assessee recovered a part of the said sum, the same was
offered as business income. In the result, the Revenue’s appeal was dismissed.

Section 147 – Reassessment – Natural justice – Order passed without disposing of objections raised by assessee to the report of DVO – reopening was improper and null and void

6. Pr
CIT-17 vs. Urmila Construction Company [ITA No. 1726 of 2016, Dated 18th
March, 2019 (Bombay High Court)]

 

[Urmila
Construction Company vs. ITO-12(3)(4); dated 06/11/2009; ITA. No.
2115/Mum/2009, A.Y. 2005-06 Mum. ITAT]

 

Section
147 – Reassessment – Natural justice – Order passed without disposing of
objections raised by assessee to the report of DVO – reopening was improper and
null and void

 

The assessee was engaged in
the business of building development. During such proceedings, the A.O. had
disputed the valuation of the work in progress in relation to the incomplete
construction work on a certain site. The A.O., therefore, referred the
valuation to the Departmental Valuation Officer (DVO) on 30.12.2007. The report
of the DVO did not come for some time. In the meantime, the assessment was
getting barred by limitation on 31.12.2007. The A.O., therefore, on 27.12.2007
passed an order of assessment u/s. 143(3) of the Act. This assessment was
subject to receiving the report of the DVO. The DVO report was received on
3.12.2009. Thereupon, the A.O. reopened the assessee’s return for the said assessment year, relying upon the report of the DVO.

 

Being aggrieved with the
A.O order, the assessee filed an appeal to the CIT(A). The CIT(A) upheld the
action of the A.O.

 

Being aggrieved with the
CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal held that
the report of the DVO cannot be the basis for reopening the assessment. The
Tribunal relied upon the decision of the Supreme Court in the case of Asst.
CIT vs. Dhairya Construction (2010) 328 ITR 515 and other decisions of High
Courts.

 

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
the notice of reopening of assessment was issued within a period of four years
from the end of the relevant assessment year. The original assessment was
completed, awaiting the report of the DVO. Under such circumstances, whether,
upon receipt of such report of DVO, reopening of the assessment can be validly
made or not, is the question.The court observed that it was not inclined to
decide this question. This was so because of the reason that once the A.O.
reopened the assessment, the assessee had strongly disputed the contents of the
DVO report. Before the A.O. the assessee had highlighted various factors as to
why the report of the DVO was not valid. The A.O., instead of deciding such
objections, once again called for the remarks of the DVO. The response of the
DVO did not come and in the meantime, the re-assessment proceedings were
getting time-barred. The A.O., therefore, passed an order of assessment under
section 143(3) r.w.s. 147 of the Act on the basis of the report of the DVO,
without dealing with the objections of the assessee to such a report.

 

The methodology adopted by
the A.O. in such an order of reassessment was wholly incorrect. Even if the notice
of reassessment was valid, the A.O. was to pass an order of reassessment in
accordance with the law. He could not have passed a fresh order without dealing
with and disposing of the objections raised by the assessee to the report of
the DVO. On this ground, the Revenue’s appeal was dismissed. 

 

Section 28(ii)(c) – Business income – Compensation – the agreement between assessee and foreign company was not agreement of agency but principal-to-principal – compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

5. Pr.
CIT-2 vs. RST India Ltd. [Income tax appeal No. 1798 of 2016, Dated 12th
March, 2019 (Bombay High Court)]

 

[ITO-2(3)(1)
vs. RST India Ltd., dated 03/02/2016; ITA. No. 1608/Mum/2009, A.Y. 2005-06;
Bench: D, Mum. ITAT]

 

Section
28(ii)(c) – Business income – Compensation – the agreement between assessee and
foreign company was not agreement of agency but principal-to-principal –
compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

 

The assessee had entered
into an agreement with US-based company Sealand Service Inc. Under the
agreement the assessee was to solicit business on behalf of the said Sealand
Service Inc. After some disputes between the parties, this contract was
terminated pursuant to which the assessee received a compensation of Rs. 2.25
crore during the period relevant to the A.Y. in question. The assessee claimed
that the receipt was capital in nature and therefore not assessable to tax. The
AO, however, rejected the contention and held that it would be chargeable to
tax in terms of section 28(ii)(c) of the Act.

 

The CIT (A) allowed the
assessee’s appeal holding that there was no principal agent relationship
between the parties and the contract was on principal-to-principal basis and
therefore section 28(ii)(c) would not apply.

 

In further appeal by the
Revenue, the Tribunal confirmed the view of the CIT Appeals, inter alia
holding that the entire source of the income was terminated by virtue of the
said agreement and that in view of the fact that there was no
principal-to-agent relationship, section 28(ii)(c) will not apply.

 

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
it is not disputed that upon termination of the contract the assessee’s entire
business of soliciting freight on behalf of the US-based company came to be
terminated. It may be that the assessee had some other business. Insofar as the
question of taxing the receipts arising out of the contract terminating the
very source of the business, the same would not be relevant. The real question
is, was the relationship between the assessee and the US-based company one in
the nature of an agency?

 

Section 28(ii)(c) of the
Act makes any compensation or other payment due, i.e, the receipt by a person
holding an agency in connection with the termination of the agency or the
modification of the terms and conditions relating thereto, chargeable as profits
and gains of business and profession. The essential requirement for application
of the section would therefore be that there was a co-relation of agency
principal between the assessee and the US- based company. In the present case,
the CIT (A) and the tribunal have concurrently held that the relationship was
one of principal-to-principal and not one of agency.

 

The Court further observed
that the true character of the relationship from the agreement would have to be
gathered from reading the document as a whole. This Court in the case of Daruvala
Bros. (P). Ltd. vs. Commissioner of Income Tax (Central), Bombay, reported in
(1971) 80 ITR 213 had found that the agreement made between the parties was
of sole distribution and the agent was acting on his behalf and not on behalf
of the principal. In that background, it was held that the agreement in
question was not one of agency, though the document may have used such term to
describe the relationship between the two sides. In such circumstances the Revenue’s
appeal was dismissed.

Section 271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is admitted by High Court penalty does not become unsustainable – However as issue is debatable, therefore penalty could not be imposed

4. The
Pr. CIT-1 vs. Rasiklal M. Parikh [Income tax Appeal No. 169 of 2017, Dated 19th
March, 2019 (Bombay High Court)]

 

[Rasiklal
M. Parikh vs. ACIT-19(2); ITA. No. 6016/Mum/2013, Mum. ITAT]

 

Section
271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is
admitted by High Court penalty does not become unsustainable – However as issue
is debatable, therefore penalty could not be imposed

 

The assessee is an
individual. He filed his ROI for the A.Y. 2006-07. The assessment of his return
gave rise to disallowance of exemption u/s. 54F of the Act. During the year the
assessee had transferred the tenancy rights in a premises for consideration of
Rs. 1.67 crore and claimed exemption of Rs. 1.45 crore u/s. 54F of the
investment in residential house. Such exemption was disallowed by the A.O. He
also initiated penalty proceedings. The disallowance was confirmed up to the
stage of the Tribunal, upon which the Assessee filed an appeal before the High
Court, which was admitted. The A.O. imposed a penalty of Rs. 50 lakh.

 

This was challenged by the
Assessee before the CIT (A) and then the Tribunal. The Tribunal, by the
impugned judgement, deleted the penalty only on the ground that since the High
Court has admitted the assessee’s quantum appeal, the issue is a debatable one.

 

Being aggrieved with the ITAT order, the
Revenue filed an appeal to the High Court. The High Court was not in agreement
with the observations of the Tribunal that merely because the High Court has
admitted the appeal and framed substantial questions of law, the entire issue
is a debatable one and under no circumstances the penalty could be imposed. In
this context, reference was made to a decision of a division bench of the
Gujarat High Court in the case of Commissioner of Income Tax vs. Dharamshi
B. Shah [2014] 366 ITR 140 (Guj).



However, the Hon’ble Court
held that despite the above-cited decision, this appeal need not be
entertained. This is so because independently, too, one can safely come to the
conclusion that the entire issue was a debatable one. The dispute between the
assessee and the Revenue was with reference to actual payment for purchase of
the flat and whether, when the assessee had purchased one more flat, though
contagious, could the assessee claim exemption u/s. 54F of the Act.

 

It can thus be seen that
the Assessee had made a bona fide claim. Neither any income nor any
particulars of the income were concealed. As per the settled legal position,
merely because a claim is rejected it would not automatically give rise to
penalty proceedings. Reference in this respect can be made to the decision of
the Supreme Court in the case of Commissioner of Income Tax, Ahmedabad vs.
Reliance Petroproducts Pvt. Ltd. Under the above circumstances, for the
reasons different from those recorded by the Tribunal in the impugned
judgement, the Revenue’s appeal was dismissed.

Section 28 (i) – Business income vs. income from house property – Income received from leasing out of shops and other commercial establishments – Also received common amenities charges, maintenance charges, advertisement charges – Held to be assessable as business income

12 Pr. CIT-6 vs. Krome Planet
Interiors Pvt. Ltd. [Income-tax appeal No. 282 of 2017; dated 15th
April, 2019 (Bombay High Court)]

 

[Krome Planet Interiors Pvt. Ltd. vs. ACIT; A.Y.:
2008-09; Mum. ITAT]

 

Section 28 (i) – Business income vs. income from house
property – Income received from leasing out of shops and other commercial
establishments – Also received common amenities charges, maintenance charges,
advertisement charges – Held to be assessable as business income

 

The
assessee is a private limited company engaged in the business of leasing out
shop space in shopping malls. The assessee had filed his return for the A.Y.
2008-2009 declaring the income received from such activity of leasing out of
shops and other commercial establishments to various persons as business
income. In addition to rental income, the assessee had also received certain
charges from the licensees such as common amenities charges, maintenance
charges and advertisement charges.

 

However,
the assessing officer (AO) held that the income was from house property and not
business income.

 

The
issue eventually reached the Tribunal. The Tribunal, by the impugned judgement
held that the income was business income. It noted that the assessee had
entered into a leave and license agreement with the licensee which shows that
the building was constructed for the purpose of a shopping mall with the
approval of the Pune Municipal Corporation. The assessee was providing various
facilities and amenities apart from giving shopping space on lease. The
agreement contained the list of facilities to be provided by the assessee. The
charges for the facilities and utilisation were included in the license fees
charge for leasing the shop space. The additional charges towards the costs of
electricity consumed would be payable by the licensees. The period of license
was 60 months. The Tribunal also noted that no space in the shopping mall was
given on rent simplicitor. The Tribunal, therefore, held that the object of the
assessee to exploit the building as a business is established. The assessee had
also taken a loan facility from a bank for the shopping mall project.

 

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee had obtained a loan from a bank for its mall
complex project; that the assessee had entered into leave and license
agreements with individuals for letting out commercial space; a majority of the
licenses were for 60 months; in addition to providing such commercial space on
lease, the assessee also provided a range of common amenities, a list of which
is reproduced earlier. These facilities included installation of elevators,
installation of a fire hydrant & sprinkler system, installation of central
garbage collection and disposal system, installation of common dining
arrangement for occupants and the staff, common water purifier and dispensing
system, lighting arrangement for common areas, etc.

 

Thus,
in plain terms, the assessee did not simply rent out a commercial space without
any additional responsibilities. He executed leave and license agreements and also
provided a range of common facilities and amenities upon which the occupiers
could run their business from the leased out premises. The charges for such
amenities were also broken down in two parts. Charges for several common
amenities were included in the rentals. Only on a consumption-based amenity,
such as electricity, would the occupant be charged separately. All factors thus
clearly indicate that the assessee desired to enter into a business of renting
out commercial space to interested individuals and business houses.

 

The Revenue, however, strongly relied on
the decision of the Supreme Court in the case of Raj Dadarkar &
Associates vs. Assistant Commissioner of Income-tax, reported in (2017) 81
taxmann.com 193. It was, however, a case in which on facts
the Supreme Court held that the assessee was not engaged in systematic activity
of providing service to occupiers of the shops so as to constitute the receipt
as business income. In the result, the Revenue appeal was dismissed.

Section 80-IB(11A) – Profits derived from the business of the industrial undertaking – Subsidies – Eligible for deduction u/s. 80-IB – Liberty India 317 ITR 218 (SC) is distinguishable on facts

11 Pioneer Foods & Agro
Industries vs. ITO-18(3)(4) [ITA No. 142 of 2017; dated 22nd April,
2019 (Bombay High Court)]

 

[Pioneer Foods & Agro Industries vs. ITO-18(3)(4);
dated 20th July, 2016; A.Y.: 2009-10; ITA No. 6088 &
6089/Mum/2013, Mum. ITAT]

Section 80-IB(11A) – Profits derived from the business
of the industrial undertaking – Subsidies – Eligible for deduction u/s. 80-IB –
Liberty India 317 ITR 218 (SC) is distinguishable on facts

 

The assessee is a partnership firm engaged in the business
of manufacturing and exporting honey. The assessee had filed return of income
for the A.Y. 2009-10. In relation to the export of the said product, the
assessee had claimed deduction u/s. 80IB(11A) of the Act in relation to benefit
received by the assessee for the export under the Vishesh Krishi and Gram Udyog
Yojana (“VKGUY” for short).

 

The AO having disallowed the claim, the issue eventually
reached the Tribunal. The Tribunal, by the impugned judgement, upheld the
addition. On appeal before the High Court, the assessee had confined its
grievance in relation to the benefits received under the VKGUY scheme.

 

The
assessee submitted that the Supreme Court in the case of CIT vs.
Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC) had an occasion to
examine a case where the assessee was engaged in the business of manufacture of
steel and ferro silicon and had claimed similar subsidies. The assessee had
claimed deduction u/s. 80IB(4) of the Act in relation to such subsidies. The AO
had disallowed the claim. The issue reached the Supreme Court.

 

The
Supreme Court noted the speech of the Finance Minister while presenting the
budget for the assessment year 1999-2000 in relation to the Government of
India’s Industrial Development Policy for the North-Eastern region. It also
noted the distinction between the expressions “attributable to” and “derived
from” as discussed in various earlier judgements. The Supreme Court
distinguished the judgement in the case of Liberty India (supra),
observing that in the said case the Court was concerned with the export
incentive which is far remote from the activity of export. The profit,
therefore, cannot be said to have been derived from such activity. In the
opinion of the Court, the case on hand was one where the transport and interest
subsidy had a direct nexus with the manufacturing activity inasmuch as these
subsidies go to reduce the cost of production.

 

In the present case, the Court observed that the objective
of the VKGUY scheme was to promote the export of agricultural produce and their
value-added products, minor forest produce and their value-added variants, gram
udyog products, forest-based products and other produces as may be notified. In
relation to the exports of such products, benefits in the form of incentives
would be granted at the prescribed rate. The objective behind granting such
benefits was to compensate the high transport cost and to offset other
disadvantages. In order to make the export of such products viable, the
Government of India decided to grant certain incentives under the said scheme.
Clearly, thus, the case was covered by the decision of the Supreme Court in the
case of Meghalaya Steels Ltd. (supra). This was not a case akin
to export incentives such as DEPB which the Supreme Court in the case of Liberty
India (supra) held was a benefit far remote from the assessee’s
business of export. In the result, the assessee’s appeal was allowed.

 

Section 54F – Capital gains – Investment in residential house – Flat was owned by a co-operative housing society on a piece of land which was granted under a long-term lease – Eligible for deduction

10  Pr. CIT-23 vs. Jaya Uday Tuljapurkar [Income tax appeal No. 53 of 2017;
dated 22nd April, 2019 (Bombay High Court)]

 [ACIT vs. Jaya Uday Tuljapurkar; dated 28th September,
2015; Mum. ITAT]

 

Section 54F – Capital gains – Investment in
residential house – Flat was owned by a co-operative housing society on a piece
of land which was granted under a long-term lease – Eligible for deduction

 

The
assessee, an individual, was a joint owner of a residential property in the
nature of a flat. He had received the said property under a Will dated 15th
October, 2006 made by his father. The flat complex was owned by a co-operative
housing society on a piece of land which was granted under a long-term lease.
The father of the assessee was a member of the said society and owned the flat.
After his death, the assessee received half a share, the other half going to
his mother. These co-owners sold the flat under a registered deed dated 18th
July, 2008 for a sale consideration of Rs. 23 crores. The assessee, after
the sale of the flat, invested a part of the sale consideration of Rs. 2.89
crores in the purchase of a new residential unit. In his return of income filed
for the A.Y. 2009-2010, he had shown the sale consideration of Rs. 11.50 crores
which was his share of the sale proceeds by way of capital gain. He claimed the
benefit of cost indexation and also claimed exemption of the sum of Rs. 2.89
crores while computing his capital gain tax liability in terms of section 54 of
the Act.

 

The
assessing officer (AO) rejected his claim on the ground that the assessee had
not transferred the building and the land appurtenant thereto. In the opinion
of the AO, since this was a pre-condition for application of section 54 of the
Act, the assessee was not entitled to the benefit of exemption as per the said
provision.

 

On appeal to the CIT(A) it was held that the fact that the
residential building in which the flat was situated was constructed on a leased
land, would not change the nature of transaction. He accepted the assessee’s
contention that as per the provisions of the Maharashtra Ownership Flats
(Regulation of the Promotion of Construction, Sale, Management and Transfer)
Act, 1963, the assessee would be the owner of the flat in law. The Commissioner
(A) also held that for applicability of section 54, the assessee had to sell a
capital asset in the nature of building or land appurtenant thereto. The word
‘or’ cannot be read as ‘and’ in the context of the said provision.

 

The Revenue carried the matter in appeal before the
Tribunal. The Tribunal dismissed the Revenue’s appeal, upon which the appeal
was filed before the Hon’ble High Court.

The
Revenue submitted that for availing benefit of section 54 of the Act, the
assessee has to sell a capital asset in the nature of building and land
appurtenant thereto. In the present case, the complex was situated on land
which itself was granted on lease. The co-operative housing society was not the
owner of the land. Therefore, what the assessee had transferred under a
registered sale deed was a mere building and not the land appurtenant thereto.
In support of his contention that in the context of section 54 of the Act the
word ‘or’ should be read as ‘and’, the Revenue relied on the commentaries of
certain renowned authorities on income-tax law.

 

The
Court held that the facts noted above were not in dispute. The father of the
assessee was allotted a flat in a residential complex in a co-operative housing
society. The complex was constructed on land which was not owned by the society
but was being enjoyed on long-term lease. According to the Revenue, the sale of
a flat in such a society and investing any sale proceeds for acquisition of a
new residential unit would not satisfy the requirements of section 54 of the
Act. Firstly, there is no such prescription u/s. 54(1) of the Act. Secondly,
such a rigid interpretation would disallow every claim in case of transfer of a
residential unit in a co-operative housing society.

 

The
very concept of such a society is that the society is the owner of the land and
continues to be so irrespective of the coming and going of members. A member of
such a society has a possessory right over the plot of land which is allotted
to him. In case of a constructed building of a co-operative housing society,
the member owns the constructed property and along with other members enjoys
the possessory rights over the land on which the building is situated. In
either case, a member of the society, even when he sells his house, never
transfers the title in land to the purchaser. The present case is no different.
Merely because the housing complex in the present case is situated on a piece
of land which is occupied by the co-operative housing society under a long-term
lease, would make no difference. In the result, the Department appeal was
dismissed.

 

Main object is carry out infrastructure projects – Amendment in object clause as do business in futures and options – Amended clause to be considered

15. Pr.CIT-1 vs. Triforce Infrastructure
(India) Pvt. Ltd [ Income tax Appeal no 888 of 2016 Dated: 11th
December, 2018 (Bombay High Court)]. 

 

[DCIT-1(3) vs. Triforce Infrastructure
(India) Pvt. Ltd; dated 12/06/2015 ; ITA. No 1890/Mum/2014, Bench : SMC  AY: 2007-08 , 
Mum.  ITAT ]

 

Main object is carry out infrastructure
projects –  Amendment in object
clause  as do business in futures and
options – Amended clause to be considered



The
assessee had in its return of income declared nil income. During assessment
proceedings, the A.O noted from the Profit & Loss Account that the assessee
was in receipt of speculation gain, dividend income and gain on Options
aggregating to Rs. 6.11 lakh. Against the above, the expenditure claimed was
Rs.42.45 lakh. Out of the above, expenditure claimed as loss on futures was
Rs.42.40 lakh. The A.O in assessment proceedings u/s. 143(3) of the Act
disallowed the loss on account of futures and options on the ground that the
object clause of Memorandum of Association (MOU) did not authorise the company
to do business in futures and options.

Being
aggrieved with the asst  order, the
assessee filed an appeal to the CIT(A). The CIT(A) while allowing the appeal
reproduced clauses 21 and clause 68 of the MOU. In fact, clause 68 was
introduced into the MOU w.e.f. 30th December, 2005. It was further
held that clause 21 could itself permit the assessee to deal with the shares,
futures and options. Nevertheless, on 31st December, 2005 clause 68
of the MOU specifically enabled the assessee to do business in futures and
options i.e. before starting the business in futures and options. As the
relevant assessment year is 2007-08, the CIT(A) allowed the assessee’s appeal
holding that loss incurred in futures and options as well as trading in shares
is a part of its business loss.

Being
aggrieved with the order of the CIT(A), the Revenue filed an appeal to the
Tribunal. The Tribunal find that the main business of the assessee is to carry
out infrastructure projects for which the assessee company collected share
application money also. As per the assessee, due to unfavourable circumstances,
the assessee did not get any infrastructure contract, therefore, he decided to
deploy the available surplus funds, collected for infrastructure activity, in
the stock exchange market. The assessee furnished all these details to the A.O
regarding the receipt of share application money, loss incurred in future and
options transactions, share business along with the details of business
expenditure incurred by the assessee. The A.O without providing due opportunity
to the assessee, as has been claimed, in the same breath, assess the income
from speculation business of shares and gains in the future options transactions.
The Tribunal dismissed the Revenue’s appeal upholding the order of the CIT(A).

 

Being
aggrieved with the order of the Tribunal, the Revenue filed an appeal to the
High Court. The Court find that the view taken by the CIT(A) as well as the
Tribunal, cannot be faulted with. The losses on futures and options was
incurred post 30th December, 2005 i.e. after clause 68 was
introduced in the MOU by an amendment. This appeal is in respect of A.Y.
2007-08 when clause 68 of the MOU was in existence. This entitled the assessee
to do business in Futures and Options. In the above view, the question as
proposed does not give rise to any substantial question of law. The appeal is
dismissed.   

 

 

Section 37 (1): Business expenditure – books of accounts, and details not produced – being destroyed due to flood – filed evidence indicating the destruction of physical accounts due to heavy rains – Allowable as deduction – ‘best judgment assessment’ should not be made as a ‘best punishment assessment’.

14. Pr CIT-19 vs. Rahul J Jain [ ITA no
857 of 2016 Dated: 11th December, 2018 (Bombay High Court)]. 

 

[Asst CIT 16(3)  vs. Rahul J Jain ; dated 28/09/2015 ; ITA. No
5986/Mum/2013, AY : 2009-10, Bench : D 
Mum.  ITAT ]

 

Section 37 (1): Business expenditure – books
of accounts, and details not produced – being destroyed due to flood – filed
evidence indicating the destruction of physical accounts due to heavy rains –
Allowable as deduction –  ‘best judgment
assessment’ should not be made as a ‘best punishment assessment’.

 

The
assessee is engaged in the business of trading in ferrous and nonferrous
metals. During the scrutiny proceeding, the assessee was unable to produce its
physical books of accounts, evidences for sales, purchases and expenses claimed
in the view of the same being destroyed due to flood on 8th July,
2009. The assessee filed necessary evidence indicating the destruction of
physical accounts due to heavy rains on 8th July, 2009. Besides, it
also filed evidences of its sellers and buyers to support its claim of loss.
However, the A.O assessed the income of the assessee at Rs. 57.95 lakh under
the head ‘business’ as against the loss of Rs.18.74 2 lakh as shown by the
assessee in its return of income.

 

The
CIT(A) allowed the assessee’s appeal inter alia by noting the fact that the
assessee had produced various documents in support of its claims for expenses,
after recording the fact that various confirmation letters from the parties who
had made purchases were also filed. However, the A.O did not carry out any
further verification in regard to it. The CIT(A) also recorded the fact that
the return as submitted should be accepted keeping in view of the fact that
there was a sharp and continuous fall in nickel prices which is the main
ingredient in stainless steel. Further, the assessee has made more than 90 % of
the sale during the year, out of the opening stock held by it as a carried
forward from the earlier year. Moreover, it also takes cognizance of the fact
that the assessee’s book results were also accepted by the Sales Tax and
Central Excise authorities. For all the above reasons, the appeal of the
assessee was allowed by order of the CIT(A).

 

Being
aggrieved with the order of the CIT(A), the Revenue filed further appeal to the
Tribunal. The Tribunal find that the documentary evidence to support the
assessee’s claim containing sufficient particulars on the basis of which
requisite verification from the parties mentioned therein could have been done
by the A.O, if he has any doubt in regard to the documents submitted. Further,
the Tribunal notes that the documents submitted in support of their claim were
not disputed by the Revenue before the Tribunal. Further, the impugned order
also records fall in the prices of the steel in the global market which lead to
a loss of the sales made by the assessee. In these circumstances, the appeal of
the Revenue was dismissed.

 

The Tribunal in its order
observed as under :- “We can very well appreciate that at times,  the A.O has no choice but to make a best judgment
assessment.

But in our considered view,
the fairness of justice demands that ‘best judgment assessment’ should not be
made as a ‘best punishment assessment’.


Being aggrieved with the order of the ITAT,
the Revenue filed further appeal to the High Court. The court find that both
the CIT(A) and the Tribunal on examination of the facts have come to the
conclusion that there was material evidence available before the A.O for him to
carry out necessary investigation to determine whether or not the loss suffered
by the assessee  was justifiable. The
best judgment assessment can certainly be resorted to by the A.O in the absence
of any record, but it cannot be arbitrary. This is more particularly so when
various supporting documents justifying their loss return was filed before the
A.O and he had completely ignored the same. We find that this appeal
essentially is in respect of question of facts. In the above view, the appeal
was dismissed. 

Section 68 : Cash credits – Unsecured loans received – Confirmation, balance sheet and bank accounts of creditor was produced – A.O has not made enquiry in respect of the creditors – Deletion of addition was held to be justified.

13.  The Pr. CIT-27 vs. Parth Enterprises [ Income
tax Appeal no 786 of 2016 Dated: 11th December, 2018 (Bombay High
Court)].

[ITO-22(1)(4) vs.
Parth Enterprises; dated 10/06/2015; ITA. No 976/Mum/2013, Bench : C , AY:
2009-10     Mum.  ITAT ]

 

Section 68 : Cash credits – Unsecured loans
received – Confirmation, balance sheet and bank accounts of creditor was
produced – A.O has not made enquiry in respect of the creditors –  Deletion of addition was held to be justified.

 

The
assessee is engaged in the business of builders and developers. During the
year, the assessee had taken unsecured loans from 90 persons. However,
confirmations were filed only in respect 77 persons. The AO conducted enquiry
from external sources on the basis of information available on record and on
test check basis on 01.12.2011. Enquiries were conducted in a few cases, based
on the statement given by those parties . During  a survey action u/s.  133A of the IT Act at the premise of one
Deepak Kapadia CA by the DDIT (investigation), unit IX(3), Mumbai his statement
was also recorded, that in his statement he admitted that he had provided
entries for loans in lieu of cash received from the assessee and also explained
that the modus operandi is of giving cheques and receiving cash back which were
then returned to those parties whose names are appearing as unsecured creditors
in the books of account of the appellant.

 

This
resulted in the A.O concluding that unsecured loans to the extent of Rs. 3.35
crore were hit by section 68 of the Act. Thus, added to the income of the
assessee.

 

Being
aggrieved by the assessment order the assessee filed an appeal to the CIT(A).
The CIT(A) found that creditworthiness of the parties were not doubted. On
facts, it came to the conclusion that out of 90 parties, loan reflected in the
names of 13 parties was hit by Section 68 of the Act. Accordingly, an addition
of Rs.36 lakh was confirmed against the addition of Rs. 3.35 crore made by the
A.O. In regard to the balance of Rs. 2.99 crore, the CIT(A) found that the
loans were genuine and therefore not hit by section 68 of the Act resulting in
its deletion.

 

Being
aggrieved by order, further appeals were filed by the Assessee as well as
Revenue to the Tribunal. The Revenue challenged the deletion of Rs. 2.99 crore
while the assessee challenged the upholding of addition of Rs. 36 lakh.

 

The
Tribunal find that there were total 90 loan creditors from whom unsecured cash
credit amounting to Rs. 3,35,00,000 had been introduced in the books of accounts
by the assessee, that out of the 90 loan creditors confirmations were submitted
only in the case of 77 parties and for the remaining 13 parties confirmation
were not furnished during the assessment proceedings, that during the course of
appellate proceedings  the remaining loan
confirmation were filed along with other supporting documents. The FAA after
considering the remand report and reply of the assessee – decided the matter.
Thus the ITAT decided the effective ground of appeal against the assessee with
regard to the creditors who had advance Rs.36 lakh to it. Further it held that
the FAA had rightly deleted the addition of Rs. 2.99 crore. The AO had made no
effort to verify the details filed by the assessee before him.


Being aggrieved with the order of the ITAT, the Revenue filed the Appeal before
High Court. The Hon. Court find that there are concurrent finding on facts
rendered by the CIT(A) and the Tribunal holding that only Rs. 36 lakh can be
added to the declared income and the balance amount of Rs. 2.99 crore was not
hit by section 68 of the Act. This finding is premised on the fact that no
enquiry was made in respect of 76 creditors out of 77 creditors and the
assessee had provided required documentary evidence in respect of the 76 creditors.
Thus, these are essentially finding of fact and the view taken by the Tribunal
is a possible view on these facts. In view of the above, the question raised
does not give rise to any substantial question of law. Accordingly, appeal was
dismissed.

Section 45: Capital gains-Transfer-Capital gains are levied in the year in which the possession of the asset and all other rights are transferred and not in the year in which the title of the asset gets transferred. [Section 2(47), Transfer of Property Act, 1953]

9. 
Pr.CIT-25 vs.  Talwalkars Fitness
Club [ Income tax Appeal no 589 of 2016 Dated: 29th October, 2018
(Bombay High Court)]. 

Talwalkars Fitness Club vs. ACIT-21(2);
dated 27/05/2015 ; ITA. No 7246/Mum/2014, Bench: E ;  AY 2008-09  
Mum.  ITAT ]


Section 45: Capital gains-Transfer-Capital
gains are levied in the year in which the possession of the asset and all other
rights are transferred and not in the year in which the title of the asset gets
transferred. [Section 2(47), Transfer of Property Act, 1953]


During the assessment
proceedings, the A.O noticed that the assessee had disposed of two premises
each measuring 1635 sq. ft. for a total consideration of Rs.4,40,00,000/- by
way of two separate agreements to sale. The AO observed that the assessee had not
offered capital gains arising out on such sale. On being asked to explain, the
assessee submitted that though the agreements to sale were executed during the
financial year relevant to assessment year 2011-12, however, the actual sale
took place in the subsequent year and the capital gains were accordingly
offered in subsequent assessment year 2012-13, which had been accepted by the
department also. The assessee further explained that the assessee had not
parted with the possession of the property in question during the year under
consideration.


The AO, however, did not
agree with the contentions of the assessee. He observed that the property was
transferred by way of two registered sale agreements both executed on
14.02.2011 i.e. during the year under consideration. The said agreements were
duly registered with the stamp duty authorities. The sale agreement in question
was not revokable. The handing over of the possession of the property on a
future date was a mere formality. He therefore held that the transfer of the
property took place on the date of agreement and thus the capital gains were
liable to be assessed during the year under consideration.


In appeal, the Ld. CIT(A),
while referring to the wording of the some of the clauses of the agreement dated
14.02.11, upheld the findings of the AO that the capital gains arising from the
sale of the said property would be liable to be assessed in the A.Y. 2011-12.


Aggrieved by the order of
the Ld. CIT(A), the assessee filed appeal before ITAT. The Tribunal held that
the assessee has taken us through the different clauses of the agreement dated
14.02.11. He has submitted that though, the reference to the parties in the
agreement has been given as vendors and purchasers, however, it was an
agreement to sell and not the sale deed itself. As per the separate agreements,
each of the property had been agreed to be sold for a consideration of
Rs.2,20,00,000/. Only a token amount of Rs.20,00,000/- was received as advance.
However, the balance consideration was agreed to be paid by 26.05.11. The
possession of the property was not handed over to the prospective purchasers.
The sale transaction was deferred for a future date on the payment of balance
consideration of the amount of Rs.2 crore and therafter the possession was to
be handed over to the prospective purchasers.


The assessee continued to
enjoy the possession of the property even after the execution of the agreement
and was liable to handover the possession on receipt of the balance
consideration amount. It was also 
observed that the advance received by the assessee of Rs.20 lakh was
less than the 10% of the total consideration amount settled. The assessee was
not under obligation to handover the possession of the property till the
receipt of the balance consideration of the amount. The assessee was liable to
pay the due taxes on the property and was also liable for any type of loss or
damage to the property till it was handed over to the prospective purchaser
after receipt of balance sale consideration. The sale transaction was completed
on 16.06.11 and till then the assessee continued to be the owner in possession
of the property. The assessee has already offered the due taxes in the
subsequent year relevant to the financial year in which the sale deed was completed
and the possession was handed over by the assessee to the purchasers, which has
also been accepted by the department. Hence, there was no justification on the
part of the AO to tax the assessee for short term capital gains for the year
under consideration. In the result, the appeal of the assessee is hereby
allowed.


Aggrieved
by the order of the ITAT, the Revenue filed appeal before High Court. The Court
held  that the Tribunal applied the
correct legal principles and construed the clauses in the agreement, otherwise
than as understood by the A.O and the Commissioner. Such findings of fact can
never be termed as perverse for they are in consonance with the materials
produced before the Tribunal. Accordingly Revenue appeal was dismissed.

 

Section 22: Income from house property vis a vis Income from business – Real estate developer – main object not acquiring and holding properties – Rental income is held to be assessable as Income from house property. [Section 28(i)] Section 80IB(10) : Housing projects – stilt parking is part & parcel of the housing project – Eligible to deduction

8. CIT-24 vs.  Gundecha Builders [ Income tax Appeal no 347
of 2016
Dated: 31st July, 2018
(Bombay High Court)]. 

[ACIT-24(3) vs. Gundecha Builders; dated
19/02/2014 ; ITA. No 4475/Mum/2011, Bench G, 
Mumbai.  ITAT ]


Section 22: Income from house property vis a vis
Income from business – Real estate developer – main object  not acquiring and holding properties – Rental
income is held to be assessable as Income from house property. [Section 28(i)]


Section 80IB(10) : Housing projects – stilt
parking is part & parcel of the housing project – Eligible to deduction


The assessee is engaged in
the business of developing real estate projects. During the previous year the
assessee has claimed lease income of Rs.30.18 lakh under the head income from
house property. The same was not accepted
by  the 
A.O  who  held 
it  to  be 
business  income. Consequently,
the deduction available on the account of repair and maintenance could not be
availed of by the assessee.


Being aggrieved, the
assessee filed an appeal to the CIT(A). The CIT(A) held that the rental income
received by the assessee has to be classified as income from house property.
Thus, 30% deduction on account of repairs and maintenance be allowed.


Being aggrieved with the
CIT(A) order, the Revenue filed an appeal to the Tribunal. The Tribunal holds
that the dispute stands squarely covered by the decision of the Supreme Court
in Sambhu Investment (P)Ltd. vs. CIT (2003) 263 ITR 143(SC), wherein the
Hon’ble Apex Court has held that when main intention of letting out the
property or any portion thereof is to earn rental income, the income is to be
assessed as income from house property and where the intention is to exploit
the immovable property by way of complex commercial activities, the income
should be assessee as income from business. Applying this proposition to the
facts of the instant case, it was held 
that the assessee has let out the property to earn the rental income.
Accordingly, the lease income was taxable as income from house property.


Before High Court the
Revenue points out that after the above decision the issue now stands concluded
in favour of the revenue by the decision of the Supreme Court in Chennai
Properties and Investments Limited, Chennai vs. CIT (2015) 14 SCC 793 and Rayala
Corporation Private Limited vs. ACIT (2016)15 SCC 201.


The Court observed  that the assessee is in the business of
development of real estate projects and letting of property is not the business
of the assessee. In both the decisions relied upon by Revenue Chennai Properties
(supra) and Rayala Corporation (supra), the Supreme Court on facts
found that the appellant was in the business of letting out its property on
lease and earning rent there from. Clearly it is not so in this case. Further,
the decision of this Court in CIT vs. Sane & Doshi Enterprises (2015) 377
ITR 165 wherein on identical facts this Court has taken a view that rental
income received from unsold portion of the property constructed by real estate
developer is assessable to tax as income from house property. Accordingly,
Revenue Appeal is dismissed.


As regard second issue is
concerned, the AO has disallowed assessee’s claim of deduction u/s. 80IB(10) in
regards to parking space. The CIT(A) allowed the assessee’s claim after find
that parking is part & parcel of the housing project that is the first and
foremost requirement of the residents of the residential units. Therefore, it
cannot be said that sale proceeds of stilt parking is outside the purview of
section 80IB(10) of the Act. The parking’s are in built and approved in the
residential structure of the residential building and no such separate
approvals are taken. The principle decided by the Hon’ble Spl. Bench of ITAT
(Pune) in the case of Brahma Associates vs. JCIT also supports the case
of the appellant that if some part of the flat is used for commercial purpose,
the correct character of housing project is not vitiated, AO has not brought on
record that which part of expenditure claimed to have been incurred for parking
is bogus. Hence, the A.O was directed to allow deduction to the appellant u/s.
80IB(10) on sale proceeds of stilt parking .The Tribunal upheld the finding of
the CIT(A)


Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The court held that
this issue stands concluded against the Revenue and in favour of the assessee
by virtue of the orders of this Court in respect of AYs  2006-07 and 2007-08 decided in CIT vs.
Gundecha Builders (ITXA Nos.2253 of 2011 and 1513 of 2012 order dated 7th
March, 2013). Accordingly, Revenue Appeal was dismissed.


 

Section 28(iv) : Remission or cessation of trading liability – Loan waiver cannot be assessed as cessation of liability, if the assessee has not claimed any deduction and section 28(iv) does not apply if the receipts are in the nature of cash or money [ Section 41(1) ]

7. The Pr. CIT-1 vs.  M/s Graviss Hospitality Ltd [Income tax Appeal no 431 of 2016 Dated: 21st August, 2018
(Bombay High Court)]. 

[ACIT-1(1)  vs. 
Graviss Hospitality Ltd;     dated
17/06/2015 ;  ITA. No 6211/Mum/2011,
Bench: G , AY: 2008-09  Mumbai  ITAT ]


Section 28(iv) : Remission or cessation of
trading liability – Loan waiver cannot be assessed as cessation of liability,
if the assessee has not claimed any deduction and section 28(iv) does not apply
if the receipts are in the nature of cash or money [ Section 41(1) ]


The assessee company was
allowed rebate on loan liability of Rs.3,05,10,355/- from Inter Continental
Hospital  and SC Hotels & Resorts
India Pvt. Ltd. The entire rebate on loans was credited to the P& L account
under the head ‘other income’ and the same was offered for tax.


During the assessment
proceedings, the assessee furnished the details and rebate on loan to the AO
and submitted that out of total rebate allowed, an amount of Rs.2,10,73,487/-
related to principal amount of loan waived by SC Hotels & Resorts India
Pvt. Ltd. The assessee submitted before the AO that the receipt of loan from
SCH was on capital account and therefore the waiver of the principal amount was
also on capital account. The assessee submitted that the waiver of loan on
principal amount inadvertently remained to be excluded from total income and
the same was wrongly offered for tax and therefore the same was required to be
deducted from the total income.


The AO, however, did not
accept the contention of the assessee and disallowed the same observing that
the assessee was required to file a revised return of income in this respect.
He relied on the decision of the Hon’ble Supreme Court in the case of “Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC).


In appeal, the ld. CIT(A),
observed that the waiver of loan was required to be treated as capital receipt
and was not taxable income. He, while relying upon the decision of the Tribunal
in the case of “CIT vs. Chicago Pneumatics Ltd.” [2007] 15 SOT 252 (Mumbai)
held that if the assessee was entitled to a claim the same it should be allowed
to the assessee. He therefore directed the AO to treat the same as capital
receipt.


Being aggrieved with the
order of the CIT(A), the Revenue filed the Appeal before ITAT. The Tribunal
held that the waiver was not in respect of any benefit in kind or of any
perquisite. The waiver was of the principle loan amount in cash. The assessee
had not claimed any deduction in respect of loss, expenditure or trading
liability in relation to the loan amount. The waiver was of the principle
amount of loan for capital asset. He, thereafter, relying upon the decision of
the Hon’ble Jurisdictional High Court, in the case of “Mahindra &
Mahindra Ltd. vs. CIT” 261 ITR 501, held that the waiver of the loan amount
was a capital receipt not taxable as business income of the assessee. Further
relied on the Hon’ble Bombay High Court in the case of ‘Pruthvi Brokers
& Shareholders Pvt. Ltd.’ and 
held that even if a claim is not made before the AO it can be made
before the appellate authorities. The jurisdiction of the appellate authorities
to entertain such a claim is not barred.


The Hon’ble High Court
observed that the Hon’ble Supreme Court in the case of Mahindra & Mahindra
Ltd. (2018) 404 ITR 1 held that on a plain reading of section 28 (iv) of
the Act, it appears that for the applicability of the said provision, the
income which can be taxed shall arise from the business or profession. Also, in
order to invoke this provision, the benefit which is received has to be in some
other form rather than in the shape of money. If that is because of the
remission loan liability, then, this section would not be attracted.  Accordingly, Revenue appeal was dismissed.

Section 263: Commissioner – Revision of orders prejudicial to revenue – Scope of power – Subsequent amendement. [ Section 6(a)]

6.  CIT-26 vs. Mihir Doshi [ Income tax Appeal no
196 of 2016, Dated: 23rd August, 2018 (Bombay High Court)]. 

 

[Mihir Doshi vs. DCIT; dated
30/08/2013 ; ITA. No 4403/Mum/2010, Mum. 
ITAT Mum.  ITAT ]

 

Section 263: Commissioner – Revision of orders prejudicial to
revenue – Scope of power – Subsequent amendement. [ Section 6(a)]

 

The assessee has been serving in
‘Morgan Stanley International (Inc)’ of the USA. He was on deputation to India.
He filed return of income for Assessment Year 2003- 2004 on 19th
October, 2004, claiming the status of a ‘Resident’, but ‘not ordinarily
resident’ within the meaning of section 6 sub-section 6 clause (a) of the I.T
Act. He offered the salary earned in India to the extent of Rs.3,23,23,506/- to
tax. He offered further income under the head ‘Short Term Capital Gain’ and
‘Bank Interest’ on his own, which the A.O brought to tax by his Assessment
Order of 24th January, 2006. The said proceedings resulted from the
refund sought by this assessee and the A.O modified his order by invoking
section 154 of the Act. Admittedly the A.O was possessed of this power and he
modified or corrected his order to the extent of the amount of income which
could be brought to tax.

 

The Commissioner was of the view
that the A.O did not examine the legal status of the assessee in the course of
the assessment proceedings and, hence, initiated action u/s. 263 of the Act.
That is on the footing, namely, the unamended section 6 sub-section 6 clause
(a) of the Act. It is said that the A.O gave effect
to the order of the Commissioner, but when the assessee asked for rectification
of that order to exclude double addition, the A.O surprisingly passed another
order dated 24th February, 2009 deleting the entire amount. It is in
these circumstances that the records were again summoned by the Commissioner of
Income Tax and he returned the finding that the order of the A.O is erroneous
in so far as it is prejudicial to the interest of Revenue. Not only the salary,
but his perquisites also should be brought to tax was the view of the
Commissioner.

 

The aggrieved assessee approached
the Tribunal and the Tribunal considered both issues in the backdrop of the
peculiar facts and came to the conclusion that there could not be prejudice
caused to the Revenue as the A.O not only brought to tax the Indian component,
but the global component of the salary. That was a mistake and he, therefore,
made this correction so as to pass an Assessment Order in tune with the law. It
does not mean that the Commissioner was authorised by the same legal provision,
namely, section 263 of the Act to raise the issue of taxability. Firstly, all
proceeds of the entire tax deducted at source and secondly, that part of the
refund which was granted to the assessee on the basis that the sum refunded,
does not belong to the assessee, but to his employer. The main issue was
whether there was indeed any mistake in the Assessment Order and whether that
justified exercise of powers by the A.O conferred vide section 154 of the Act.
The Tribunal considered the factual and legal position and a judgment of the
Hon’ble Supreme Court in the case of Pradip J. Mehta vs. Commissioner of
Income Tax (300 ITR 231) and arrived at the conclusion that the amendment
to section 6 sub-section 6 clause(a) has been brought into effect from 1st
April, 2004. That was not applicable to the Assessment Year under
consideration. The existing law was considered by the Hon’ble Supreme Court in
the aforesaid judgment and the Hon’ble Supreme Court’s judgment would bind the
A.O. That part of the income earned outside India would have to be excluded and
the assessee would have to be taxed to the extent of the income earned in
India. That has admittedly been done.

 

Being aggrieved with the order of the ITAT, the Revenue filed the
Appeal before High Court. The Court find that, in such circumstances, there was
no prejudice caused and this was not a fit case, therefore, to exercise the
powers u/s. 263 of the Act. Such a conclusion is imminently possible in the
peculiar facts of this case. The assessee’s status, the nature of his income
and the legal provision then prevailing having been correctly applied, the
order under Appeal does not suffer from perversity or any error of law apparent
on the face of the record. Accordingly, 
dept appeal was dismissed.

Section 153A: Assessment – Search or requisition-No addition can be made in respect of an unabated assessment which has become final if no incriminating material is found during the search. [Section 132, 143(3)]

5.  The Pr. CIT-4 vs. Jignesh P. Shah [Income tax
Appeal no 555 of 2016, Dated: 26th September, 2018 (Bombay High
Court)]. 

 

[Jignesh P. Shah vs. DCIT;
dated 13/02/2015 ; ITA. No 1553 & 3173/Mum/2010, Mum.  ITAT ]

 

Section 153A: Assessment – Search or requisition-No addition can
be made in respect of an unabated assessment which has become final if no
incriminating material is found during the search. [Section 132, 143(3)]

 

The assessee is an individual being
the member of Financial Technologies India Ltd., was covered under search and
seizure action. In pursuance of search action u/s. 132(1), notices u/s. 153A
was issued to the assessee on 25.10.2007 for the six assessment years
immediately preceding the assessment year of the year of the search, which
included the aforesaid assessment years. In response to the said notices the
assessee filed his return of income on 26.11.2007 on the same income which was
declared in the original return of income filed u/s. 139. In the assessment
order passed u/s. 153A, r.w.s 143(3), the addition on account of deemed
dividend of Rs.1,69,68,750/- for the A.Y. 2002-03 and Rs.4,65,76,000/- for the
A.Y. 2004-05 was made, vide separate order dated 31.03.2009.

 

The Ld. AO noted the facts about
receiving the payments by the assessee from Lotus investment, which was a
division of La-fin Financial Services Pvt. Ltd. in which the assessee held 50%
of share, from the balance sheets and records already filed along with the
return of income. However, an Assessment Order was made and this time, an
addition, on account of deemed dividend of Rs.1,69,68,750/for AY: 2002-03 and
Rs.4,65,76,000/- for AY:  2004-05, was
made. This came to be confirmed by the CIT (A).

 

The assessee submitted that during
the course of search and seizure action, no incriminating document, material or
unaccounted assets were found from the assessee. The A.O, without there being
any incriminating material found in the course of search relating to the deemed
dividend has made the addition on the basis of information already available in
the return of income. This is also evident from the copy of panchnama and
statement on oath of the assessee recorded at the time of search. The Ld. AO
has noted the facts about receiving of the payments by the assessee from Lotus
investment, which was a division of La-fin Financial Services Pvt. Ltd. in
which the assessee held 50% of share, from the balance sheets and records
already filed along with the return of income. Since the assessment for the
A.Ys. 2002-03 & 2004-05 had attained finality before the date of search and
does not get abated in view of second proviso to section 153A, therefore,
without there being any incriminating material found at the time of search, no
addition over and above the income which already stood assessed can be made.
This proposition he said, is squarely covered by the decision of All Cargo
Global Logistics Ltd. vs. DCIT reported in (2012) 137 ITD 287 (SB) (Mum).

 

Even the Hon’ble jurisdictional
(Bombay) High Court in the case of CIT vs. Murli Agro Products Ltd. ITA No.
36 of 2009 order dated 29.10.2010, has clearly held that, once the
assessment has attained finality before the date of search and no material is found
in the course of proceedings u/s. 132(1), then no addition can be made in the
proceedings u/s. 153A. This proposition has been reiterated by Hon’ble
Rajasthan High Court in the case of Jai Steel (India) vs. ACIT reported in
(2013) 259 CTR (Raj) 281. Thus, the addition of deemed dividend made by the
assessing officer is beyond the scope of assessment u/s 153A for the impugned
assessment years.

 

The Tribunal held that the
principle which was enunciated by the judgment of this Court rendered in the
case of Commissioner of Income Tax vs. M/S Murli Agro Products Ltd. (Income
Tax Appeal No.36 of 2009 decided on 29th October 2010) was
applied. That judgment held that, once the assessment has attained finality
before the date of search and no material is found in the course of proceedings
u/s. 132(1), then, no addition can be made in the proceedings u/s. 153A. After
setting out this principle in great details, the Tribunal rendered their
opinion that factually there was no incriminating material found during the
course of search relating to the addition made on account of deemed dividend.
The very fact that section 132 was resorted requiring the Assessing Officer to
record the necessary satisfaction, was lacking in this case. The assessment,
which had gained finality, in the absence of any material termed as
incriminating having thus been subjected to assessment/reassessment, the Tribunal
held in favour of the assessee.

 

Being aggrieved with the order of
the ITAT, the Revenue filed the Appeal before High Court. The Court upheld  the order of the Tribunal. Accordingly,
dismissed the departments appeal .

18. Jayantilal Investments vs. ACIT [ Income tax Appeal no 519 of 2003, Dated: 4th July, 2018 (Bombay High Court)]. [Reversed ACIT vs. Jayantilal Investments. Ltd; AY 1988-89 , dated 20/07/2004 ; Mum. ITAT ] Section 36(1)(iii) prior to Amendment: Business expenditure — Capital or revenue – interest paid on the loan taken for purchase of plot of land – stock-in-trade – revenue expenditure

The assessee filed its return of
income for the subject A.Y. declaring an income of Rs.15,280/. Subsequently
revised return of income was filed by the assessee declaring a loss of Rs.2.30
lakh. In the revised return, the appellant had claimed amount of Rs.9.52 lakh
as interest expenditure allowable u/s. 36(1)(iii) of the Act. During the course
of assessment proceedings on being so called upon by the A.O, the assessee
explained that so far as interest is concerned, it capitalises interest to the
extent it is expended, till the commencement of the project, therefore the
interest is taken as revenue expenditure. However, the A.O still entertained
doubts about allowing as deduction Rs.6.98 lakh being the interest expenditure
claimed on account of its construction project ‘Lucky Shoppe’. The assessee
pointed out that the above amount of Rs.6.98 lakh was debited to profit & loss
account but was wrongly capitalised in the original return of income, as during
the previous year relevant to the subject assessment year the work in the Lucky
Shoppe project had commenced. This was not accepted on the ground that mere
placing of orders would not amount to commencing of the project. Thus, not
allowable as revenue expenditure. The alternate submission of the appellant
that open plot of land in respect of ‘Lucky Shoppe’ forms stock in trade.
Therefore, the interest paid on the loan taken to purchase open plot of land
for Lucky Shoppe project is allowable as revenue expenditure being its
stock-in-trade. This alternative submission was negatived by the A.O on the
ground that purchase of plot of land is capital in nature. Hence, interest must
also be capitalised. Thus, the A.O disallowed the deduction of Rs.6.98 lakh
being interest paid on plot of land of Lucky Shoppe project.

 

The CIT(A) found that interest paid
on land was being allowed as revenue expenditure in the earlier Assessment
Years and it was only in the subject Assessment Year that the A.O for the first
time treated the same as work in progress and capitalised the same. The CIT(A)
held that the interest paid on the loan taken for the purpose of its
stock-in-trade i.e., plot of land for the ‘Lucky Shoppe’ project has to be
allowed as expenditure to determine its income. In support reliance was placed
on the decision of this Court in S.F.Engineer & Ors. vs. CIT  57 ITR 455 (Bom). Consequently, the
CIT(A) deleted the disallowance made by the A.O in respect of interest paid on
‘Lucky Shoppe’ project.

 

The Revenue filed an appeal to the
Tribunal. The Tribunal held that the assessee has not shown any work had
commenced on ‘Lucky Shoppe’ project plot of land during the previous year
relevant to the subject Assessment Year. Thus, it concluded that the A.O was
justified in coming to conclusion that interest expenditure in respect of Lucky
Shoppe project (plot of land) could not be allowed as revenue expenditure.
Thus, the Tribunal allowed the Revenue’s appeal and disallowed deduction of
interest in respect of ‘Lucky Shoppe’ project.

 

Being
aggrieved with the order of the ITAT, the assessee filed an appeal to the High
Court. The Court found that the plot of land which was purchased out of
borrowed funds on which interest was paid, forms part of its stock-in-trade.
Therefore, interest paid on purchase of stock-in-trade is to be allowed as
revenue expenditure. This was negatived by the A.O on the ground that purchase
of plot is necessarily capital in nature and, therefore, interest thereon is
also to be capitalised. However, the fact is that the loan on which interest of
Rs.6.98 lakh is paid was taken for purchase of plot of land in the course of
its business. Therefore, the interest has been paid to acquire stock-in-trade.
In the above circumstances as held by the CIT(A), the same has to be allowed as
revenue expenditure. In view of section 36(1)(iii) of the Act as existing prior
to amendment with effect from 1.4.2004 all interest paid in respect of capital
borrowed for the purpose of business or profession has to be allowed as
deduction while computing income under had income from business. Prior to
amendment made on 1.4.2004, there was no distinction based on whether the
borrowing is for purchase of capital asset or otherwise, interest was allowable
as deduction in determining the taxable income. It was only after introduction
of proviso to section 36(1)(iii) of the Act w.e.f. 1.4.2004 that the purpose of
borrowing i.e. acquisition of assets then interest paid would be capitalised.
The Supreme Court in Dy. CIT vs. Core Healthcare Ltd. 218 ITR 194 has
held that prior to 1.4.2004 interest paid on borrowings for purchase of asset
i.e. machinery is to be allowed as a deduction u/s. 36(1)(iii) of the Act. This
even if the machinery is not received in the year of booking. It held that the
restriction introduced in the proviso to section 36(1)(iii) of the Act was
effective only from A.Y 2004-05 and not for earlier Assessment Years. In this
case, the A.Y 1988-89 i.e., prior to amendment by addition of proviso to
section 36(1)(iii) of the Act. Therefore, the interest paid on the borrowings
to purchase the ‘Lucky Shoppe’ project plot of land is allowable as a deduction
u/s. 36(1)(iii) of the Act. This is so as it was incurred for the purposes of
its business. Accordingly, Assessee appeal was allowed.

4 Section 36(1)(vii): Bad debt- Write-off of bad debts were held to be allowable – and there is no obligation on the assessee to establish that debt had became bad.

1.     Hinduja Ventures Ltd vs.
DCIT [ Income tax Appeal no 270 of 2008, Dated: 2nd August, 2018
(Bombay High Court)]. 

 

[Hinduja
Ventures Ltd vs. DCIT; dated 24/08/2006; Mum. 
ITAT ]


After
the  close of accounting year, the
assessee had received money which it had written off as bad debts in its
accounts. Thus claim for deduction u/s.36(1)(vii) of the Act was disallowed. It
is an agreed position between the parties that after the Amendment with effect
from 1.4.1981 to section 36(1)(vii) of the Act, there is no requirement in law
that the Assessee must establish that the debt infact has become irrecoverable.

 

This as
requirement of section 36(1)(vii) of the Act to claim deduction on account of
bad debts is for the Assessee to write off the debt as irrecoverable in its
account. This is as held by the Supreme Court in TRF Ltd. vs. CIT (2010)
323 ITR 397. 

 

In this
case, it is undisputed position that the assessee had written off bad debts in
its account for the previous year relevant to the subject assessment year and
claimed deduction u/s. 36(1)(vii) of the Act. Thus, the fact that the amounts
written off as bad debts were recovered subsequent to the end of the accounting
year would not justify the Revenue to disallow the deduction on the ground that
the debt written off was not infact bad debt. In a similar circumstance, this
Court in CIT vs. Star Chemicals (Bombay) P. Ltd. [2009] 313 ITR 126 (Bom)
placed reliance upon Circular No.551 dated 23.1.1990 issued by the CBDT to
conclude that once the Assessee has written off debts as bad debts then the
requirement of section 36(1)(vii) of the Act are satisfied. There is no
requirement  to establish that the debt
was infact bad.

 

The tax on
the amount written off as bad debts in the previous year subject to relevant
Assessment Year has been offered to tax in the year the amounts were recovered
i.e. in the subsequent Assessment Year. The assessee  appeal was 
allowed.  

 

3 Section 264 : Revision– fresh claim of the deduction can be entertained – delay in filing the Revision Application – for reasonable cause it should have been condoned – order rejecting the revision application was set aside.


1.    Dwarikesh Sugar Industries
Ltd vs. DCIT [ Writ Petition no 1206 of 2018, Dated: 12th July, 2018
(Bombay High Court)]. 


The
assessee is engaged in manufacture of sugar. It purchases sugarcane from
farmers through various Societies established by the State Government under the
U.P. Sugarcane (Regulation of Supply & Purchase) Rules, 1954. The assessee
is required to pay commission to the above Societies from whom sugarcane is
procured. During the year, the assessee paid the Societies, the Commission
under the Sugarcane Act upto January, 2012. However, the assessee was under a
belief that the State Government would announce waiver of commission to be paid
to the Society under the Sugarcane Act for the months of February and March,
2012. In the above view, the assessee did not claim deduction on account of the
above accrued liability in its assessment for A.Y. 2012-13. However, the waiver
as expected from the State Government did not come. On the contrary, on 19th
June, 2012 the State Government called upon the assessee to pay the Commission
of Rs.4.25 crores payable to the sugarcane Societies for having acquired
sugarcane from them during February and March, 2012. In the aforesaid
circumstances, during the previous year relevant to A.Y 2013-14, the assessee
paid the commission of Rs.4.25 crores to the Societies under the Sugarcane
Act. 

 

The
assessee claimed a deduction of Rs.4.25 crores in its return for the previous
year relevant to the A.Y. 2013-14. However, the A.O, did not accept the
assessee’s claim for deduction of Rs.4.25 crores being commission paid to the
Societies under the Sugarcane Act. This on the ground that the payment relates
to the A.Y. 2012-13 and therefore could not be allowed as a deduction in the
A.Y. 2013-14. 

 

Consequent
to the above, the assessee filed an Appeal before the CIT(A). At the same time,
the assessee also filed a Revision Application u/s. 264 of the Act before Pr.
CIT alongwith an application for condonation of delay. The Pr. CIT rejected the
Assessee’s application for condonation of delay. This on the ground that the
assessee could have made this claim in a revised return for the A.Y 2012-13,
which infact it filed on 8th June, 2013. This without claiming this
deduction. Thus, the impugned order found, there is no cause for the delay and
rejected the condonation of delay application. Further, on merits also, Pr. CIT
rejected the claim. 

 

Consequent to the above,
the assessee filed an Writ Petition before the High Court. The Assessee relied
the decisions of the Delhi High Court in Rajesh Kumar Aggarwal vs.
CIT[2017] (78) taxmann.com 265 and the decision of the Kerala High Court in
Transformers & Electricals Kerala Ltd. Vs. DCIT[2016] 75 taxmann.com 298
wherein a view has been taken that the powers of revision u/s. 264 of
the Act are very wide and is not restricted to only consideration of claims
made before the A.O. Therefore, it is submitted that it would be appropriate
that, Pr. CIT passes a fresh order after hearing the parties and considering
the above decisions relied upon by the parties .

 

The
Revenue submits that restoring the Revision Application would be a futile
exercise as the Revision Application itself is not maintainable. It is pointed
out that the claim of deduction of Rs.4.25 crores being the payment made to the
Societies was not a claim made either in the original or revised return of
income before the A. O. Thus, relying upon the decision of the Apex Court in Goetze
(India) Ltd. vs. CIT, 2006 (284) ITR 323, it is submitted that such a claim
could not be made before the CIT in Revision u/s. 264 of the Act.

 

The Hon.
Court find that the delay in filing the Revision Application u/s. 264 of the
Act is concerned, it is the assessee’s case that as payments of commission to
Societies under the Sugarcane Act was made in previous year relevant to A.Y
2013-14. This was consequent to the order dated 19th June, 2012 of
the State Government. Therefore, they took a view that, the deduction was
allowable in A.Y 2013-14. It was in the above context, that though the assessee
had filed a revised return of income, in the year 2013 for A.Y 2012-13, it did
not claim the deduction of Rs.4.25 crores being the amount paid to the
Societies. It was only after A.O, by his order dated 25th March,
2016 held that, this deduction of Rs.4.25 crores relates to A.Y 2012-13 and
therefore could not be allowed in the A.Y 2013-14 that the assessee was
compelled to file the Revision Petition so as to claim the deduction. This to
ensure that, in atleast one of the two assessment years it gets the benefit of
deduction.

 

It is to
be noted that the assessee filed its Revision Application on 22nd
April, 2016 i.e. within a month of the order of the A.O  relating to A.Y 2013-14. In the aforesaid
circumstances, the reason in filing the Revision Application is for reasonable
cause and should have been condoned by the Pr. CIT. In the above circumstances,
delay was condoned and revision application was restored to the Pr. CIT for
disposal of the application on merits. Petition was allowed.



2 Section 45 : Capital gains vis a vis Business income – sale of property held as investment – Rental income disclosed as business income – gains arising on sale of property held in investment to be treated as capital gains.

1.      
 Pr. CIT-31 vs. Shree Shreemal Builders [ Income tax Appeal no 205 of
2016, Dated: 31st July, 2018 (Bombay High Court)]. 

 

[DCIT
vs. Shree Shreemal Builders; dated 14/11/2014, Mum.  ITAT ]

The
assessee sold a building which was acquired in 1978. It offered the gain made
on the sale of the building for tax under the head “capital gains”. However,
the A.O held that as the assessee was in business of development of real estate
and the fact that rental income received from building was offered to tax as
business income in the earlier years. The profit/gain on sale of the building
was in nature of business profit/gain. Therefore, chargeable to tax under the
head profit/gain of business or purchases and not under the head “capital
gains”.

 

Being
aggrieved, the assessee filed an appeal to the CIT (A). The CIT(A) on the facts
found that the assessee had been showing the building as part of its assets in
the balance sheet and it has never been shown as stock in trade till date. The
CIT(A) further held that merely because a person is engaged in business of
development of real estate he is not barred by holding any property as and by
way of investment. It was further found that interest paid on borrowed funds
was being capitalised and not claimed as an expenditure in the regular course
of business to arrive at the taxable income. So far as classifying the rental
income under the head “business income” is concerned, it held that by itself it
alone would not change the character of an investment into stock in trade. In
these circumstances the appeal of the assessee was allowed.

 

Being aggrieved the Revenue filed an appeal to the Tribunal. The
Tribunal find that the said building had been acquired in the year 1978 and
ever since that date the property has been shown as an asset/investment and not
as stock in trade. Further, it held that profit/gain on sale of the building is
classifiable under the head capital gains. Support was also drawn from the fact
that interest paid on the funds borrowed were not debited to the Profit and
Loss Account but were capitalised. So far as classifying the rental income from
the said building as business income is concerned, the ITAT helds that, by
itself, this would not change the character of the investment in the building
into a stock in trade. The appeal of the Revenue was dismissed.

 

Being aggrieved the Revenue
filed an appeal to the High Court. The Court find that the both CIT(A) and the
Tribunal on consideration of all facts has concluded that the building which
was acquired in 1978 and sold in previous year relevant to the subject
assessment year was an investment. This finding was on the basis that the
assessee had all along shown the building as its investment and not as its
stock in trade in its Balance Sheet and Profit and Loss Account. Further, the
interest paid on the amounts borrowed for acquisition of the building has been
capitalised since beginning and no amount of interest was claimed as an
expenditure in its profit and loss account. The first objection on behalf of
Revenue is that as the assessee is in the business of real estate development
all its income relating to real estate can only be taxed as business income.
This submission on behalf of the Revenue is contrary to the directions in the CBDT
circular No.4/2007 dated 15th June, 2007 wherein in paragraph 10
thereof it is stated that it is possible for a tax payer to have two portfolios
at the same time i.e. Investment portfolio (investment) and trading portfolio
(stock in trade).



Further
this Court in Commissioner of Income Tax vs. Gopal Purohit (2010) 188 Taxman
140 has also held to the same effect. The second objection on behalf
of the Revenue is that as the assessee had classified its rental income from
the said building as business income that would by itself be evidence of it
being stock in trade. In any case in such matters the totality of the facts are
to be taken into account as done by the CIT(A) and the Tribunal. Therefore the
profit/gain on sale of the investment is taxable under the head “capital
gains”. Accordingly, Revenue appeal dismissed. 

1 Section 68: Cash credits-Share application money-Permanent account numbers, bank details of share applicants and affidavits of share applicant company was furnished – share application money cannot be considered as unexplained cash credits.

1.        Pr. CIT-4 vs. Acquatic
Remedies Pvt. Ltd [ Income tax Appeal no 83 of 2016, Dated: 30th
July, 2018 (Bombay High Court)]. 

[DCIT
vs.  Acquatic Remedies Pvt. Ltd; dated
17/04/2015, Mum.  ITAT ]


A survey
was conducted on GP  by the Investigation
Wing of the Revenue. During the course of the survey, it was found that GP  was issuing bogus accommodation bills to
various concerns including the assessee and its sister companies. Consequently,
a search operation was conducted on the premises of the assessee and its sister
companies.

 

Thereafter,
assessment orders were passed u/s. 153(3) r.w.s 153A of the Act by the A.O for
A.Ys 2005-06 to 2009-10 making additions under the following heads :-

 

(a) on account
of introduction of share capital as unexplained cash credit u/s. 68 of the Act
;

 

(b) on
account of bogus purchases;

 

(c) on
account of commission paid at 2% for accommodation bills ; and

 

(d) on
account of cash discount at 5% on cash purchases.

 

The CIT(A)
for subject AYs confirmed the addition on account of unexplained cash credit
u/s. 68 of the Act relating to introduction of share capital. However, the
CIT(A) by common order partly allowed the Appeal to the extent of deleting
commission of 2% in respect of the share capital and on account of 5% discount
on purchases in respect of share capital.

 

Being
aggrieved, both the Revenue, as well as, the assessee filed appeals to the
Tribunal. The Tribunal, allowed the Appeal of the assessee on issue of cash
credit and also in respect of commission and cash discount as held by the CIT
(A) while dismissing the Revenue’s Appeal.

 

The
Revenue  in appeal before High Court  challenges the order of the Tribunal that the
identity and creditworthiness of the shareholders is not established and the
genuineness of the transaction not being established, the Tribunal ought not to
have allowed the assessee’s appeals.

 

The Hon.
High Court finds that the persons who invested in the shares of the assessee
had PAN numbers allotted to them which was made available by the assessee to
the A.O. Besides, the shareholders had also filed Affidavits before the A.O
pointing out that they had invested in the shares of the assessee out of their
own bank accounts. Copies of acknowledgement of Return of Income of the
shareholders was also filed. The assessee also requested the A.O to summon the
shareholders. These evidences have not been shown to be incorrect. Therefore,
the objection with regard to identity of the shareholders not being established
does not survive. So far as, the creditworthiness of the investors is
concerned, these Appeals are of AYs prior to AY: 2013-14. It was only with
effect from 1st April, 2013 i.e. from the Assessment Year 2013-14
that a proviso was added to section 68 of the Act which required the person
investing in shares of any Company to satisfy, if required by the A.O, the
source of the funds which enabled the investments in shares.

 

So far as
the genuineness of the investment by the shareholders is concerned, Revenue
placed reliance upon the statement of Kamlesh Jain who was an employee, as well
as, the shareholder of the assessee and that during the course of the search,
certain blank transfer forms were found in the possession of the assessee.
Besides, it is submitted that the shares were supposed to be finally
transferred to the family members of the Directors of the assessee company at a
discounted price.

 

The
Tribunal records the fact that copies of the share application form, share
allotment Register and Bank Statements showing receipt of funds were on record.
Moreover, all the shareholders had filed Affidavits declaring the fact that
they are investing in the assessee company by issuing of cheques from their
Accounts. Infact, the statement very categorically states that, he did not
intend to purchase any shares of Aqua Formulations (P) Ltd., but no such
declaration is made in respect of the investment made by him in the assessee
Company. Thus, there is no conclusive evidence in support of the above
submission in the context of the assessee. It records, that the entire basis of
the Revenue’s case is based on surmise that the assessee was taking bogus
purchase bills and cash was introduced in the form of share capital without any
evidence in support.

 

Regarding  cash discount at 5% on cash purchases  and commission paid at 2% for obtaining
accommodation bills treating the same as unexplained expenditure. The court
held that there is no unexplained expenditure nor any bogus purchases.
Accordingly, the  Appeals were dismissed.






Section 92C: Transfer pricing – Notional interest on Redemption of preference shares money paid to Associated enterprises- transfer pricing adjustments by re-characterising was held to be not legal Corporate guarantee commission – No comparison can be made between guarantees issued by commercial banks as against a corporate guarantee issued by a holding company for benefit of its AE

18. 
CIT-6 vs. Aegis Limited [Income tax Appeal no 1248 of 2016 , Dated: 28th
January, 2019 (Bombay High Court)]. 

[Aegis Limited vs. ACIT-5(1); dated
27/07/2015; ITA. No 1213/Mum/2014, AY: 2009-10; Bench : K, Mum.  ITAT ]

 

Section 92C: Transfer pricing – Notional
interest on Redemption of preference shares 
money paid to Associated enterprises- transfer pricing adjustments by
re-characterising was held to be not legal

 

Corporate guarantee commission – No
comparison can be made between guarantees issued by commercial banks as against
a corporate guarantee issued by a holding company for benefit of its AE

 

The assessee subscribed to redeemable
preference shares of its AE and also redeemed some of these shares at par. The
assessee’s case had been that subscription of preference shares does not impact
profit & loss account or taxable income or any corresponding expense
resulting into deduction in the hands of the assessee. Redemption of preference
shares at par represents an uncontrolled price for shares, based on a
comparison with such uncontrolled transaction price and, therefore, such
redemption of preference share should be considered at arms length from Indian
transfer pricing prospective.

 

During the course of transfer pricing
proceedings, the TPO observed that the preference shares are equivalent to
interest free loan and in an uncontrolled third party scenario, interest would
be charged on such an amount, as these are not in the nature of business
advances. After making reference to FINMMDA guidelines and conducting enquires
from CRISIL u/s. 133(6), he assumed the credit ratings of the AE to be BBB(-)
and on the basis of bond rate information obtained from CRISIL, he determined
the rate of interest at 15.41% and computed the adjustment of Rs. 59,90,19,794/.
The DRP agreed that the TPO’s re-characterisations approach into loan and
charging of interest thereon is correct. However, they did not agree with the
TPO’s approach of imputing the interest using credit rating and Indian bond
yield. They instead directed the Assessing Officer to charge interest rate as
charged by the assessee which was at 13.78% and thereby also directed to add
markup of 1.65%, for risks. They directed the adjustment to made
accordingly. 

 

Being aggrieved
with the DRP order, the assessee filed an appeal to the ITAT. The Tribunal find
that the TPO /Assessing Officer cannot disregarded any apparent transaction and
substitute it, without any material of exception circumstance highlighting that
assessee has tried to conceal the real transaction or some sham transaction has
been unearthed. The TPO cannot question the commercial expediency of the
transaction entered into by the assessee unless there are evidence and
circumstances to doubt. Here it is a case of investment in shares and it cannot
be given different colour so as to expand the scope of transfer pricing
adjustments by re-characterising it as interest free loan. Now, whether in a
third party scenario, if an independent enterprise subscribes to a share, can
it be characterise as loan. If not, then this transaction also cannot be
inferred as loan. The Co-ordinate Benches of the Tribunal have been
consistently holding that subscription of shares cannot be characterises as
loan and therefore no interest should be imputed by treating it as a loan.
Accordingly, the adjustment of interest made by the A.O was deleted.

 

Being aggrieved
with the ITAT order, the revenue filed an appeal to the High Court. The Court
observed  that, we are broadly in
agreement with the view of the Tribunal. The facts on record would suggest that
the assessee had entered into a transaction of purchase and sale of shares of
an AE. Nothing is brought on record by the Revenue to suggest that the transaction
was sham.

 

In absence of any
material on record, the TPO could not have treated such transaction as a loan
and charged interest thereon on notional basis. Accordingly this ground was
dismissed. Next Ground is adjustment made by TPO in connection with the
corporate guarantee given by the assessee in favour of its AE.

 

The Tribunal
restricted subject addition to 1% guarantee commission relying upon other
decisions of the Tribunal along similar lines. The TPO had, however, added 5%
by way of commission. Being aggrieved with
the ITAT order, the revenue filed an appeal to the High Court. The Court relied
on the judgment of this Court in the case of Commissioner of Income-tax,
Mumbai v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 wherein it
has been held  that there is a
substantial difference between a bank guarantee and a corporate guarantee.

 

The ITAT
observed  that, the Tribunal applied a
lower percentage of commission in the present case considering that, what the
assessee had provided was a corporate guarantee and not a bank guarantee. The
Revenue appeal was dismissed.  

 

Section 37(1) : Business expenditure–Capital or revenue-Non-compete fee –Allowable as revenue expenditure

17. 
Pr CIT-3 vs. Six Sigma Gases India Pvt. Ltd [ ITA no 1259 of 2016 Dated:
28th January, 2019 (Bombay High Court)]. 

[Six Sigma Gases India Pvt. Ltd vs..
ACIT-3(3); dated 09/09/2015 ; AY: 
2006-07  ITA. No 3441/Mum/2012,
Bench : E ; Mum.  ITAT ]

 

Section 37(1) : Business
expenditure–Capital or revenue-Non-compete fee –Allowable as revenue
expenditure

 

The assessee is a Private Limited
Company. During the year the assessee had entered into a non-compete agreement
with the original promoter of the Company under which in lieu of payment of
Rs.2.06 crore (rounded off), the promoter would not engage himself in the same
business for a period of five years. Incidentally, the business of the company
was of manufacture of oxygen gases.



The A.O did not
allow the entire expenditure as claimed by the assessee but treated it as
differed revenue expenditure to be spanned over five years period. By the
impugned order, the CIT(A) confirmed the action of the AO.

 

Being aggrieved
with the CIT (A) order, the assessee filed an appeal to the Tribunal. The
Tribunal by the impugned judgment held in favour of the assessee relying upon
and referring to the decision of this Court in the case of The CIT-1,
Mumbai vs. Everest Advertising Pvt. Ltd., Mumbai dated 14th December, 2012
rendered in Income Tax Appeal No. 6539 of 2010 wherein the Hon’ble
High Court has held that “…..the object of making payment was to derive an
advantage by eliminating the competition over a period of three years and the
said period cannot be considered as sufficiently long period so as to ward off
competition from Mr. Kapadia for a long time in future or forever so as to hold
that benefit of enduring nature is received from such payment. The Tribunal has
recorded a finding that exit of Mr. Kapadia would have immediate impact on the
business of the assessee-company and in order to protect the business interest
the assessee had paid the said amount to ward off the competition…..”

 

The Revenue
argued that, under the agreement, the assessee would avoid competition from the
erstwhile promoter for a period of five years. The assessee thus acquired an
enduring benefit. The expenditure should have been treated as a capital
expenditure.

 

The assessee submitted that, the
assessee did not receive any enduring benefit out of the agreement. Under the
non-compete agreement, the asssessee had received a immediate benefit by
avoiding the possible competition from the original promoters of the Company.

 

Being aggrieved with the ITAT order,
the revenue filed an appeal to the High Court. The Court find that the Madras
High Court in the case of Asianet Communications Ltd. vs. CIT, Chennai
reported in 257 Taxman 473 also treated the expenditure as revenue in
nature in a case where the non compete agreement was for a period of five yers
holding that the same did not result into any enduring benefit to the assessee.
Similar view was expressed by the same Court in the case of Carborandum
Universal Ltd. vs. Joint Commissioner of Income-tax, Special Range-I, Chennai,
reported in [2012] 26 taxmann.com 268. It can thus be seen that, looking to
the nature of non-compete agreement, as also the duration thereof, the Courts
have recognised such expenditure as Revenue expenditure. In the present case,
the assessee had subject agreement with the promoter of the Company to avoid
immediate competition. The business of the assessee company continue. No new
business was acquired. The benefit therefore was held by the Tribunal
instantaneous.

 

Accordingly appeal of revenue was
dismissed.

Section 263 : Commissioner- Revision – Book profit – only power vested upon the Revenue authorities is the power of examining whether the books of accounts are certified by the authorities under the Companies Act – Revision was not valid. [Section 115JB]

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

16. 
The Pr. CIT-1 vs. Family Investment Pvt. Ltd [ Income tax Appeal no:
1669 of 2016 Dated: 28th January, 2019 (Bombay High
Court)]. 

[Family Investment Pvt. Ltd vs. The Pr.
CIT-9; dated 02/12/2015 ; ITA. No 1945/Mum/2015, AY:2010-11;      Bench 
F      Mum.  ITAT]

 

Section 263 : Commissioner- Revision – Book
profit – only power vested upon the Revenue authorities is the power of
examining whether the books of accounts are certified by the authorities under
the Companies Act – Revision was not valid. [Section 115JB]

 

The assessee-company is engaged in the
business of dealing in shares and securities under the Portfolio Management
Scheme. While framing the assessment order u/s. 143(3) of the Act, the A.O
observed that 15% of Book Profit is less than the tax payable on the income assessed
under the normal provision of the Act, provisions of section 115JB of the Act
will not apply. Hence, for the purpose of taxation, total income shall be taken
as per the normal provisions of the Act. This order did not find favour with
the Principal CIT who vide notice u/s. 263 of the Act dated 22nd
September, 2014 sought to set aside the assessment order holding it to be
erroneous and prejudicial to the interest of the Revenue.

 

Being aggrieved
with the Pr.CIT order, the assessee filed an appeal to the Tribunal. The
Tribunal held that it can be seen that the only power vested upon the Revenue
authorities is the power of examining whether the books of accounts are
certified by the authorities under the Companies Act. It is not the case of the
Pr. CIT that the books of account have not been properly certified by the
authorities under the Companies Act, therefore the observations of the Pr. CIT
is not acceptable. The second contention of the Principal CIT is that the AO
has not examined this issue during the course of the assessment proceedings.

 

The Court observed  that vide letter dated 7th
December, 2012, the assessee has furnished (a) ledger account of donation u/s.
80G alongwith donation receipts (b) copy of acknowledgement of return of income
and balance sheet and profit and loss account of Shantilal Shanghvi Foundation
alongwith all its schedule. Thus, it can be seen that in response to a specific
query, the assessee has filed all the related details alongwith supporting
evidences. Therefore, it cannot be said that the AO has not examined this issue
during the course of assessment proceedings. The AO has thoroughly examined the
claim, therefore ITAT set aside the order of the Principal CIT.

 

Being aggrieved with the ITAT order,
the Revenue filed an appeal to the High Court. The Court observed that on
perusal of the documents on record with the assistance of the learned counsel
for the parties would show that the Tribunal proceeded to allow the appeal
principally on two grounds.

 

Apart from these observations of the
Tribunal, independently the court observed that during the year under
consideration the assessee had committed to a total donation of Rs.12.75 crore,
out of which Rs.10.25 crore was actually donated during the period relevant to
the assessment year in question. Out of the remaining Rs. 2.50 crore, Rs. 2
crore was donated in the next year, but even before the date of closing of the
account of the present year and remaining Rs.50 lakh was donated shortly after
that. In view of such facts, we do not see any reasons to interfere.



The court also took the note of the
fact that the decision of the Supreme Court in case of Apollo Tyres is referred
to larger bench. In the result, appeal is dismissed.

 

17. The Pr. CIT-6 vs. I-Ven Interactive Ltd [ Income tax Appeal no 94 of 2016, Dated: 27th June, 2018 (Bombay High Court)]. [ACIT-10(1) vs. I-Ven Interactive Ltd; dated 19/01/2015 ; ITA. No 1712/Mum/2011, AY: 2006-07 Mum. ITAT ] Section 143(2) : Assessment–Notice–Notice served on the old address- Assessment was held to be void [Section 292BB]

The assessee had filed its return
of income for A.Y 2006-07 giving its new address therein. However, the A.O
served the notice within the stipulated time u/s. 143(2) of the Act not on the
address in the return but upon the address in the PAN record. The above notice
sent by the Revenue within the prescribed time was not received by the assessee
as it ceased to be the address of the assessee. Thereafter, admittedly beyond
the time prescribed u/s. 143(2) of the Act, the notice was served upon the assessee.

 

During the Assessment proceedings,
the assessee did raise objections as to the jurisdiction to assess the
department u/s. 143(3) of the Act. However, the A.O did not accept it and
passed an order u/s. 143(3) of the Act.

 

The justification of the Revenue is
that, they served the notice dated 5th October, 2007 at the address
available in its PAN records. Therefore, the notice u/s. 143(2) of the Act sent
on the earlier address was correct. Besides, the assessee participated in the
assessment proceedings and their action is protected by section 292BB of the
Act.

Being aggrieved with the order of
the A.O, the assessee filed the Appeal before the CIT(A). The CIT(A) find that
the impugned statutory notices issued without jurisdiction. The notice u/s.
143(2) was not served to the assessee and therefore, the proceedings u/s.
143(2) were bad in law. In view of the assessee raising such objections during
assessment proceedings, the provisions of section 292BB were not applicable and
section 292BB could not have given validity to the illegality / irregularity of
the notices.

 

The CIT(A) held that the A.O
completed assessment u/s. 143(3) of the Act without assuming valid jurisdiction
u/s. 143(2) of the Act. In the facts and circumstances, the assessment framed
u/s. 143(3) of the Act was invalid.

Being aggrieved with the order of
the CIT(A), the Revenue filed the Appeal before the ITAT. ITAT upheld the CIT(A) order.

 

Being aggrieved with the order of
the ITAT, the Revenue filed the Appeal before the High Court. The Court
observed  that besides the return of
income indicating the new address, the appellant had by earlier letter dated 6th
December, 2005 intimated the change of its address to the A.O and also
requested a issue of fresh PAN. Besides, the A.O had infact served at the new
address, the assessment order u/s. 143(3) of the Act on 30th
November, 2006 in respect of AY: 2004-05. This was much prior to the statutory
notice issued on 5th October, 2007 and 25th July, 2008 at
the address of the assessee as recorded in the PAN. The Assessee had taken up
the objection with regard to non service of notice during the assessment
proceedings. Thus, as rightly held by the impugned order of the Tribunal that,
in view of the proviso to section 292(BB) of the Act, the notice not being
served within time, cannot be deemed to be valid. Therefore, no fault can be
found with the impugned order of the Tribunal. Accordingly, revenue Appeal
was  dismissed.

16. The Pr. CIT-9 vs. Agilisys IT Services India P. Ltd [ Income tax Appeal no 1361 of 2015, Dated: 12thJune, 2018 (Bombay High Court)]. [ITO V Agilisys IT Services India P. Ltd; dated 29/04/2015 ; ITA. No 2226/Mum/2011, AY 2003-04 Bench: K , Mum. ITAT ] Section 143(3) r.w.s 263 : Once the CIT(A) by its order had accepted the fact that the assessment order had gone beyond a scope of directions of the CIT u/s. 263 of the Act – there was no occasion for him to touch upon the merits of the issue

Assessee a 100% EOU is engaged in
the business of software development and export of software. In its return of
income, Assessee had claimed benefit of exemption u/s. 10B of the Act in
respect of its 100% EOU. The assessment was completed on 29th March,
2006 u/s.  143 (3) of the Act.

 

The CIT passed an revision order
u/s.  263 of the Act, holding that the
assessment order was erroneous and prejudicial to the interest of Revenue. This
to the extent exemption was allowed u/s. 10B of the Act in respect of non
receipt of foreign exchange within six months of exports and on the issue of
International Transactions in respect of Transfer Pricing of International
Transactions with Associated Enterprises (AE), not being referred to the
Transfer Pricing Officer (TPO) in terms of section 92CA of the Act. In the
light of the above, the CIT directed the A.O to finalise the assessment denovo,
on the above issues.

 

Consequent to the above order of
the CIT, the A.O proceeded to pass a fresh order. However, in the fresh order,
the A.O not only dealt with issue of exemption u/s. 10B of the Act in relation
to delay in realisation of foreign exchange and referred the matter to the TPO
but also dealt with the issue of reallocation of R & D Expenses for
claiming deduction u/s.  10B of the Act.

 

Being aggrieved by the order of
A.O, the Assessee carried the matter in appeal to the CIT(A). The CIT(A) by an
order, accepted the contention of the assessee that, the A.O had gone beyond
the issue which were directed to be considered denovo by the CIT in its
order u/s.263 of the Act. Therefore, to that extent, the order was without
jurisdiction. Notwithstanding the above finding, the CIT(A) proceeded further
to decide the issue, inter alia, with regard to R & D expenses on
merits, held that assessee is entitled to set off R & D expenses with the
profits of STIP units as the R & D expenses have a direct nexus with the
export business of the STIP unit.

 

Being aggrieved with the order of
the CIT(A), both the Revenue as well as assessee filed the Appeal to the
Tribunal. The Revenue in its appeal before the Tribunal, did not challenge the
finding of the CIT(A) that the order of the assessing officer dated 24th
December, 2009, was beyond the directions contained in the order dated 27th
September, 2007 passed by the CIT u/s. 263 of the Act and, therefore, without
jurisdiction. Nor did it urge this issue at the hearing before the Tribunal.
The Revenue’s only challenge was on the issue of allowing the set off of R
& D Expenses incurred in a non STIP Unit with STIP unit of the Respondent .

 

The Appellant’s basic contention
was that once the CIT(A) had by its order dated 12th January, 2011
had accepted the fact that the Assessment Order dated 24th December,
2009 had gone beyond a scope of directions of the CIT u/s. 263 of the Act,
there was no occasion for him to touch upon the merits of the issue. This as it
was beyond the scope of the directions of the CIT i.e. to the extent of set off
of R & D Expenses. The ITAT upheld the contention of the assessee.

 

Being aggrieved with the order of
the ITAT, the Revenue filed the Appeal before the High Court. The Court
observed that the Revenue has not challenged the finding of the CIT(A) that the
A.O has gone beyond the scope of directions given by the CIT(A) in its order
u/s. 263 of the Act. The issue now being urged by the Revenue in appeal. As
this was not an issue urged by them before the Tribunal, this question does not
arise from the order of the Tribunal.

 

Further the question as urged, is
beyond the issue raised before the Tribunal and cannot be urged before this
Court as held by this Court in CIT vs. Tata Chemicals 256 ITR 395. In
any case, it may be pointed out that the earlier Assessment Order dated 29th
March, 2006 has not been cancelled by the order of CIT u/s. 263 of the Act, for
passing a fresh Assessment Order. Once it is not disputed by the Revenue before
the Tribunal that, the order of the A.O on set off of R & D Expenses was
beyond the scope of the directions given by the CIT in exercise of its power
u/s. 263 of the Act, the occasion to examine the correctness of the same, would
not arise. Accordingly, the  Appeal
was  dismissed.

Section 45: Capital gains –Business income- Investment in shares- A company can have two portfolio – investor and a trader at the same time- Investment was held to be assessable as short term capital gains. [Section 28i)]

10. The Pr. CIT-12 vs. Business Match Services (I)
Pvt. Ltd [ Income tax Appeal no 699 of 2016  Dated: 27th November, 2018 (Bombay High Court)].

 

 [Business Match Services (I) Pvt. Ltd vs.
DCIT; dated 19/08/2015 ; ITA. No 7267/M/2010, AY: 2007-08 and 2008-09, Bench B,
Mum. ITAT ]

 

Section
45: Capital gains –Business income- Investment in shares- A company can have
two portfolio – investor and a trader at the same time- Investment was held to
be assessable as short term capital gains. [Section 28i)]


The assessee company is engaged in the business of providing
consultancy services in the field of private placement of shares to foreign
institutional investors, financial institutions.


During the two years under consideration, the assessee also dealt in
purchase and sale of shares. It declared a portion of profits arising on sale
of shares as Short term Capital Gain (STCG) and the remaining portion was offered
as its business income, i.e. the assessee has maintained separate portfolios
for investment and trading assets. In both the years under consideration, the
AO did not agree with the claim of STCG declared by the assessee and
accordingly assessed the same as business income. 


The CIT(A) confirmed the view of the A.O, upon which, the issue
reached the Tribunal at the hands of the Assessee.


Being aggrieved with the order of the CIT(A), the assessee filed the
Appeal before ITAT. The Tribunal find that the AO has considered all the shares
together to take the view that the assessee has indulged in trading in shares.
However, the fact remains that the assessee itself has offered gains arising on
shares held as trading stock as its business income. The assessee has claimed
the gains arising on sale of Adani Enterprises Limited only as Short Term
Capital Gain with the claim that it has held the same as its investment. It is
now well settled proposition that a person is entitled to maintain two separate
portfolios, one for its investment and another one for its trading assets. For
this proposition, it relied on to the Circular No.4/2007 dated 15/06/2007
issued by the CBDT and also the decision rendered by Hon’ble High Court
in the case of Gopal Purohit (2010) (228 CTR 582). In the instant case,
the A.O has not disproved the claim of the assessee that it has maintained two
different portfolios as discussed above. Even though the Ld. CIT(A) has
observed that the question whether transactions were in the nature of trade or
otherwise is largely dependent upon the facts of each case, yet we are of the
view that the Ld CIT(A) has not properly appreciated the facts prevailing in
the instant case. The Tribunal held that the intention of the assessee at the
time of purchase of shares of Adani Enterprises Limited was to hold it as its
investments. The A.O has not brought any material on record to show the
contrary, which means that the AO has arrived at the adverse conclusion only on
surmises. Accordingly, the gains arising on its sale should be assessed as
Short term capital gains only. Accordingly, the gains arising on sale of shares
of Adani Enterprises Limited under the head “Income from Capital gains.” In the
earlier year also, Assessee had claimed capital gain out of its sale of shares.
Same was accepted by the A.O.


Being aggrieved with the order of the ITAT, the Revenue filed the
Appeal before High Court. The Court observed that the dispute pertains only to
one scrip namely the shares of M/s. Adani Enterprise Ltd., Assessee had
purchased the shares in installments and after holding them for some time, sold
them also in installments. Thus, there were no instances of repetitive purchase
and sale of shares. From the balance sheet, it could be gathered that the
Assessee had used its own funds or interest free funds, borrowed from the
Directors of the Company in order to purchase the shares. The Assessee had
taken physical delivery of the shares and in the books of account, treated the
same as an investment. Inter alia, on said grounds, Tribunal had ruled in
favour of the Assessee. Whether the purchase and sale of shares is in the
nature of investment or business venture, would depend on facts and
circumstances of each case. There are judicially laid down guidelines and parameters
to judge whether in a case, the sale of shares would give rise to business
income or capital gain. In the present case, the Tribunal has applied the
correct parameters to the facts, emerging from the record. The revenue appeal
was dismissed.

 

Section 147 : Reassessment – Beyond period of 4 years –Findings in case of another assessee – No failure to disclose material facts – Reassessment was held to be not valid. [Sections 80IB(10) ,148]

12.  Pr.CIT
vs. Vaman Estate [ Income tax Appeal no 678 of 2016, Dated: 27th November, 2018 (Bombay
High Court)]. 

 

[ACIT-21(2) vs. Vaman Estate; dated 15/07/2015 ;
ITA. No 5584/Mum/2012, AY: 2004-05 , Bench: F, Mum.  ITAT ]

 

Section
147 : Reassessment – Beyond period of 4 years –Findings in case of another
assessee – No failure to disclose material facts – Reassessment was held to be
not valid. [Sections 80IB(10) ,148]

 

The assessee filed on 31.10.2004 declaring total income at Rs. Nil.
In the return of income filed by the assessee for the said assessment year, the
principal claim was of deduction u/s. 80IB(10) of the Act arising out of income
from development of a housing project. In the assessment carried out by the
A.O, he disallowed a part of the claim after detailed scrutiny. Such assessment
was reopened by the A.O by issuance of notice, which was done beyond the period
of four years from the end of relevant assessment year. In order to issue such
notice, the A.O had recorded the detailed reasons. The gist of his reason was
that a similar claim was lodged by one 
Abode Builders for the same housing project. In the course of
examination of such claim of the said assessee, the A.O had detected certain
defects. The A.O had rejected the claim inter alia on the ground that
the development and construction of housing project had commenced prior to
01.10.1998 (which was the crucial date for claiming the benefits u/s. 80IB(10)
of the Act). The A.O of the present assessee, therefore, found that the
assessee was not entitled to the deduction since one of the essential
requirements of the provision was breached. He noted that these facts were not
disclosed by the assessee and not brought to the notice of the A.O during the
assessment. Therefore, there was failure on the part of the assessee to
disclose truly and fully all material facts necessary for assessment.


The CIT(A) observed that during the scrutiny assessment, there was
no failure on the part of the assessee to disclose truly and fully all material
facts. Even on merits, he was of the opinion that there was no evidence to
suggest that the development and construction of the housing project commenced
prior to 01.10.1998. On such grounds, the assessee’s appeal was allowed.

 

The Revenue carried the matter in further appeal before the
Tribunal. The Tribunal held that in absence of any failure on the part of the
assessee to disclose true facts, the reopening of assessment beyond the period
of four years was not permissible. It is undisputed that in the original
assessment, the A.O had examined the assessee’s claim of deduction u/s.
80IB(10) of the Act at some length. To the extent he was dissatisfied, the
claim was disallowed. Such assessment was sought to be reopened only on the
ground that in case of Abode Builders where similar claim was raised in
connection with the same housing project, the A. O had detected certain
breaches which disqualified the assessee from claiming deduction. Essentially,
according to the A.O, the development and construction of the housing project
had commenced prior to 01.10.1998. The CIT(A) in a detailed consideration of
all the relevant aspects of the matter came to the conclusion that there was no
material to suggest that the development and construction of the housing
project had commenced prior to 01.10.1998.


Being aggrieved with the order of the ITAT, the Revenue filed the
Appeal before High Court. The Court find that the assessee had made full
disclosure of all relevant facts during the original scrutiny assessment. As
noticed by the CIT(A), all necessary facts were before the A.O while deciding
the original assessment. During such assessment, the assessee’s claim of
deduction was also minutely examined by the A.O. Reopening of assessment beyond
the period of four years was, therefore, correctly disallowed by the CIT(A) and
the Tribunal. As noted, the only source available with the A.O to contend that
relevant material was not brought on record by the assessee was assessment in
case of Abode Builders. Here also, there is one vital defect in the logic
adopted by the A.O. We do not find any where any material to suggest that the
development and construction of the housing project commenced before
01.10.1998. Even in the reasons recorded, the A.O has not linked any material
in order to make this observation. He has mainly relied on the findings of the
A.O of Abode Builders. This conclusion was reversed by the CIT(A) noting that
in fact all along there was evidence suggesting that the commencement of
construction of the housing project was some time in the year 2002. It was
pointed out that the assessment order in case of M/s. Abode Builders was set
aside by the CIT(A) and the same was confirmed by the Tribunal. There was no
failure on the part of the assessee to disclose truly and fully all relevant
facts as correctly held by the CIT(A) and the Tribunal pursuant to the detailed
discussion. Therefore, no question of law arises. The appeal was dismissed
accordingly.  

 

15. CIT(Exemption) vs. Indian Institute of Banking and Finance. [ITA No. 1368 of 2015 Dated: 28th March, 2018 (Bombay High Court)]. [ Affirmed ACIT vs. Indian Institute of Banking and Finance, dated 11/02/2015 ; Mum. ITAT ] Section 11 : Educational Institution – purpose of development of banking personnel for/in the banking industry – by holding courses and also disbursing knowledge by lectures, discussions, books, correspondence with public bodies and individuals or otherwise etc – Trust entitle to exemption.[Section 2(15)]

[ Affirmed ACIT vs. Indian
Institute of Banking and Finance, dated 11/02/2015 ; Mum. ITAT ]

 

Section 11 : Educational
Institution – purpose of development of banking personnel for/in the banking
industry – by holding courses and also disbursing knowledge by lectures,
discussions, books, correspondence with public bodies and individuals or
otherwise etc – Trust entitle to exemption.[Section 2(15)]


The assessee is a Company
registered u/s. 26 of the Indian Companies Act, 1913 as a non-profit making
Company. The principal objects of the assessee as per the Memorandum of
Association is to inter-alia conduct educational activities in respect
of the banking and finance subjects by holding courses and also disbursing
knowledge by lectures, discussions, books, correspondence with public bodies
and individuals or otherwise etc. It is an undisputed position that, assessee
is registered u/s. 12A of the Act.

 

During the course of assessment
proceedings, the assessee sought benefit of exemption u/s. 11 of the Act. The
A.O denied the same on the ground that the claim for exemption u/s. 10(22) of
the Act for the A.Y 1996-97 to 1998-99 which had been granted by the Tribunal was
pending in Appeal filed by the Revenue in High Court, as well as, application
u/s. 10(23C)(vi) of the Act was pending before the CIT. It was on the aforesaid
basis that the A.O held that the benefit u/s. 11 cannot be granted to the
petitioners. This without dealing with the petitioner’s primary contention that
they are entitled to exemption as they satisfy the definition of charitable
purpose as they are an educational institution.

 

On further Appeal, the Tribunal
allowed the assessee’s appeal. The Tribunal after examining the object clause
as given in the Memorandum of Association gave a finding that the assessee has
been created for the purpose of development of banking personnel for/in the
banking industry. The assessee company imparts education to the candidates who
are connected with the banking industry. It has library facility, organises
lectures, seminars and undertake examinations for promoting bank officers. In
the aforesaid context, the Tribunal concluded on facts which were before the
Revenue Authorities that it exists for advancement of learning in the field of
banking. Besides, on facts it found the fee structure of the institute for
these courses was not on the higher side. Further, the assessee company
reliance upon the decision of this Court in Director of Income-tax
(Exemption), Mumbai vs. Samudra Institute of Maritime Studies Trust, reported
in [2014] 49 taxmann.com 510 (Bombay) to inter-alia hold that the
activity which is carried out by the assessee company is educational in nature.
This is for the reason that it imparts education to the members of the banking
industry and prepares them to discharge their duties as bankers more
efficiently.

 

Further, with regard to the
objection of the A.O that as the benefit of the assessee company is restricted
only to the persons working in the banking industry, it is not available to the
public at large was negatived by placing reliance upon the decision of the Apex
Court in Ahmedabad Rana Caste Association vs. Commissioner of Income-Tax,
reported in 82 ITR 704. In the above case, it has been held that the object
beneficial to a section of the public is an object of general public utility
and to serve a charitable purpose it is not necessary that the object should be
to benefit the whole of mankind or all persons in a country or State. In the
above view, it was, held that the petitioners were an institute for a
charitable purpose as defined in section 2(15) of the Act.

 

Being aggrieved, Revenue filed
appeal before the High Court. The Revenue contented  that the activity carried out by the assessee
is in the nature of running Coaching Classes or Center and therefore the
benefit of section 11 of the Act cannot be extended to the assessee company.

 

The Court observed that there is no
such objection taken before the authorities by the Revenue. Besides, nothing
has been shown to us why it should be considered as a coaching class. Further,
the Court found that the impugned order of the Tribunal has only applied the
decision of this Court in Samudra Institute of Maritime Studies Trust (supra)
to conclude that the activities which are run by the institute is an
educational activity and not in the nature of running a Coaching Center or a
Class. The grant or refusal to grant exemption u/s.  10(22) and/or (23C) of the Act cannot govern
the application of section 11 of the Act. In the above view, the Appeal was
dismissed.