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

6 Business expenditure – Mark to market loss – Loss suffered in foreign exchange transactions entered into for hedging business transactions – cannot be disallowed as being “notional” or “speculative” in nature: Section 37(1)

6.  Business
expenditure – Mark to market loss – Loss suffered in foreign exchange
transactions entered into for hedging business transactions – cannot be
disallowed as being “notional” or “speculative” in nature: Section 37(1)


CIT-4 vs. Walchandnagar Industries Ltd. [Income tax Appeal no. 352 of
2015 dated : 01/11/2017 (Bombay High Court)].


[Walchandnagar Industries Ltd. vs. ACIT. [ITA No. 3826/Mum/2013; Bench
: G ; dated 21/08/2014 ; AY 2009-10, Mum. ITAT ]


The
assessee is a manufacturer of engineering goods. During the course of the
assessment proceedings, the A.O noticed that the assessee has shown loss on
account of foreign exchange currency rate fluctuation. On perusing the details,
the A.O noticed that the loss was on account of marked to market loss.


The
assessee was show caused to explain why the exchange rate fluctuation loss
should not be treated as speculation loss. The assessee explained the
difference between forward contracts and option contracts. The AO did not
accept the detailed submission of the assessee. The AO was of the opinion that
the loss arising from revaluation as on 31.3.2009 is a notional loss and cannot
be allowed as expenditure u/s. 37(1) of the Act.


The
assessee carried the matter before the Ld. CIT(A) but without any success.


Before
ITAT, the assessee stated that the issue of disallowance on account of marked
to market loss is squarely covered in favour of the assessee by the decision of
the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India
Pvt. Ltd. 312 ITR 254.


The
ITAT find that the Hon’ble Supreme Court in the case of Woodward Governor
India (Supra) has held that loss suffered by the assessee on account
of fluctuation in the rate of foreign exchange as on the date of the balance
sheet is an item of expenditure u/s. 37(1) of the Act. Respectfully following
the decision of the Hon’ble Supreme Court, the AO is directed to delete the
disallowance of Rs. 2,28,01,707/-.


Being
aggrieved the Revenue filed an appeal to the High Court. The court perused the
said decision of this Court in the case of CIT vs. M/s. D. Chetan &
Co ( 2017) 390 ITR 36 (Bom.)(HC); the Court held that ; Loss
suffered in foreign exchange transactions entered into for hedging business
transactions cannot be disallowed as being “notional” or “speculative” in
nature.


Hence, no
substantial question of law arises and accordingly the appeal was dismissed. 

5 TDS – Section 194C or 194J – subtitling and standard fee paid for basic broadcasting of a channel at any frequency

5.  TDS – Section
194C or 194J – subtitling and standard fee paid for basic broadcasting of a
channel at any frequency 


CIT (TDS) vs. UTV Entertainment Television Ltd. [ Income tax Appeal no.
525 of 2015 dated : 11/10/2017 (Bombay High Court)].


[UTV Entertainment Television Ltd. vs. ITO (OSD)(TDS) 3(1). [ITA No.
2699, 4204, 4205 & 2700/Mum/2012; Bench: F ; dated 29/10/2014 ; Mum. ITAT ]


The
assessee is a Public Limited Company carrying on business of broadcasting of
Television (TV) channels. The assessee operates certain entertaining channels.
During the survey, A.O found that certain amounts were paid by assessee on account
of ;


 (i)
Carriage Fees / Placement Charges.

(ii)
Subtitling charges (Editing Expenses).

(iii)
Dubbing Charges.


Tax
was deducted on the said amounts as per section 194C of the Act. The A.O was of
the opinion that the carriage fees, editing charges and dubbing charges were in
the nature of fees payable for technical services and, therefore, tax should
have been deducted u/s. 194J of the Act. The A.O passed an order that the three
items were not covered by section 194C but by section 194J.


The
appeal preferred by the assessee before the CIT(A) was partly allowed holding
that there was no short deduction of tax by the assessee on account of payment
of placement charges, subtitling charges and dubbing charges. Further appeal
was before the ITAT where Revenue appeal was dismissed.


Being
aggrieved by the said order, an appeal was preferred by the Revenue before the
High Court. The Revenue submitted that the payments made by the assessee was
not contractual payments and, therefore, section 194C of the Act will not be
applicable. His contention was that the activity for which payments were made
by the assessee are either for professional or for technical services and,
therefore, section 194J will apply to the present case. As per the Agreements
these payments are given to MSO/Cable Operators to retransmit and/or carry the
service of the channels on ‘S’ Band in their respective territories. The
services provided by these MSOs/Cable Operators does not come within the
purview of section 194C of the Act, as placing the service of the channel on
‘S’ Band is a Technical Service for which the TDS is required to be deducted as
per the provisions of section 194J of the Act.


The
Hon. Court observed that as per the agreements entered into between the
assessee and the cable operators/ Multi System Operators (MSOs), the cable
operators pay a fee to the assessee for acquiring rights to distribute the
channels. It is pointed out that the cable operators face bandwidth constraints
and due to the same, the cable operators are in a state to decide which channel
will reach the end viewer at what frequency (placement). Accordingly,
broadcasters make payments to the cable operators to carry their channels at a
particular frequency. Fee paid in that behalf is known as “carriage fee” or
“placement fee”. The payment of placement fee leads to placement of channels in
prime bands, which in turn, enhances the viewership of the channel and it also
leads to better advertisement revenues to the TV channel. The placement charges
are consideration for placing the channels on agreed frequency bands. It was
found that, as a matter of fact, by agreeing to place the channel on any
preferred band, the cable operator does not render any technical service to the
distributor/ TV channel. Reference is made to the standard fee paid for basic
broadcasting of a channel at any frequency. It has considered clause (iv) of
the explanation to section 194C which incorporates inclusive definition of
“work”. Clause (iv) includes broadcasting and telecasting including production
of programmes for such broadcasting and telecasting.


The
subtitles are textual versions of the dialogs in the films and television
programmes which are normally displayed at the bottom of the screen. Sometimes,
it is a textual version of the dialogs in the same language. Reliance is placed
on the CBDT notification dated 12th January 1977. The said
notification includes editing in the profession of film artists for the purpose
of section 44AA of the Act. However, the service of subtitling is not included
in the category of film artists. As noted earlier, subclause (b) of clause (iv)
of the explanation to section 194C covers the work of broadcasting and
telecasting including production of programmes for such broadcasting or telecasting.


The
High Court observed that when services are rendered as per the contract by
accepting placement fee or carriage fee, the same are similar to the services
rendered against the payment of standard fee paid for broadcasting of channels
on any frequency. In the present case, the placement fees are paid under the
contract between the assessee and the cable operators/ MSOs. Therefore, by no
stretch of imagination, considering the nature of transaction, the argument of
the Revenue that carriage fees or placement fees are in the nature of
commission or royalty can be accepted. Thus, the High court concur with the
view taken by the Appellate Tribunal. The Revenue appeals were dismissed.

4 Cessation of liability – waiver of loans availed by assessee from DEG, Germany – in nature of capital liability – hence, the provision of section 41(1) was not applicable.

4.  Cessation of liability –  waiver of loans availed by assessee from DEG,
Germany – in nature of capital liability – hence, the provision of section
41(1) was not applicable.


CIT-4 vs. Rieter India Pvt. Ltd. [ Income tax Appeal no 477 of 2015
dated : 18/08/2017 (Bombay High Court)].


[ACIT vs. Rieter India Pvt. Ltd. [dated 24/07/2014 ; AY : 2003-04 ;
Mum. ITAT ]


The
assessee company had obtained the term loan from DEG, Germany in the course of
the FY: 1994-95 and 1995-96. The term loan from DEG, Germany has been approved
by the RBI.


The
said RBI approval reveals that the assessee was permitted to raise foreign
currency loan from DEG, Germany for financing the import of capital equipments
for manufacturing of textile spinning machinery and components.


Further,
even the loan agreement with DEG, Germany reflects financing of the project
undertaken by the assessee of manufacturing textile spinning machinery and
components thereof. The said agreement also shows that the loan raised from
DEG, Germany was a long term means of finance for the purposes of funding assessee’s
project of manufacturing textile spinning machinery and components for textile
industries.


The
assessee had placed the list of machineries which have been acquired from
Spindle Fabrik Suessen, Germany and the respective invoices thereof. The
financial statements of the assessee as on 31.03.1995 reveals that a liability
of Rs.32.75 crore was outstanding as a part of current liabilities of Rs.42.60
crore against the name of Spindle Fabrik Suessen, Germany, against the
machineries acquired. The aforesaid position is not disputed by the Revenue.
The loan from DEG, Germany was received on 30.09.1995 and was utilised for
payment of the outstanding liability towards acquisition of fixed assets of
Rs.32.75 crore, apart from meeting other liabilities. It is not in dispute that
assessee has utilied the loan raised from DEG, Germany for payment of Rs.32.75
crore to Spindle Fabrik Suessen, Germany, which was a liability outstanding
against acquisition of fixed assets from the said concern.


The
Dept. contented that discharge of such liability of Spindle Fabrik Suessen,
Germany cannot be treated as utilisation of term loan from DEG, Germany for
acquisition of fixed assets, because the assets already stood acquired prior to
that date.


The
Tribunal held that the payment made by the assessee to Spindle Fabrik Suessen,
Germany towards outstanding liability against acquisition of fixed assets of
Rs.32.75 crore, which is out of the loan funds from DEG, Germany is to be understood as utilisation of loan funds towards
acquisition of capital assets. Therefore, it has to be understood that the loan
availed from DEG, Germany was utilised for the purposes of acquisition of
capital assets, to the above extent.


Further,
the Tribunal held that the subsequent waiver of such an amount,  cannot be said to be waiver of a loan raised
for trading activity. The waiver of the principal amount of term loan granted
by DEG, Germany of Rs.29,63,27,000/- was with respect to a loan which was
granted as well as utilised for purchase of capital assets, namely, plant &
machinery. Considered in the aforesaid factual backdrop, the waiver of the
principal amount of loan utilised for acquisition of capital assets and not for
the purposes of trading activity and accordingly the issue was covered in
favour of the assessee by the judgment of the Hon’ble Bombay High Court in
the case of Mahindra and Mahindra Ltd. (2003) 261 ITR 501 (Bom).


The
High Court agreed with the conclusion arrived at by ITAT,  the same to be in consonance with the
principle of law laid down by the Division Bench of this Court in the case of Mahindra
& Mahindra Ltd. vs. CIT, (2003) 261 ITR 501. The Revenue in support
of the appeal, however, urged that the Tribunal ignored the law laid down in
another Judgement reported in Solid Containers Ltd. vs. DCIT, 308 ITR 417.
However, the court held that the facts and circumstances involved in the
present case were not identical to those considered in Solid Containers (supra).
The court observed  that such facts as
are disclosed in the records of the present case are closer to that of Mahindra
& Mahindra and not Solid Containers. The assessee relied upon a latest
order passed in ITXA No. 1803 of 2014 dated 07th August 2017, Commissioner
of Income Tax9 vs. M/s. Graham Firth Steel Products (I) Ltd. In the
above view, the appeal of revenue was dismissed.

1 Section 147 – Reassessment – After the expiry of four years – No failure by assessee to truly and fully disclose all material facts – reopening is bad in law

ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No: 802 of 2015 (Bom. HC)  
A.Y.: 2003-04      Dated: 29th January, 2018
[ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No.2476/PN/2012;
Dated: 24th Aug., 2014 ; Pune.  ITAT]

The Assessee Company was
incorporated in 1996 with the Kalyani Group (Indian Partner), holding 75% and
Lemmerz Werke GMBH Germany (German Partner) holding remaining 25% share in it.
Thereafter, the share holding of the Assessee company, underwent a change with
the German Partners, increasing its share holding to 80% in the Assessee
Company by acquiring shares from M/s. Kalyani Group.

 

The Assessment was
completed u/s. 143 (3) of the Act after having discussed the shareholding
pattern, allowed the carried forward loss under section 79 of the Act.
Thereafter, the assessment was reopened on the point of shares holding pattern
of the company i.e  in the assessment
order, applicability of provisions of section 
79 of I.T. Act has not been considered by the AO.

 

Thereafter, the A.O passed
an order u/s.  143 read with 147 of the
Act, rejected the Petitioner’s objection, and thereafter, inter alia,
disallowed the carry forward of business losses u/s.  79 of the Act.

 

The CIT(A) allowed the
Assessee’s appeal, inter alia, holding that when all facts including the
change in shareholding pattern, had been disclosed during the regular
assessment proceedings, as is evident from the Assessment Order passed in the
regular assessment proceedings, then merely because the Assessing Officer
choose not to apply section 79 of the Act, it could not be said that the
Assessee had failed to disclose fully and truly all material facts, necessary
for assessment. This was a case where the first proviso to section 147 of the
Act will apply as the reopening notice is beyond a period of four years from
the end of the relevant AY.

 

Being aggrieved, Revenue
filed an appeal to the Tribunal. The Tribunal held that, where an assessment
order u/s. 143(3) of the Act was passed in regular assessment proceedings,
evidencing full and true disclosure of all material facts necessary for the purpose
of assessment. Then mere non consideration of section 79 of the Act by the A.O
cannot lead to the conclusion that the Assessee had failed to disclose all
material facts truly and fully, which were necessary for Assessment. The
Tribunal  relied upon the Apex Court’s
decision in Calcutta Discount Company Ltd. vs. CIT 41 ITR 191 – wherein
it has been held that obligation of the Asssessee is to disclose all primary
facts truly and fully to the extent relevant for the purpose of Assessment. The
Assessee is under no obligation to inform the Assessing Officer of the
interference of fact or law to be drawn from the material facts which had been
disclosed fully and truly by the Assessee.

 

Being aggrieved, Revenue
filed an appeal to the High Court. The grievance of the Revenue is that it was
obligatory on the part of the Assessee to invite the attention of the A.O to
section 79 of the Act during regular assessment proceedings. Thus, not having
done so, it is submitted that the first proviso to section 147 of the Act, can
have no application.

 

The Hon. High Court
observed that it is an undisputed fact that the regular Assessment Order had
been passed u/s. 143(3) of the Act. The reopening notice has been issued beyond
the period of four years from the end of the relevant AY. Therefore, the first
proviso to section 147 of the Act is applicable and reopening notice can only
be sustained in cases where there is failure to disclose fully and truly all
material facts necessary for assessment. The reasons in support of the impugned
notice itself records the fact that the issue of shareholding pattern of the
company was discussed by the A.O in his Assessment order passed in the regular
assessment proceedings. The only basis of reopening is that the A.O in the
regular assessment did not apply provisions of section 79 of the Act, to
determine the taxable income. This non application of mind by the A.O while
carrying out assessment cannot lead to the conclusion that there has been any
failure on the part of the Assessee to truly and fully disclose all material
facts necessary for Assessment. The Tribunal correctly placed reliance upon the
decision of the Supreme Court in Calcutta Discount Company Ltd., (supra) to
hold that not pointing out the inference to be drawn from facts will not amount
to failure to disclose truly and fully all material facts, necessary for
assessment. In view of the above the, Appeal of dept was dismissed.

8. Depreciation – trial production – even if final production is not started – as the expenses incurred thereafter will have to be treated as incurred in the course of business and on the same basis the depreciation is admissible.: Section 32

The Pr.CIT-4
vs. Larsen and Toubro Ltd. [Income tax Appeal no 421 of 2015 dt : 06/11/2017
(Bombay High Court)].

[Larsen and
Toubro Ltd. vs. The Pr.CIT-4. [ITA No. 4771 & 4459/Mum/2005; Bench : J ;
dated 27/08/2014 ; AY 1997-98 Mum. ITAT ]

 

The assessee
had claimed depreciation in respect of the machineries which were stated to
have been installed and put to use in the production of clinker which is
intermediates stage for production of cement. The AO observed that even if the
assessee had produced 100 MT of clinker it was only a trial run for one day and
this quantity was minuscule compared to the intended production capacity and
that the assessee was not able to prove that after the trial run, commercial
production of clinker was initiated within reasonable time. The AO pointed out
that the trial runs continued till October 1997 before the reasonable quantity
of clinker was produced. The AO held that use of machinery for trial production
cannot be deemed to be user for the purpose of business and therefore
depreciation on plant and machinery used in production of clinker cannot be
allowed. The AO disallowed the claim of depreciation of Rs. 34,79,40,576/-.

 

The CIT(A) confirmed the disallowance by
observing that as per section 32 the depreciation can be allowed, only if the
assets have been used for the purpose of business carried on during the year.
The expression ‘used for the purpose of business or profession means that the
assets were capable of being put to use and were used for the purpose of
enabling the owner to carry on the business or profession. The user of assets
during the year should be actual, effective and real user in the commercial
sense. In the case of the appellant as has been pointed out by the AO, even if
it is accepted that plant and machinery used for production of intermediate
stages are eligible for depreciation, is accepted, the trial production took
place only for one day. It appears that some technical snag developed in the
plant and, therefore, immediately the trial run was stopped. The AO has stated
that the trial run continued at least till October, 1997.

 

The appellant has not produced any evidence
to show as to when exactly the commercial production started. In the present
case, the trial production by the assessee cannot be considered as the date of
user by the assessee. One cannot ignore the facts that there was substantial
gap between the first trial run and subsequent trial runs and commercial
production. From the long gap between the first trial run and subsequent trial
runs it can be said that the installation of plant and machinery even for
production of clinkers was not satisfactorily completed and was still in installation
stage. The CIT(A) confirmed the action of the AO.

 

The assessee
filed appeal before ITAT. The Tribunal observed that there is no merit in the
action of the lower authorities for denial of claim of depreciation in respect
of plant and machinery which has been put to use even for trial production,
which is also for the purpose of assessee’s business of manufacture of clinker.
The Hon’ble Gujarat High Court in the case of ACIT vs. Ashima Syntex, 251
ITR 133 (Guj) held that even trial production of a machinery would fall
within the ambit of “used for the purpose of business” .Further, it
was held that as the statute does not prescribe a minimum time limit for
“use” of the machinery, the assessee cannot be denied the benefit of
depreciation on the ground that the machinery was used for a very short
duration for trial run. Furthermore, the Hon’ble Bombay High Court in the case
of CIT vs. Industrial Solvents & Chemicals Pvt. Ltd., (Mumbai) (119
ITR 615) held that once the plant commences operation and reasonable
quantity of product is produced, the business is set up. This is so even if the
product is sub-standard and not marketable.

 

Industrial
Solvents & Chemicals Pvt. Ltd. was entirely a new company. The Court held
that once the business is set up, the expenses incurred thereafter will have to
be treated as incurred in the course of business and on the same basis, the
depreciation and development rebate admissible to the assessee company would
have to be determined. Even use of machine for one day will entitled the
assessee for claim of depreciation. Since it is not clear from the record as to
the period for which machinery was actually used by assessee, we direct the AO
to verify the period of used and restrict the claim of depreciation to 50%, if
he finds that machinery was used for less than 180 days during the year under
consideration.

 

The Revenue filed appeal before High Court. The Court observed that the issue is no longer res integra in view of the decision of Industrial Solvents & Chemicals (P) Ltd. (supra). The court observed that the Order of the Tribunal cannot be faulted inasmuch as the jurisdictional High Court has already held that once plant commences operation and even if product is substantial and not marketable, the business can said to have been set up. Mere breakdown of machinery or technical snags that may have developed after the trial run which had interrupted the continuation of further production for a period of time cannot be held ground to deprive the assessee of the benefit of depreciation claimed. In the above view, the appeal was dismissed. _

7. Revision – Difference of view – it is not open to CIT to revise it – Further CIT has considered wrong facts – revision not permissible : Section 263

Commissioner
of Income Tax-III, Pune vs. V. Raj Enterprises. [Income tax Appeal no 1335 of
2014 dt : 31/01/2017 (Bombay High Court)].

 

[V. Raj
Enterprises vs. Commissioner of Income Tax, [dated 30/09/2013 ; A Y: 2007-08
.Pune   ITAT ]

 

The Assessee is
engaged in the business of arbitrage and jobbing through various share broking
firms. For the subject AY in its ROI, assessee returned an income of Rs.2.10
crore. The AO by an order dated 30/11/2009 u/s. 143(3) of the Act, determined
the income at Rs.2.11 crore.

 

Thereafter, the
CIT in exercise of its powers u/s. 263 of the Act, by order dated 30/3/2012
revised the assessment order. The CIT held that the Assessee was not entitled
to rebate u/s. 88E of the Act in respect of STT (Security Transaction Tax) paid
as it was a share broker. Moreover, it helds that this aspect was not examined
by the AO while passing the Assessment Order.

 

Being aggrieved,
the Assessee carried the issue in appeal to the Tribunal. The Tribunal held
that the AO while passing the Assessment Order u/s. 143(3) of the Act had
verified and examined the Contract Notes, Bills of respective brokers etc.,
before granting the rebate of STT paid u/s. 88E of the Act as claimed by the
Assessee. Further, on same set of facts, the Assessee’s claim for rebate u/s.
88E of the Act had been allowed by the Revenue in the earlier Assessment Years.
Further, the order also notes that the CIT while revising the order of
Assessment proceeded on an incorrect assumption of fact that the Assessee is a
share broker. This is contrary to the facts on record as the Assessee was doing
the work of jobbing through different share brokerage firm. Thus, for the above
reasons, the Tribunal allowed the appeal and set aside the CIT order dated
30/3/2012 , passed in exercise his powers u/s. 263 of the Act. 

 

The grievance
of the Revenue in appeal before High Court was that the Assessee is not
entitled to the benefit of rebate of STT u/s. 88E of the Act. The High Court
noted that the issue arising in the appeal was a jurisdictional issue of the
powers of the CIT to exercise his powers of Revision u/s. 263 of the Act in the
present facts. The grievance of Revenue on merits of the dispute would merit
examination only if the exercise of jurisdiction u/s. 263 of the Act, is
proper. As noted by the Tribunal, the entire basis of exercising jurisdiction
u/s. 263 of the Act is on the basis of assumption of incorrect fact that the
Assessee is a share broker. This, in fact, is not so. Where the basic facts
have been misunderstood by the CIT, the exercise of powers of Revision is not
sustainable.

 

Moreover, the
same issue also arose for the earlier AYs i.e. 2005-06 and 2006-07. The Revenue
had accepted the Assessee’s claim for rebate u/s. 88E of the Act to the extent
STT is paid. Last but not the least, Revenue is not able to dispute the fact
that the AO while passing the Assessment Order dated 30th November,
2009 had granted the claim of the Petitioner for benefit u/s. 88E of the Act on
examination and verification of the Contract Notes, Bills of respective brokers
etc. Thus, on the basis of the records available and examination by the
AO, a view has been taken by the AO and it is not open to CIT to revise it
merely because his view on the same facts, is different, as held by the Apex
Court in Malbar Industrial Co. Ltd., vs. CIT 243 ITR 83 (SC).

 

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

4 Section 4 – Charge of income-tax – Interest on advance – if the income does not result at all – then the same cannot be taxed – even though an entry is made in the books of account about such a hypothetical income – which has not been materialised.

1.      
CIT vs. Godrej Realty Pvt.
Ltd.

ITA
No.: 264 of 2015  (Bom High Court)

AY:
2008-09 Dated: 11th December, 2017 

[Godrej
Realty Pvt. Ltd v. ITO; ITA No.: 4487/Mum/2012; 
Dated: 04th June, 2014; Mum. ITAT]


The Assessee Company had
entered into a Memorandum of Understanding (MoU) with M/s. Desai & Gaikwad
to develop residential project on a plot of land, belonging to M/s. Desai &
Gaikwad at Pune. In terms of the MoU, the Assessee had given an advance to M/s.
Desai & Gaikwad and the assessee was entitled to receive from M/s. Desai
& Gaikwad interest at 10% p.a. on the aforesaid project advance. However,
the obligation to pay interest on M/s. Desai & Gaikwad to the assessee, was
from the date of execution of the development agreement. In its return for the
subject AY, the assessee did not offer to tax any interest on the aforesaid
advance with M/s. Desai & Gaikwad.

 

However, the A.O, brought
to tax the amount of interest on advance. This on the basis of M/s. Desai &
Gaikwad’s ledger account showed an aggregate of advance and interest, as
payable by it to the assessee. Thus, concluding that interest had accrued to
the assessee, as it follows the mercantile system of accounting. Therefore,
interest is includable in its total income.

The CIT(A) dismissed the
assessee appeal. Thus, upholding the view of the A.O that as M/s. Desai &
Gaikwad had shown interest liability to the assessee as expenditure in its
books of account, it follows that interest has accrued to the assessee.
Therefore, the interest was includable in the total income subject to tax.

 

The Revenue case is that,
assessee was following the mercantile system of accounting. Therefore, it was
obligatory on its part to account for its accrued interest, which had so
accrued in terms of MoU. This accrual of interest is further supported,
according to him by the fact that M/s. Desai & Gaikwad has shown in its
books the above amount as a liability to the assessee. In support of the
proposition that in a mercantile system of accounting, the income is said to
accrue, when it becomes due and the postponement of the date of payment or non
receipt of the payment, would not affect the accrual of interest, he places
reliance upon the decision of the Supreme Court in Morvi Industries Ltd.
vs. CIT (1971) 82 ITR 835.

 

The Tribunal records the
fact that in terms of MOU, M/s. Desai & Gaikwad was liable to pay interest
at 10% p.a. on the advance from the date of the execution of the development
agreement and the undisputed position is, it has not been executed. The debit
note sent by the assessee to M/s. Desai & Gaikwad towards the interest chargeable
on the advance was returned by M/s. Desai & Gaikwad, denying its liability
to pay any interest as demanded. Moreover, the board of directors of the
assessee had recording the no acceptance of the debit note towards the interest
payable, decided to waive the interest chargeable which is to be recovered from
M/s. Desai & Gaikwad.

Being aggrieved, the
Revenue carried the issue in appeal to the High court. The Hon. Court observed
that, in fact, there was no accrual of income in the present case. This for the
reason that there was no right to receive income of Rs.1.98 crores as interest
as admittedly development agreement has not been executed. The interest in
terms of the MoU would only commence on development agreement, being executed.
Admittedly, this is not done. Further, the return of the debit note by M/s.
Desai & Gaikwad was also an indication of the fact that M/s. Desai &
Gaikwad did not accept that interest is payable to the Assessee. Consequently,
there was no amount which had become due to the Assessee.

 

The entire grievance of the
Revenue before us is that the entries made by M/s. Desai & Gaikwad in its
ledger account, indicating that interest was payable, by itself, lead to the
conclusion that interest had accrued to the assessee is not correct.
Particularly, in the context of the MoU and return of debit note. Moreover, the
board of directors of assessee had passed a resolution, waiving the interest
receivable from M/s. Desai & Gaikwad. This, on account of non acceptance of
liability to interest by M/s. Desai & Gaikwad. Therefore, it was not an
unilateral giving up of accrued income but acceptance of the rejection of debit
note by M/s. Desai & Gaikwad. Moreover, the reliance upon Morvi Industries
Ltd., (supra) is inapplicable for the reasons on facts, the accrual of
income in this case would only arise after the execution of the development
agreement. Undisputedly, it has not taken place. Thus, as no income i.e.
interest has accrued or has been received, the occasion to levy tax on such
hypothetical income, cannot arise. Accordingly, Revenue appeal was dismissed.  


3 Income in respect of sale of flats – accrued when possession of the flat was given – not when allotment letter was issued.

CIT vs. Millennium Estates Private Ltd.
ITA No.: 853 of 2015 (Bom. High Court)
A.Y.: 2007-08      Dated: 30th January, 2018
[Millennium Estates Private Ltd. v. DCIT; ITA No. 517/Mum/2011;  Dated: 16th May, 2012; Mum.  ITAT]

The assessee carries on
business as a contractor and developer. During the scrutiny proceedings the A.O
found that an amount was shown under the head current liabilities i.e. as
advances received from it buyers. The A.O did not accept the contention of the
Assessee that the aforesaid amounts from M/s. Siddhi Vinayak Securities Pvt.
Ltd. and M/s. Manomay Estates Pvt. Ltd. were received as advance at the time of
allotment on 14 & 15 March 2007 and that further consideration was received
on 1 April 2007, when the possession of the flats was given, thus chargeable to
tax in the next AY. The A.O made addition the aggregate amount received from
M/s. Siddhi Vinayak Securities Pvt. Ltd and M/s. Manomay Estates Pvt. Ltd. as
accrued income in the subject Assessment Year. 

 

Being aggrieved, the
assessee carried the issue in appeal to the CIT (A). The CIT (A) dismissed the
Assessee appeal.

 

On further Appeal, the
Tribunal  allowed the Assessee appeal.
Thus  after being examined all the
clauses of the allotment letter as well as the clauses of the possession letter
concluded that the sale of the flats took place only in the subject Assessment
Year i.e. on 1 April 2007 i.e. when the possession of the flats was given and
the balance amount was paid. The accrual of income took place in the next year.
Till then, the amount received was only in the nature of advances. The Tribunal
also records the fact that it was not the case of the Revenue that the possession
letter dated 1 April 2007 was not genuine. Nor has the Revenue brought on
record any evidence to show that the possession was given to M/s. Siddhi
Vinayak Securities (P.) Ltd. and M/s. Manomay Estates (P.) Ltd. prior to 1
April 2007. In the above view the addition was made by the A.O and upheld by
the CIT (A) was deleted.

 

The Tribunal also records
the fact that in the next AY , the Assessee has offered the income on the sale
of the flats to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay
Estates Pvt. Ltd. to tax. The same has also been accepted by the Revenue as
taxable income for the next AY.

 

The grievance of the
Revenue is that the sale of the flats under consideration had in fact taken
place on 14 and 15 March 2007 when they were allotted under an allotment
letters to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay Estates
Pvt. Ltd.

 

Being aggrieved, further
Revenue filed an appeal to the High Court. The Hon. High Court observed that
the Tribunal has reproduced the relevant clauses of the allotment letter dated
15 March 2007 which is similar to the allotment letter dated 14 March 2007 and
the relevant clause. The Tribunal, held that the amount of Rs.2.14 Crores was
an advance during the subject AY. It thus held that part of the above amount
had accrued as income during the AY 2007-08. From the above clauses of the
allotment letter and clause 9 of the possession letter referred to by the
Tribunal it is very evident that the possession of the flats was given on
receipt of total consideration only on 1 April 2007. The Tribunal records as a
matter of fact that there is no dispute about the genuineness of the letter of
possession dated 1 April 2007. Moreover, no statement of the buyers or other
evidence, even circumstantial in nature, was brought on record to indicate that
the facts are different from what has been recorded in the possession letter
dated 1 April 2007. In the aforesaid facts, the view taken by the Tribunal on
the self evident terms of allotment and possession letter does not give rise to
any substantial question of law. Accordingly, Appeal of dept was  dismissed.

 

10. Capital Gain – purchase and sale of shares and mutual funds – Whether chargeable to tax under the head ‘capital gains’ or as business income

CIT, vs. Mohan Vallabhdas Bhatiya. [ Income tax Appeal no
1201 of 2014 dt : 24/01/2017 (Bombay High Court)].

[ACIT , vs. Mohan Vallabhdas Bhatiya., [dated 31/01/2014;
A Y: 2005-06. Mum.ITAT]

The assessee carries on business as a trader in shares. He
also has investments, consequently he holds two portfolios one an investment
portfolio showing the capital assets and the other is trading portfolio. The
assessee was consistently showing gains on account of his investment portfolio
and offering them to tax under the head ‘capital gains’. In fact, right from
the AY : 2003-04 till AY: 200-10, the Revenue has consistently accepted the claim
of the assessee with regard to the gain made on its investment portfolio is
taxable under the head Capital gain except for the subject AY, the Revenue is
seeking to take a different view. The grievance of the Revenue is that in the
subject Assessment Year, there were borrowed funds. Thus, the gains claimed to
have been made on investments are in fact trading gains.

So far as borrowed funds are concerned, the Tribunal records
the fact that a small amount of loan was taken from the relatives and it did
not bear any interest. Moreover, the use of borrowed funds is not necessarily
attributable to the investments made, as there is no such finding given by the
authorities below.

The Hon. High Court dismissed the Revenue’s appeal upholding
the stand of the Assessee that the income earned on account of purchase and
sale of shares and mutual funds were chargeable to tax under the head ‘capital
gains’ and not as business income.

The High Court observed that even before the Tribunal, the
Revenue did not point out any variation in the facts and circumstances of the
case for the subject Assessment Year from those of the earlier and subsequent
years on account of income earned on investment. Moreover, the loan which has
been taken from relatives were for a small amount and further the use of these
borrowed funds were not established to be for purchase of shares for investment
by the authorities.

Therefore, in view of the fact that the Revenue
has been consistently taking a view that the income earned on investments is
taxable under the head capital gains no difference in facts and /or in law has
been pointed out to take a different view for the subject AY. Moreover, both
the CIT(A) as well as the Tribunal have concurrently come to a finding of fact
that the income earned on the investment portfolio is chargeable under the head
capital gains and not under the head ‘profits from trading of shares’ which is
not shown to be perverse. In the above view, the revenue’s Appeal was
dismissed. 

9. TDS – Payments made for hiring of cranes – the crane owner responsible for day-to-day maintenance and operating costs – liable for TDS u/s. 194C of the Act – not u/s. 194I of the Act.

CIT (TDS) vs. M/s. UB Engineering Ltd. [ Income tax Appeal
no 1312 of 2014 With 1313 of 2014, dt : 23/01/2017 (Bombay High Court)].

[ITO , (TDS – 3), vs. M/s. UB Engineering Ltd. [ ITA NO.
2025 & 2026/PN/2012; Bench : A ; dated 30/09/2013 ; A Y:2007-08 &
2008-09. Pune. ITAT ]

The assessee is engaged in the business of erection and
commissioning of Industrial Plants and also in A.Ys. 2008-09 & 2009-10
undertakes maintenance of operational plants. The assessee undertakes such work
on contractual basis. Amongst the machinery deployed, it includes ‘cranes’
which are mobilised for movement of heavy machinery. Apart from the deployment
of machinery, assessee also allocated specific activities to labour
contractors. In the case of such activities, assessee incurred expenditure of
Rs.1,21,14,506/- for mobilisation of cranes. The assessee company deducted tax
at source on such payments treating the same to be contractual payments and
applying the provisions of section 194C of the Act. Accordingly, the assessee
deducted tax at source u/s. 194C @ 1% whereas as per the AO the tax was liable
to be deducted in terms of the provisions of section 194I of the Act @ 10% plus
surcharge, treating the payments as rental payments. For the said reason, the
AO treated the assessee as an assessee in default in terms of section 201(1) of
the Act for short deduction of tax to the extent of Rs.12,39,043/- and also
held the assessee liable for the payment of interest on such short deduction in
terms of section 201(1A) amounting to Rs.4,46,055/-.

The CIT(A) considered the facts of the case and concluded
that assessee had correctly applied the provisions of section 194C of the Act
while deducting the tax at source on the impugned payments. The CIT(A) has
noticed that assessee hired services of cranes for which entire maintenance,
repairs, drivers’ salaries etc. was borne by the supplier. The CIT(A) relied
upon the decision of the Pune Tribunal in the case of Wings Travels, ITA No.
1136/PN/2009 and also the judgement of the Hon’ble Gujarat High Court in the
case of Swayam Shipping Services (P) Ltd., 339 ITR 647 (Gujarat) and concluded
that the AO was not justified in invoking the provisions of section 194I of the
Act in respect of the ‘crane hire charges’.

The Tribunal observed that factually, it is not in dispute
that the crane owner not only provides the services of a crane but is also
responsible to provide the operator and incur maintenance & repairs costs, etc.
The Hon’ble Gujarat High Court in the case of Swayam Shipping Services (P) Ltd.
(supra) held that the payments for hiring cranes and Trailers were
liable for deduction of tax at source in terms of section 194C of the Act and
not in terms of section 194I of the Act. The Tribunal also relied on decision,
of the Pune Bench decision in the case of Wings Travels (ITA
No.1136/PN/2009, dated 30th August, 2011 and Bharat Forge Ltd.
vs. Addl. CIT vide ITA No.1357/PN/2010, wherein a similar view to the
effect that in cases where the crane owner provides the operator as also is
responsible for day-to-day maintenance and operating costs, the payments made
for hiring of cranes would be liable for deduction of tax at source u/s. 194C
of the Act and not u/s. 194I of the Act, as contended by the Revenue. Accordingly,
the order of the CIT(A) was affirmed.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the impugned order dismissed the
Revenue’s  appeal before it by inter
alia placing reliance upon the decision of the  coordinate 
bench in the case of  Wings
Travels (Supra). In the affidavit dated 13th January, 2017, Mr.
Rajesh Gawali,  Deputy Commissioner of
Income Tax (TDS) stated that the 
decision of the coordinate  bench
of the Tribunal in  Wings Travels  (supra) has been accepted by the Income
Tax Department in view of an  earlier
view taken in the case of  Accenture
Services (P) Ltd. (ITAT  No.5920,
5921 and 5922/Mum/2009).

In the above view, Revenue Appeal was dismissed.

8. Advance received for exports – shown in the accounts as a liability for a period of more than 10 years – no addition of the amount shown as a liability u/s. 41(1)

CIT vs. M/s. Aasia Business Ventures Pvt.Ltd. [ Income tax
Appeal no 1010 of 2014, dt : 24/01/2017 (Bombay High Court)].

[M/s. Aasia Business Ventures Pvt. Ltd. vs. ITO. [ITA
No.430/MUM/2011 ; Bench : A ; date:08/11/2013 ; A Y: 2007- 2008. MUM. ITAT ]

The assessee is engaged in giving advisory services and
traded in shares. Earlier, the assessee was a trader in SKO Superior Kerosene
Oil. It imported SKO and was selling the same in domestic market. During the
course of assessment, the AO noticed that an amount of Rs.3.04 crore was
reflected under the head “current liabilities” (being advance against exports)
in its balance sheet for the year ending 31st March, 2007. On
inquiry, the AO found that the advance had been received as far back as on 24th
January, 1997 from one Amas Mauritius Ltd. in order to export goods.
However, the exports could not be made till date and the balance is still due
and payable to  Amas Mauritius Ltd. in
the books of assessee. The AO in the above view held that the transaction of
advance from Amas Mauritius Ltd. was not a genuine transaction and it was not
to be repaid. Therefore, an addition of Rs.3.04 crore was made on application
of section 41(1) of the Act as cessation of liability.

The CIT(A) upheld the order of AO. Being aggrieved by the
order of the CIT(A), the assessee filed an appeal to the Tribunal. The assessee
pointed out that it had approached the Reserve Bank of India for permission to
return the amount of Rs.3.04 crore shown as an advance against export to Amas
Mauritius Ltd. However, the approval of RBI had not yet been received. The
Tribunal allowed the assessee’s appeal by following the decisions of this Court
in Commissioner of Income Tax vs. Chase Bright Steel Ltd. 177 ITR 128 to
hold that where an amount is shown as an advance in the balance sheet by the
assessee, it amounts to acknowledgment of liability and it does not cease to
exist. So far as the genuineness of the transaction as well as creditworthiness
of the creditor is concerned, the impugned order holds that the same was appearing
in the books of account for all the earlier assessment years and the same was
accepted by the Revenue as genuine. Further, the ITAT placed reliance upon a
decision of its Co-ordinate bench in Jayram Holdings Pvt. Ltd. (ITA
No.6914/Mum/2010) rendered on 4th July, 2012 wherein in almost identical fact
situation, advance received for exports was also shown in the accounts as a
liability for a period of more than 10 years, the Tribunal took a view that
there can be no addition of the amount shown as a liability either u/s. 41(1)
and/or u/s. 28(iv) of the Act. This is so as long as the liability exists.

Before the High Court, the grievance of the Revenue was that
the above transaction is not genuine. This particularly in view of the fact
that Amas Mauritius Ltd. is a 40% shareholder in the assessee company. Thus
related.

Therefore, the impugned order of the Tribunal requires
consideration by this Court to determine its correctness.

The High Court observed that the issue as arising herein was
also a subject matter of consideration before the Tribunal in the case of M/s.
Jayram Holdings Pvt. Ltd. (supra) and it is relied upon in the impugned
order to conclude that section 41(1) of the Act cannot be applied in the
present facts. The Court noticed that in the above case also, the assessee
therein had received from its sister concern an advance for export and shown in
its books over a period of 10 years as a liability.

However, the Tribunal held that section 41(1) of the Act
cannot be applied so long as the liability is acknowledged. The Court held that
the liability does not cease, so long as the party acknowledges its liability.
The order of the Tribunal in Jayram Holdings Pvt. Ltd. (supra) has been
accepted by the revenue. No distinguishing features in the present case have
been indicated during the course of the hearing.

Moreover, it was stated that on obtaining the
permission from Reserve Bank of India on 21st April, 2014, the
amounts have been repatriated to  Amas
Mauritius Ltd. on 16th May, 2014. Thereafter, this amount is not now
shown as a liability. In the above view, the appeal was dismissed.

2 Section 271D – Penalty – Accepting/ repaying loans/ advances via journal entries contravenes section 269SS & 269T – Penalty cannot be levied if the transactions are bona fide, genuine & reasonable cause u/s. 273B

CIT vs. Lodha Properties Development Pvt. Ltd.
ITA No: 172 of 2015 (Bom High Court)
A.Y.: 2009-10,  Dated: 06th February, 2018  
[Lodha Properties Development Pvt. Ltd. vs. ACIT; ITA No. 476/Mum/2014;  
Dated: 27th June, 2014 Mum.  ITAT]

The assessee who belongs to the Lodha group , was engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the assessment, vide para 6, the AO, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act.

The assessee submitted that the loans received are by way of “journal entries? and there is no acceptance of cash by any method other than the one prescribed in the statute. The core transactions were undertaken by way of cheque only and however, the assessee resorted to the journal entries for transfer / assignment of loan among the group companies for business consideration. In case of journal entries, as per the assessee, the liabilities are transferred / assigned by the group companies to the assessee or to take effect of actionable claims /payments/ received by group companies on behalf of the company. The journal entries were also passed in the books of accounts for reimbursement of expenses and for sharing of the expenses within the group.

The assessee further submitted during the period when journal entries were passed, the assessee company was under the bona fide belief that there is no breach of provisions of income tax Act considering recognized method of assigning credit / debit balance by passing journal entries.

In such cases, the provisions of section 269SS of the Act have no application and for this, the assesse relied on the judgement of the Honble Madras High Court in the case of CIT vs. Idhayam Publications Ltd [2007] 163 Taxman 265 (Mad.) which is relevant for the proposition that the deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. It is the contention of the assessee that there is no cash transactions involved and relied on the contents of the CBDT Circular No.387, dated 6th July, 1984 and mentioned that the purpose of introducing section 269SS of the Act is to curb cash transactions only and the same is not aimed at transfer of money by transfer / assignment of loans of other group companies.

Addl. CIT  mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act .

The ld. CIT(A)  confirmed the findings recorded by the A.O.

The Tribunal held  that there is no finding  in the order of the AO that during the assessment proceedings the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon’ble High Court in the case of Triumph International (I) Ltd, 345 ITR 370 (Bom), neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.

In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, it was observed that why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries.

Further, there is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Hon?ble High court, the said “journal entries? constitutes one of the recognised modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. Accordingly, the appeal of the assessee was allowed.

The Hon. High Court observed  that the Tribunal has on application of the test laid down for establishment of reasonable cause, for breach of section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits.

In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon by the Revenue as there was a reasonable cause in terms of section 271B of the Act for having received loans / deposits through journal entries is at the very least is a possible view in the facts of the case. Accordingly appeal of dept was dismissed.

3 Section 263 – Revision – two possible views – the issue is debatable –Revision is not permissible

CIT vs. Yes Bank Ltd. [ Income tax Appeal
no. 599 of 2015 dated : 01/08/2017 (Bombay High Court)].

 [Yes Bank Ltd. vs. CIT [A.Y-2007-08  Mum. ITAT ]

During the FY:2005-06, the assessee had
incurred an aggregate expenditure of Rs.16,39,10,000/- on Initial Public
Offering (“IPO”) of equity shares made. The Issue closed on June 12, 2005. It
has claimed a deduction u/s. 35D for Rs.3,27,82,000/- being one-fifth of the
total expenses incurred. This is the second year of claim for deduction.

The assessee submits that section 35D grants
a deduction / amortisation in respect of expenses incurred by a company in
connection with the issue, for public subscription, of shares or debentures of
a company over a period of five years. Since the foregoing expenses on IPO are
in connection with the issue of shares for public subscription, one fifth of
the total amount thereof is eligible for deduction u/s. 35D.

The A.O had made an inquiry while passing
the assessment order. In return of income, the assessee had made the following
note. Deduction of Rs.3,27,82,000/- claimed u/s. 35D of the Act.

The Assessee submits that the A.O had before
passing the assessment order, called for explanation from the assessee. The
explanation was given for claiming deduction u/s. 35D of the Act, in respect of
expenses incurred by the company in connection with the issue of public
subscription of the shares and debentures of the company for a period of 5
years.

According to the Revenue, the order passed
by the A.O granting benefit u/s. 35D of the Act was erroneous and the same was
prejudicial to the interest of the Revenue. As such, ingredients of section 263
of the Act were attracted.

The assessee submitted that it is an
industrial undertaking for the purpose of section 35D of the Act and relied
upon the judgement of this Court in a case of the CIT vs. Emirates
Commercial Bank Ltd. 262 ITR 55, wherein this Court has held that the
banks are industrial undertakings and eligible for deductions u/s. 32A.

Also in HSBC Securities and Capital
Markets (India) Pvt. Ltd. (1384/M/2000), where the Hon’ble Mumbai ITAT has
held that even a share broking entity is an “industrial undertaking” for the
purpose of section 35D.

Therefore, the claim of assessee for
deduction u/s. 35D is in accordance with law and is allowable. The Tribunal set
aside the order of the Commissioner passed u/s. 263 of the Act.

The Hon. High Court find that the Tribunal
has considered the decision of the Apex Court in the case of Malabar
Industrial Co. Ltd. (supra) and held that when two possible views are
available and the issue is debatable, then, initiation of revision is not
permissible u/s. 263 of the Act.

It appears that the A.O sought clarification
from the assessee about the correctness of the amount of one fifth of the total
expenses incurred u/s. 35D of the Act. The assessee under letter dated
26.10.2004, gave specific explanation on the issue raised by the A.O and
thereafter, the assessment order was passed. Only because the Commissioner
thought that other view is a better view, would not enable CIT to exercise
power u/s. 263 of the Act. In the light of the above, the appeal was dismissed.
_

2 Section 153A – Search and seizure – Assessment would be limited to the incriminating evidence found during the search

CIT vs. SKS Ispat & Power Limited.
[Income tax Appeal no. 1874 of 2014 dated: 12/07/2017 (Bombay High Court)].

[Affirmed SKS Ispat & Power Limited
vs. DCIT . [ITA No. 8746 & 8747/MUM/2010 ; Bench : E ; dated 07/05/2014 ;
A.Y-2002-03 & 2003-04.Mum. ITAT ]

The Assessee raised a legal issue before
ITAT relating to the sustainability of additions which are not supported by the
seized or incriminating material u/s. 153A of the Act.

There was a search and seizure action on the
assessee in the case of SKS Ispat Ltd. Group, which is engaged in the business
of manufacturing and trading of steel products. The assessee filed the return
of income as per the provisions of the section 139(1) of the Act and the
assessments were completed u/s. 143(3) r.w.s. 153A of the Act. Thus, the
assessments for the said AYs have reached finality. In all these four
assessments, AO made a common addition under the heads (i) unexplained sundry
creditors and (ii) share application money. Before the Tribunal, it is the
claim of the assessee that the said additions were made without the assistance
of any incriminating material gathered during the search and seizure operation.

In this regard, the Assessee submitted that
on para 7 of the assessment order and mentioned that the basis for the addition
is the financial statements annexed with the return of income. Otherwise, there
is no seized material in possession of the AO which is incriminating
information that suggests the necessity of making the said additions validly.
Similarly, para 8 of the said order of the AO, Assessee demonstrated that no
seized material is available in support of making the said additions.

The Tribunal observed that, undisputedly,
the impugned quantum additions are made merely based on the entries in the
accounted books and certainly not based on either the unaccounted books of
accounts of the assessee or books not produced to the AO earlier or the
incriminating material gathered by the investigation wing of the revenue.

The Tribunal held that the AO was not justified
in making the addition on account of unaccounted sundry creditors (purchases)
and unexplained share of the money u/s. 153A of the Act, as there was no
incriminating material discovered in the search.

Before the High Court the Revenue contented,
the judgements relied by the Tribunal while limiting the scope of inquiry u/s.
153A of the Act to the extent of discovery of incriminating material during
search only is improper. The said judgements were in respect of assessments
which had taken place u/s. 143(3) of the Act. In the present case, the
assessment has taken place u/s. 143(1) of the Act. The distinguishing feature
in sections 143(1) and 143(3) has not been considered by the Tribunal in an
assessment u/s. 143(3) of the Act a long drawn inquiry is contemplated. It
would also amount to examination of evidence. However, inquiry u/s. 143 (1) of
the Act is limited on the basis of return filed. In view of that, the
judgements  relied on would not be
applicable.

The Assessee submits that this Court has time
and again held that assessment u/s. 153A of the Act would be limited to the
extent of any incriminating articles, incriminating evidence found during the
search. Even in case of The Commissioner of Income Tax vs. Gurinder Singh
Bawa decided by this Court, the assessment was u/s. 143(1) of the Act.
The Assessee relied on the judgment of this Court in The Commissioner of
Income Tax vs. Gurinder Singh Bawa reported in [2016] 386 ITR 483
(Bom) and another Judgment of this Court in the case of The
Commissioner of Income Tax vs. Warehousing Corporation & Anr. reported
in [2016] 374 ITR 645 (Bom).

The Hon. High Court observed that on perusal
of Section 153A of the Act, it is manifest that it does not make any
distinction between assessment conducted u/s. 143(1) and 143(3). This Court had
occasion to consider the scope of section 153A of the Act in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa [2016] 386 ITR 483 (Bom) and
in the case of The Commissioner of Income Tax vs. Continental Warehousing
Corporation & Anr. reported in [2016] 374 ITR 645 (Bom). It
has been observed that section 153A cannot be a tool to have a second inning of
assessment either to the Revenue or the Assessee. Even in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa (referred to supra)
the assessment was u/s. 143(1) of the Act and the Court held that the scope of
assessment after search u/s. 153A would be limited to the incriminating
evidence found during the search and no further. In the said Judgment, the
Judgement of this Court in The Commissioner of Income Tax vs. Continental
Warehousing Corporation & Anr. (referred to supra) has been
followed. Considering the authoritative pronouncements of this Court in above
referred cases, one of which is also with regard to assessment u/s. 143(1), the
issue is no longer res integral and stands concluded in the above
referred Judgements. In the above view, the Appeals was dismissed.

1 Section 45 – Capital Gain – assessee not engaged in the business of dealing in land – the profit arising on its sale is assessable as Capital gain only

[Affirmed The Sonawala Company Pvt. Ltd.
vs. ACIT. [ITA No. 4004/MUM/2010 ; Bench : F ; dated 27/08/2014; A Y: 2007-
2008. Mum. ITAT]

CIT vs.The Sonawala Company Pvt. Ltd.
[Income tax Appeal no. 385 of 2015 dated : 11/07/2017 (Bombay High Court)].

The assessee had gross income received as
hoarding charges/compensation consisted of hoarding charges, lease rent,
parking charges etc.

The assessee had sold a plot located in Pune
for a consideration of Rs.2.23 crore. The assessee had acquired the lease hold
rights on it through an agreement dated 11.12.1941. The assessee declared the
profit arising on sale of above said plot as long term capital gain and claimed
deduction u/s. 54EC of the Act. The AO noticed that the assessee had proposed
to construct flat on the above said land about 20 years back and had also
obtained advances from the parties.

The assessee had also prepared plans for construction
of residential premises and also obtained sanction from Pune Municipal
Corporation. However, the project was abandoned and the advances received from
parties excepting a sum of Rs.73,200/- were returned back.

The AO took the view that the assessee had
converted the above said plot as “Business asset” and accordingly
assessed the gain arising on sale of land as business income. Consequently, he
rejected the claim for deduction u/s. 54EC of the Act.  

The Revenue submits that though the open
space was acquired in the year 1941 by the Assessee, it was only in the year
2004, the construction permission was obtained for developing the said flat and
the same was assigned along with construction rights. As such the same will
have to be constituted as business income and not long term capital gain.

The assessee submitted that even a solitary
transaction can amount to business transaction. The attending circumstances are
writ large to come to the conclusion that the sale of a flat along with
construction permission of the project is a business income. The Hon’ble Punjab
& Haryana High Court had considered an identical issue in the case of CIT
vs. Raj Bricks Industry (2010)(322 ITR 625).

The Tribunal observed that in the instant
case, the assessee has been holding the leasehold right in the land since 1941.
It has sold the same after holding it for about 65 years.

About 20 years back, the assessee had
attempted to develop the same, but it was prevented by the order of the Hon’ble
Bombay High Court. Hence, the assessee could not develop the same.
Subsequently, the assessee has obtained permission to construct a residential
premises. All these sequences would show that the assessee has continued to
hold the land as its capital asset. Under these circumstances, the Tribunal
held that the CIT(A) was justified in holding that the gain arising on sale of
land should be assessed as “Long term Capital gain” only.

Consequently it was held that the assessee
can claim deduction u/s. 54EC of the Act, subject to the fulfilment of
conditions prescribed in that section.

The Hon. High Court held that totality of
the facts as were discussed by the CIT (A) and the Tribunal would show that no
error has been committed in treating the income from the sale of land as long term
capital gain.

 In view of that, no substantial questions of
law arise. The appeal as such is dismissed.

 

8 Method of accounting – Section 145(3) – AO cannot reject the accounts on the basis that the goods are sold at the prices lower than the market price or purchase price – the law does not oblige/compel a trader to make or maximise its profits

The
Pr. CIT vs. Yes Power and Infrastructure. Pvt. Ltd. [AY 2005-06] [Income tax
Appeal no. 813 of 2015 dated:20/02/2018 (Bombay High Court)].  [ACIT vs. Yes Power and Infrastructure. Pvt.
Ltd.[ITA No.7026/Mum/2012; dated 17/12/2014 ; Mum.  ITAT ]

The assessee is engaged in
trading of steel and other engineering items. The A.O during year found that
the assessee had sales of Rs. 52.17 crore while gross profit was only Rs. 26.08
lakh. This led the A.O. to call for an explanation for such low profits from
the Assessee.


In response, the Assessee
pointed out that the company, is a concern mainly engaged in trading of steel
& engineering products. The company 
purchase and sale these goods on very competitive low margin but our
volume are very high. Normally, company purchases the goods and resale them at
the minimum time gap. It is a known fact that rates of steel keep fluctuating
and it is a very volatile item. To avoid any risk due to market price
fluctuation, company  has to take the
fast decision to sell at the available rate received from the market, some time
it may be sold on a low price or some times at a higher price. During the year,
some of the transactions are sold at lower price because of the expectation of
the rate of steel going lower and lower. Moreover, due to fact that assessee
works with a very small capital and no borrowing from banks, assessee does not
have capacity to hold stock for longer periods. Hence, company has to take
decision to sell and purchase, keeping the time gap at the minimum.


However, the A.O. did not
accept the explanation for low profits and rejected the books of accounts. This
on the ground that the purchase price of goods was much higher than the selling
price of those very items. On rejection of the books of accounts, the A.O.
estimated the gross profit on the basis of 2 percent of the sales. This
resulted in enhancement of gross profits from Rs. 26.08 lakh to Rs. 1.18 crore.


Being aggrieved with the
order, the assessee filed an Appeal to the CIT(A). The CIT(A) dismissed the
assessee’s appeal.


On further Appeal, the
Tribunal allowed the assessee’s Appeal. This inter alia on the ground
that it found that the assessee had along with return of income filed audited
accounts along with audit report for the subject assessment year. Moreover,
during the course of scrutiny, complete books of accounts with item-wise and
month-wise purchase and sales in quantitative details were also furnished. It
found that the A.O. did not find any defect in the books of accounts nor with
regard to quantity details furnished by the assessee. In the above
circumstances, it held that merely because the assessee being a trader has sold
goods at prices lower than the purchase price and/or the prevailing market
price would not warrant rejection of the books of accounts.


Being aggrieved with the
order, the revenue filed an Appeal to the High Court. The grievance of the
Revenue with the impugned order is that the assessee has sold goods at price
lower than its purchase price. Therefore, the books of accounts cannot be relied
upon. Thus, the rejection of the books of accounts and estimation of profits in
these facts should not have been interfered with.

The High Court held  that it is not the case of the Revenue that
the amounts reflected as sale price and/or purchase price in the books do not
correctly reflect the sale and/or purchase prices. In terms of section 145(3)
of the Act, the A.O. is entitled to reject the books of accounts only on any of
the following condition being satisfied.


(i) Whether he is not
satisfied about the correctness or completeness of accounts; or

(ii) Whether the method of
accounting has not been regularly followed by the Assessee; or

(iii) The income has been
determined not in accordance with notified income and disclosure standard.


 It is not the case of the Revenue that
any of the above circumstances specified in section 145(3) of the Act are
satisfied. The rejection of accounts is justified on the basis that it is not
possible for the assessee who is a trader to sell goods at the prices lower
than the market price or purchase price. In fact, as observed by the Apex
Court, Commissioner of Income Tax, Gujarat vs. A. Raman & Co. and in
S.A. Builders vs. Commissioner of Income Tax – 2, the law does not
oblige/compel a trader to make or maximise its profits. Accordingly, the
revenue Appeal was dismissed.

7 Unexplained expenditure – Section 69C – payment made to parties – the assessee filed details of all parties with their PAN numbers, TDS deducted, details of the bank – assessee could not be held responsible for the parties not appearing in person – No disallowance

The Pr. CIT vs. Chawla Interbild Construction Co. Pvt.
Ltd. [AY: 2009-10] [Income tax
Appeal no. 1103 of 2015 dated:28/02/2018 (Bombay High Court)].  [ACIT, Circle-9(1) vs. Chawla
Interbild Construction Co. Pvt. Ltd.[ITA No.7026/Mum/2012;  Bench:C ; dated 11/03/2015 ; Mum. ITAT]


The assessee is a firm
engaged in Civil Engineering and execution of the contracts. During the course
of the assessment proceedings, the A.O doubted the genuineness of payments made
to 13 parties and claimed as expenditure. The notices issued to 13 parties by
the A.O were returned by the postal authorities. Consequently, on the above
ground, the A.O made adhoc disallowance of 40% on the total payment made i.e.
Rs. 4.88 crore out of Rs.12.20 crore and added the same to the assessee’s
income.


Being aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). In appeal, the assessee
filed details of all 13 parties with their PAN numbers, addresses, TDS
deducted, date of bill, date of cheque and its number, details of the bank etc.
The CIT(A) after taking the additional evidence on record sought a remand
report from the A.O. The A.O in his remand report submitted that out of 13
parties, 8 parties had appeared before him and the payments made to them stood
satisfactorily explained. However, the remand report indicates that out of 13
parties, 5 parties had not appeared before him. On the basis of the remand
report and the evidence before it, the CIT(A) while allowing the assessee
appeal held that the assessee had done all that was possible to do by giving
particulars of the parties and their PAN numbers. In these circumstances, the
CIT(A) held that the  assessee could not
be held responsible for the parties not appearing in person and allowed the
appeal. Thus, holding that the payments made to all 13 parties were genuine and
the addition on account of disallowance was deleted.


Being aggrieved by the
order, the Revenue carried the issue in appeal to the Tribunal. In appeal, the
Tribunal observed  that all the details
including the dates of payments, net amounts paid, cheque numbers, details of
the bank branches, amount of TDS deducted, details of the bills, including the
details of the TDS made etc. have been furnished in the tabular form
before the CIT(A). Thus, the assessee discharged the initial onus cast upon him
in respect of the payments made to all 13 parties. The order further records
that thereafter, the responsibility was cast upon the A.O if he still doubted
the genuineness of the payments made to those 13 parties. In the aforesaid
circumstances, the appeal of the Revenue was dismissed. 


Being aggrieved by the ITAT
order, the Revenue  preferred an appeal
to the High Court. The Court held that the A.O while passing the assessment
order has disallowed 40% of the total payments made on the basis of the
payments made to 13 parties, who were not produced before him during the
assessment proceedings. This on the ground that payments are not genuine. The
court observed that the assessee had done everything to produce necessary
evidence, which would indicate that the payments have been made to the parties
concerned. The details furnished by the assessee were sufficient for the A.O to
take further steps if he still doubted the genuineness of the payments to
examine whether or not the payments were genuine. The A.O on receipt of further
information did not carry out the necessary enquiries on the basis of the PAN
numbers, which were available with him to find out the genuineness of the
parties. The CIT(A) as well as the Tribunal have correctly held that it is not
possible for the assessee to compel the appearance of the parties before the
A.O. In the above circumstances, the view taken by the Tribunal is a reasonable
and possible view. Consequently,  the
appeal of revenue was dismissed.

6 Business Expenses – Section 37 – loss/ liability arising on account of fluctuation in rate of exchange in case of loans utilised for working capital of the business – allowable as an expenditure

The Pr. CIT-20 vs. Aloka Exports.
[ AY 2009-10] [Income tax  Appeal no. 806 of 2015 dated: 26/02/2018 (Bombay High Court)].    
[ACIT, Circle-17(2) vs. Aloka Exports.[ITA No. 4771/Mum/2012;  Bench : A ; dated 27/08/2014 ; Mum.  ITAT ]

The assessee is engaged in
the business of manufacture and export of readymade garments, imitation
jewellery, handicrafts etc. The AO noticed that the assessee claimed deduction
of expenses relating to foreign exchange rate difference.

The assessee submitted that
the term loan was availed  for working
capital purposes. At the year end, the assessee worked out the foreign exchange
difference and claimed the loss arising thereon as deduction.


The AO noticed that the
EEFC account is maintained in foreign currency and accordingly held that the
assessee could not have incurred loss on account of foreign exchange difference.
The assessee explained before the AO about the method of accounting of “foreign
exchange loss/gain”. However, the assessing officer took the view that the loss
accounted by the assessee is against the accounting principles. Accordingly he
disallowed the foreign exchange difference loss claimed by the assessee.


The Ld CIT(A) deleted the
disallowance of loss arising on foreign exchange difference by following the
decisions rendered by Hon’ble Supreme Court in the followingcases:-


(a) Sutlej
Cotton Mills Ltd vs. CIT (116 ITR 1)(SC)

(b) CIT
vs. Woodward Governor India Pvt Ltd (312 ITR 254)(SC).


On further appeal by the
Revenue, the Tribunal upheld the order of the CIT(A). It held that the foreign
exchange term loan was utilised for working capital requirements. Thus, the
loss on account of foreign exchange difference is allowable as a revenue loss.


The Hon. High Court
observed that  both the CIT(A) as well as
the Tribunal have on perusal of the record, come to a conclusion that the loan
taken was utilised only for working capital requirements. Therefore, loss on
account of foreign exchange variation would be allowable as a trading loss. In
fact, even the Assessing Officer has held that term loan was not utilised for
purchase of plant and machinery.


The Court held that this
issue stands covered by the decisions of the Supreme Court in Sutlej Cotton
Mills Ltd., vs. CIT 116 ITR 1 (SC) that loss arising during the process of
conversion of foreign currency is a part of its trading asset i.e. circulating
capital, it would be a trading loss. Further, as held by the Apex Court in CIT
vs.Woodward Governor India Pvt. Ltd., 312 ITR 254 – that loss/liability
arising on account of fluctuation in rate of exchange in case of loans utilised
for revenue purposes, is allowable as an expenditure. Accordingly, the question
of law  raised in the appeal of revenue
was dismissed.

5 Expenses or payments not deductible-Section 40A(3) -the payment is made to producer of meat in cash in excess of Rs.20,000/– Circular issued by the CBDT cannot impose additional condition to the Act and / or Rules adverse to an assessee – No disallowance can be made

Pr. CIT – I, Thane vs. Gee Square
Exports.     

[AY
2009-10] [Income tax Appeal no. 1224 of 2015 dated : 13/03/2018 ; (Bombay High
Court)]. 

[Affirmed
Gee Square Exports vs.  I.T.O.

[dated
: 31/10/2014 ; Mum.  ITAT ]


The assessee is a
partnership firm engaged in the business of exporting frozen buffalo meat and
veal meat to countries like Oman, Kuwait and Vietnam etc. The assessee
purchases raw meat from various farmers and after processing and packaging in
cartoons, exports the same. The assessee had in the course of its above
activity, made its purchases of meat in cash in excess of Rs.20,000/-. The AO
disallowed payments made in cash for purchases of meat in excess of Rs.20,000/-
i.e. Rs.26.79 crore in the aggregate u/s. 
40A(3) of the Act. Thus, the AO rejected 
the appellant’s contention that in view of the proviso to sec. 40A(3) of
the Act read with Rule 6DD(e) and (k) of the Income Tax Rules, they would not
be hit by section 40A(3) of the Act. This rejection was primarily on the ground
that in view of CBDT Circular No.8 of 2016, wherein in paragraph 4 thereof, one
of the conditions for grant of benefit of section 6DD of the Income Tax Rules
was certification from a Veterinary Doctor certifying that the person certified
in the certificate is a producer of meat and slaughtering was done under his
supervision.


Being aggrieved by the
order of AO, the assessee filed appeal before CIT(A). The CIT(A) upheld the
Assessment order.


Being aggrieved by the order
of CIT(A), the assessee filed appeal before ITAT. The Tribunal observed  that section 40A(3) of the Act provides that
no disallowance thereunder shall be made if the payment in cash has been made
in the manner prescribed i.e. in circumstances provided in Rule 6DD of the
Rules. The Tribunal held that the payment is made to producer of meat in cash
and would satisfy the requirement of Rule 6DD(e) of the Rules, which is as
under :


“(e) Where the payment
is made for the purchase of (i) ……. (ii) the produce of animal husbandry
(including livestock, meat, hides and skins) or dairy or poultry farming; or”


There were no other
conditions to be satisfied in terms of the above Rules. This Tribunal further
helds that neither the Act nor the Rules provides that the benefit of Rule 6DD
of the Rules would be available only if the further conditions / requirements
set out by the board in its Circular are complied with.


The Tribunal also observed
that the power of the board to issue circulars u/s. 119 of the Act is mainly to
remove hardship caused to the assessee. In the above view, it was held by the
Tribunal that the scope of Rule 6DD of the Rules cannot be restricted and/or
fettered by the CBDT Circular No.8 of 2016. 


Before the High Court, the
Revenue states that the assessee had failed to satisfy the conditions of CBDT
Circular. Therefore, the  order of the
Tribunal could not have allowed the assessee’s appeal. 


The Court observed that the
basis of the Revenue seeking to deny the benefit of the proviso to section
40A(3) of the Act and Rule 6DD(e) of the Rules is non satisfaction of the
condition provided in CBDT Circular No.8 of 2016. In particular, non furnishing
of a Certificate from a Veterinary Doctor. The proviso to section 40A(3) of the
Act seeks to exclude certain categories/classes of payments from its net in
circumstances as prescribed. Section 2(33) of the Act defines “prescribed”
means prescribed by the Rules. It does not include CBDT Circulars. It is a
settled position in law that a Circular issued by the CBDT cannot impose
additional condition to the Act and / or Rules adverse to an assessee. In UCO
Bank vs. Commissioner of Income Tax, 237 ITR 889, the Apex Court has
observed “Also a circular cannot impose on the taxpayer a burden higher than
what the Act itself, on a true interpretation, envisages”.

Thus, the view of the
Tribunal that the CBDT Circular cannot put in new conditions for grant of
benefit which are not provided either in the Act or in the Rules framed
thereunder, cannot be faulted. More particularly so as to deprive the assessee
of the benefit to which it is otherwise entitled to under the statutory
provisions. Needless to state, it is beyond the powers of the CBDT to make a
legislation so as to deprive the respondent assessee of the benefits available
under the Act and the Rules. The assessee having satisfied the requirements
under Rule 6DD of the Rules, cannot, to that extent, be subjected to
disallowance u/s. 40A(3) of the Act. Besides, we may in passing point out that
the impugned order of the Tribunal holds that a Certificate of Veterinary
Doctor was rejected by the Authorities under the Act, only because it was not
in proper form. In the above facts, the revenue appeal was dismissed.

12. Penalty – Year of taxability of income – u/s.271 (1) (c)

The CIT, vs. M/s. Otis Elevator Co.(I) Ltd. [ Income tax
Appeal no 758 of 2014, dt : 15/11/2016 (Bombay High Court)].

[DCIT, vs. M/s. M/s. Otis Elevator Co.(I)
Ltd,. [ITA No. 4509/MUM/2012,; Bench : C ; dated 21/08/2013 ; 2007-2008 . Mum.
ITAT ]

The assessee is engaged in manufacturing and
sale of elevators / lifts. In the subject AY, the assessee had declared an
income of Rs.89.04 crore. The AO added a sum of Rs. 7.35 crore on account of
advances received on dormant contracts prior to 2004. Finally, the AO
determined the taxable income of the assessee at Rs.156.05 crore in his order in quantum proceedings and also initiated
penalty proceedings u/s. 271(1)(c) of the Act.

In the penalty proceedings, the assessee
explained that the amounts of Rs.7.35 crore shown as advances in respect of
dormant contracts were in fact offered to tax in the subsequent AYs 2008-09 and
2009-10. Consequently, the assessee contended that no penalty u/s. 271(1)(c) of
the Act is imposable. However, the AO did not accept the above contention and
imposed a penalty of Rs. 2.47 crore u/s. 271(1)(c) of the Act upon the assessee
for concealing income by filing inaccurate particulars.

Being aggrieved, the assessee preferred an
appeal to CIT(A). By order the CIT(A) held that the amounts received as
advances in respect of dormant contracts and shown as current liability were in
fact offered to tax during the subsequent AYs i.e. Assessment Years 2008-09 and
2009-10 even before the proceedings for assessment of the subject AY i.e. AY
2007-08 were initiated in November, 2010. The CIT(A) in his order records the
fact that the return of income for AY’s 2008-09 and 2009-10 were filed on 29th
September, 2008 and 30th September, 2009 that is much before
November, 2010. In these circumstances, the CIT(A) allowed the appeal of the
assessee and deleted the penalty of Rs.2.47 crore u/s. 271(1)(c) of the Act
imposed by the AO.

Being aggrieved, the Revenue carried the
issue of penalty in appeal to the Tribunal. On consideration of the facts, the
Tribunal held that the advances relating to the dormant contracts were offered
to tax in the subsequent assessment years even before any inquiry was initiated
by the AO to complete the assessment for the subject AY. Consequently, the
Tribunal held that it was not a case of concealment of income but rather the
dispute was only with regard to in which year the income was taxable. The
Tribunal dismissed the Revenue’s appeal.

In Revenue appeal, the High court note that
the basis for imposition of penalty is non payment of tax on the amount
received on dormant accounts in the subject assessment year. Both the CIT(A)
and the Tribunal have rendered a finding of fact that these amounts / advances
relating to dormant contracts have already been offered to tax for the
subsequent AY’s i.e. Assessment Years 2008-09 and 2009-10. In the present
facts, undisputedly the income has been declared in the subsequent assessment
years before the assessment proceedings for the subject AY 2007-08 was
initiated. Thus, the only issue which arises is about the year of taxability of
income and it is certainly not a question of concealment of income and / or
filing of inaccurate particulars of income by the assessee.

The above concurrent finding of facts as well as
the acceptance of the assessee’s explanation by CIT(A) and the Tribunal has not
been shown to be perverse. Therefore, the question as proposed does not give
rise to any substantial question of law. Thus, not entertained. Accordingly,
the appeal is dismissed.

11. TDS – ‘Work’ – include all work carried right from planning the schedule to post production processes, which would make the programme fit for telecasting – Thus, the payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

The CIT, TDS vs. M/s. Sahara One Media
and Entertainment Ltd. [ Income tax Appeal no 894 of 2014, with 1031 of 2014 dt
: 23/10/2013 (Bombay High Court)].

[ACIT, TDS vs. M/s. Sahara One Media and
Entertainment Ltd,. [ITA No. 4548/MUM/2012, 4549/MUM/2012, 4550/MUM/2012 ;
Bench : E ; dated 23/10/2013 ; 2008-2009, 2009-2010 & 2010-11. Mum. ITAT ]

The assessee is engaged in the business of
production of cinematographic motion features and small screen programmes. In
the process of carrying on its business, the assessee made payments to others
on account of production, print processing fees and dubbing. At the time of
making these payments, the assessee deducted tax at source (TDS) u/s. 194C at
2% as the payment was made for carrying out work pursuant to a contract.

The AO was of the view that the print
processing fees and dubbing expenses paid were in the nature of fees of
technical services and tax had to be deducted u/s. 194J at 10%. Resultantly,
the DCIT (TDS) held that there was short deduction of tax in respect of the
dubbing expenses and fees paid for print processing. Consequently, the assessee
was deemed to be an assessee in default u/s. 201 (1) to the extent of short
deduction of tax.

In appeal, the ld. CIT(A), observed that it
was evident from the sample Agreement that the assessee used to hire the
producers (who first approach the assessee) for producing TV programmes for it,
on a commissioned work basis and pay consideration to such assigned producer
for producing the programmes. He further observed that under the provisions of
section 194C of the Act, it has been provided that expression ‘work’ shall
include, inter alia, broadcasting and telecasting including production
of programmes for such broadcasting and telecasting. Therefore, where the
payment was made for production of TV programmes, it was covered by provisions
of section 194C. He further observed that the principal purpose of entering
into the Agreements was to get the programmes produced through the assigned
producers on a commissioned work basis. The assessee was the exclusive owner of
the programmes to be produced by the producer. He therefore held that the
payment for carrying out the work of producing programmes on behalf of assessee
was in the nature of ‘work’ as defined in section 194C and the same could not
be treated as ‘fees for technical services’ or ‘royalty’ u/s. 194J of the Act.
While holding so he relied upon the judgement of the Hon’ble Delhi High Court
in the case of ‘CIT vs. Prasar Bharti Broadcasting Corpn. Of India’ [292
ITR 580]. In the said case, the assessee was a government
corporation engaged in controlling various TV channels of Doordarshan. It was
held that the payments made by it to various producers of programmes were
covered under Explanation III(b) to section 194C, as a contract for production
of programmes for broadcasting or telecasting and not as a fee for professional
services or royalty; hence the tax deduction at source was required to be made
@2% u/s 194C and section 194J was not applicable. He therefore accepted the
contention of the assessee that tax was deductable @2% u/s. 194 C of the act and
not @ 10% u/s.194 J.

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view taken by the
CIT(A) and observed that the definition of ‘work’ as provided u/s. 194C would
include all work carried right from planning the schedule to post production
processes, which would make the programme fit for telecasting. Thus, the
payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

Being aggrieved, the Revenue filed a appeal
before High Court and contended that the payments made for dubbing and print
processing would be the payments in the nature of technical fees. Therefore,
tax would be deductible u/s. 194J and not as contract for work u/s.194C.

The Hon. High
Court noted that definition of ‘work’ as provided in section 194C, which reads
as under :

“ Explanation – For the purposes of this
section – (i) …. (ii) …. (iii) …. “(iv) “work” shall include – (a) ….. (b)
Broadcasting and telecasting including production of programmes for such broadcasting
or telecasting; (c) ….. (d) …. (e) ….” (f) .

The definition of ‘work’ as provided in the
Explanation to section 194C of the Act is itself inclusive. It include all work
necessary for preparation / production of any programme so as to put it in a
state fit for broadcasting and / or telecasting. In view of the self evident
position in law, by virtue of the definition of “work” as provided in section
194C of the Act.

In view of the self-evident position in law,
no substantial question of law arises for consideration . Thus, the appeal was
dismissed. 

10. Business expenditure – Service tax – The Assessee was obliged under the law to pay service tax to the Government and paid when such payment is not forthcoming from the client/customer – Allowable : Section 37 of the Act

CIT vs. Prime Broking Company (I) Ltd. [
Income tax Appeal no 847 of 2014 dt : 14/10/2016 (Bombay High Court)].

[ACIT vs. Prime Broking Company (I) Ltd.
[ITA No. 5632/MUM/2012 ; Bench : C ; dated 31/10/2013 ; A Y: 2009- 2010. MUM.
ITAT ]

The Assessee is engaged in the business of
broking in Government and other securities. The Assessee raises an invoice on
its clients for the transaction done on its behalf in respect of its broking
services. The total amount of bill in the invoice is the aggregate of brokerage
and applicable service taxes thereon. During the subject assessment year, some
of the clients of the Assessee did not pay the service tax as required in terms
of the invoice for onward payment to the Government of India. In these
circumstances, the Assessee paid the service tax payable out of its own
resources and claimed the same as deduction u/s. 37(1).

The AO disallowed the claim for deduction
holding that the obligation to pay the service tax is on the customer /client
and the same cannot be shifted to the Assessee.

The CIT (A) allowed the Assessee’s appeal.
This is on the ground that in terms of section 68 of the Finance Act, 1994, the
obligation to pay the service tax into the treasury is of the service provider,
i.e. the Assessee. The failure of its client/customer to pay service tax to the
Assessee would not absolve the obligation of the Assessee to pay the same to
the Government of India. The CIT (A) held that the deduction of the service tax
paid to the Assessee was a business expenditure incurred on account of
commercial expediency and deductible u/s. 37(1).

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view of the CIT
(Appeals).

On further appeal, the High Court held that
the Assessee was obliged under the law to pay service tax to the Government
even when such payment is not forthcoming from the client/customer. Therefore,
it would be a deductible business expenditure u/s. 37(1). It is undisputed that
the obligation under the Finance Act, 1994 to pay the service tax is on the
Assessee being the service provider. This obligation has to be fulfilled by the
service provider whether or not it receives the service tax from its
clients/customers. Non-payment of such service tax into the treasury would
normally result in demand and penalty proceedings under the Finance Act, 1994.
Therefore, the payment is on account of expediency, exclusively and wholly
incurred for the purposes of business, therefore, deductible u/s. 37(1).

The High Court dismissed the above appeal on
the ground that the same did not give rise to any substantial question of law.
The appeal is dismissed.

6. Jurisdiction to initiate proceedings u/s. 153C of the Act – the seized document must belong to the assessee is a jurisdictional issue – non satisfaction thereof – would make the entire proceedings taken there under null and void.

Commissioner of Income
Tax III, vs. Arpit Land Pvt. Ltd. and M/s. Ambit Realty Pvt. Ltd. [ Income tax
Appeal no 83 of 2014 and 150 of 2014 dated : 07/02/2017 (Bombay High Court)].

[Arpit Land Pvt. Ltd,
vs. ACIT, and M/s. Ambit Realty Pvt. Ltd. [dated 22/03/2013 ; Mum.ITAT]

In search and seizure
action u/s. 132 of the Act carried out in case of Jay Corporation group. Mr.
Dilip Dherai was managing and handling land acquisition on behalf of Jay
Corporation group. During the course of search, certain documents were found in
possession of Mr. Dilip Dherai on the basis of which the AO after recording
satisfaction u/s. 153C of the Act proceeded to initiate proceedings in respect
of both the assessees.

The Tribunal found that
the documents seized from possession of Mr. Dilip Dherai did not belong to the
assessee. Consequently, it held that the AO did not have jurisdiction to
initiate proceedings u/s. 153C of the Act, as at the relevant time jurisdiction
of AO to proceed consequent to the search is only when money, bullion,
jewellery or other valuable article or thing or books of accounts or documents
seized or requisitioned belongs or belonged to a person other than the person
who has been searched, then the AO having jurisdiction over such person on
being handed over seized document etc could proceed against such other person
by recording satisfaction and issuing a notice in accordance with the
provisions of the Act.

The Tribunal recorded the
fact that the documents seized from the possession of Mr.Dilip Dherai do not
belong to any of two assessees, consequently, the AO did not have jurisdiction
u/s. 153C of the Act to issue notice to the assessee’s.

The Tribunal also held
that satisfaction recorded by the AO before initiating assessment proceedings
in respect of two assessees were also not sustainable. In the above view, the
Tribunal held that the AO did not have jurisdiction to initiate proceedings
u/s. 153C of the Act on the two assessee’s before the high Court .

The Revenue submitted that
the assessees and Mr.Dilip Dherai are all hand-in- glove working in tandem to
acquire land. Therefore, in the above facts the impugned notice under Section
153C of the Act and also satisfaction note recorded by the AO cannot be found
fault with. Thus the impugned order of the Tribunal calls for interference and
these appeals be admitted.

The Hon. High Court noted
that in terms of Section 153C of the Act at the relevant time i.e. prior to 1st
June, 2015 the proceedings u/s. 153C of the Act could only be
initiated/proceeded against a party – assessee if the document seized during
the search and seizure proceedings of another person belonged to the party –
assessee concerned. The impugned order recorded a finding of fact that the
seized documents which formed the basis of initiation of proceedings against
the assessees do not belong to it. This finding of fact has not been shown to
be incorrect.

The High Court also
referred to a similar view taken in CIT vs. Sinhgad Technical Education
Society (2015) 378 ITR 84.

The court observed that, the
requirement of section 153C of the Act cannot be ignored at the altar of
suspicion. The Revenue has to strictly comply with section 153C of the Act. The
seized document must belong to the assessee is a jurisdictional issue and non
satisfaction thereof would make the entire proceedings taken there under null
and void. The issue of section 69C of the Act can only arise for consideration
if the proceedings u/s. 153C of the Act are upheld. Therefore, in the present
facts, the issue of section 69C of the Act is academic. In view of the above,
the revenue Appeal was dismissed.

5. Section 50C is part of Chapter IV-E of the Act – only for purpose of computing the income chargeable under the head ‘Capital gains’ – Cannot be applied in determining income under Chapter IV-D of the Act under the head ‘Profits and gains of business or profession.

CIT – 5 vs. M/s.
Neelkamal Realtors and Erectors India Pvt. Ltd. [Income tax Appeal no 1549 of
2014, dated: 28/02/2017 (Bombay High Court)].

[M/s. Neelkamal Realtors
and Erectors India Pvt Ltd vs. DCIT. [ITA NO. 1143/Mum/2013; Bench : F ; dated
16/08/2013; A Y:2009-10 . Mum. ITAT]

The assessee is a
builder/developer following the project completion method of accounting. During
the previous year relevant to the AY the assessee offered net profit of Rs.
3.63 crore on completion of a project called ‘Orchid Towers’. During the
assessment proceedings, the assesses was asked to furnish party-wise details of
flats sold with details of name and addresses of the buyers, area of flat sold,
total sale consideration, date of agreement, date of receipt of first payment etc.
On the perusal of details as furnished, the AO concluded that there were
variations in prices charged by the assessee to different customers. Therefore,
AO made addition of Rs.15.22 lakh on the basis of difference between the rates
charged in respect of similar flats. Thereafter as a consequence to
rectification application made by the assessee, the AO reduced the addition of
Rs.4.45 crore.

Being aggrieved the
assessee filed an appeal to the CIT (A). The CIT (A) sustained the addition to
Rs.8.53 crore. This on completely new ground, namely, value of the flats had to
be considered not on the basis of consideration received but on application of
the provisions of section 50C as well as section 56(2)(vii)(b)(ii) of the Act.

Being aggrieved, the
assessee filed a further appeal to the Tribunal. The Tribunal held that section
50C of the Act which has been invoked by the CIT (A) would have no application
in the facts of the present case. This in view of the fact that section 50C is
part of Chapter IV-E of the Act dealing with the head ‘Capital gains’. The
aforesaid provision is applicable only for purpose of computing the income
chargeable under the head ‘Capital gains’. It would have no application in
determining income under Chapter IV-D of the Act under the head ‘Profits and
gains of business or profession. Further, the impugned order holds that section
56(2)(vii)(b)(ii) of the Act would have no application as it applies to an
individual or Hindu Undivided Family (HUF). The Assessee here is neither an
individual or HUF. The Tribunal further held that section 56(2)(vii)(b)(ii) of
the Act seeks to levy tax in the hands of the transferee of the flat i.e.
purchase of flat without consideration or for consideration which is less than
stamp duty value of the property in excess of Rs.50,000/-.In this case, section
56(2)(vii)(b)(ii) of the Act is sought to be applied admittedly to a
transferor. The Tribunal further records the fact that section 56 of the Act
which refers to income from other source i.e. not chargeable under other heads
of income. In the present facts, the consideration received on sale of flats
was offered as income under the head ‘Profits and gains of business or
profession’. Further, the Tribunal also holds that the AO without giving any
reason did not accept the explanation offered by the assessee for difference in
consideration received from different customers with regard to sale of flats in
“Orchid Towers” and allowed the appeal of the assessee.

Being aggrieved, the
Revenue filed an appeal to the High Court. The High Court observed that so far
application of section 56(2)(vii)(b)(ii) of the Act is concerned, it is self
evident that it only applies to individuals and Hindu Undivided Family.
Moreover, it seeks to tax the transferee of the property for having given
consideration for which is less than the stamp value by Rs.50,000/- or more for
purchase of the property. Lastly, the finding of Tribunal that the AO did not
deal with explanation offered by the assessee justifying the difference in
prices of similar flats, is a finding of fact. This has not been shown to be
perverse. In the above view, appeal was dismissed.

4.. Service of notice u/s. 143(2) – not served at correct address – the Assessment Order will not be saved by Section 292BB of the Act – Section 27 of the General Clauses Act

CIT vs. M/s. Abacus
Distribution Systems (India) Pvt. Ltd. [ Income tax Appeal No. 1382 of 2014,
dated : 07/02/2017; AY: 2006-07 (Bombay High Court)].

[M/s. Abacus
Distribution Systems (India) Pvt. Ltd. 
vs. DCIT. [ITA No. 8226/MUM/2010 ; Bench : K ; dated:06/12/2013 ; A Y:
2006-07 . MUM. ITAT ]

The assessee filed its
return of income on 20th November, 2006 wherein its address is
mentioned at Nariman Point, Mumbai 400 021.” On 23rd November, 2006,
the assessee filed a communication to the AO intimating him that the address of
the assessee had now changed and its new address was intimated at Dadar (W),
Mumbai – 400 028.”

On 28th
November, 2007 a notice u/s. 143(2) of the Act was issued by the AO to the
assessee at its original address of Nariman Point, Mumbai. On 29th
November, 2007 Income Tax Inspector filed a report stating that he had visited
the office premises of Nariman Point, Mumbai to serve the notice u/s. 143(2) of
the Act, but no such company was found in occupation of the address as
communicated in the return of income.

On 30th
November, 2007, the AO handed over the notice u/s. 143(2) of the Act to the
Post Office for service of the notice addressed to the erstwhile office of
Nariman Point, Mumbai of the assessee.

On 11th
December, 2007, the AO once again sent a notice u/s. 143(2) by post to the
assessee. However, this time it was addressed to the new office premises of the
assessee at Dadar, Mumbai.

On 12th
December, 2007 a notice was served upon the assessee fixing the hearing for the
subject assessment year on 17th December, 2007. Immediately on
receipt of the above notice the assessee on 13th December, 2007 had
objected to the assessment proceedings for the subject AY on the ground that no
notice u/s. 143(2) of the Act has been served within the statutory period of 12
months as provided in proviso to section 143(2) of the Act.
Notwithstanding the above, on 9th September, 2010 the AO consequent
to the directions of the Dispute Resolution Panel passed an Assessment Order
u/s. 143(3) r.w.s. 144C(13) of the Act.

Being aggrieved with the
order, the assessee filed an appeal to the Tribunal. The Tribunal allowed the
assessee’s appeal holding that in terms of section 143(2) of the Act, it is
mandatory for the AO to serve a notice u/s. 143(2) of the Act before the expiry
of 12 months from the end of the month in which the return is furnished. It is
undisputed position that the assessee had informed the AO as far back as 23rd
November, 2006 of the change in its address from Nariman Point, Mumbai to
Dadar(W), Mumbai. Notwithstanding the above, on 30th November, 2007
the AO sent a notice u/s. 143(2) by post at the old address. It was only later
on 11th December, 2007 that the AO sent a notice u/s. 143(2) to the
assessee at its new address. Taking into account the fact that the assessee had
objected at the very first instance to the assessment being taken up for
completion, in the absence of the mandatory requirement of section 143(2) of
the Act being satisfied i.e. service thereof within one year from the end of
the month in which the return is filed. The Tribunal held that the assessment
order dated 9th September, 2010 for the subject AY to be null and
void.

Being aggrieved, the
Revenue carried the issue in appeal to the High Court. The Hon. High Court
observed that the notice u/s. 143(2) of the Act which was handed over to the
post office on 30th November, 2007 was incorrectly addressed. In
terms of section 282 of the Act as existing in 2007, a notice may be served on
the person named therein either by post or as if it were a summons issued by
the Court under the Code of Civil Procedure. Section 27 of the General Clauses
Act provides that where any Central Act requires a document to be served by
post where the expression “serve” or “given” or “sent” shall be deemed to have
been effected by properly addressing, prepaying and posting. In such cases,
unless the contrary is proved which would be deemed to have been served at the
time when the letter would be delivered in the ordinary course of post to the
addressee. In this case admittedly the envelope containing the notice was
wrongly addressed. Thus the presumption u/s. 27 of the General Clauses Act
cannot be invoked. It is very pertinent to note that subsequently i.e. on 11th
December, 2007 the AO served the notice upon the correct address of the
assessee. This posting to the correct address was on the basis of the record
which was already available with the AO by virtue of letter dated 23rd November,
2006 addressed by the assessee to the AO. Moreover, as the objection to the
Assessment proceeding was taken much before the Assessment proceedings were
completed on the basis of no service of notice before the expiry of the period,
the Assessment Order will not be saved by section 292BB of the Act.

In the above view, the
Tribunal correctly held the notice u/s. 143(2) has not been served at the
correct address on or before 30th November, 2007. Accordingly,
Appeal was dismissed.

9 Brought forward business losses – can be set off against the gains arising from any business or profession – though chargeable to tax under any other head of income : Set off of brought forward unabsorbed depreciation against the short term capital gain

Commissioner of Income
Tax, vs. M/s. Hickson & Dadajee Pvt. Ltd. [ Income tax Appeal no 1493 of
2014 dt : 28/02/2017 (Bombay High Court)].

[M/s.
Hickson & Dadajee Pvt. Ltd, VS ACIT [ ITA No: 5882/M/2012 dated 28/02/2014
; A Y: 2009-10 .
Mum.  ITAT ]

The assessee
company, carrying on the business of manufacturing of dyes and dyes
international, harmless food colours as well as construction business, filed
its return of income for the year under consideration on 28-9-2011 declaring
total income of Rs. 1,23,70,170/-. In the said year, the assessee had derived
income from sale of plant & machinery and building which was offered to tax
as deemed short term capital gain u/s. 50 of the Act, 1961. Against the said
income, brought forward business losses of the earlier year and unabsorbed
depreciation were set off by the assessee. The A.O., however, did not allow the
claim of the assessee for such set off on the ground that the income from sale
of plant & machinery and building was chargeable to tax as short term capital
gain u/s. 50 of the Act.

 

On appeal,
the ld. CIT(A) upheld the order of the A.O. on this issue relying on the
decision of the Mumbai Bench of the Tribunal in the case of Dura Foam
Industries Pvt. Ltd. vs. JCIT (ITA No. 4917 & 4918/Mum/2008).

 

Aggrieved by
the order of the ld. CIT(A), the assessee has preferred this appeal before the
Tribunal. Tribunal find that assessee’s appeal is squarely covered by the
decision of the co-ordinate Bench of this Tribunal in the case of Digital
Electronics Ltd. vs. Addl. CIT reported in 49 SOT 65 wherein the claim of
the assessee for set off of brought forward business losses against the short
term capital gain on sale of factory building, plant and machinery was
disallowed by the A.O. on the ground that as per section 72 of the Act, the
brought forward business losses could be set off only against profits and gains
of business or profession. Tribunal allowed the claim of the assessee for set
off of brought forward business losses against short term capital gain.

 

The Tribunal
respectfully follow the decision of the co-ordinate Bench of the  Tribunal in the said case and direct the A.O.
to allow the claim of the assessee for set off of brought forward business
losses against the deemed short term capital gain arising from sale of plant
& machinery and building.

Being aggrieved, the Revenue carried the issue in
appeal to the High Court. The Hon.  High
Court observed  that the Revenue has
accepted  the decision of the Tribunal in
Digital Electronics Ltd. (supra). Further no distinguishing features in
the present facts had been shown to the court, which would warrant taking of a
different view from that taken by the Tribunal in Digital Electronics Ltd. (supra)
and accepted by the Revenue. In the above view, appeal of revenue was  dismissed.

As regards
the issue involved relating to the assessee’s claim for set off of brought
forward unabsorbed depreciation against the short term capital gain the Court
observed that same was  also covered in
favour of the assessee by the decision of CIT vs. Hindustan Unilever Ltd. (2016)
72 taxman.com 325 wherein this Court upheld the view of the Tribunal in
following the decision of Gujarat High Court in General Motors India
(P.)Ltd. vs. Dy. CIT (Special Civil Application No. 1773 of 2012 dated
23-8-2012) wherein a similar issue was decided in favour of the assessee.

Accordingly, appeal
dismissed.

8 Charitable Purpose – The activity of sale of milk being incidental to its Panjrapole activity – does not amount to carrying on of any business activity – it is not in contravention to the proviso to section 2(15) of the Act

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole. [ Income tax Appeal no 1695 of
2014, dt : 20/03/2017 (Bombay High Court)].

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole.] [ITA NO. 1198/Mum/2012;  Bench : J ; dated 26/03/2014 ; A Y: 2009-10 .
Mum.  ITAT ]

The assessee trust is over 130 years old and
registered with the Charity Commissioner since 1953. The assessee was granted
Certificate of Registration under Section 12A of the Act. By Finance (No.2)
Act, 2009, the definition of “Charitable Purpose” u/s. 2(15) of the Act was
amended w.e.f. 12th April, 2009. Therefore, in view of the newly
added proviso, charitable purpose would not include advancement of any other
object of general purpose utility, if it involves carrying out activities in
the nature of trade, commerce or business, with receipts in excess of Rs.10
lakhs. In view of the above amendment, the DIT (Exemption) issued a show cause
notice that the income and expenditure account of the assessee, revealed income
on account of sale of milk at Rs.1.57 crore and income from interest and
dividend at Rs.58.34 lakh. Thus, indicating that the activities carried out by
the assessee of selling milk was in the nature of trade, commerce or business.

In its
reply, the assessee pointed out that it is running a Panjrapole i.e. for
protection of cows and oxen for over last 130 years. The activity of selling
milk was incidental to its Panjrapole activity and in any case did not involve
any trade, commerce or business, so as to be hit by the newly added proviso to
section 2(15) of the Act.

The DIT(E)
cancelled the respondent’s registration under the Act by invoking section
12AA(3) of the Act. The basis for cancellation of the registration was that in
view of the newly added proviso to section 2(15) of the Act, its income by way
of sale of milk, interest and dividend being in excess of Rs.10 lakhs the
assessee would cease to be a trust for charitable purpose. The DIT (E) further
records in his order the fact that the assessee was earning only Rs.3.76 lakhs
from its aforesaid activity of selling milk would not detract from the
application of the newly added proviso to section 2(15) of the Act. This for
the reason that the proviso as applicable is receipt based and not profit /
income based.

Being
aggrieved, the assessee filed an appeal to the Tribunal. The Tribunal records
the following facts : ( a) the fundamental / dominant function of the Trust is
to provide asylum to old, maimed, sick, weak, disabled and stray animals and
birds particularly cows; (b) that only 25% of the cows being looked after yield
milk and it is these milk yielding cows which support the balance 75% of the
cows which are non milk yielding; (c) that the milk needs to be procured from
the cows otherwise it will be detrimental to the health of the cows, if not
fatal; (d) the milk so procured is distributed free of charge to children,
schools, hospitals etc. and the balance amount of milk remaining after such free
distribution is sold to the general public at nominal rate; (e) the assessee is
selling milk at subsidized rates; and (f) nothing has been brought on record to
suggest that the Trust conducted its affairs solely on commercial basis.

The Tribunal 
after recording the above facts inter alia placed reliance on a decision
of the Tribunal in the case of Sabarmati Ashram Gaushala Trust vs. ADIT (Exem)
25 ITR 701 on an identical facts situation wherein it has been held that
the activities of selling milk by a Panjrapole will not by itself make the
newly added proviso to section 2(15) of the Act applicable. Further, reliance
was also placed in the impugned order upon the decision of the Delhi High Court
in ICAI vs. Director General of Income Tax (Exemption) 347 ITR 99 to
hold that the activities of selling milk by the assessee would be incidental in
running a Panjrapole in view of the proviso to section 2(15) of the Act. Thus,
the appeal of the assessee was allowed. 

On appeal by the Revenue the Hon. High Court observed
that  there is no bar in law to a Trust
selling its produce at market price as held 
by the Gujarat High Court   in
Sabarmati Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 dated 15th
January, 2014. In fact, the above factor alone will not make it an activity of
trade, commerce or business or even in its nature.

The Court also referred to another decision of the
Delhi High Court in Institute of Chartered Accountants of India & Anr.
(ICAI) vs. Director General of Income Tax (Exemption) & Ors. 358 ITR
91, where the Court held that the expression “business”, “trade” or “commerce”
as used in the first proviso must, thus, be interpreted restrictively and where
the dominant object of an organisation is charitable any incidental activity
for furtherance of the object would not fall within the expressions “business”,
“trade” or “commerce”.” (emphasis supplied).

The Court observed
that  the Revenue has not been able to
show that the view taken by the Apex Court in Surat Art Silk Cloth
Manufacturers’ Association (supra), Gujarat High Court in Sabarmati
Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 (supra) and the
Delhi High Court in ICAI 347 ITR 99 (supra) and ICAI and Anr. 358 ITR 91
(supra) laying down the dominant activity test should not be followed.
Therefore, it was held that the question as proposed does not give rise to any
substantial question of law. Thus, appeal was dismissed.

7 Assessee entitled to raise claims not made in ROI before appellate authorities – which not made in ROI Expenses incurred for issuance of FCCBs is revenue in nature – even if the FCCB are convertible into equity at a later date

CIT vs. M/s. Faze Three Ltd. [ Income tax Appeal no 1761
of 2014, dt : 16/03/2017 (Bombay High Court)].

[M/s. Faze Three Ltd
vs. ACIT. [ITA No.5449/MUM/2011 ;  Bench
: F ; date:16/08/2013 ; A Y: 2007- 2008. MUM. 
ITAT ]

In the course of assessment the assessee filed
a letter claiming deduction of Rs. 2.24 crore towards expenses incurred on
issue of FCCBs. It was claimed that the assessee missed to lodge claim for
deduction in the computation of total income. The AO refused the claim by
relying on the decision of the Hon’ble Supreme Court in Goetz India vs. CIT [284
ITR 323] by assigning the reason that since revised return was not filed, this
claim was not entertainable. The learned CIT(A) upheld the assessment order on
this issue.

The Tribunal held that
there is no bar on the appellate authorities in considering a claim made by the
assessee otherwise than by filing a revised return. Thus, the question arose
for consideration was as to whether the expenses on issue of FCCBs can be
allowed as deduction or not.

The Tribunal relied on
the decision of Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd. [(2010)
321 ITR 611 (Raj.)] wherein it has been 
held that the debentures when issued are only a loan. Any expenses
incurred on issuing debenture, whether convertible or non-convertible is
allowable deduction. Similarly, the Hon’ble Punjab & Haryana High Court in CIT
vs. Sukhjit Starch & Chemicals Ltd. [(2010) 326 ITR 29 (P&H)] has
also held that the expenditure on the issue of convertible debentures is
admissible. The Tribunal observed  that
there is no qualitative difference between the issuance of debentures or bonds.
Both fall in the realm of loan. Thus the Tribunal  held 
that the assessee was entitled to 
deduction for this amount.

Being aggrieved, the
Revenue filed an appeal to the High Court. The Court observed  that the preliminary  issue arising herein stands concluded against
the Revenue and in favour of the Assessee by the decision of this Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd., 349 ITR 336 .

As regards, the expenditure incurred on the
issue of FCCBs should be considered as capital expenditure and not be allowed
as revenue expenditure. The Hon Court 
relied on the decision of the Delhi High Court in CIT vs. Havells
India Ltd., 352 ITR 376 – wherein on an identical fact situation, the
appeal of the Revenue was dismissed. The Revenue was  not able to show any reason which would
require the court to take a view different from that taken by the various High
Courts in the country on an identical issue. In the above circumstances, the
revenue, Appeal was  dismissed.

9. Genuineness of trust – a breach/contravention of the Bombay Public Trust Act, 1950-would not result in the trust being disqualified from being approved u/s. 80G.

D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust. [ Income tax Appeal no. 902 of 2014 dt : 15/10/2016
(Bombay High Court)].

[D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust., [dated 13/11/2013 ; A Y: 2011-12. Mum. ITAT ]

The assessee is a Charitable Trust duly
registered u/s. 12AA Act. On 2nd December, 2011, the assessee Trust
applied to the Director of Income Tax (Exemption) for renewal of Certificate /
approval u/s. 80G. The application was rejected by the Director of Income Tax
(Exemption). This rejection was on the ground that the Trust had obtained
unsecured loan of Rs. 50 lakh from third parties without obtaining prior
approval of the Charity Commissioner as required u/s. 36A(3) of the Bombay
Public Trust Act, 1950. Thus, concluding that the assessee is not a genuine
trust.

Being aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal by the impugned order held that there is
no dispute that the assessee fully satisfied the conditions specified in
section 80G(5) of the Act for approval there under. It further observed that
there is no requirement under the Act that a breach / contravention of the
Bombay Public Trust Act, 1950 would result in the trust being disqualified from
being approved u/s. 80G of the Act. It held that the very fact that the Revenue
had not initiated any action u/s. 12AA of the Act to revoke its registration
would imply that the activities of the Trust are genuine.

Moreover, the Tribunal also records the fact
that the Charity Commissioner has not taken any action against the assessee for
violation of the provisions of section 36A of the Bombay Public Trust Act, 1950
in having borrowed funds without its prior permission. In the aforesaid circumstances,
the appeal of the assessee was allowed.

The Revenue appealed before the High Court
and urged that the Trust is not a genuine trust in as much as it has been
borrowing funds on regular basis from third persons and has been repaying it by
borrowing further funds from other parties on regular basis.

The Hon. High Court find that the impugned
order of the Tribunal has on the basis of the clear provision of section 80G
recorded that the assessee completely satisfies/fulfils all the conditions
specified in section 80G(5) for the purposes of availing benefit u/s. 80G. This
coupled with the fact that the Revenue itself has also not taken any
proceedings to have the registration cancelled, would itself imply that the
Revenue does consider the Trust to be a genuine trust.

It is an undisputed position that the assessee
satisfies all conditions for approval of the trust u/s. 80G. Therefore, it is
not open to the Authorities to refuse approval by imposing conditions which are
not mentioned in Section 80G. In the above circumstances, the impugned order of
the Tribunal was upheld. Therefore,
the appeal was dismissed.

8. Interpretation – SUBLATO FUNDAMENTO CEDIT OPUS – Once the foundation is removed, the superstructure falls.

Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd. [Income tax Appeal no 573 of 2014 dt :
01/10/2016 (Bombay High Court)].

[Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd., [dated 06/10/2013 ; A Y: 2006-07. Mum. ITAT
]

The assessee is in construction business.
During the AY: 2006 – 07, the assessee had paid share application money to one
M/s. Siddhivinayak Realities Pvt. Ltd. The Assessing Officer added the amount
of Rs.10.35 crore as deemed dividend on a substantive basis in the hands of
Siddhivinayak Realities Pvt. Ltd. and on a protective basis in the hands of its
director Mr. Vikas Oberoi in their assessment orders. Being aggrieved, both
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi challenged their
orders of assessment holding that they are in receipt of deemed dividend. Their
appeals were allowed by the CIT(A) holding that they could not be charged to
tax on the amount of Rs.10.35 crores as recipients of deemed dividend u/s.
2(22)(e).

Being aggrieved by the order of CIT(A), the
Revenue filed an appeal to the Tribunal which was dismissed. Thereafter, the
Revenue filed an appeal to High court, being in the case of M/s.Siddhivinayak
Realities Pvt. Ltd. and Mr. Vikas Oberoi. The High Court by orders dated 4th
July 2014 and 8th June 2016, respectively, dismissed both the
Revenue’s appeals from the orders of the Tribunal holding that M/s.
Siddhivinayak Realities Pvt. Ltd. and Vikas Oberoi cannot be charged to tax as
recipients of deemed dividend.

In the meantime, pending the aforesaid
proceedings, the ACIT (TDS) passed an order dated 11th February 2011
u/s. 201(1) and 201(1A) of the Act holding the assessee to be an assessee in
default for not having deducted tax on the deemed dividend of Rs.10.35 crore
paid to M/s. Siddhivinayak Realities Pvt. Ltd. The assessee, being aggrieved,
filed an appeal to the CIT (A). The appeal of the assessee was allowed by the
CIT (A) holding that as in the appellate proceedings in respect of M/s.
Siddhivinayak Realities Pvt. Ltd. and Mr. ikas Oberoi, the addition of income
to the extent of Rs.10.35 crore u/s. 2(22)(e) of the Act on substantive and
protective basis had been deleted, there was no taxable income which had to
suffer tax deduction at source. Consequently, no failure to deduct tax could
arise.

Being aggrieved, the Revenue carried the
issue in further appeal to the Tribunal. The Tribunal upheld the order of the
CIT (Appeals) holding that once the addition made on account of deemed dividend
is deleted in the hands of the recipient of the amount of Rs.10.35 crore, there
could be no failure to deduct tax at source thereon. Thus, the consequent
demand u/s. 201(1) and 201(1A) upon the assessee was not justified.

Being aggrieved, the Revenue filed an appeal
before High Court. The High Court held that both the CIT (A) as well as the
Tribunal in these (TDS) proceedings have held that as the very basis for
holding the assessee liable for failure to deduct tax did not subsist, the TDS
proceedings must also fail. This was in view of the orders passed in the case
of recipients i.e. M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi in
appeal by the authorities under the Act including this Court that they were not
liable to any tax as they had not received any deemed dividend u/s. 2(22)(e).
Once the foundation is removed, the superstructure falls (sublato fundamento
Cedit opus). The grievance of the Revenue is that in TDS proceedings, one
must ignore the orders passed in the hands of the recipients i.e.
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi.

The Court observed that the officers of the
Revenue while administering the TDS provisions are not outside the scope of the
Act and orders passed under the Act in respect of the character of the payment
made under the Act are binding upon them. The fact that at the time the order
of the ACIT (TDS) was passed, there was basis to do so does not mean that
orders passed on income in the hands of the recipients will have no bearing in
deciding its validity. One must not ignore the fact that this order of the TDS
officer is tentative in nature and its existence would depend upon the nature
of receipt in the hands of the recipient and subject to the orders passed in
respect thereof by appropriate court. In the above view, the appeal was
dismissed.

7. Reopening of assessment – the reasons for reopening must be based on some material – the material used by the AO for forming his opinion must have some bearing or nexus with escapement of income – If not, the reopening notice would be clearly without jurisdiction: Section 148.

Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co.  
[ Income tax Appeal no. 670 of 2014, dt : 04/10/2016 (Bombay High
Court)].

[Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co,. [ITA No. 3930/MUM/2006, 3897/MUM/2006,
746/MUM/2007; Bench : L ; dated 19/07/2013; AYs: 2000-2001, 2003-2004. Mum.
ITAT ]

The Assessee is a Project Contractor. It
awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh
to set up a power plant on a turnkey basis. Further, KPCL had awarded an
onshore contract to the Assessee for supply of goods and services along with
the commissioning of the plant. KPCL also awarded an offshore supply contract
to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103
million. The equipment valued at US$ 103 million was supplied by Hanjung and
taken delivery of outside India by the Assessee for and on behalf of KPCL. The
aforesaid equipment was lost during its transit after the Assessee took
delivery from Hanjung. As the insurance claim was not honoured, the Assessee
filed a suit against the Insurance Company for recovery of US$ 103 million. The
regular assessment proceeding was completed for the subject  A.Y. u/s. 143(3).

A reopening notice was issued by the
Assessing Officer for the subject A.Y. and the reasons to believe that income
chargeable to tax has escaped assessment u/s. 147 of the Act. During the course
of assessment proceedings, it was noticed that there was another contract
titled “Offshore Equipment Supply Contract” also dated 1st February,
1998 entered into between M/s. Lanco Kondapalli Power Private Limited and M/s.
Hanjung DCM Co. Ltd. (Hanjung). The AO had reason to believe that income of US$
51.5 million chargeable to tax has escaped assessment. Issue notice u/s. 148.

The assessee during the assessment
proceedings consequent to reopening notice dated 26th March 2004
submitted that the same is without jurisdiction and, therefore, must be
quashed. Nevertheless, the AO proceeded on the basis that in the suit filed by
the Assessee in the Secunderabad Court against the Insurance Company it had
claimed to have supplied equipment valued at US$ 103 million which was lost.

The Assessing Officer placed reliance on
para 5 of the plaint, which reads as under :

“ 5. MAIN SUPPLY CONTRACT “

Under the terms
of contract dated 15th February 1998 (“Supply Contract”) between
Plaintiff and LKPL, Plaintiff agreed to supply equipment, materials and design
for the construction of LKPL’s combined cycle power plant at Kondapalli IDA,
Andhra Pradesh in India (the “Kondapalli Project”). The value of this Supply
Contract was about US$ 103 million.” It was on the aforesaid basis that the AO
sought to justify his reasons to believe that income chargeable to tax has
escaped assessment and, therefore, proceeded to hold even on merits against the
Assessee.

On appeal, the CIT(A) examined all the
facts. These facts included not only the suit as filed but also the terms of
the contract and scope of work, in particular the responsibility of the parties
there under. Based on this examination, the CIT(A) concluded that in terms of
its obligation to insure the goods/equipment during transit, the appellant had
taken out an Insurance policy as a contractor with KPCL as the principal. Based
on this policy coupled with the plaint as filed, the CIT(A) observed that the
plaint has to be read as a whole. So read, the nature of the relationship
between the parties as described in paragraph 4 thereof, which, as extracted in
the order, reads as under :

“4. A brief reference to the parties
involved in relation to the subject matter of this suit is as follows :

a. Lanco Kondapalli Power Pvt. Limited (formerly a public limited
company) (‘LKPL’) is the owner of the Kondapalli Power Project.

b. Plaintiff is the EPC
contractor for the Kondapalli Power Project, and an assured under the policy
issued by Defendant.

 i. Encon Services Limited (‘Encon’) is the subcontractor of Plaintiff
for transportation of the GT & GTG from Kakinada to Machilipatnam.

j.   Seaways Shipping Limited
(‘SSL’) was appointed by Encon for inland transportation of GT & GTG from
Kakinada to Machilipatnam, and was the character of ‘Jala Hamsa’ and ‘AmethiI’.

n. Aistom are the suppliers of the GT & GTC, from whom Plaintiff
arranged to procure the replacement equipment for ensuring completion of the
project.”

The CIT(A) came to the conclusion that on
the basis of the words used in para 5 of the plaint, it cannot be established
that the assessee had supplied (as owner) the equipment, material and design,
and that the word “supply” only refers to the responsibilities of the assessee
for setting up of the power project as per the onshore contract. The reasons as
recorded do not therefore suggest any link between the material found by him and
his conclusion that there was reason to believe that the income chargeable has
escaped assessment. He, therefore, concluded that there was no reason to form a
belief that income chargeable to tax has escaped assessment.

On appeal by the Revenue, the Tribunal, by
the impugned order, confirmed the finding of the CIT(A).

The Hon. High Court observed that at the
stage of a notice of reopening, the AO does not have to “establish” that any
income has escaped assessment. However the AO must simply be shown to have
formed an opinion, which, in turn, is supported by reasons. The reasons
themselves must be based on some material. A minimum requirement one would
expect in the face of this scheme of things is that the material used by the AO
for forming his opinion must have some bearing or nexus with escapement of
income. If not, the reopening notice would be clearly without jurisdiction. In
the present case, the material used by the AO for purportedly forming this
opinion is the description of the assessee of itself as “a supplier” of the
equipment in an EPC contract, which inter alia required it to take offshore
delivery of the equipment from a foreign vendor and supply and install the same
onshore. Mere description as a “supplier” in a suit by the assessee against the
insurance company claiming an insurance claim for loss of equipment, when the
assessee insured the equipment jointly with the purchaser, can possibly have no
connection with the escapement of any income arising out of sale of the
equipment. Since that was the only material used by the AO for issuance of the
reopening notice, the notice is without any legal basis or justification. In
these circumstances, the order of the coordinate bench for Assessment Years
1999-2000 and 2002-2003 also supports the Respondent’s contention that they
were not suppliers of the equipment and no income assessable to tax has escaped
assessment. It’s obligation was to insure the goods/equipment during transit
done by it either on its own or through a subcontractor.

The Hon. High Court also found that, the
contract provided that the contractor, i.e. Assessee will provide/arrange at
its own cost in the joint name of the owner and contractor a comprehensive
insurance cover to the project, including any damage to the goods during transit.
It was in that context that the Assessee had made a claim for insurance. Taking
into account the concurrent findings of fact arrived at by the CIT(A) and by
the Tribunal, and that nothing has been shown to indicate that the finding is
perverse the appeal was dismissed.

6. Penalty – CIT(A) could not have imposed penalty on a new ground which was not the basis for initiation of penalty – penalty could be only on the ground on which it was initiated – Not liable for penalty : u/s. 271(1)(c)

CIT vs. Acme Associates. [ Income tax
Appeal no 640 of 2014 dated : 17/10/2016 (Bombay High Court)].

[Acme Associates vs. ACIT. [ITA No.
649/MUM/2011; Bench : I; dated 13/09/2013 ; A Y: 2005- 2006.( MUM.)  ITAT ]

The assessee is in the business of Real
Estate Development. For the A.Y. 2005-06, the assessee has filed its ROI ,
declaring a income of Rs. 2.04 crore claiming 100% deduction u/s. 80IB(10).
During the course of the assessment proceedings, the AO noticed that two
buyers, viz. Ms. Sulbha M. Waghle and Mr. Mangesh G. Waghle had entered into
joint agreement for purchase of flats which in the aggregate exceeded 1,000
sq.ft. Consequently, AO disallowed the deduction claimed u/s. 801B(10) and
initiated penalty proceedings u/s. 271(1)(c) on the aforesaid ground for furnishing
inaccurate information/concealing income.

The assessee carried the issue in appeal to
the CIT(A). During pendency of the appeal, a search action u/s. 132 was carried
out on the assessee group. Consequent to which, notices u/s.153A were issued to
the assessee including one for the subject A Y 2005-06. In the above
circumstances, the assessee withdrew its appeal for A.Y. 2005-06 pending before
CIT(A). Thereafter, by order dated 30th March, 2010, the AO imposed
penalty upon assessee u/s. 271(1)(c). This was on the very ground on which the
AO had initiated penalty proceedings viz. selling of flats to two members of
the family which in the aggregate was in excess of 1000 sq.ft. of built up
area. Therefore concluding that the Assessee has furnished incorrect
particulars of income/concealed particulars of income. Consequently, a penalty
was imposed.

Being aggrieved, the assessee carried the
order of the AO imposing penalty u/s. 271(1)(c) to CIT(A). The CIT (A)
confirmed the penalty imposed by the AO. However, the confirmation was on a
completely new and different ground viz. that during search proceedings, the
assessee had made disclosure that the project in respect of which deduction
u/s. 801B(10) was being claimed was not completed before the due date i.e. 31st
March 2008. Thus confirming the order dated 30th March, 2010.
It is to be noted that CIT(A) in its order did not deal with the issue on which
the AO had initiated and confirmed the penalty upon the assessee.

Being aggrieved, the assessee filed a
further appeal to the Tribunal. The Tribunal held that the initiation and
confirmation of penalty by the AO u/s. 271(1)(c) was not on the ground that the
project was not completed by the due date, on which the CIT (A) confirmed the
penalty. Thus, the Tribunal held that this could not be done by the CIT(A) as
the penalty proceedings were initiated on account of selling flats of an area
in excess of 1000 sq.ft. i.e. a ground different from the ground on which
the   CIT(A) confirmed the penalty. The
order also noted the fact that at the time when the return of income was filed
on 31st October 2005, it was not possible to predict whether the
project would be completed on or before the specified date 31st
March 2008. Further, the Tribunal also examined the issue on which the
Assessing Officer had imposed penalty, namely, selling of two flats to the
members of same family, the area of which in the aggregate exceeded 1000 sq.ft.
built up and held that no material was brought on record that assessee had
constructed a flat of more than 1000 sq.ft. built up area or that the assessee
had sold any unit of more than 1000 sq.ft. It renders a finding of fact that
after units had been sold the buyers had joined two flats resulting in a flat
in excess of 1000 sq.ft. In the aforesaid view, the Tribunal held that there is
no furnishing of inaccurate particulars and/ or concealing of income warranting
the imposition of penalty u/s. 271(1)(c).

The Hon. High Court in the revenue appeal
held that, it was the original ground on basis of which penalty was initiated,
that the assessee was required to offer explanation during penalty proceedings
to establish that the claim as made in the return of income was not on account
of furnishing of inaccurate particulars of income or concealment of income vis-a-vis
of selling flat having area 1000 sq.ft. The AO under the Act also considered
the assessee’s explanation in the context in which the penalty proceedings were
initiated and did not rightly place any reliance upon the subsequent events. In
an appeal from the order of the Assessing Officer, the CIT(A) could not have
imposed penalty on a new ground which was not the basis for initiation of
penalty. The appeal before the CIT(A) was with regard to issue of penalty u/s.
271(1)(c) only on the ground on which the penalty proceedings were initiated in
the assessment order. Although the powers of CIT(A) are coterminous with that
of the AO, the imposition of penalty could be only the ground on which it was
initiated. This is not the case, where the CIT(A) had independently initiated
penalty proceedings on a new ground in an order in quantum proceedings in
appeal from the Assessment Order. This alone could lead to the imposition of
penalty u/s. 271(1)(c) on the new ground. The ground on which the penalty was
initiated and penalty imposed by the AO, namely, that the flat had been sold in
the project which was in excess of 1000 sq.ft., the Tribunal has recorded a
finding of fact that the flats were sold individually by two separate
agreements individually to the purchasers in joint names. However, two flats
were subsequently joined by the purchasers aggregating the size of two flats to
1000 sq.ft. built up purchased from the assessee. This is finding of fact which
has not been shown to be perverse or arbitrary. In the above view, revenue
appeal was dismissed.

15. Tribunal jurisdiction u/s. 254(2) of the Act – Once a matter is disposed off by the Tribunal it would be functus officio – It can only exercise limited jurisdiction to rectify its order – No clarification can be sought

CIT vs. Shri Suresh G. Wadhwa. [
Income tax Appeal no. 904 of 2014 dt : 05/12/2016 (Bombay High Court)].

[Shri Suresh G. Wadhwa vs. JCIT,. [ MA
NO. 387/MUM/2013 Arising out of ITA No 6395/MUM/2010; Bench : I ; dated
04/12/2013 ; A Y: 2009-10. Mum. ITAT ]

The Tribunal passed an order dated 2nd
August, 2013 u/s. 254(1) of the Act relating to the AY : 2009-10. The AO was
not interpreting/understanding the said order correctly. In the above view, the
assessee filed an application u/s. 254(2) of the Act seeking clarification of
the order dated 2nd August, 2013, so as to explain its correct
meaning. By the impugned order, the Tribunal allowed the assessee’s
miscellaneous application seeking a clarification of its order dated 2nd
August, 2013. The Tribunal in the impugned order dated 4th December,
2013 records that under the garb of clarification of an order, a party’s right
to interpret the Tribunal’s order cannot be pre-empted. If the parties are
aggrieved by the interpretation of the Tribunal’s order by the lower
authorities, it would only be fair to challenge the same in an appropriate
proceedings. Notwithstanding the above, the Tribunal allowed the application by
the impugned order clarifying its earlier order dated 2nd August,
2013. This the Tribunal did by holding that though such an application for
clarification may not strictly fall u/s. 254(2) of the Act, yet such an
application would be entertained in exercise of its inherent powers and in
support relied upon the Apex Court order in Honda Siel Power
Products Ltd. vs. Commissioner of Income Tax, 295 ITR 466.

The Revenue preferred appeal before
the High Court against the order of the Tribunal passed u/s. 254(2) of the Act.
The Court observed that the Tribunal after passing an order u/s. 254(1) of the
Act has became functus officio in respect of the proceedings which led
to the final order dated 2nd August, 2013 passed in respect of AY :
2009-10. The Tribunal’s powers are for rectification are specifically set out
in section 254(2) of the Act. There is no provision in the Act enabling the
Tribunal to clarify its order after it has became functus officio particularly
when the clarification is not in respect of clerical/typographical errors which
have crept into the order. The Tribunal has no powers of Review. It cannot in
the garb of clarifying its order already passed u/s. 254(1) of the Act, seek to
review the same. The issue is of jurisdiction of the Tribunal to entertain such
an application for clarification. Undoubtedly, an inherent power of procedural
review is available with every Tribunal but not of substantive review. Procedural
review would be cases where the procedure/process of adjudicating the dispute
is not followed, to illustrate an order passed ex parte or when no
notice of hearing is received by party, etc. i.e. the process of
arriving at justice is vitiated. (Grindlays Bank Ltd. vs.
Central Govt. Industrial Tribunal, 1980 (suppl.) SCC 420). Seeking clarification and/or amplification of an order
already passed without it falling within the parameters of an rectification
application, would lead to chaos and uncertainty. No order of the Tribunal
would then be final, as it would always be subject to clarification. Once the
Tribunal has passed an order u/s. 254(1) of the Act, it becomes functus
officio and loses jurisdiction over the lis. It is axiomatic that
once a matter is disposed of by the Tribunal/Court, it would be functus
officio. The Tribunal can only exercise limited jurisdiction as provided in
section 254(2) of the Act, to rectify its order in view of apparent error on
record or in case of procedural issues leading to an order passed u/s. 254(1)
of the Act. Thus, the Tribunal ought not to have entertained such an application on the part of the assessee.

The reliance placed upon
the decision of the Apex Court in Honda Siel Power Products Ltd. (supra)
is inappropriate. In the facts of that case, a binding decision of a coordinate
bench was cited before the Tribunal during the hearing of the appeal and the
same was not considered in the order of the Tribunal. It was in the above
context, that the Tribunal had allowed the application for rectification made
by the party. However, it was reversed by the High Court. On further appeal,
the Apex Court restored the order of the Tribunal. It held that the Tribunal
allowed the application applied u/s. 254(2) of the Act for rectification as a
binding order cited during the hearing before the Tribunal was not considered
in the impugned order of the Tribunal. In fact, this would be a case of
procedural review as held by the Apex Court in Grindlays Bank (supra)
and also fall within the scope of section 254(2) of the Act. It must be noted
that the Apex Court in Honda Siel Power Product Ltd. (supra) did not
exercise inherent powers in the facts before it, but allowed the application
u/s. 254(2) of the Act. Therefore, the reliance of Honda Siel Power Product
Ltd. (supra) is misplaced.

The impugned order dated 4th
December, 2013 was quashed and set aside.

14. Reopening of assessment – No reason to believe that the income chargeable to tax has escaped assessment – reopening notice was bad in law. Section 148

CIT vs. Devkumar Haresh
Vaidya. [ Income tax Appeal no 750 of 2014, dt : 05/12/2016 (Bombay High
Court)].

[Devkumar Haresh Vaidya
(IT) vs. ACIT . [ITA No. 7325/MUM/2012; Bench : J ; AY 2007-08 dt: d 31/07/2013
; Mum. ITAT ]

The Assessee filed its ROI
for  AY 2007-08 declaring a total income
of Rs. 24.69 lakh. The same was accepted u/s. 143(1) of the Act. Thereafter,
the AO received information from the Deputy Director of Income Tax
(Investigation), Surat that property situated at New Delhi (said property) was
sold on 23rd August, 2006 for a total consideration of Rs.148.93
crore by the 12 family members, including the assessee and the assessees’s
share in the said amount was Rs.6.21 crore. Consequently, a notice u/s. 148 of
the Act was issued seeking to reopen the assessment for AY: 2007-08. The reason
for reopening the assessment was that said property had been sold to one
Mineral Management Services (I) Ltd. Thus, the sale was assessable to tax in
the A.Y. 2007-08 as it was so assessed in the hands of Mineral Management
Services (I) Ltd. in that year.

The assessee challenged
the notice pointing out that he had offered to tax the entire consideration of
Rs.6.21 crore (Rs. 4 crore in his hands and Rs.2.21 crore as a part of his late
father’s income was offered to tax) in the earlier A.Y. 2006-07. Moreover, he
had also claimed the benefit of section 54EC of the Act in A.Y. 2006-07. This
was accepted by the AO in scrutiny proceedings u/s. 143(3) of the Act. It was
pointed out that the said property was a family property in which his mother
(Devhuti Vaidya) had undivided and indeterminate rights/share in the said
property. Therefore, though the assessee and his family members did not have
possession of the said property, they had filed caveat objecting the
grant of probate to the Will of the assessee’s maternal grand father Mr.
Anantrai Pattani in favour of his maternal uncle Mr. Kumar Pattani. In the
above view, as a part of the settlement arrived at between the assessee and his
family members with his uncle Mr. Kumar Pattani, an Agreement for Sale dated 25th
October, 2005 by which the assessee sold his rights in the said property to one
M/s. Duce Property and Services Pvt. Ltd. and withdrew his objections to grant
of probate to Mr. Kumar Pattani. All this in consideration of  Rs.12 crore (as a
family) and Rs.4 crore as a part thereof being for the transfer of his interest
/ right in the immovable property was also received in A.Y. 2006-07.

All the above facts were
examined by the AO while passing the assessment order for the A.Y. 2006-07 and
held that the assessee had sold his rights/share in the immovable property and
sought benefit of the investment made of the sales proceeds u/s. 54EC of the
Act. It was also pointed out that as is evident from the reasons for reopening
the assessment that the amendment made in section 54EC of the Act effective
from A.Y. 2007-08 which would restrict the benefit of that provision to Rs.50
lakh had triggered the reopening notice.

This was evident from the
following observations recorded in the reasons, which reads as under :“ In
view of above amendment, if the assessee would have shown the capital gain
correctly in the A.Y. 2007-08, then she would not have been eligible for
deduction of more than Rs.50 lakhs even if she would have complied with the
time limit provision of the section 54EC.”

However, the AO by order
passed u/s. 143(3) r/w section 147 of the Act, did not accept the assessee’s
objections. Consequently, the AO brought to tax an amount of Rs.6.21 crore on
the above account. (Rs.4 crore being the assessee’s share and Rs.2.21 crore
being his share in his late father Mr. Haresh Vaidya’s interest, who had
expired in the meantime.).

On appeal, the CIT(A) also
dismissed the assessee’s appeal.

On further appeal, the
Tribunal held that the AO could not have any reason to believe that income
chargeable to tax has escaped assessment. In particular, it held that the
assessee had offered capital gains to tax in the AY 2006-07 and the same was
accepted after examination / consideration while passing an order u/s. 143(3)
of the Act. Thus, the AO having already assessed the income arising on sale of
rights in the said property as evidenced by the Agreement for Sale dated 25th
August, 2005 and letter dated 17th October, 2005 evidencing the
family arrangement coupled with having received the consideration in the
Assessment Year 2005-06 which was also offered to tax in that year could not
have had any reason to believe that income chargeable to tax has escaped
assessment. The impugned order also records the fact that there were disputes
amongst the legal heirs of late Mr. Anantrai Pattani including pending probate
proceedings before the High Court. The dispute between the assessee and his
uncle Mr. Kumar Pattani stood settled on the basis of offer made by the uncle
in his letter dated 17th October, 2005 to the assessee and his
family members to give up their rights in respect of the said property
(including not contesting the probate petition) on his uncle paying a sum of
Rs.12 crore in the aggregate. 

Further, the fact that the
communication received from the Deputy Director of Income Tax (Investigation),
Surat which was the material for issuing the impugned notice, also seems to
indicate that the entire exercise was only for denying the benefit of section
54EC of the Act in view of the amendment thereto with effect from AY 2007-08.
The Tribunal held that reopening notice was bad in law.

The Hon. High Court held
that once the assessee has offered the capital gains to tax on the basis of the
Agreement for Sale dated 25th October, 2005 read with the letter
dated 17th October, 2005 and the receipt of consideration for sale
of his interest in said property and accepted on due examination u/s. 143(3) of
the Act, the AO could not have had any reason to believe that income chargeable
to tax has escaped assessment. In fact, this is a case of change of opinion,
inasmuch as for the A.Y. 2006-07, the AO in scrutiny proceedings accepted that
the transaction qua the respondent is taxable in A.Y. 2006-07 and now
seeks to tax it in A.Y. 2007-08.

The report received from
the DDIT (Inv), Surat essentially seeks to deny the exemption u/s. 54EC of the
Act in view of the amendment thereto. When the capital gains has been offered
to tax in earlier assessment year and accepted by the Revenue in scrutiny
proceedings, then a mere change in law in the subject assessment year with
regard to extent of exemption will not give any reason to believe that income
chargeable to tax in the subject assessment year had escaped assessment.
Therefore, the appeal was dismissed.

13. Rectification – Retrospective Amendment u/s. 115JB – Rectification made by the A.O on the issue in the order passed u/s. 143(3) r.w.s. 254 of the Act- Such mistake, if any, was in the order originally passed by the A.O. u/s. 143(3) of the Act – Not permissible: u/s. 154 of the Act

CIT vs. Weizmann Ltd. [
Income tax Appeal no 1020 of 2014 dt : 09/12/2016 (Bombay High Court)].

[M/s Weizmann Ltd.,vs.
ACIT. [ITA No. 768 /MUM/2012; Bench : G ; date:31/10/2013 ; A Y: 2001- 2002.
(MUM) ITAT ]

On 27th February,
2004, the assessment order was passed u/s. 143(3) for the subject assessment
year. The assessing officer accepted the assessee’s claim of book profits u/s.
115JB. The book profits as claimed was after allowing of amounts set aside as
provisions for diminution in the value of assets. The assessee being aggrieved
by the assessment order on certain other issues had preferred an appeal to the
appellate authority and carried its grievance up to the Tribunal. On 29th August,
2007, the Tribunal restored some of the issues by which the assessee was
aggrieved to the Assessing Officer. It is relevant to note that the issue of
allowing of amounts set aside as provision for diminution of the value of
assets was not an issue which was restored to the Assessing Officer for
readjudication.

Consequent to the above,
the Assessing Officer passed an order dated 30th December, 2008 u/s.
143(3) r.w.s 254 of the Act giving effect to the order dated 29th
August, 2007 of the Tribunal.

The Finance (No.2) Act of
2009 amended section 115JB of the Act with retrospective effect from 1st April,
2001. The amendment inter alia added to Explanation I to section 115JB
of the Act, clause (i) providing that for purposes of computing that the book
profits thereunder, the profit shown in the profit and loss account is to be
increased by the amounts set aside as provision for diminution in the value of
assets.

In view of the above amendment the A.O. by
order dated 19th August, 2010 u/s. 154 rectified its order dated 30th
December, 2008 and made addition of Rs. 1,28,60,000/- to the book profit
of the assessee on account of provision for diminution in the value of
investment relying on the amendment made in the provisions of section 115JB
that with retrospective effect on 1-4-2001.

The assessee challenged
the order passed by the A.O. u/s. 154 of the Act by preferring an appeal before
the CIT(A) disputing the addition of Rs. 1,28,60,000/- made by the A.O. to the
book profit on account of provision for diminution in the value of investment.
The ld. CIT(A) did not find merit in the said appeal of the assessee and
dismissed the same.

The assessee preferred an
appeal before the Tribunal. The assessee submitted that the order u/s. 143(3)
r.w.s. 254 of the Act, was passed by the A.O. as per the specific directions
given by the Tribunal while restoring only the limited issues to the file of
the A.O. He submitted that the issue relating to the allowability of provision
for diminution in the value of investment was not before the Tribunal and since
the same was not restored by the Tribunal to the file of the A.O., the
consideration of the same was beyond the scope of order passed by the A.O. u/s
143(3) r.w.s. 254 of the Act. He relied on the decision of Hon’ble Bombay
High Court in the case of CIT vs. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570.

The Tribunal held that it
cannot be said that there was any mistake in the order of the A.O. passed u/s
143(3) r.w.s. 254 of the Act on 30-12-2008 in allowing the deduction on account
of provision for diminution in the value of investment calling for any
rectification u/s. 154 of the Act. Such mistake, if any, was in the order originally
passed by the A.O. u/s. 143(3) of the Act on 27-2-2004 and not in the order
passed on 30-12-2008. The rectification made by the A.O. on this issue to the
order passed u/s. 143(3) r.w.s. 254 of the Act by an order dated 19-8-2010
passed u/s. 154 of the Act thus was not permissible. The Tribunal, therefore,
directed the A.O. to delete the addition made by way of rectification order
u/s. 154 of the Act.

The Revenue preferred an
appeal before the High Court. The High Court held that the issue stands concluded
by the decision of this Court in Sakseria Cotton Mills Ltd. (supra) in
favour of the assessee. The distinction sought to be made by the Revenue on the
basis of the amendment to section 115JB of the Act in 2009 with retrospective
effect from 2001 does not address the fundamental issue of non merger of the
order dated 27th February, 2004 with the order dated 30th December,
2008. Therefore, any rectification of the order dated 27th February,
2004 is required to be done within 4 years from 27th February, 2004
as provided u/s. 154 of the Act. It is not disputed before us that issue of the
provisions made for diminution in value of assets which is sought to be
rectified is an issue which was never the subject matter of consideration in
the order dated 30th December, 2008 passed u/s. 143(3) r/w section
254 of the Act. Therefore, in these circumstances, it could not be rectified
u/s. 154 of the Act. In the above view, the revenue appeal was dismissed.

3. Book profit – Accounts prepared and certified in accordance with the provisions of the Companies Act – has to be accepted – cannot be altered – Section 115JB Explanation .

CIT – 6 vs. Century Textiles and Industries Ltd.[Income tax Appeal no. 1072 of 2014, dt : 16/01/2017 (Bombay High Court)].

[Asst CIT vs. Century  Textiles and Industries Ltd,. [ITA No. 3261/MUM/2009; Bench : C ; dated 13/09/2013 ; AY 2005-06, Mum. ITAT ]

During the course of assessment proceedings, the AO noticed that the assessee had debited to its Profit and Loss Account an amount of Rs.12.41 crore being the arrears of depreciation for the earlier A.Y 2000-01 and 2001-02. The AO called upon the assessee to explain why the depreciation relating to earlier AY should not be added back to the Book Profits. The assessee pointed out that its accounts had been prepared in accordance with the provisions of the Companies Act which were duly audited. Therefore, in view of the decision of the Apex Court in CIT vs. Apollo Tyres Ltd [255 ITR 273] wherein it has been stated that the book profit as prepared and certified in accordance with the provisions of the Companies Act, has to be accepted and cannot be altered to determine book profit for purpose of section 115JB of the Act except as provided in the Explanation thereto. Notwithstanding the above, the AO did not accept the same and added arrears of depreciation for the A.Y 2000-01 and 2001- 02 to the audited book profits to determine the book profits for the purpose section 115JB of the Act.

Being aggrieved, the assessee filed an appeal to the CIT(A). The appeal was allowed by the CIT(A) following the decision of Apollo Tyres Ltd (supra) .Thus deleted the addition made by the AO.

Being aggrieved the Revenue carried the issue in appeal to the Tribunal. The Tribunal referred to the judgment of Hon’ble High Court of Bombay in case of Kinetic Motor Company Ltd. (262 ITR 330) in which the High Court referred to the judgment of Hon’ble Supreme Court in case of Apollo Tyres Ltd. (Supra) and held that the accounts prepared and certified in accordance with part 2 and part 3 of schedule VI of the companies Act could not be tinkered with and AO had no jurisdiction to go beyond the net profit shown in the such accounts. The Tribunal, therefore, deleted the addition made.

On further appeal, the High Court held that the issue stands concluded by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and the decision of this Court in Kinetic Motor Co. Ltd. (supra). The above decisions have held that it is not permissible to the AO to tinker with the profit declared in the audited account maintained in terms of Schedule VI of the Companies Act. As the order of the Tribunal has merely followed decision of the Apex Court in Apollo Tyres Ltd. (supra) question as formulated does not give rise to any substantial question of law.

The other grievance of the Revenue was that the clause (iia) was inserted only in Finance Act, 2006 w.e.f. 1st April, 2007 and is not applicable for the year under consideration. However, the court observed that the grievance of the revenue does not carry the issue in the present facts any further as the Tribunal has not allowed the claim of the respondent-assessee by relying upon clause (iia) of explanation to section 115JB of the Act. Further that this issue was not urged before the authorities under the Act. Therefore, in view of the decision in CIT vs. Tata Chemicals Ltd. [256 ITR 395], it cannot be urged before this Court for the first time.

2. Sale of shares – capital gain vs Business Income- consistency – own funds – considering the volume and frequency of purchase / sale of shares – held not a trader: Section 45

CIT – 4 , vs. Shri Upendra K. Doshi. [ Income tax Appeal no. 848 of 2011; AY 2008-09 dated : 15/11/2016 (Bombay High Court)].

[Shri Upendra K. Doshi vs. DCIT [ITA no:7854/M/2014 dated 14/08/2013 ; A Y: 2005-06 to 2008-09. Mum. ITAT ]

The assessee purchased and sold certain shares, profit from which was claimed as Short term/Long term capital gain depending upon the period of holding. The AO did not dispute the long term capital gain. However, he treated the assessee as a trader instead of investor and accordingly re-characterised the amount shown as ‘Short term capital gain’ as ‘Business income’.
The ld. CIT(A) noticed that the assessee consistently held the shares as ‘Investment’ and this treatment of profit from sale of shares as ‘capital gain’ stood accepted by the AO in earlier year as well. He, therefore, directed to treat the amount as Short term capital gain as against the ‘Business income’ held by the AO.

Being aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal observed that the treatment of Long term capital gain has been accepted by the AO. The only dispute is about the treatment of profit from sale of shares etc., other than long term capital assets, which the AO treated it as ‘Business income’. The assessee gave similar treatment to the shares by keeping it as ‘Investment’ on the lines as was done in the earlier years. For the immediately preceding assessment year i.e. 2004-05, the assessee showed Long term capital gain and Short term capital gain from the transfer of shares.

The AO accepted profit from transfer of shares as short term/long term capital gain respectively in the assessment made u/s. 143(3) of the Act for such earlier year. Similar is the position for the A.Y. 2003-04 in which the assessee again showed profit from the transfer of shares as Long term capital gain and Short term capital gain which was assessed by the AO as such in assessment made u/s. 143(3) of the Act. This shows that the assessee held and declared the shares as ‘Investment’ and this stand came to be accepted by the Revenue. Thus the ld. CIT(A) order was upheld .

Being aggrieved by the order of the Tribunal, the Revenue filed an appeal before the High Court. The Hon’ble High Court took the note of the fact that appeals for AY 2005-06 and AY 2006-07 are admitted by the High Court considering the frequent and voluminous transactions carried out with borrowed funds in shares held as “Short Term Capital Gain”. The Hon’ble court observed that in the subject assessment year, the assessee has carried out the business activity out of its own funds and the authorities have also rendered a finding of fact that the transactions are not large nor so frequent so as to hold that the assessee was a trader in shares.

The finding of fact arrived at both by the CIT(A) as well as the Tribunal for the subject assessment year that the assessee was an investor in shares out of its own funds and considering the volume and frequency of purchase / sale of shares is not a trader has not been shown to be perverse by the Revenue. In the above view, the appeal was dismissed.

1.Reopening of assessment – No tangible material before the AO for assuming the jurisdiction u/s. 147- Reopening notice was bad in law: Section 148

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

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

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

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

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

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

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

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

18. Transfer Pricing – Once comparable companies have been found functionally non comparable – then the same should be excluded – the same cannot be include merely on the basis of assessee’s inclusion in the transfer pricing study report – There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee

Commissioner of Income Tax vs. M/s. Tata Power Solar
Systems Ltd. [ Income tax Appeal no 1120 of 2014 dt : 16/12/2016 (Bombay High
Court)].

[M/s. Tata Power Solar Systems Ltd v Dy. CIT. [ ITA NO.
6657/MUM/2012;  Bench : K ; dated
15/01/2014 ; A Y: 2008-09. Mum.  ITAT ]

The Assessee is engaged in design, development and
manufacture and sale of Solar Modules and Systems. During the year, the
Assessee had reported International Transaction with its Associated Enterprises
(AE). In the Transfer Pricing Study submitted by the Assessee to the Revenue,
it had included M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. in the list
of two comparables for the purpose of arriving at Arms Length price (ALP) in
respect of its transactions entered into with its AE. However, before the Transfer
Pricing Officer (TPO) itself, the Assessee sought to withdraw the two companies
from the list of comparables. This, inter alia on the ground of
functional differences. However, the same was not permitted by the TPO and was
taken into consideration while determining the ALP. This resulted in a draft
Assessment Order based on ALP arrived at on a comparability study inclusive
of  the two companies.  The Draft Resolution Panel (DRP) on an
application made to it by the Assessee did not disturb the said inclusion  among the list of comparables to determine
the ALP as reflected in the draft Assessment Order. This was essentially on the
ground that the Assessee had itself relied upon the two companies as
comparables. Therefore, it was not permissible for the Assessee now to withdraw
the two companies from comparability analysis. 

The Tribunal allowed the Assessee’s appeal. The Tribunal
found that the ultimate aim of the transfer pricing provisions is to determine
the appropriate ALP, which can be done only by bench marking with the proper
comparables based on FAR analysis and under the prescribed methods. If in the
course of the proceedings, it is found that certain comparables do not stand
the test of functional analysis or for some reason, then the same should be
excluded and  they should not continue to
be included simply because the assessee had included the same initially. If the
cogent reasons have been given by the assessee for excluding the same, the same
should be considered. The initial onus or duty is cast upon the assessee to
carry out the selection of proper comparables based on FAR analysis and by
adopting suitable transfer pricing method and then analyse its transaction to
show the correct arm’s length result. Thereafter, it is axiomatic that the
taxing authorities / TPO, should scrutinise the assessee’s report on arm’s
length result and the entire process of arriving at the ALP, whether they are
based on transfer pricing principles and statutory provisions or not. If he
himself finds some irregularity or mistake in any of the process or the steps
undertaken, then he is bound to correct in accordance with the settled
principles and law.

If the assessee points out some mistake or any irregularity
in the arm’s length result, then it is incumbent upon the TPO to examine and
consider the same and if the assessee’s contentions are found to be correct or
tenable, then he has to accept the same. There cannot be estoppel against
correct procedure of law and principles solely on account of acquiescence or mistake
of the assessee. The TPO is required under law to analyze every comparableand
then only determine the correct ALP based on proper comparability analysis.
Thus, there is no  merit in the
contention of the Revenue that simply because the assessee has included these
two companies then the assessee is debarred from objecting to the same, if
there are strong and cogent reasons.

It was observed  that
the  two companies Indo Wind Energy Ltd.
and B.F. Utilities Ltd. are engaged in the business of generation of Wind
Energy Ltd., whereas the assessee is Tata Power Solar Systems Ltd. engaged in
the business of manufacture and sale of solar cells, photo voltaic modules and
systems which are used for solar energy. The assessee is not into generation of
energy. These two functions are 
different. The assessee before the TPO / DRP has placed the key
difference between the functions carried out by the assessee and the functions
required for generation of wind energy. These have not been rebutted either by
the TPO or by the DRP but have been rejected mainly on the ground that the
assessee has included the same initially in its transfer pricing study report.
It is also seen from the record that in the subsequent year, the TPO has
specifically issued a show cause notice for inclusion of these two companies,
however, on the assessee’s objection based on functional difference, the TPO
has excluded these two companies.

Thus, accordingly, Indo Wind Energy Ltd. and B.F. Utilities
Ltd., were to be excluded from the list of final comparables.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the Transfer Pricing Mechanism
requires comparability analysis to be done between like companies and
controlled and uncontrolled transactions.

This comparison has to be done between like
companies and requires carrying out of FAR analysis to find the same. Moreover,
the Assessee’s submission in arriving at the ALP is not final. It is for the
TPO to examine and find out the companies listed as comparables which are, in
fact comparable. The impugned order has on FAR analysis found that the two
companies are not comparable. They are in a different area i.e. wind energy
while the Assessee is in the field of solar energy. The issue raised herein is
concluded against the Revenue and in favour of the Assessee by the decision of
this Court in CIT vs. Tara Jewellers Pvt. Ltd., 381 ITR 404. In
view of the above, Appeal of the revenue was 
dismissed.

17. TDS – The liability to deduct tax at source arose – when the amount payable stood credited in the books of Assessee – Even in respect of services received earlier : There can be no estoppel against the statute

Commissioner of Income Tax vs. Underwater Services Company
(Dissolved). [ Income tax Appeal no 1240 of 2014, dt : 20/12/2016 (Bombay High
Court)].

[Underwater Services Company (Dissolved). vs. Assistance
Commissioner of Income Tax,. [ITA No. 
5828/MUM/2012;  Bench : F ; dated
30/07/2012 ;  Mum.  ITAT ]

The Assessee was engaged in providing underwater services,
such as diving, towing, salvaging, underwater marine repair and maintenance.
For the aforesaid purpose, it chartered two vessels belonging to M/s.Samsung
Maritime Ltd. (a sister concern) and claimed charter hire expenses for the year
at Rs.441.37 lakh. The same was liable for deduction of tax at source u/s.
194-I of the Act. The recipient/payee of the hire charges i.e. M/s. Samsung
Maritime Ltd. had applied to the department for waiver of tax deducted at
source u/s. 197 of the Act. The Income Tax Officer (TDS) by a communication
dated 7th May, 2008 granted a certificate u/s. 197(1) of the Act and
directed the Assessee that charter hire paid or credited to M/s.Samsung
Maritime Ltd. would be after deduction of tax at the rate of 2.02% (net) instead of 10%.

During the assessment proceedings, the assessee  urgedthat the amounts on account of charter
hire charges were paid and also credited to the account of M/s.Samsung Maritime
Ltd. after 7th May, 2008. Thus the deduction of tax was at the
concessional rate of 2.02%. Without prejudice it was pointed that the amount
which could be disallowed at the highest was Rs.86.40 lakh on account of
services received prior to 7th May, 2008. The AO passed the order
and disallowed the amount of Rs.86.40 lakh which according to him was an amount
payable prior to date of certificate dated 7th May, 2008. This on
the ground that the certificate was operative only from the date of issue i.e.
7th May, 2008 and coupled with his undertaking that the assessee has
itself offered the disallowance of Rs.86.40 lakh. 

Being aggrieved, the Assessee had filed an appeal before the
CIT (A). The CIT (A) dismissed the assessee’s appeal. It upheld the
disallowance of Rs.86.46 lakhs for non deduction of tax at the rate of 10% as
done by the AO.

Being aggrieved, the Assessee carried the issue in appeal to
the Tribunal. The Tribunal held that amount payable for month of April 2008 in
respect of two vessels taken on hire from M/s. Samsung Maritime Ltd. stood
credited in the books of Assessee only after 7th May, 2008 and
admittedly paid thereafter. In the above view the Tribunal  held that the liability to deduct tax at
source only arose post 7th May, 2008 even in respect of services
received earlier. Consequently, the tax deducted on such credit/payment would
be on lower rate of 2.02% (net) as allowed by the certificate u/s. 197(1) of
the Act. The Tribunal also relied upon its earlier order for the Assessment
Year 2007-08 which accepted the Assessee’s contention, that is, as date of
credit and date of payment were as in the present facts both after the issuance
of certificate u/s. 197(1) of the Act the tax will be deducted at lower rate.

The grievance of the Revenue before High Court is two fold,
one that the Assessee has itself accepted the liability to deduct tax at the
rate of 10% prior to 7th May, 2008 and offered to disallow
expenditure of Rs.86.40 lakh. Therefore, it is not now open to the Assessee to
urge before the Appellate Authorities that the amount of Rs.86.40 lakh cannot
be disallowed as now contended. Secondly, it is submitted that entries are made
in the books by the Assessee only to circumvent the provisions of Act coupled
with the fact that the payee M/s. Samsung Maritime Ltd. and Assessee belong to
same group. Therefore, the Assessee’s claim made before and allowed by the
Tribunal is incorrect. 

The High Court noted that the Tribunal  on examination of the ledger account of the
Assessee noted that the date of credit for the charter hire charges payable to
its sister company M/s.Samsung Maritime Ltd. was credited only after 7th
May, 2008. The payment was also made by the Assessee after crediting of the
amount in its books of account. Moreover, the ledger account was produced
before the Tribunal as the same was produced even before the AO. Moreover,
there can be no estoppel against the statute. Therefore, even if it is
assumed that the Assessee had suggested that Rs.86.40 lakh be disallowed for
not deducting tax at 10% then the same would be contrary to the deduction of
tax to be done u/s. 197 of the Act. The Authorities under the Act were obliged
to apply the law to the facts existing and grant relief to the Assessee
wherever available. In view of above, the view taken by the Tribunal in the
impugned order on the available facts is a possible view. Appeal of revenue was
dismissed.

16. Business set up – when the business is established and is ready to commence the business – there may be an interval between the setting up of the business and the commencement – Section 3 of the Act

CIT vs. M/s. Conde Nast (India) Pvt. Ltd. [ Income tax
Appeal no 1083 of 2014, dt : 16/12/2016 (Bombay High Court)].

[M/s. Conde Nast (India) Pvt. Ltd. vs. DCIT. [ITA
No.1819/MUM/2013; Bench: SMC; dated: 04/09/2013;  A Y: 2007- 2008. MUM.  ITAT ]

The assessee was engaged in the business of printing,
publishing, circulating, marketing and distributing publications. During the
assessment proceeding, the AO noticed that the assessee had claimed that its
business had been set up w.e.f. 20-11-2006 and expenditure incurred after
20-11-2006 had been claimed as revenue expenditure at Rs.3,56,33,431/-.The
assessee was asked to substantiate its claim with necessary evidence. After
considering various details, the AO found that the business of the assessee has
not been set up as the assessee has appointed only executives along with
editors. No issue of the magazine is published during the year. The AO found
that the magazines have been published in FY: 2007-08 relating to AY: 2008-09.
Accordingly, he held that the business was not set up in the year under
consideration. Hence, he disallowed the claim of expenditure.

The assessee preferred appeal before the CIT(A). It was
submitted that the editor, who is at the helm of affairs in the editorial
department in publishing organisation, decides what shall and what shall not go
into his publication on the basis of what he conceives to be the publications
mission and philosophy. Thereafter the functions of the editorial as well as
the activities taken by the assessee during the year under consideration were
filed and explained  before him. The Ld
CIT(A) noted that the first issue of the magazine, namely, VOGUE, published by
the assessee, came on October, 2007 and accordingly the business was set up
only on October, 2007 and not during the year under consideration. Accordingly,
the  CIT(A) confirmed the order of the
AO.

The Tribunal observed that there is a well-marked distinction
between a business being set up and the commencement of the business. It is the
setting up of the business that has to be considered and not the commencement.
It is only when the business is set up that the previous year for that business
commences and expenses incurred prior to the setting up are not a permissible
deduction. It has further observed  that
when the business is established and is ready to commence the business, then it
can be said that the business is set up. Before the assessee is ready to
commence business, the business is not set up. There may be an interval between
the setting up of the business and the commencement thereof and all expenses
incurred during the interval would be permissible deductions.

The Tribunal after going through the chart and  various details along with supporting
evidence, observed that  it is amply
proved that major activity has started during the year under consideration.
Some orders have been placed, photographer is engaged, some technical staff
were also employed, business premises has been taken from where all these
activities are conducted. Even trial production was also started. From all
these facts, it is seen that the assessee has started its activity for
publishing its magazines. The question is not generating of revenue, the
question comes for consideration as to whether any activity has been started or
not. The Tribunal relied on the decision 
of HSBC Securities India Holdings Pvt. Ltd. dated 20th
November, 2001 (ITA No.3181/M/1999). The Tribunal held  that the business of the assessee was set up,
therefore, the expenditure incurred by the assessee are allowable. However,
since the nature of expenditure was not examined therefore, to this limited
purpose the matter was remanded back to the file of the AO to examine the
genuineness of the expenditure and then allow them as per provision of law. In the
result, appeal of the assessee was allowed.

On appeal by the revenue before the High Court
it was observed that the impugned order of the Tribunal had relied on an order
of its Coordinate Bench in HSBC Securities India Holdings Pvt. Ltd.,
decided on 20th November, 2001 (ITA No.3181/M/1999). The impugned
order finds that the test laid down by the Tribunal in HSBC Securities (India)
Holdings (P) Ltd., to determine whether or not the Assessee’s business has been
set up, were satisfied on the present facts. It was found  from the record of the High Court that the
order of the Tribunal in HSBC Securities India Holdings Pvt. Ltd., (supra)
has been accepted by the Revenue as the memo of appeal does not indicate any
challenge by the Revenue to the above order. It is also not disputed in the
memo of appeal that the order in HSBC Securities (India) Holdings (P) Ltd., (supra)
applies to the present facts. Thus, no grievance is made in respect of the
impugned order following the order of the Coordinate Bench in HSBC Securities
(India) Holdings (P) Ltd., (supra). Thus the Court held that the
question as framed did not give rise to any substantial question of law.
Accordingly, Appeal of revenue was dismissed.

The Commissioner of Income Tax I, Pune vs. Gera Developments Private Limited, Pune. [INCOME TAX APPEAL NO. 2171 OF 2013 dt 29/2/2016 Bombay High court.]

fiogf49gjkf0d
[Gera Developments Private Limited, Pune vs. CIT -I, Pune . ITA No. 33/PN/2012 ; Bench : A ; dated 08/03/2013 ; A Y: 2007- 2008. Pune ITAT ]

Revision – Erroneous and Prejudicial to the Revenue – Application of mind is important – No discussion in asst order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind : Section 263

The assessee filed its return of income declaring total income of Rs.19.97 crore. Amongst the issues which arose for consideration during the assessment proceedings were:

i) whether the consideration of Rs.41 Crore received on transfer of development right is to be taxed in the subject assessment year or not;

ii) whether an amount of Rs.68.24 lakh should be allowed as warranty expenses.

The Assessing Officer on issue of transfer of development right held that the amount of Rs. 41 crore received by the assessee was subject to performance of certain obligation relating to environmental clearance and in the absence of performing the obligation, the amounts had to be returned. On consideration of facts, the Assessing Officer held that an amount of Rs. 5.86 crore could alone be taxed in the subject assessment year and the balance amount of Rs. 35.14 crore were considered as deposit. So far as the warranty expenses are concerned, the Assessing Officer called for various details and justification for claiming warranty expenses. The assessee to this by filing a reply and on satisfaction, the Assessing Officer allowed the warranty expenses as claimed in the assessment order.

The CIT in exercise of his power u/s. 263 of the Act, held that the conclusion of the Assessing Officer on the above 2 issues namely transfer of development right and warranty expenses is erroneous and prejudicial to the interest of the Revenue. Moreover, the Commissioner also held that set off of short term capital loss without taking into account Section 94 of the Act was also erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to complete the assessment proceedings in accordance with law as discussed in his order.

Being aggrieved, the assessee appealed to ITAT . The grievance of the assessee was that the asst order of the Assessing Officer was not erroneous nor prejudicial to the interest of the Revenue on the following three issues.

(a) Consideration received as transfer of Development Right.

(b) Warranty expenses and

(c) Set off of short term capital loss.

So far as issue (a) above is concerned the Assessment Order, on consideration of all facts, records the conclusion that out of an amount of Rs.41 crore received, an amount of Rs.35.14 crore was in the nature of deposit as the receipt was subject to environmental clearance. Only Rs. 5.86 crore could be treated as income for the subject assessment year. In view of above, the ITAT held that asst. order cannot be treated as erroneous. So far as the issue (b) above with regard to warranty expenses is concerned, the ITAT held that the questions were posed during the assessment proceedings to the assessee. The same were responded to by the assessee justifying the warranty expenses claimed. On satisfaction, the Assessing Officer accepted the claim of expenditure made by assessee. Thus a view was taken that it cannot be said to erroneous.

So far as issue (c) above with regard to the set off of the short term capital loss is concerned, the ITAT upheld the order dated 31/10/2011 of the Commissioner of Income Tax holding the same is erroneous and prejudicial to the Revenue. The Revenue being aggrieved by the order of the ITAT insofar as it set aside the order dated 31/10/2011 of the Commissioner of Income Tax i.e. on issues (a) and (b) above viz. taxability of consideration received on transfer of development right and allowing of warranty expenses.

The Hon’ble Court observed with regard to issue (a) i.e. taxability of the transfer of development right, that the ITAT records findings of Assessing Officer in detail from which it is evident that the Assessing Officer applied his mind to the above claim and on the basis of the facts before him, came to the conclusion that an amount of Rs.5.86 crore out of Rs. 41 crore received could alone be subjected to the tax as income during the subject assessment year. The balance amount Rs.35.14 crore has to be treated as deposit as the same is subject to being refunded in the absence of the environmental clearance. Thus, the Assessing Officer has taken a view/formed an opinion on the facts before him and such a opinion cannot be said to be an erroneousas it does not proceed on the incorrect assumption of facts or law and the view taken is a possible view. Therefore, as held by the Apex Court in Malabar Industrial Co. Ltd vs. Commissioner of Income Tax, 243 ITR page 83 where two views are possible and the Income Tax Officer has taken one view with which the Commissioner of the Income Tax does not agree, cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is itself unsustainable in law.

So far as issue (b) i.e. warranty expenses claimed by the assessee is concerned, the court observed that the ITAT has recorded the fact that a specific query with regard to the same was made by the Assessing Officer during the assessment proceedings. This query was responded to by the assessee justifying the warranty expenses. The Assessing Officer being satisfied with regard to the justification offered, allowed the claim of warranty expenses as made by the assessee. It was thus clear that the Assessing Officer had considered the issue by raising questions during the assessment proceedings. The mere fact that it does not fall for discussion in the assessment order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind. It is clear that if the Assessing Officer is satisfied with the response of the assessee on the issue and drops the likely addition, it cannot be said to be non application of mind to the issue arising before the Assessing Officer. In fact this issue was a subject matter of the consideration by the Court in the Commissioner of Income Tax 8 V/s. M/s. Fine Jewellery (India) Ltd., Income Tax Appeal No. 296 of 2013 dt 03rd February, 2015. Thus to hold that if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it has not been dealt with in the assessment order would not lead to a conclusion that the Assessing Officer has not applied his mind to the issues.

Thus on the issues (a) and (b) viz. consideration received on transfer of development right and warranty expenses are concerned, the impugned order of the ITAT has applied the principle of law laid down in Malabar Industrial Co. Ltd (supra) and M/s. Fine Jewellery (India) Ltd. (supra). Thus, appeal is dismissed.

Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

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[M/s.Credit Lyonnais (through their successors : Calyon Bank) vs. The Asstt. Director of Income-tax (IT ) – 1(2) Mumbai. ITA no. 9596/Mum/2004 & 214/ Mum/2005: Asst.Year 2001-2002]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.

The Commissioner of Income-Tax-3 vs. M/s. Parrys (Eastern) Pvt Ltd [Income Tax Appeal No. 2220 OF 2013; dt 18/2/2016 (Bombay High court )]

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(The IT O 3(2)(4), vs. Parrys (Eastern) P.Ltd. I.T.A. No. 26/Mum/2011; Bench: C ; A Y: 2005-06 ; dt : 13.2.2013)

Capital gain -Deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 of the Act.

The assessee had disclosed an amount of Rs.7.12 crore as deemed short term capital gain u/s. 50 of the Act. This deemed short term capital gain arose on account of the sale of depreciable assets. This deemed short term capital gain was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer passed an order u /s 143(3) of the Act holding that in view of section 74 of the Act, such set off on short term capital gain against the long term capital gain is not permitted. Thus, he disallowed the set off of brought forward long term capital loss and unabsorbed depreciation against the deemed short term capital.

In appeal, the CIT[A] allowed the assessee’s appeal holding that the issue stand concluded by the decision of High Court in the case of CIT vs. ACE Builders(P) Ltd reported in 281 ITR 210(Bom).

On further appeal by the Revenue, the Tribunal by the impugned order upheld the order passed by the CIT(A) by placing reliance upon the decision of this Court in the case of ACE Builders(P) Ltd(supra) and by following its own order in the case of Komac Investments and Finance Pvt Ltd vs. Income Tax Officer 132 ITD 290. On further appeal the Revenue contended that in view of the clear mandate of Section 74 of the Act, no set off of the carry forward long term capital loss against the deemed short term capital gain u/s. 50 of the Act is permissible..

The Hon. High Court, observed that the issue stands concluded by the decision of this Court in ACE Builders(P) Ltd (supra) in favour of the Assessee. The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the assessee was entitled to claim set off as the amount of Rs.7.12 Crore arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. It was also observed that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as no information was provided as to whether any appeal being filed from that order. Therefore, no substantial questions of law arise for consideration , Appeal was dismissed.

Exemptions – On sale of Agricultural land – Sections 54 B & 54 F:

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Commissioner of Income Tax vs. Narsing Gopal Patil INCOME TAX APPEAL NO. 2319 of 2013 dated: 1st MAR CH, 2016. (Bom HC)

(Narsing Gopal Patil, Pune vs. Asst CIT ITA No. ITA No.1544/PN/2012 & ITA 1815/PN/2012 (A Y: 2008-09) dt 3rd, May 2013).

The assessee for the subject assessment year, sold land which according to him had been used as agricultural land. The sale consideration was partly invested in the purchase of agricultural land and partly utilised for construction of the two buildings claiming it to be a residential house. The assessee claimed the benefit of exemption as available u/s. 54B of the Act to the extent the sale proceeds were utilised for purchase of the agricultural land and section 54F to the extent that the sale proceeds were utilised to construct the residential house. The Assessing Officer denied both the claims. Regarding the claim for the benefit of section 54B was concerned, he held that the assessee had not been able to prove that the land sold had been used for Agricultural purposes in the two preceding years prior to its sale.

The CIT(A) held that the assessee was entitled to the benefit of section 54B in as much as it had led evidence before the Assessing Officer, that the user of the land sold was for agricultural purposes by furnishing 7/12 extract and his return of income filed for the Assessment years 2002 – 03 to 2007 – 08 disclosing agricultural income. The other claim of the assessee for exemption u/s. 54F was denied by the CIT(A).

The Dept. challenged the CIT (A) order to the extent it allowed the claim for benefit of section 54B, and assessee as regard section 54 F, before the Tribunal. The Tribunal upheld the order of the CIT(A) in granting the benefit of section 54B to the assessee, on the ground that the assessee had produced evidence, to show that the land which was sold, was in fact used for agricultural purpose during the period of two years prior to the date of its transfer. This evidence was in the form of 7/12 extract as per land revenue record and also return of income filed for the assessment year 2005 – 2006 to 2007- 2008 in which the assessee had declared its agricultural income.

Similarly, the Tribunal upheld the claim of section 54 F by holding that, so long as the assessee’s claim of exemption was limited to the investment in the construction of the residential portion of the building, the same was held to be allowable.

The Hon’ble High Court observed that the finding recorded by the lower authorities was a finding of fact, that the subject land was being used for agricultural purpose in the two years preceding the date of the sale. This finding of fact was rendered on the basis of 7/12 extract led as evidence before the Assessing Officer, which indicates the manner in which the land is being used. In fact, as correctly observed by the Tribunal, there is a presumption of the correctness of entries in the land revenue record in terms of section 157 of the Maharashtra Land Revenue Code, 1966. This presumption is not an irrebuttable presumption and it will be open for the Assessing Officer to lead evidence to rebut the presumption. However, no such evidence was brought on record by the Revenue to rebut the presumption. Moreover, the assessee has also placed before the authorities its return of income filed for the assessment year 2005 – 2006 to 2007- 2008, wherein he had inter alia declared agricultural income. In view of the fact that the revenue has not been able to establish that the evidence led by the assessee is unreliable by leading any contrary evidence, there is no reason to discard the evidence produced by the assessee. Thus, there is a concurrent finding of fact by CIT(A) as well as the Tribunal that the land has been used for agricultural purpose. Thus, no substantial question of law arises. However, the Court admitted the question relating to section 54 F claim i.e allowing exemption under section 54F, when the investment made by the assessee is in a ‘commercial cum housing complex’.

Section 14A – Shares held as stock in trade – Disallowance cannot be made :

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Difference in brokerage income shown in service tax return and in the Profit and Loss account – Excess brokerage on account of method of accounting:

Commissioner of Income Tax 4 vs. Credit Suisse First Boston (India) Securities Pvt. Ltd. INCOME TAX APPEAL NO.2387 of 2013 dt : 21ST MAR CH, 2016 (Bom HC) (Affirmed Mumbai ITAT decision on the above issues DCIT, CIT – 4(1) vs. M/s Credit Suisse First Boston (India) Securities Ltd. ITA no : 7354/Mum/2004, AY : 2001- 02 dt: 06/03/ 2013)

The assessee had been reflecting in the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage was been shown on actual basis on the basis of constant method adopted by the assessee. The AO made an addition on this account . The CIT (A) and Tribunal recorded a finding that sometime the assessee was required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee was also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This was a minor difference, which had been reconciled by the assessee. In the above view, the Hon’ble Court held that question as formulated does not give rise to any substantial question of law.

As regards section 14 A, it was observed that the Assessing Officer had disallowed the expenditure, on the ground that the Assesee had earned dividend income in respect of the shares held by the assessee. There is no dispute between the parties that the shares held by the Assessee are stock in trade, as the assessee is a trader in shares and had in its books classified it under the head ‘Stock in Trade’. The Revenue conceeded that the issue stood concluded against the Revenue and in favour of the Assessee, by the decisions of this Court in HDFC Bank Ltd. vs. The Deputy Commissioner of Income Tax2(3) (Writ Petition No.1753 of 2016 rendered on 25th February, 2016). In view of the above, the Hon’ble Court held that question as formulated did not give rise to any substantial question of law.

Section 48 – Capital gain – Full value of consideration – computation of capital gain only refers to full value of consideration received – no occasion to substitute the same :

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Commissioner of Income Tax Central IV vs. M/s. B. Arunkumar & Co. Income Tax Appeal NO.2337 OF 2013 dt 8/3/2016 . (Bom HC)

(Affirmed Mumbai ITAT decision in ACIT Cir.16(3) vs. M/s. B. Arunkumar & Co., ITA No.8272/M/11, AY : 2008- 09, Bench B, dt: 24.05.2013).

The assessee was a firm belonging to one Harshad Mehta Group. The assessee firm owned 19% shares in a company namely M/s. Inter Gold (India) Pvt. Ltd. Shares in the aforesaid company were acquired by the assessee-firm during the years 2002 and 2003 at different rates and these shares were not tradable in the open market. The balance share holding in M/s. Inter Gold was held by Sh. Arun Kumar Mehta family members (38%) and by foreign companies (41%). The assessee sold its 19% shareholdings in M/s. Inter Gold (India) Pvt. Ltd. to one M/s. Rosy Blue (I) (P) Ltd. and returned a capital loss on account of indexation. The consideration for the sale of shares in two tranches was Rs.750 per share and Rs.936 per share respectively.

The Assessing Officer did not accept the capital loss as claimed and sought to substitute the consideration received by the assessee at Rs.936 and Rs.750 per share with the value of Rs.1,225 per share as consideration received on the sale of its shares to M/s. Rosy Blue India Pvt. Ltd. This substituted value being the breakup value of the shares, was taken as its fair market value (FMV). In the result, the Assessing officer worked out the long term capital gains at Rs.4.57 crore instead of loss at Rs.3.65 crore as claimed. Being aggrieved, the assessee carried the issue in appeal to the CIT (Appeals). The CIT (Appeals) allowed the appeal of the assessee. He held that in the absence of any provision in the Act to replace the consideration received on sale of shares, by adopting the market value is not permissible.

In contrast, attention was drawn to section 50C, which provides for substitution of the consideration received on sale of land and buildings by the stamp duty value of land and buildings (immovable property). He further held, that the Assessing Officer cannot substitute the consideration shown as received on sale of shares by the assessee in the absence of evidence, to indicate that the consideration disclosed on sale of shares was not the complete consideration received and/or accrued to the assessee. Being aggrieved, the Revenue carried this issue in appeal to the Tribunal. The Tribunal reiterated the findings of fact rendered by the Commissioner of Income Tax (Appeals) that the transfer of the shares at the declared consideration was not done by the assessee with the object of tax avoidance or reducing its tax liability. The Tribunal, in the impugned order, placed reliance upon the decision of the Apex Court in CIT vs. Gillaners Arbuthnot and Co. (87 ITR 407) and CIT vs. George Henderson & Co. Ltd. (66 ITR 622), to conclude that, where a transfer of a capital assets takes place by sale on receipt of a price, then the consideration fixed/bargained for by the parties should be accepted for the purpose of computing capital gains. It cannot be replaced by the market value or a notional value. The full value of consideration is the money received to transfer the assets. Accordingly, the Tribunal dismissed the Revenue’s Appeal and upheld the order of the CIT (Appeals).

The Revenue before the Hon’ble High Court, contented that the decisions of the Apex Court relied upon in the impugned order were rendered under Income-tax Act, 1922 and therefore, would not apply while considering the Act.

The Hon’ble court held that, it was not the case of the revenue that the amount disclosed by the respondent assessee, was less than what has been received by them or what had accrued on sale of its shares. The revenue has not in any manner shown that the consideration disclosed by the assessee to the revenue, is not the correct consideration received by them and that the same should be replaced. Moreover, wherever the Parliament thought it fit ,that the consideration on a transfer of a capital asset has to be ascertained on the basis of market value of the asset transferred, specific provision has been made in the Act. To illustrate section 50C provides for stamp value duty in case of transfer of land or buildings. Similarly, section 45(2) and 45(4) provide that in cases of conversion of the investment into stock in trade or transfer of shares on dissolution of a firm to its partners respectively has to be at market value. The consideration disclosed on sale of shares by the assessee was infact the only consideration received/ accrued to it, no occasion to substitute the same can arise. Accordingly, the appeal of Revenue was dismissed.

Export profit: Deduction u/s.80HHC of Income-tax Act: A.Ys. 1995-96, 1997-98, 1998-99 and 2000-01: Exclusion of mineral oil: Calcined petroleum coke derived from crude petroleum is not mineral oil: Assessee is entitled to deduction.

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[Goa Carbon Ltd. v. CIT, 332 ITR 209 (Bom.); 239 CTR 354 (Bom.)

The assessee was engaged in manufacture and export of calcined petroleum coke. For the relevant years the assessee’s claim for deduction u/s.80HHC of the Income-tax Act was allowed by the Assessing Officer. However, the Commissioner withdrew the allowance by exercising the powers u/s.263 of the Act. The Tribunal upheld the decision of the Commissioner holding that the calcined petroleum coke was a form of mineral oil and in view of Ss.2(b) of section 80HHC, the provision for deduction u/s.80HHC(1) was not applicable to the calcined petroleum coke manufactured by the assessee.

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

“(i) The expression ‘mineral oil’ is not defined in the Act. The expression ‘minerals’ is used primarily for substances found on the earth or below the land and does not denote a product manufactured from the minerals found on the land or below the land. The word ‘oil’ ordinarily means a substance which is in liquid form and does not include a rock or solid substance or crystallised substance. For a substance to be regarded as mineral oil, it must ordinarily be a substance in liquid form and derived or extracted from the earth or land, from the surface of the earth or from below the earth.

(ii) Although calcined petroleum coke is a product which is derived from crude oil, no trader in the market would call the calcined petroleum coke a crude oil or a mineral oil. In common parlance, nobody would mistake calcined petroleum coke for a crude oil. Though the initial raw material used for manufacture of the calcined petroleum coke is petroleum crude oil extracted from the earth, the product which is manufactured is an entirely different product commercially known and regarded as different from petroleum crude and which is different from that derived by mere distillation of the petroleum crude which is a mineral oil. Calcined petroleum coke cannot be regarded as a mineral only because the original raw material is mineral oil.

(iii) The calcined petroleum coke was not a mineral oil within the meaning of section 80HHC.”

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