Category: Tribunal News: Part A-Domestic Taxation

Hewlett-Packard Globalsoft Pvt. Ltd. vs. DCIT.

A.Y. : 2008-2009. Date of Order : 25.3.2009

Income-tax Act, 1961 — Section 139A(5B) and S. 272B —
Whether Press Release dated September 25, 2007 and February 12, 2008 issued by
CBDT brings down the rigours of S. 139A(5B) —Held : Yes. Whether penalty u/s.
272B cannot be levied in a case where an assessee has submitted Permanent
Account Number of such number of deductees as satisfies the threshold limit
mentioned in the Press Release issued by CBDT —Held : Yes.

 

Facts :

The Assessing Officer (AO) found that the assessee had
filed its quarterly statement in Form No. 24Q for the 3rd quarter of financial
year 2007-08 wherein it had not furnished Permanent Account Number (PAN) of
2154 deductees out of the total of 29,733 deductees. He also found that
details furnished for 38 deductees were not in accordance with the provisions
of S. 139A(5B) of the Act. In response to the show-cause notice issued by the
AO the assessee submitted that the number of deductees whose PAN had been
furnished by the assessee exceeded the threshold limit of 90% stated in the
press release issued by the CBDT and therefore penalty u/s. 272B is not
leviable. However, the AO was of the view that the compliance to the extent of
threshold limit stated in press release issued by the CBDT is only for filing
quarterly TDS statements and that such compliance does not debar an AO from
initiating penal action. He, accordingly, levied penalty u/s. 272B. The CIT(A)
confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal upon going through the Press Release dated
September 25, 2007 and also subsequent Press Release dated February 12, 2008,
held that it is evident from paras 2 and 3 of the Press Release that the CBDT
has prescribed a threshold limit for compliance i.e., to provide
information of PAN data by virtue of S. 139A(5B)(iv) of the Act. It held that
the sole intention of the Press Release is to bring down the rigour of the
provision of S. 139A(5B) and 272B keeping in view the laborious and cumbersome
task of compliance.

Since the assessee had furnished PAN data to the extent of
93% of the total deductees there was compliance in furnishing PAN data in
accordance with the threshold limit of 90% prescribed in press release by the
CBDT, the penal provisions were held to be not attracted. Accordingly, the
Tribunal deleted the penalty levied u/s. 272B of the Act.

Kanbay Software India Pvt. Ltd. vs. DCIT

A.Y. : 2002-2003. Date of Order : 28.4.2009

Income-tax Act, 1961 — Section 271(1)(c) — Concealment
penalty — Impact of the decision of the Apex Court in Dharmendra Textile
Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for
penalty can be invoked only when the conditions for imposition of penalty
under Section are satisfied — Held : Yes. Whether once the mandate of S.
271(1)(c), read with Explanations thereto are satisfied, there is no further
onus on the AO to establish mens rea —Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textile Processors and Ors. is
confined to treating the willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held, Yes.

 

Facts :

The assessee company was engaged in the business of
development and export of computer software. The assessee had two units
eligible for deduction u/s. 10A. For assessment year 2002-03, in the first
unit the assessee had made profits, while in the second unit, the assessee
incurred losses. The assessee filed a revised return of income for AY 2002-03,
wherein it claimed carry forward of loss and unabsorbed depreciation of second
unit and claimed a deduction u/s. 10A on the profits of first unit without
setting off loss and depreciation of the second unit. Appropriate disclosure
was made in the return of income. The Assessing Officer (AO) rejected this
claim and the assessee accepted the decision of the AO. The AO initiated
proceedings for furnishing inaccurate particulars of income and levied penalty
u/s. 271(1)(c) which action of the AO was confirmed by CIT(A). Aggrieved,
assessee preferred an appeal to the Tribunal.

Held :

The Tribunal deleted the penalty and held as under :

(a) On first principles, penalty u/s. 271(1)(c) is not
simply a consequence of an addition being made to the income of the
assessee. Unless it is established that there is concealment of income or
furnishing of inaccurate particulars or it is established that on the facts
of the case, concealment of income can be deemed in accordance with the
provisions of law, the penalty provisions cannot be invoked at all,
irrespective of whether penalty is a civil liability or a criminal
liability.

(b) The judgment of the Supreme Court (SC) in UOI vs.
Dharmendra Textile Processors (306 ITR 277) has to be understood in the
correct perspective. Penalty u/s. 271(1)(c) has been held to be a ‘civil
liability’ in contradistinction to prosecution u/s. 276C. It is wrong to
infer that because the liability is a ‘civil liability’ it ceases to be
penal in character. There is no contradistinction in a liability being a
civil liability and the same liability being a penal liability as well,
though a civil liability cannot certainly be a criminal liability as well.

(c) The only impact of a liability being a civil
liability is that mens rea or the intentions of the assessee need not
be proved. Unless contravention of law takes place and unless the conditions
for imposition of penalty u/s. 271(1)(c) are satisfied, even a civil
liability cannot be invoked. The action which triggers the civil liability
is the lapse on the part of the assessee.

(d) An addition made during the course of assessment
proceedings, by itself, cannot be enough to initiate, leave aside conclude,
penalty proceedings u/s. 271(1)(c).

(e) The proposition that mens rea need not be
proved before penalty u/s. 271(1)(c) can be imposed was not laid down by SC
in Dharmendra Textile for the first time. Even in the case of K. P.
Madhusudan (251 ITR 99), a three-judge Bench of SC had so held.

(f) Dharmendra Textiles is not an authority for the
proposition that penalty is an automatic consequence of an addition being
made to the income of the taxpayer for the reason that whether it is a civil
liability or a criminal liability, penalty can only come into play when
conditions are satisfied. All that Explanation 1 to S. 271(1)(c) is to shift
the onus of proof from AO to the assessee; instead of AO being under an
obligation to establish the mala fides of the assessee, the onus is
now on the assessee to establish his innocence and righteous conduct.

(g) The observations in Dharmendra Textile to the effect
that penalty is to provide a remedy for loss of Revenue cannot be construed
to mean that penalty can be imposed as an automatic consequence for addition
to returned income, given the scheme of S. 271(1)(c).

(h) An assessee’s statutory obligation u/s. 139(1) is to
give correct and complete information with the return of income. If this is
complied with, then there is no contravention which can attract even a civil
liability. The fact that additions and disallowances are made by the AO does
not mean that there is a breach of the obligation. The proposition that just
because penalty u/s. 271(1)(c) is a civil liability, it must mean that
penalty can automatically be levied on the basis of any addition to income
is not correct.

The AO observed that the assessee has earned an amount of
Rs.1,31,39,526 on account of trading in shares and also earned brokerage of
Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of
share trading business of the assessee is deemed to be speculative and as per
Explanation to S. 28, speculation business should be segregated from other
business. Therefore, he allocated the expenditure incurred to speculative
business and other business. He, accordingly, arrived at a speculation loss of
Rs.49,66,658.

The CIT(A) deleted the allocation of expenditure made by the
AO and allowed this ground.

The Revenue preferred an appeal to the Tribunal.

The CIT(A) has correctly held that considering the
transactions as speculative will come only when a particular transaction is
considered as speculative in nature u/s.43(5). So long as the assessee deals in
delivery-based transactions, Explanation to S. 28 does not come into operation
as there are no speculative transactions u/s.43(5). The issue can only be
considered with reference to Explanation to S. 73. That portion of the Section
will come into play after considering the income under the head ‘Income from
Business’ as also income under other heads. The allocation of expenditure and
segregation of business will come into picture only when the assessee indulges
in speculative nature of transactions. The order of the CIT(A) was held to be
correct both on facts as well as on law.

The assessee employer took residential premises on lease and
provided them to its employees. It recovered from its employees standard rent
for the accommodation so provided. Lease rent paid by the assessee was greater
than amount recovered by it from its employees. In accordance with the ratio of
decisions of several High Courts including the jurisdictional High Court, the
difference between the amount of rent paid by the employer and the amount of
standard rent charged from the employee was not regarded as a perquisite.
Subsequently, the Finance Act, 2007 inserted Explanation 1 to S. 17(2)(ii) with
retrospective effect from 1-4-2002. As a result of the retrospective amendment
the employee became chargeable to tax on perquisite value of the accommodation
where the rent paid by the assessee was greater than the rent recovered from the
employee.

The AO held that the assessee has short-deducted income-tax
at source from salaries paid by it to its employees and consequently the AO held
the assessee to be an assessee in default and demanded the amount of income-tax
short-deducted along with interest u/s.201(1A). The CIT(A) upheld the action of
the AO.

The assessee preferred an appeal to the Tribunal.

The Tribunal noted that :

(a) at the relevant time, when the TDS was to be effected
by the assessee-bank, there was no such provision on the statute book and the
law was amended at a later date with retrospective effect from 1-4-2002.

(b) the issue under consideration is covered in favour of
the assessee with the decision of the Nagpur Bench of the Tribunal in the
group cases of Canara Bank where it has been held that as far as the
assessee-employer is concerned, it is not hit by the retrospective insertion
of Explanation 1 to S. 17(2) thereof in the absence of any such extension of
retrospective effect either to S. 192 or S. 201.

The Tribunal, agreeing with the ratio of the Nagpur Bench
division decided the issue in favour of the assessee.

The assessee-was registered under the provisions of Andhra
Pradesh (Telangana Area) Public Societies Registration Act in 1982. It was
established for promotion of trade and commerce and some other charitable
objects. It was granted registration u/s.12A and was also granted recognition
u/s.80G.

It’s application dated 8-3-2008 for renewal of recognition
u/s.80G was rejected by DIT on the ground that the Finance Act, 2008 has w.e.f.
1-4-2009 amended the definition of the term ‘charitable purpose’ by adding a
proviso to S. 2(15), which specifically lays down that advancement of any other
objects of general public utility shall not be ‘charitable purpose’ if it
involves carrying on of any activity in the nature of trade, commerce or
business for a cess or fee or any other consideration, irrespective of the
nature of use of application, or retention, of the income from such activity.

The assesee preferred an appeal to the Tribunal.

The Tribunal noted that :

(a) there was no violation of S. 80G(5) by the assessee;

(b) the decision of the Tribunal, relied upon by the D.R.,
in Andhra Pradesh Federation of Textile Association (ITA No. 88/Hyd./08, dated
30-1-2009) is not applicable to the facts of this case, as in that case, it
was found that the element of charity in the activities of the assessee was
absent, and held that the association could not be considered as a charitable
association within the meaning of S. 2(15) of the Act;

(c) the issue is covered by the decision of the Tribunal in
DDIT v. Indian Electrical and Electronics Manufacturers Association, (2009) 31
SOT 346 (Mum.) where it has been held that the proviso to S. 2(15) is not
clarificatory in nature and would not apply retrospectively;

(d) Legislature has specified the date from which proviso
to S. 2(15) is applicable;

(e) the provisions of S. 80G allowing certain deductions to
the donors apply to specific act of donation made on particular date.

Held that, the provisions of proviso to S. 2(15) shall not
apply to donations received by the assessee up to 31-3-2009. In the absence of
any violation of provisions of S. 80G(5), the assessee is entitled for approval
u/s. 80G in respect of donations received up till 31-3-2009. The Tribunal
directed the DDIT accordingly and allowed the appeal of the assessee.

The objects of the assessee company inter alia included
production of feature films, TV serials, video films and documentary films, etc.
In the course of survey action it was found that assessee had made payments to
various film and T.V. serial producers and directors under different agreements.
The AO, on examining the agreements entered into, came to the conclusion that
the assessee has incurred expenditure for production of films as a whole. After
the film is produced, it acquires the entire right of the film concerned,
including the intellectual property right as well as complete ownership of
distribution and exhibition rights of the film and serial.

He rejected the arguments of the assessee that

(a) it has merely financed the film and has retained
control over negative rights of the completed film as assurance of realisation
of money from the producer;

(b) control over distribution of the film has been taken to
ensure best price available can be recovered from the distribution of the
film;

(c) the producer is in full command of making the film and
not the assessee;

(d) the assessee has neither produced the film, nor has it
got it produced;

(e) the producers/directors with whom agreements are
entered into and to whom advances are made are not
contractors/sub-contractors. For all these reasons the assessee contended that
the provisions of S. 194C are not attracted to the payments made by ic.

The AO held that advances made by the assessee to producers
and directors are covered u/s.194C. He issued notice u/s.201 treating the
assessee as an assessee in default and raised demands for tax and interest
u/s.201(1)/(1A).

In appeal, the CIT(A) gave partial relief to the assessee.
The assessee preferred an appeal to the Tribunal.

The Tribunal observed that :

(a) in majority of the agreements film-makers and producers
have right to participate in the surplus after repayment of the principal
amount and these terms support the case of the assessee that status of the
film-makers/ producers is also like principal, as in normal commercial
practice, once the contract is executed, the contractor is out of the project
and the entire surplus is enjoyed by the principal;

(b) while the relationships of the principal and contractor
can be determined on the basis of the terms of the agreement or contract, at
the same time, industry and trade practices and conventions are also to be
taken judicial note of, and considered before arriving at final conclusions,
in respect of the relationships created. In film industry, it is not uncommon
that the entire film project is financed by a third party, who otherwise is
not involved in the execution of a film project;

(c) the AO had admitted that the assessee has not hired the
services of the producer and director. This itself takes the
producers/directors out of the term “contractors” and hence, the first mandate
of S. 194C is not fulfilled;

(d) production of the film goes through many stages and it
is nowhere the case of the Revenue that the assessee has any active role in
the production of the film;

(e) Censor Board certificates in respect of the films which
the assessee has financed were all in the name of the producers. If the
assessee’s role was as a producer, then the Censor Board Certificates being
very important legal documents, would have shown the assessee as a producer.

On examining the agreements, the Tribunal concluded that no
relationship of ‘principal’ and ‘contractor’ was created between the assessee
and film-producers/directors, but all agreements were finance agreements with
unique features
to participate in the surplus by taking the risk of losses also.

The Tribunal held that the payments made by the assessee to
producers and directors of the film/TV serials cannot be said to be covered by
S. 194C. It held that the assessee is not a deemed defaulter u/s.201(1) and
there is no question of levy of interest u/s.201(1A).

The Tribunal allowed the appeal of the assessee.

The assessee-company had in its return of income claimed a
deduction of Rs.19,18,441 being 1/5th of the total expenditure incurred on VRS.
The Assessing Officer (AO) disallowed this on the ground that the expenditure
was incurred subsequent to closure of the business and hence VRS expenditure was
not wholly and exclusively incurred for the purpose of business.

In appeal to the CIT(A) observed that during the current year
there was no manufacturing activity, hence, the question of allowability of
expenses relating to manufacturing business did not arise. He confirmed the
disallowance on further appeal by the assessee:

The Tribunal noted that :

(a) the AO observed that “the assessee-company is engaged
in the business of manufacturing chemicals and trading of scientific
instruments”;

(b) the CIT(A) while considering the assessee’s claim of
depreciation has observed that during the year the assessee had not undertaken
any manufacturing activity and that the business income was by way of trading,
service charges and commission. He upheld the disallowance of depreciation on
plant and machinery, but allowed depreciation on non-manufacturing items
(computer, furniture and motor cars) as the assessee was having some business
activity during the year, and

(c) in the A.Y. 2001-02 similar disallowance made by the AO
on the ground that expenditure has been incurred subsequent to closure of
business was deleted by the CIT(A) and the Tribunal had, on an appeal by the
Revenue, upheld the action of the CIT(A),

Following the order of the Tribunal for the earlier year and
also keeping in view that merely because the assessee has closed its
manufacturing activity did not mean that the assessee has not carried out its
business activities, the claim of the assessee was held allowable.

DCIT vs. Ashok Kumar

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Section 6(1)(c) and Explanation to
S. 6(1) — In the case of an assessee who is sent on deputation by his Indian
employer to a company outside India and his salary is borne and paid by the
foreign company, can it be said that the assessee has left India for the
purpose of employment and therefore his case is covered by clause (a) of
Explanation to S. 6(1) — Held : Yes.

 

Facts :

The assessee was an employee of ONGC. During the previous
year relevant to assessment year 2004-05, he was seconded to ONGC Nile Ganga
BV, a Dutch company. During the year under consideration his stay in India was
for 98 days. The AO held that in view of S. 6(1)(c) of the Act the assessee
became resident and accordingly he charged to tax salary received by the
assessee from ONGC Nile Ganga in Sudan. The AO held that the assessee did not
leave India for employment outside India but was sent for work of ONGC out of
India and, therefore, his income was chargeable to tax.

The CIT(A) held the assessee to be a non-resident and
directed the AO to exclude salary received by the assessee from ONGC Nile
Ganga by treating the assessee as a non-resident.

The Revenue filed an appeal to the Tribunal.

Held :

The Tribunal noted that during the period when the assessee
was deputed to ONGC Nile Ganga no salary was paid by ONGC. It held that since
ONGC Nile Ganga B.V. is a foreign company, a separate entity, the assessee can
be said to have left India but joined employment in a foreign country and,
therefore, the condition for treating him as resident would be for 180 days (sic
182 days) as against 60 days provided in the Explanation. Accordingly, it
held that the assessee was a non-resident and therefore, income received by
him from ONGC Nile Ganga in Sudan would not be taxable. It noted that this
view was also supported by the decision of AAR in the case of British Gas
India P. Ltd. (285 ITR 218). The Tribunal dismissed the appeal of the Revenue.

DCIT vs. Venkat Shoes Pvt. Ltd.

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 —
Whether provisions of S. 195 apply only to income chargeable to tax in India —
Held : Yes. Whether in a case where amount paid to non-resident is not
chargeable to tax in India and therefore provisions of Chapter XVII-B are not
applicable, can such an amount be disallowed u/s. 40(a)(i) — Held : No.

 

Facts :

The assessee paid a sum of Rs.23,57,715 as commission to a
non-resident. The commission was paid for services rendered by the agent
outside India. The assessee did not deduct tax at source on the ground that
the services have been rendered outside India. The AO held that in view of the
ratio of the decision of the Supreme Court in the case of Transmission
Corporation of India the assessee ought to have deducted tax at source. The AO
disallowed this sum u/s. 40(a)(i) since according to the him tax was
deductible on this sum and the assessee had failed in its duty of deducting
tax as per S. 195.

The CIT(A) held that (a) the commission paid by the
assessee was not chargeable to tax in India as per Ss. 4 and 5 of the Act; (b)
the case of the assessee was supported by CBDT Circular No. 786, dated
7.2.2000. Accordingly, he held that the provisions of S. 195 and S. 40(a)(i)
were not applicable. He also accepted the assessee’s contention that the Apex
Court decision in the case of Transmission Corporation of AP Ltd. and Another
mandated deduction of tax at source only when the same is chargeable to tax in
India. Accordingly, he allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that as the non-resident rendered
services outside India, the amount under consideration could not be said to
have been deemed to accrue or arise in India and also the payment was remitted
abroad and therefore the amount was not exigible to tax in India. The Tribunal
held that since the payment was not chargeable to tax in India, the provisions
of S. 195(2) are not applicable.

The Tribunal also found the case of the assessee to be
fully meeting the criteria laid down by the CBDT in its Circular No. 786,
dated 7th February, 2000 and Circular No. 23, dated 23rd July, 1969 according
to which, no tax is deductible u/s. 195. The Tribunal noted that in view of
the decision of the Apex Court in Azadi Bachao Andolan the circulars of CBDT
are binding on the Revenue authorities.

The Tribunal held that it cannot be said that the decision
of the Apex Court in Transmission Corporation mandates deduction of tax at
source, if non-resident renders service outside India which is not chargeable
to tax. The Hon’ble Court’s exposition in that case was on the premise that at
least some part of the receipt may be chargeable to tax. The Apex Court has
clearly upheld that the obligation of the assessee to deduct tax at source is
limited to the appropriate portion of income chargeable under the Act. So when
there is no income chargeable to tax, the question of deduction at source does
not arise.