Category: Tribunal News: Part A-Domestic Taxation

Held

1. Section 10(33), at the material time, exempted, inter alia, dividend referred to in section 115-O from the purview of taxation. Section 115-O talks of a `domestic company’.

2. On perusal of the definition of `domestic company’ u/s. 2(22A), it transpires that it is only Indian company or any other company, which has, in respect of its income is liable to tax under this Act, made prescribed arrangement for the declaration and payment of dividend. Obviously, this definition does not extend to foreign companies.

3. Therefore, the disallowance u/s. 14A is conceivable only in respect of investment made in the shares of domestic companies and not foreign companies.

The CIT(A) held that since the amount of Rs. 52.22 lakh was not received for any services rendered by the assessee to `A’, the amount could not be treated as income of the assessee. Further, since the assessee did not claim the said amount as expenditure in its accounts, no tax was deducted at source by the assessee. Therefore, no disallowance could be made in terms of provisions of section 40(a)(ia).

Held
On further appeal by the Revenue, the Tribunal upheld the CIT(A)’s order. The Tribunal noted as under :

1. As is evident from the terms and conditions of the consortium agreement, the payment by the assessee to other consortium members is not voluntary. The assessee is under a legal obligation in terms of the agreement to pay the amount to other consortium members in accordance with settled terms.
2. There is nothing to suggest that the assessee rendered any service to `A’. It is the settled legal position that income accrues when an enforceable debt is created in favour of an assessee. In other words, income accrues when the assessee acquires the right to receive the same. The terms of the consortium agreement do not reveal any such right in favour of assessee. Income of Rs. 52.22 lakh rightfully belonged to the other consortium members to whom the amount was distributed by the assessee.
3. Since the assessee only distributed the income in terms of the agreement and this did not amount to incurring of an expenditure nor did the assessee claim any expenditure, there was no infirmity in the findings of the CIT(A) in deleting the disallowance u/s. 40(a)(ia).

Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.

The CIT(A) held that :
a. During the relevant assessment year there was only admission of HDIL as new partner in the firm.
b. There was neither retirement nor distribution of assets nor revaluation of plot of land during the assessment year under consideration.
c. Mere admission of partners did not attract provisions of section 45(4).
d. During the continuance of the partnership-firm, rights of the partners were confined to obtaining the share of the profit and no partner could have exclusive claim to any assets.

Accordingly, the addition made by the Assessing Officer was set aside.

Held
On appeal by the Revenue, the Tribunal dismissed the appeal. The Tribunal noted as under :

1. It is not a case where firm was taken over by the new partner so that provisions of section 45(4) can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of each partner with reference to the assets of the firm cannot be isolated and carved out from the value of the partners’ interest in the totality of the partnership assets.

2. In the case under consideration, asset of the firm, i.e., plot of land, was never transferred to anybody – it always remained with the assesseefirm only. From the date of purchase of the plot till 27-05-2008, when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by section 2(47), in the case of assessee-firm.

3. From the very beginning of the partnership, the plot of land in question was treated as stockin- trade by the assessee-firm. Even on 31-03- 2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. The Assessing Officer has nowhere rebutted/doubted this factual position.

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

The Tribunal dismissed the objections raised by the Revenue. The Tribunal noted as under:

(1) The Act has conferred certain powers on the Income Tax authorities for discharging and 158 (2012) 44-A BCAJ 9 10 one such power relates to matters of stay of the demand. The assessee filed the stay application before the Assessing Officer, but the Assessing Officer did not take any action, be it a case of rejection or otherwise. The same is the fate of application lying with the Additional Commissioner. The Commissioner merely passed on the responsibility to his deputies instead of either staying the demand or rejecting the request for stay of the same or otherwise.

(2) While there is inaction on part of the Revenue on the applications for stay, the assessee is busy in making application for stay of demand from time to time fearing ultimate coercive action by the AO and its likely adverse effects on the business operations of the assessee.

(3) Regarding the DSA by the assessee before the Tribunal, the decisions of the Tribunal are in favour of the assessee for the proposition that it is not necessary that the assessee should necessarily approach the Commissioner of Income-tax before approaching the Tribunal for grant of stay.

(4) Therefore, DSA filed before the Tribunal is maintainable and it is not the requirement of law that the assessee should necessarily approach the Commissioner before approaching the Tribunal for grant of stay.

(5) It does not make any difference whether the assessee filed any application before the Revenue and not awaited their decisions before filing application before the Tribunal or directly approached the Tribunal without even filing the applications before the Revenue authorities when there exists threat of coercive action by the Assessing Officer.

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

The CIT(A) allowed the assessee’s claim. The Tribunal also held in favour of the assessee. The Tribunal noted that since the assessee has paid the full consideration before the statutory period of 2 years from the date of sale of shares and has acquired the right in the two flats which is being constructed by the builder, the benefit of deduction u/s.54F cannot be denied to the assessee.

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

For A.Y. 2007-08, the assessment of total income of the assessee was completed vide order dated 23-3- 2007, passed u/s.143(3) of the Act. While assessing the total income, the Assessing Officer (AO) allowed a deduction of Rs.74,42,770 being the amount of interest on term loan from IDBI which was not paid as due, but was deferred by IDBI and such deferral was regarded as deemed payment.

Subsequently the Assessing Officer (AO) recorded the reasons which were supplied to the assessee vide letter dated 26-8-2009, and issued notice u/s.148. One of the reasons recorded was that on perusal of the assessment records it is noticed that in respect of the loan obtained by the assessee from IDBI, the assessee had not paid interest instalment amounting to Rs.74,42,770 which was deferred by IDBI. This had been treated as deemed payment of interest and was allowed as deduction. Upon receiving the copy of reasons recorded, the assessee objected to the issuance of notice u/s.148 on the ground that the time section 43B was amended after the assessee has filed its return of income, by Finance Act, 2006 with retrospective effect from 1-4-1989 to provide for disallowance of interest which has been converted into loan and also that since the amount under consideration has been paid in subsequent years it will not have any impact on the income-tax liability ultimately. The assessee consented that this can be rectified u/s.154 of the Act. The AO without disposing of the assessee’s objections proceeded to complete the reassessment and added the sum of Rs.74,42,770 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO in reopening the assessment u/s.147 r.w.s. 148 of the Act on the ground that the assessee has admitted one of the reasons recorded for reopening the assessment. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that in view of the retrospective amendment of section 43B of the Act by the Finance Act, 2006, subsequent to the filling of the return, certain disallowance under this provision was called for, which was consented by the assessee by filing rectification petition vide letter dated 30-9-2009. The amendment was on the statute even at the time when the AO completed assessment u/s.143(3) of the Act. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT, (325 ITR 102) (Bom.) it was contended that proceedings u/s.147 were being objected to as there was no escapement of income.
The Tribunal held that:

(1) Mere fresh application of mind to the same set of facts or mere change of opinion does not confer jurisdiction even after amendment in section 147 w.e.f. 1-4-1989.

(2) When a regular order of assessment is passed in terms of section 143(3), a presumption can be raised that such an order has been passed on application of mind. A presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take, benefit of its own wrong.

(3) Considering the ratio of the decisions of the Delhi High Court in the case of Jindal Photo Films Ltd. v. DCIT, 234 ITR 170 (Del.) and also the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator India Ltd., (256 ITR 1) which has been affirmed by the Supreme Court in 320 ITR 561 (SC), in order to invoke the provisions of section 147, the AO is required to have some tangible material pinpointing escapement of income from assessment and in the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(4) The amendment to section 43B was available to the AO while framing assessment, even otherwise, based on the ratio of the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. (supra) it can be safely concluded that once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act.

The Tribunal held that the jurisdiction is to be assumed by the AO u/s.154 of the Act and not 148 of the Act. The Tribunal allowed this issue of the assessee’s cross-objections.

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

In an appeal filed by the assessee, the Tribunal was considering taxability of certain amounts as cash credits u/s.68 of the Act and also allowability of certain expenditure as a deduction. In the course of hearing before the Tribunal, the assessee filed certain additional evidence. After considering the evidence filed by the assessee before the lower authorities and also the additional evidence filed before the Tribunal, the Judicial Member (JM) decided both the issues in favour of the assessee, while the Accountant Member (AM) decided both the issues in favour of the Department. The members formulated questions to be referred by the President to the Third Member. The TM agreed with the JM and decided both the issues in favour of the assessee. At the stage of giving effect to the opinion of the TM, the JM passed an order in conformity with the order of the TM, whereas the AM observed that it is not possible to give effect to the order of the TM on the ground that the order of TM was contrary to the opinion expressed by the TM himself in his own order and that the TM had not considered various points of differences arising from the dissenting orders. He raised certain new questions on merits of the dispute and directed that the matter be referred back to the President. The JM did not agree and raised an issue whether the Members of the Bench could comment on the order of the TM instead of merely passing a confirmatory order in terms of section 255(4). The President on a reference made by the Division Bench referred the following question to the SB for its consideration:

“Whether on a proper interpretation of s.s (4) of section 255 of the Income-tax Act, the order proposed by the learned AM while giving effect to the opinion of the majority consequent to the opinion expressed by the learned Third Member, can be said to be a valid or lawful order passed in accordance with the said provision.”

Held:

(1) There is no doubt that the Accountant Member while agreeing with the questions formulated at the time of the original reference to the President of the ITAT has again framed three new questions at the time of giving effect to the opinion of the majority de hors the provisions of section 255(4) of the Act as he had become functus officio after he passed his initial draft order;

(2) The opinion expressed by the Third Member was very much binding on the Accountant Member. The Accountant Member who is in minority was bound to follow the opinion of the Third Member in its true letter and spirit. It was necessary for judicial propriety and discipline that the member who is in minority must accept as binding the opinion of the Third Member;

(3) On a difference of opinion among the two Members of the Tribunal, the third Member was called upon to answer two questions on which there was difference of opinion among the two members who framed the questions and the third Member in a wellconsidered order, answered the reference by giving sound and valid reasons agreeing with the views of the Judicial Member. Thus, the majority view was in favour of the assessee;

(4) The proposed order dated 18-2-2010 of the Accountant Member who is in the minority and had become functus officio wherein he has expressed his inability to give effect to the opinion of the majority and proceeded to frame three new questions to be referred to the President, ITAT again for resolving the controversy cannot be said to be a valid or lawful order passed in accordance with the provisions of section 255(4) of the Act. The SB held that the said order dated 18-2-2010 proposed by the Accountant Member to be not sustainable in law. It answered the question referred to it in favour of the assessee.