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Category: Tribunal News: Part A-Domestic Taxation

Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

29 ACIT vs. Suratchandra B. Thakkar (HUF)
TS-648-ITAT-2022 (Mumbai)
A.Y.s: 2006-07 to 2008-09
Date of order: 12th August, 2022
Section: 28

Advances received by an Assessee landlord who has converted land into stock-in-trade, following project completion method, are not taxable on receipt basis.

FACTS

The assessee was a 25 per cent owner of a land in respect of which development agreement was entered into with K. Raheja Universal Pvt. Ltd. Under the terms of the Development Agreement, the land owners and developers were to share sale proceeds in the ratio of 45.5 per cent and 54.5 per cent respectively. The Assessee had a 25 per cent share in land, and was entitled to 25 per cent of 45.5 per cent share receivable by the land owners. The project consisted of construction of four towers of which two were completed in previous year relevant to A.Y. 2008-09 and two were completed in previous year relevant to A.Y. 2009-10.

The Assessee received advances of Rs. 1,78,68,399, Rs. 96,04,258 and Rs. 2,77,19,807 against sale of flats in A.Ys. 2006-07, 2007-08 and 2008-09 respectively. However, no income was offered on the ground that the Assessee was following the project completion method of accounting, and entire income was declared in A.Ys. 2008-09 and 2009-10 on completion of the project, receipt of occupancy certificate and execution of conveyance deed in favour of buyers.

According to the Assessing Officer (AO), as the entire cost of construction was being met by the developer, the project did not require any contribution from the Assessee. Therefore, the advances received became final and certain. The AO also observed that the Assessee had not shown any work-in-progress in the balance sheet. Also, since there was no risk attached to the Assessee, the advances, according to the AO, became income in the year of their receipt.

Aggrieved, the Assessee preferred an appeal to CIT(A) who allowed the appeal filed by the Assessee and held that the land was not transferred by the land owners to the developers till the completion of construction and therefore entire risk of the project remained with the land owners including the Assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the Assessee has already paid tax on advances received in A.Ys. 2008-09 and 2009-10. The Tribunal concurred with the following findings of the CIT(A):

(i)    Since the land in question was treated as stock-in-trade by the Assessee in its books of account, transfer of the same was not liable to be taxed as capital gain.

(ii)    The Supreme Court, in the case of Seshasayee Steel Pvt. Ltd. 115 taxmann.com 5 (SC), held that executing a development agreement granting permission to start advertising, selling and construction and permitting to execute sale agreement to a developer does not amount to granting possession u/s 53A of the Transfer of Property Act.

(iii)    Possession of land has been handed over to the prospective buyers consequent to the conveyance in favour of co-operative society of flat owners.

(iv)    The assessee was regularly and consistently following completed contract method.

(v)    In case of the developer also, the completed contract method has been accepted by the revenue.

The Tribunal did not find any error in the finding of the CIT(A) in upholding the project completion method or the completed contract method followed by the Assessee for declaring the income from the project under reference.

The Tribunal dismissed the appeal filed by the revenue for all the three years.

Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

28 Sai Bhargavanath Infra vs. ACIT
TS-658-ITAT-2022 (Pune)
A.Y.: 2014-15
Date of order: 17th August, 2022
Section: 43CA

Proviso to section 43CA providing for tolerance limit of 10 per cent, being beneficial in nature, is retrospective.

FACTS
The Assessee, a builder and developer, filed its return of income for A.Y. 2015-16 declaring therein a total income of Rs. 47,17,490. The Assessing Officer (AO) while assessing the total income of the assessee made an addition of Rs. 19,58,875 u/s 43CA of the Act, being difference between sale value of the flats sold and their stamp duty value.

Aggrieved, the Assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the Assessee preferred an appeal to the Tribunal where it contended that the stamp duty value was at an uniform rate without taking into consideration the peculiar features of a particular property. It was also contended that the difference of Rs. 19,58,875 was less than 10 per cent and therefore, not required to be added. For this proposition reliance was placed on the decision of Pune Tribunal in IT No. 923/Pun/2019 for A.Y. 2016-17, order dated 4th August, 2022 and also on the Assessee’s own case in ITA No. 2417/Pun/2017 for A.Y. 2014-15, the Tribunal on the very similar issue had remanded the matter back to the file of the AO for fresh consideration.

HELD
The Tribunal noted the proviso to section 43CA which provides for a tolerance limit of 10 per cent has been introduced by the Finance Act, 2020 w.e.f. 1st April, 2021 and that the assessment year under consideration is before the date when the amendment took place and therefore, the question is whether the proviso can apply to assessment years prior to its introduction as well.

The Tribunal observed that the decision of the Pune Bench in ITA No. 2417/Pun/2017 for A.Y. 2014-15 (supra) on which reliance has been placed by the Assessee has held the proviso to be retrospective but in the said decision reliance has been placed on the decision of Mumbai Bench of the Tribunal in the case of Maria Fernandes Cheryl vs. ITO (2021) 187 ITD 738 (Mum) which relates to section 50C of the Act. On behalf of the Assessee it was submitted that section 43CA and section 50C of the Act are pari materia provisions and therefore, holding of retrospective application of section 50C is even applicable making retrospective application to section 43CA of the Act as well. The Tribunal observed that the AR was unable to place on record any direct decision where first proviso to section 43CA has been held to be retrospective.

The Tribunal noted that the judgment of the full bench of the Apex Court in the case of CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC) has held that if any liability has to be fastened with the Assessee taxpayer retrospectively then the statute and the provision must spell out specifically regarding such retrospective applicability. However, if the provision is beneficial for the Assessee, in view of the welfare legislation spirit imbibed in the Income-tax Act, such a beneficial provision can be applied in a retrospective manner. The Tribunal examined the insertion of the first proviso to section 43CA in the light of the ratio of the decision of the Apex Court in Vatika Township (supra) and held the intent of the legislature is to provide relief to the Assessee in case such difference is less than 10 per cent which has been brought into effect from 1st April, 2021 thereby providing benefit to the Assessee. This being the beneficial provision therefore will even have retrospective effect and would apply to the present A.Y. 2015-16.

The Tribunal observed that Pune Bench of the Tribunal in Shri Dinar Umeshkumar More vs. ITO [ITA No. 1503/PUN/2015 for A.Y. 2011-12 dated 25th January, 2019] has considering the proposition of applicability of a beneficial provision in light of Hon’ble Apex Court decision in the case of Vatika Township Pvt. Ltd. (supra) has held that if a fresh benefit is provided by the Parliament in an existing provision, then such an amendment should be given retrospective effect.

The Tribunal allowed the ground of appeal by holding that the first proviso to section 43CA has retrospective effect.

Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

27 Prithvi Outdoor Publicity LLP vs. CIT(A)
ITA No. 1013/Ahd./2019 (Ahd.-Trib.)
A.Y.: 2013-14
Date of order: 29th June, 2022
Section: 40(a)(ia)

Late payment charges and service tax do not attract TDS and consequently payment of these amounts without deduction of tax at source does not attract provisions of s.40(a)(ia).

FACTS
The Assessee incurred advertisement expenditure and made a payment of Rs. 2,27,56,222 to Andhra Pradesh Road Transport Corporation (APRTC). Out of Rs. 2,27,56,222, the Assessee deducted TDS on Rs. 2,17,08,097 and balance Rs. 10,48,125 was paid without deduction of tax. Payment of Rs. 10,48,125 on which no tax was deducted comprised Rs. 9,77,429 paid towards late fees and the balance of Rs. 1,16,155 towards service tax. The Assessee contended that since there is no provision to deduct tax on late fees and service tax, the said amount could not be disallowed u/s 40(a)(ia). Further, since the amount was penal in nature, no tax could be deducted on the same. Lastly, the Assessee contended that the recipient, i.e. APRTC, had included the said payment of Rs. 10,48,125 in its income and offered the same for tax; no disallowance could be made u/s 40(a)(ia).

The Assessing Officer, however, invoked the provisions of s.40(a)(ia) with respect to the payment of Rs. 10,48,125 made without deduction of tax at source.

Aggrieved, the Assessee preferred an appeal to the CIT(A), who confirmed the action of the AO.

Aggrieved, the Assessee preferred an appeal to the Tribunal.

HELD
The Tribunal held that the TDS provisions did not apply to late fees and service tax, and therefore disallowance u/s 40(a)(ia) could not be made.

Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

26 Bai Navajbai Tata Zoroastrian Girls School vs. CIT(E)
[2022] 141 taxmann.com 62 (Mum.-Trib.)
A.Ys.: 2022-23 to 2026-27
Date of order: 29th July, 2022
Section: 12A

Conditions imposed by CIT, at the time of registration, with respect to conduct of the trust and circumstances in which registration can be cancelled, vacated by the Tribunal on the ground that the scheme of law does not visualise these conditions being part of the scheme of registration being granted to the applicant trust.

FACTS
The Assessee is a charitable trust who had applied for registration u/s 12A of the Income-tax Act, 1961 (“the Act”). The CIT granted registration to the Assessee u/s 12A subject to certain conditions. That is, while passing the order granting registration to the Assessee, the CIT imposed certain conditions, which, inter alia, are as follows:

  • The Trust/Institution should quote the PAN in all its communications with the Department.

  • The registration does not automatically confer any right on the donors to claim deduction u/s 80G.

  • No change in the terms of Trust Deed/Memorandum of Association shall be effected without the due procedure of law, and its intimation shall be given immediately to the Office of the Jurisdictional Commissioner of Income Tax. The registering authority reserves the right to consider whether any such alteration in objects would be consistent with the definition of “charitable purpose” under the Act and in conformity with the requirement of continuity of registration.

  • The Trust/ Society/Non-Profit Company shall maintain accounts regularly and get these accounts audited in accordance with the provisions of s.12A(1)(b) of the Act.

  • Separate accounts in respect of profits and gains of business incidental to attainment of objects shall be maintained in compliance with s.11(4A) of the Act.

  • All public money received including for Corpus or any contribution shall be routed through a bank account whose number shall be communicated to the Office of the Jurisdictional Commissioner of Income Tax.

The Assessee observed that all the conditions imposed in the order granting registration were the conditions which formed the reasons for which registration of the trusts is cancelled, and therefore the conditions were not valid. The Assessee challenged the said order of the Commissioner on the ground that the provisions of the Act do not provide for conditional registration u/s 12A, and in the absence of such provision under the Act, the Commissioner was not justified in imposing conditions upon the Assessee.

HELD

On appeal, the Tribunal held as follows:

  • The finding regarding the objects of the trust and the genuineness of the trust’s activities cannot be conditional.
  • The expression “compliance of the requirements under item (B), of sub-clause (i) (i.e. the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects)” is applicable to conditions precedent, say for example obtaining under FCRA which is under process, the Commissioner may grant registration subject to FCRA registration being obtained by the Assessee.

  • The conditions which the Commissioner imposed had the sanction of the law. That is, irrespective of such conditions being imposed by the Commissioner, the conditions found place in the law and the conditions imposed by the Commissioner could not be said to have the force of the law.

  • The Commissioner has a limited role, and can call for documents or information or make inquiries. The Commissioner cannot decide how and for what reasons the registration has to be cancelled, that too at the time of registration. The Commissioner, therefore, could not have supplemented the conditions by laying down conditions at the time of granting the registration.

  • Conditions attached to registration must be tested on the scheme of law, and the conditions imposed by the Commissioner did not find the force of law.

The observations of the Commissioner regarding the conduct of the Assessee trust could not be construed as legally binding in the sense that non-compliance with such guidance will not have any consequence beyond what is stated under the provisions of the Act. Further, the Tribunal also held that the implications of not doing what is set out in the conditions imposed by the Commissioner would not remain confined to the cancellation of registration when the law stipulates much harsher consequences.

Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

25 Assistant Commissioner of Income-tax vs.
Lepro Herbals (P) Ltd
[(2022) 94 ITR(T) 225 (Delhi – Trib.)]
ITA No.: 111(DELHI) of 2016
A.Y.: 2010-11; Date of order: 18th February, 2022

Ss. 132 – Where a hard disk was seized from business premises of assessee, but, no corroborative documents were found to establish that information concerning certain expenditure derived from the hard disk was true and correct, no addition had been made

FACTS
A Search u/s 132(1) of the Act was carried out at the premises of the assessee company, a manufacturer of herbal drugs. A hard disk was seized from the office premises during the search. The assessing officer (AO) considered certain figures of sales and purchases retrieved from the hard disk and concluded the assessment by making certain additions.

The contentions of the assessee that the hard disk consisted of personal data and the financial figures contained therein were only estimates that were not considered by the AO.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) deleted the additions on the ground that the additions have been made solely based on the hard disk data without any supporting or corroborative evidence. Aggrieved, the Revenue preferred an appeal before the ITAT.

HELD
The AO contended that the figures of sales and purchases derived from the pen drive reflected a true picture of the profitability of the assessee. But, the ITAT observed that no discrepancy in the books of accounts had been pointed out by the AO.

The ITAT noted that no further enquiries, in addition to the reliance placed on the hard disk data, have been carried out to establish that the expenditure mentioned in the seized document is true and correct. It was observed that identical queries were raised in the case of the assessee during previous A.Ys., but no addition had been made to that effect. The printouts of the hard disk of such previous years had the words ‘Forecast’ mentioned. Accordingly, following the principle of consistency and in the absence of any corroborative evidence, the ITAT upheld the Order passed by the CIT(A) and dismissed the appeal of Revenue.

S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

24 MLL Logistics (P.) Ltd. vs. Assistant Commissioner of Income-tax
[2022] 93 ITR(T) 513 (Mumbai -Trib.)
ITA No.: 164 (MUM) of 2019
A.Y.: 2013-14; Date of order: 18th November, 2021

S. 23 – Where House Property was let out for monthly rentals along with a refundable security deposit, and the assessing officer takes a view that such a deposit is in lieu of reduced rent, no notional addition could be made to rental income where the assessee had furnished evidence to show that municipal value was much less than rental income.

FACTS
The assessee company had declared income from house property. On perusal of the rent agreement, it was noticed that the rentals were Rs. 50,000 p.m. Further, the licensee deposited a refundable deposit of Rs. 5 crore with the assessee. Based on the same, the assessing officer (AO) took a view that the refundable deposit had been given in lieu of reduced rent of the house property. The AO questioned the rationale of the refundable deposit and made a notional addition of 10 % of the refundable deposit to the rental income.

Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the ITAT.

HELD
The assessee submitted that he has actually received Rs. 50,000 p.m. towards rent as per the rent agreement. Further, the assessee stated that even though he has received interest free security deposit, notional rent cannot be computed based on such interest free security deposit. Evidences were also furnished by the assessee to show that the actual rent was higher than the rateable value determined by Mumbai Municipal Corporation for the property.

The ITAT observed that the AO has computed notional rent at 10% of the security deposit received by the assessee. To justify such determination, the assessing officer had conducted an enquiry u/s 133(6) of the Income-tax Act, 1961 (Act) to establish that the market value of the rent is higher than what the assessee has offered. However, no concrete evidence had been brought by the AO to establish this assertion.

The ITAT held that the AO cannot determine the notional rent based on estimation or guess work. The ITAT remarked that if the rateable value is correctly determined under the municipal laws, the same is to be considered as the Annual Letting Value u/s 23 of the Act. Accordingly, the ITAT deleted the notional addition made to the rental income.
 
The ITAT placed reliance on the following decisions while deciding the matter:

1. J.K. Investors (Bom.) Ltd. vs. Dy. CIT [2000] 74 ITD 274 (Mum. – Trib.)

2. CIT vs. Tip Top Typography [2015] 228 Taxman 244 (Mag.)/[2014] 48 taxmann.com 191/368 ITR330 (Bom.)

3. CIT vs. Moni Kumar Subba [2011] 10 taxmann.com 195/199 Taxman 301/333 ITR 38 (Delhi)

4. Owais M. Hussain vs. ITO [IT Appeal No. 4320 (Mum.) of 2016, dated 11-5-2018]

5. Pankaj Wadhwa vs. ITO [2019] 101 taxmann.com 161/174 ITD 479 (Mum. – Trib.)

6. Marg Ltd. vs. CIT [2020] 120 taxmann.com 84/275 Taxman 502 (Mad.)

7. Maxopp Investment Ltd. vs. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC)

Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

23 Dwarka Portfolio Pvt. Ltd. vs. ACIT
TS-499-ITAT-2022 (Delhi)
A.Y.: 2014-15; Date of order: 27th May, 2022
Sections: 179, 226

Appeal filed by a company, struck off by the time it was taken up for hearing, is maintainable

FACTS
In this case, the assessee challenged the order passed by CIT(A) confirming the action of the Assessing Officer (AO) in adding a sum of Rs. 18,00,00,000 to the total income of the assessee u/s 68.

At the time of hearing before the Tribunal, on behalf of the revenue it was contended that the name of the assessee company has been struck off by notification no. ROC/Delhi/248(5)/STK-7/10587 dated 8th March, 2019 of Registrar of Companies NCT of Delhi and Haryana, and consequently the appeal filed by the assessee has become infructuous and prayed that the appeal be dismissed as not maintainable.

On behalf of the assessee, it was contended that the appeal could not be dismissed as ‘not maintainable’ merely because of striking off. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Gopal Shri Scrips Pvt. Ltd. 2019(3) TMI 703 SC and various provisions of the Companies Act, 2013 and Income-tax Act, 1961.

The Tribunal passed an interlocutory order deciding the maintainability of the appeal.

HELD
The Tribunal noted that there is no dispute that the name of the assessee company has been struck-off u/s 248(1) of the Companies Act. The Tribunal also noted the provisions of s. 248 of the Companies Act dealing with striking off of the companies and its effects as mentioned in s. 250 of the Companies Act. It noted that-

i) Once the company is struck-off, it shall be deemed to have been cancelled from such date except for the purpose of realizing the amount due to the company and for the payment and discharge of the liabilities or obligation of the company. Further, even after striking off of a company, the liability, if any, of the Director, Manager or Other Officers, exercising any power of management and of every member of the company shall continue and may be enforced as if the company had not been dissolved;

ii) As per s. 248(6) of the Companies Act, it is the duty of the Registrar to make provision for discharging the liability of the company before passing an order for striking off u/s 248(5) of the Companies Act. If there is any tax due from the struck-off company, the Department can invoke s. 226(3) of the Income-tax Act for satisfying such tax demands;

iii) As per s. 179 of the Income-tax Act, if the tax due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a Director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such taxes unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the company;

iv) When it comes to recovery of tax from struck-off company, the Department can invoke s. 226(3) or s. 179 subject to satisfaction of conditions stated therein. The Department can invoke both 226(3) and 179 simultaneously for which there is no bar;

v) If the proceedings pending before the Court or Tribunal (regarding the determination of quantum of tax / liability for paying tax) are dismissed for having become infructuous without adjudicating the actual taxes due or the liability of the assessee to pay such tax in the manner known to the Law and based on such dismissal of the proceedings if the Revenue proceeds for the recovery of `such tax due’, the rights of the Directors of the Company will be seriously jeopardised and the same will amount to a denial of rights guaranteed under the Law;

vi) If the request of the Revenue is acceded to, then, on the one hand, the appeal will be dismissed as infructuous, and on the other hand, the Revenue will initiate proceedings u/s 179 of the Income-tax Act and that too without even adjudicating in the manner prescribed under the Law on the ‘quantum of actual tax due’ or ‘liability to pay tax’, in such event great injustice will be caused, which cannot be permitted;

vii) When the Revenue Department has not foregone the right to recover the tax due or written-off the demand on the ground of assessee Company being struck-off by ROC, the right of the assessee to determine the tax liability in due process of law cannot be denied by dismissing the appeal pending before us;

viii) Further, in a case where the CIT(A) deletes the addition made by the AO, and if the Revenue files an appeal before the Tribunal, even in a case where the Revenue is having a water tight case on merit, by dismissing the appeal for having become infructuous will also result in the non-adjudication of the actual tax due by the assessee and the Revenue cannot recover the actual tax dues from the assessee. In such events, the Department of Revenue will be left with no remedy, which is contrary to the root principle of law ‘Ubi Jus Ibi Remedium’.

Having noted the above, the Tribunal observed that the moot question is whether the Tribunal can proceed with the appeal filed by the struck down company or filed by the Revenue against struck down company? In other words, whether the struck-off company can be treated as alive / operating / existing for the purpose of adjudication of the tax arrears and the consequence order by which the recovery proceedings are triggered by the Revenue.

The Tribunal observed that in the case of Gopal Scrips Pvt. Ltd. (supra), the Revenue was having a grievance against the Order of the Rajasthan High Court in dismissing the appeal for having become infructuous on the ground that the assessee company was struck-off. The Apex Court has set aside the order of Rajasthan High Court and directed to decide the appeal on merit. Ironically, the very same department is seeking to dismiss the appeal as infructuous since the assessee company is struck-off. The Department cannot have such a double standard.

The Tribunal held that though the name of the assessee company has been struck off u/s 248 of the Companies Act, in view of sub-sections (6) and (7) of section 248 and section 250 of the Companies Act, the certificate of incorporation issued to the assessee company cannot be treated as cancelled for the purpose of realizing the amount due to the company and for payment or discharge of the liability or obligations of the company, the appeal filed by the struck-off assessee company or appeal filed by the revenue against the struck-off company are maintainable. The Tribunal held that the appeal filed by the assessee company is maintainable and the same has to be decided on merits and directed the office to list the appeal before the regular bench for hearing.

In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

22 ITO (International Taxation) vs.
Mrs. Sanika Avadhoot
TS-450-ITAT-2022 (Mum.)
A.Y.: 2016-17; Date of order: 9th May, 2022
Section: 56(2)(vii)

In a case where flat booked by the assessee (original flat) could not be constructed and the assessee, in lieu of the original flat, was allotted another flat (alternate flat) which was also under construction, the difference between stamp duty value of the alternate flat and the consideration is not chargeable to tax u/s 56(2)(vii)

FACTS
The assessee filed return of income declaring total income of Rs. 1,11,640. During the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has executed an agreement for purchase of flat no. A3-3405 for a consideration of Rs. 5,62,28,500, whereas the stamp duty value of the same is Rs. 8,05,06,000. The assessee was asked to show cause why the difference between the stamp duty value and consideration be not taxed u/s 56(2)(vii).

The assessee explained that on 24th September, 2010, the assessee booked flat no. 4707 with India Bulls Sky Suites. Because of height restrictions, the booking was cancelled and shifted to flat no. 3907 in the same project on 14th November, 2013. Since the construction of this flat could not be materialized, the assessee was allotted a flat in another project by the name Sky Forest without any change in the terms of the purchase. However, a formal agreement for the flat finally allotted was entered into on 4th May, 2015. There was no change in purchase price fixed for allotment in 2010.

The AO was of the view that the assessee acquired new flat no. A-3-3405 in lieu of transfer of right and paid a consideration of Rs. 5,62,28,500 for a flat whose stamp duty is Rs. 8,05,06,000. He added the difference of Rs. 2,42,77,400 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who deleted the addition.

Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee, it was stated that in F.Y. 2010-11, the assessee made a booking for the purchase of residential premises to be constructed by India Bulls Sky Forest in the project India Bulls Sky Suites against Flat No 4707 admeasuring 3,302 sq. ft. and an amount of Rs. 72,11,834 was paid by the assessee as booking amount. Subsequently, on 21st October, 2010, the assessee paid an amount of Rs. 4,23,18,166, and on 22nd November, 2011 Rs. 12,75,398 was paid totalling Rs. 5,08,05,398. Subsequently, vide letter dated 14th November, 2013, the developer informed the assessee of its inability to construct and provided alternative residential premises Unit 3907, measuring 3,341 sq. ft. Under such circumstances, the assessee threatened the developer for specific performance to provide the residential premises or will initiate criminal proceedings against them. Thereafter, with a view to avoid litigation, both the parties agreed on alternative residential premises being unit no. A3-3405 to be constructed by India Bulls Sky Forests. It was also submitted that the stamp duty value of constructed unit A3-3405 in 2010 was Rs. 2,60,91,806. The agreement registered was nothing but a ratification of the pre-existing agreement which dated back to principal agreement of 2010. It was the same contract with only constructed premises being replaced, and there was no new agreement and earlier payment formed part of the consideration for the registered agreement. The AO treated the shifting of flat as a transfer and taxed the difference between stamp duty value and amount paid as income u/s 56(2)(vii). If AO treated the same as transfer of rights to receive residential property originally allotted against A3-3405 being replaced by new flat 3907 in IndiaBulls Sky Suites, then it falls under the definition of transfer u/s 2(47), and the assessee is eligible for deduction u/s 54F.

HELD
The Tribunal observed that these facts demonstrate that it was the same booking which dated back to 24th September, 2010, and the assessee had not made any extra payment. The Tribunal held that the CIT(A) had clearly elaborated in his findings that when the developer failed to provide the original flat, then it had offered another flat in the building, which was to be constructed on a future date. When the assessee booked the flat, that property was not existing, and it was a property to be constructed in future. The CIT(A) has explained in detail that if such transactions are treated as transfer by notionally assigning the value, then the benefit of indexation and benefit of section 54, etc., will need to be given to the assessee. The Tribunal did not find any infirmity in the decision of the CIT(A). It dismissed the appeal filed by the revenue.

Compiler’s Note: Though this decision is rendered in the context of section 56(2)(vii), it appears that the ratio of this decision would apply to provisions of section 56(2)(x) as well.

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

21 DCIT vs. MSM Satellite (Singapore) Pte Ltd
TS-480-ITAT-2022 (Mum.)
A.Ys.: 2006-07 to 2008-09;
Date of order: 9th June, 2022
Section: 244A

For determining interest u/s 244A, refund already granted has to be first adjusted against interest component

FACTS
In the first round of proceedings, the Tribunal granted relief to the assessee. The Assessing Officer (AO) passed an order giving effect to the order of the Tribunal and determined the amount of refund payable to the assessee. Aggrieved by the short grant of refund, the assessee preferred an appeal to the CIT(A). The CIT(A) directed the AO to re-compute the interest granted u/s 244A by first adjusting the refund already granted to the assessee against the interest component and the balance, if any, towards the tax component of the refund due.

Aggrieved by the order of the CIT(A), the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the present case is not a case where interest on interest due was claimed by the assessee. The issue arising in the present case is regarding the correct computation of the refund. As per the Revenue, while computing the refund and interest thereon u/s 244A, the refund already granted to the assessee should be adjusted against the tax component. However, as per the assessee, the refund already granted to the assessee should be adjusted against the interest component and balance, if any, towards the component of refund due.

The Tribunal held that the issue arising in the present appeals is settled in favour of the assessee by the decisions of the co-ordinate bench in the case of Union Bank of India vs. ACIT [(2017) 162 ITD 142 (Mum.)] and in Grasim Industries Ltd. vs. CIT [(2021) 23 taxmann.com 31 (Mum.)]. The Tribunal dismissed the grounds raised by the Revenue.

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

20 Coimbatore Vaiyapuri Maathesh vs. ITO
TS-488-ITAT-2022 (Chennai)
A.Y.: 2017-18; Date of order: 17th March, 2022
Sections: 263, 270A

Proceedings u/s 263 of the Act cannot be initiated merely for non-initiation of proceedings for levy of penalty u/s 270A

FACTS
For A.Y. 2017-18, the assessee filed his return of income declaring a total income of Rs. 4,84,300. The Assessing Officer (AO) assessed the total income u/s 143(3) to be Rs. 81,67,948 by making an addition of Rs. 29,09,000 for unexplained money u/s 69A, and disallowing the cost of improvement of Rs. 47,74,648 claimed while computing capital gains.

The Principal Commissioner of Income-tax (PCIT) issued a show cause notice (SCN) to the assessee asking the assessee to show cause why the assessment order should not be revised u/s 263 as the same has been passed with omission to initiate penalty proceedings u/s 270A in respect of disallowance of the claim made while computing capital gains.

In response to the SCN issued, the assessee submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue since there is no satisfaction/finding recorded by the AO with regard to underreporting or misreporting as required by law.

The PCIT, not being satisfied with the explanation of the assessee held that the assessment order passed by the AO with omission to initiate penalty proceedings u/s 270A, is erroneous in so far as prejudicial to the interest of the revenue, set aside the assessment order with a direction to the AO to re-do the assessment order after verification of issues discussed in 263 proceedings.

Aggrieved by the order passed by the PCIT, the assessee preferred an appeal to the Tribunal and contended that although the AO has made additions towards disallowance of capital gains but he has chosen not to initiate penalty proceedings u/s 270A because he has not arrived at satisfaction to the effect that there is an underreporting or misreporting of income as contemplated u/s 270A. Therefore, on the issue of non-initiation of penalty proceedings, the PCIT cannot assume jurisdiction and revise the assessment order. For this proposition, reliance was placed on the decision of the Madras High Court in the case of CIT vs. Chennai Metro Rail Ltd. [(2018) 92 taxmann.com 329].

HELD
The Tribunal noted that the AO had disallowed the cost of improvement on the ground that the assessee has not submitted supporting documentary evidence to substantiate his claim towards the cost of improvement. Except for this, there is no observation of unsustainability of the claim made by the assessee towards the cost of improvement. The Tribunal understood this to mean that although the AO has made an addition towards the cost of improvement, he has chosen not to initiate penalty proceedings u/s 270A because prima facie, there is no material with the AO to allege that there is an underreporting or misreporting of income. The Tribunal also noted that PCIT has relied upon the decision of Allahabad High Court in CIT vs. Surendra Prasad Aggarwal [(2005) 275 ITR 113 (All.)], where the court has held that revisionary power can be exercised for initiation of penalty proceedings.

The Tribunal found that although the Allahabad High Court in Surendra Prasad Aggarwal (supra) upheld 263 order passed by PCIT for initiation of penalty proceedings, the jurisdictional High Court in CIT vs. Chennai Metro Rail Ltd (supra) has taken a contrary view after considering the decision of the Allahabad High Court in Surendra Prasad Aggarwal (supra) and held that in the absence of any findings in the assessment order regarding underreporting or misreporting of income, the PCIT cannot revise assessment order to initiate penalty proceedings.

The Tribunal held that the PCIT erred in invoking revisional proceedings u/s 263 because the AO has chosen not to initiate penalty proceedings. The Tribunal quashed the revision order passed by the PCIT u/s 263.

Section 254: The Tribunal has jurisdiction to admit the additional grounds filed by the assessee to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee

19 ACIT vs. PC Jewellers Ltd [[2022] 93 ITR(T) 244(Delhi- Trib.)] ITA No.: 6649 & 6650 (DELHI) OF 2017 CONo. 68 & 74 (DELHI) OF 2020 A.Y.: 2013-14 & 2014-15; Date of order: 7th December, 2021

Section 254: The Tribunal has jurisdiction to admit the additional grounds filed by the assessee to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee

FACTS
In respect of the appeal filed before the ITAT by the department, the assessee had filed its cross objections and had raised additional grounds in the cross-objections. Admission of the additional grounds was opposed in principle by the Learned Departmental Representative.

HELD
The ITAT followed the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd vs. CIT[1998] 97 Taxman 358/229 ITR 383 and admitted the additional ground filed by the assessee.

The Hon’ble Apex court in the abovementioned case considered that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. The Hon’ble Apex Court also considered that the Tribunal will have the discretion to allow or not allow a new ground to be raised. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). It was held that the Tribunal has jurisdiction to examine a question of law having a bearing on the tax liability of the assessee, although not raised earlier, which arises from the facts as found by the authorities below, in order to correctly assess the tax liability of an assessee.

Section 68: When the assessee has been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter, there is no justification for the authorities to make or confirm the addition against the assessee under section 68 of the I.T. Act, 1961

18 Ancon Chemplast (P.) Ltd vs. ITO, Ward-2(4) [[2022] 93 ITR(T) 167(Delhi – Trib.)] ITA No.: 3562(DELHI) OF 2021 A.Y.: 2010-11; Date of order: 30th April, 2021

Section 68: When the assessee has been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter, there is no justification for the authorities to make or confirm the addition against the assessee under section 68 of the I.T. Act, 1961

FACTS
The assessee company issued shares at fair market value of Rs. 50 as per audited financial statements of the assessee company. The assessee received from one investor company M/s Prraneta Industries Ltd [Now known as Aadhar Venture India Ltd], a sum of Rs. 45 lakhs in three transactions dated 18.06.2009. Information in this case was received and perusal of the information revealed that the said Investor Company is one of the conduit company which is controlled and managed by ShriShirish C. Shah for the purpose of providing accommodation entries. The statement of Shri Omprakash Khandelwal, Promoter of the Company was recorded where he admitted to provide accommodation entries of the Investor Companies after charging Commission at the rate of 1.8%. Therefore, reasons were recorded and the Ld. A.O. initiated
the reassessment proceedings under section 147 of the Act.

To substantiate the facts that the assessee had received genuine share capital/premium, the assessee filed before A.O. documentary evidences such as copy of the confirmation, ITR Acknowledgement, copy of Board Resolution, copy of share application along with Share Application Form, copy of Master Data, Certificate of Incorporation and evidence in respect of listing of shares at BSE of Investor Company along with ITR and balance-sheet of the Investor. The assessee also submitted that Shri Omprakash Khandelwal, Director of the Investor Company retracted from his statement, and therefore there was no case of reopening its assessment on the basis of such statement.

The A.O. considering the modus operandi of these persons and did not accept the explanation of assessee to have received genuine share capital and made addition of Rs. 45 lakhs under section 68 of the I.T. Act and also made addition of Rs. 90,000 on account of Commission. Aggrieved, the assessee filed an appeal before the CIT(A), however, the appeal of the assessee was dismissed. Aggrieved, the assessee filed further appeal before the Tribunal.

HELD
The ITAT observed that the Investor Company was assessed to tax and was a listed public limited company, therefore, its identity was not in dispute. The assessee had also proved creditworthiness of the Investor Company and that entire transaction had taken place through a banking channel, therefore, genuineness of the transaction in the matter was also not in dispute. The assessee also explained before A.O. that Shri Shirish C. Shah was neither Director nor shareholder of the Investor Company. The A.O. had not brought any evidence on record to dispute the above explanation of the assessee. Therefore, the assessee had been able to prove the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter.

The ITAT considered following decisions rendered by co-ordinate benches of the ITAT:

i. INS Finance & Investment (P.) Ltd [IT Appeal No. 9266 (Delhi) of 2019, dated 29th October, 2020]

ii. Pr. CIT vs. M/s Bharat Securities (P.) Ltd (ITAT – Indore Bench later confirmed in Pr. CIT vs. M/s Bharat Securities (P.) Ltd [2020] 113 taxmann.com 32/268 Taxman 394 (SC)

These decisions considered identical issue on identical facts on account of share capital/premium received from M/s Prraneta Industries Ltd through Shri Shirish C. Shah based on his statement and statement of Shri Omprakash Khandelwal. This issue of receipt of share capital/premium was examined in detail by the Indore Bench of the Tribunal as well as Hon’ble Delhi Bench of the Tribunal and the addition on merits had been deleted.

The Order of the Indore Bench of ITAT was confirmed by the Hon’ble Madhya Pradesh High Court and ultimately, the SLP of the Department was dismissed confirming the Order of the Hon’ble Madhya Pradesh High Court.

Following these ITAT decisions, the ITAT did not find any justification to sustain the addition of Rs. 45 lakhs under section 68 of the I.T. Act, 1961 and addition of Rs. 90,000 under section 69C of the I.T. Act and deleted the addition of Rs. 45,90,000.

Where under a joint venture agreement shares were issued to a resident venture and a non-resident venture at a differential price and the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement, addition cannot be made under section 56(2)(viib) by disregarding the method of valuation adopted by the assessee

17 DCIT vs. Mais India Medical Devices (P.) Ltd  [[2022] 139 taxmann.com 94 (Delhi-Trib.)] A.Y.: 2014-15; Date of order: 31st May, 2022 Section: 56(2)(viib), Rule 11UA

Where under a joint venture agreement shares were issued to a resident venture and a non-resident venture at a differential price and the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement, addition cannot be made under section 56(2)(viib) by disregarding the method of valuation adopted by the assessee

FACTS
The assessee company was incorporated on 01.03.2012 on the basis of joint venture agreement between M/s Sysmech Industries LLP, a resident and M/s Demas Company, a non-resident. Both the joint venture partners agreed to contribute to the project cost of the assessee company in the ratio of 60 and 40 while keeping share holding ratio 50:50.

On the basis of valuation of equity shares at Rs. 59.99 per share following the DCF method assessee issued shares to non-resident shareholder at the rate of Rs. 60 per share after necessary compliances under FEMA etc. However, shares to the resident shareholder were issued at Rs. 40 per share.

The assessee filed return of income declaring loss of Rs. 2,97,79,141 and the case was picked up for limited scrutiny to furnish the various details including the share valuation as computed under Rule – 11UA of the Income Tax Rules, 1962.

Since the assessee company had suffered a loss in the previous assessment year, the Assessing Officer (AO) rejected the valuation of shares under DCF and made an addition, equivalent to the amount of premium charged from resident shareholder for allotment of shares to the Indian entity Sysmech Industries LLP, under section 56(2)(viib) in the hands of assessee.

Aggrieved, assessee preferred an appeal to the CIT(A) who set aside the order passed by the AO by making an observation that as projected in the report of prescribed expert there has been marked improvement in the profit margins of the company in subsequent years and thus upholding the valuation done by the chartered accountant of the assessee on DCF Method.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the AO rejected the share valuation as computed under Rule 11UA for the reason that the shares were issued to a resident shareholder for a price which was lower than the price at which shares were allotted to non-resident shareholder and also for the reason that, according to the AO, DCF method could not be applied since the assessee company had suffered a loss in the previous assessment year.

According to the Tribunal, difference in the share price as issued to the resident company and that to the non-resident company was in furtherance of the clauses of joint venture agreement. The discounted factor has occurred due to difference in the share of capital contribution to the project cost. However, in the case in hand the AO without considering the relevant clauses of joint ventures agreement presumed that as there was difference in the valuation of share for resident and non-resident entity, the valuation given by prescribed expert is liable to be rejected.

The Tribunal relying on the decision of the Supreme Court in Duncans Industries Ltd vs. State of UP 2000 ECR 19 held that question of valuation is basically a question of fact. Thus, where the law by virtue of Section 56(2)(viib) read with Rule 11UA (2)(b) makes the prescribed expert’s report admissible as evidence, then without discrediting it on facts, the valuation of shares cannot be rejected. It noted that the AO has not disputed or questioned the financial, technical and professional credentials of the venturists for entering into the joint ventures agreement. The AO without disputing the details of projects, revenue expected, costs projected has discredited the prescribed expert’s report which is admissible in evidence for valuation of shares and to determine fair market value.

The Tribunal dismissed the appeal filed by the revenue.

There is no prohibition for the NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society Merely the difference in the time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the contentions of the assessee

16 Atul H Patel vs. ITO  [TS-348-ITAT-2022(Ahd.)] A.Y.: 2012-13; Date of order: 29th April, 2022 Section: 68

There is no prohibition for the NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society

Merely the difference in the time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the contentions of the assessee

FACTS
During the year under consideration, a sum of Rs. 11,44,000 was deposited, in cash, in the bank account of the assessee, a non-resident Indian, residing at Auckland, New Zealand since 2003. The Assessing Officer (AO) treated the same as cash credit under section 68 and added the same to the total income of the assessee.

Aggrieved, assessee preferred an appeal to CIT(A) where he stated that he accepted gift of Rs. 6.44 lakh and Rs. 5 lakh from his father and brother which was used by him for purchasing a property in Vadodra. According to the assessee, his father and brother were engaged in agricultural activity on the land held by them in their personal capacity as well as on land belonging to others and were able to generate annual agricultural income of Rs. 23 lakh approx. The assessee produced cash book, bank book, 7/12 extract and gift deed.

The CIT(A) called for a remand report from the AO wherein the AO mentioned that the date of deposit of cash in bank account of assessee was before the date of gift as mentioned in the gift declaration. Thus, he contended that source of cash deposited cannot be out of gift amount. The assessee, in response, submitted that there was a typographical error in the gift declaration. 7th October, 2011 was inadvertently typed as 27th October, 2011.

The CIT(A) held that the assessee is a very unusual and wealthy NRI who has accepted a gift from his father and brother who are claimed to be agriculturists. According to him, the donors do not have sufficient resources and capacity to gift wealthy assessee. Also, there was a contradiction in the gift deed. Therefore, CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
As regards the mismatch of the time in the amount of cash deposits in the bank out of the gift received by the assessee, the Tribunal held that it was the revenue who doubted that the cash deposit is not out of the amount of gift received by the assessee. It held that the assessee has discharged his onus by submitting the details (including revised gift deed) that the cash was deposited out of the gift amount. Now the onus shifts upon the revenue to disprove the contention of the assessee based on documentary evidence. The Tribunal observed that no contrary evidence has been brought on record by the revenue suggesting that the amount of cash deposit is not out of the gift amount. It held that merely the difference in time between the cash deposited in the bank vis-à-vis cash received as gift cannot authorise the revenue authorities to draw inferences against the assessee until and unless some documentary evidences are brought on record contrary to the arguments of the assessee.

The Tribunal observed that admittedly it is very unusual that a wealthy NRI accepts a gift from his father and brother. Generally, the practice is different in society. As such NRIs give gifts to relatives. The Tribunal held that it found no prohibition for NRI for accepting gifts from relatives. In the absence of any prohibition, no adverse inference can be drawn against the assessee based on the prevailing system in society.

It also noted that assessee has furnished sufficient documentary evidence of his father and brother to justify the income in their hands from agricultural activity. But none of the authority below has made any cross verification from the concerned parties in order to bring out the truth on the surface. It held that AO before drawing any adverse inference against the assessee, should have cross verified from the donors by issuing notice under section 133(6) / 131 of the Act. The Tribunal held that no adverse inference can be drawn against the assessee by holding that the amount of cash deposited by the assessee in his bank represents the unexplained cash credit under section 68 of the Act.

The Tribunal set aside the order passed by the CIT(A) and directed the AO to delete the addition made by him.

Non-compete fees does not qualify for depreciation under section 32 since an owner thereof has a right in personam and not a right in rem

15 Sagar Ratna Restaurants Pvt. Ltd vs. ACIT  [TS-325-ITAT-2022(DEL)] A.Y.: 2014-15; Date of order: 31st March, 2022 Section: 32

Non-compete fees does not qualify for depreciation under section 32 since an owner thereof has a right in personam and not a right in rem

FACTS
For Assessment Year 2014-15, assessee filed a return of income declaring a loss of Rs. 23,12,53,397. While assessing the total income, the Assessing Officer (AO) noticed that the assessee has claimed Rs. 1,94,33,166 as depreciation on non-compete fees. Since the AO was of the view that non-compete fee is not an intangible asset as per Section 32(1)(ii) and Explanation thereto, he asked the assessee to show cause why the same should not be disallowed. The AO following the ratio of the decision of Delhi High Court in Sharp Business Systems vs. CIT [(2012) 211 Taxman 567 (Del)] disallowed the claim of depreciation on non-compete fees.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that by an agreement entered in June 2011 the assessee acquired a restaurant in the name and style of Sagar Ratna. As per the terms of the agreement, the transferor had transferred all its rights, copyrights, trademarks, etc. in respect of the restaurant Sagar Ratna. The payment made by the assessee towards non-compete fee to the transferor was treated by the assessee as a capital expenditure and depreciation was claimed thereon for A.Y. 2012-13 and 2013-14 which was allowed.

The contention of the assessee that the claim be allowed on the ground that it has been allowed in the earlier years was rejected on the ground that in earlier years the authorities did not have the benefit of ratio laid down by jurisdictional high court in the case of Sharp Business System (supra).

The Tribunal noted that the Delhi High Court in Sharp Business System (supra) while dealing with an identical issue has come to a conclusion that non-compete fee though is an intangible asset it is unlike the items mentioned in Section 32(1)(ii) where an owner can exercise rights against the world at large and which rights can be traded or transferred. In case of non-compete fees the advantage is restricted only against the seller. Therefore, it is not a right in rem but a right in personam. The Tribunal mentioned that it is conscious of the fact that some other non-jurisdictional High Courts have held that non-compete fee is an intangible asset coming within the ambit of Section 32(1)(ii) of the Act and have allowed depreciation thereon, however, the Tribunal was bound to follow the decision of the jurisdictional High Court.

The Tribunal dismissed the appeal filed by the assessee.

Powers of Commissioner (Appeals) are co-terminus with powers of Assessing Officer and that he is empowered to call for any details or documents which he deems necessary for proper adjudication of issue

14 ITO (TDS) vs. Tata Teleservices Ltd. [[2021] 92 ITR(T) 87 (Delhi – Trib.)] ITA Nos.:1685 & 1686 (DEL.) of 2017 A.Y.: 2008-09 and 2009-10; Date of order: 27th September, 2021

Powers of Commissioner (Appeals) are co-terminus with powers of Assessing Officer and that he is empowered to call for any details or documents which he deems necessary for proper adjudication of issue

FACTS
It was seen that no proper opportunity was given to the assessee to justify its case of non deduction of tax at source and ground was raised before the Ld. CIT(A) for violation of principles of natural justice by the assessee. The assessee had submitted additional evidence before the Ld. CIT(A) in the aforesaid matter. The Ld. CIT(A) had accepted the said evidence, without taking recourse to Rule 46A of the Income-tax Rules. The revenue filed an appeal before the ITAT on the ground that the CIT(A) erred to admit the additional evidence produced by the assessee before him in contravention of Rule 46A(3) of the Income-tax Rules, 1962, in as much as no opportunity was given to the Assessing Officer to examine the correctness of the additional evidence produced by the assessee before the CIT(A).

HELD
The ITAT observed that the assessee had raised the ground of violation of principles of natural justice before the CIT(A) since no proper opportunity was given to the assessee to justify its case. The assessee did not make any application for admitting additional evidences before the CIT(A).

The CIT(A) examined the various documents available on record in exercise of his powers u/s 250(4). He opined that the Assessing Officer had failed to provide proper opportunity to the assessee. The ITAT held that, in such circumstances, the CIT(A) had acted well within his power to adjudicate the issues after calling for necessary information and details and it cannot be said that there was any violation of rule 46A of the Income-tax Rules. It is trite that the First Appellate Authority has powers which are co-terminus with the powers of the Assessing Officer and that he is empowered to call for any details or documents which he deems it necessary for the proper adjudication of the issue and there is no requirement under the law for granting any further opportunity to the Assessing Officer in terms of section 250(4) in such cases.

On the basis, the appeal filed by the department was dismissed.

Where Assessing Officer failed to bring evidences to support his finding that assessee was involved in rigging price of shares held by her so as to get an undue benefit of exemption u/s 10(38), transactions of sale and purchase of such shares by assessee through recognized stock exchange could not be treated as bogus so as to make additions under Section 68

13 Mrs. Neeta Bothra vs. ITO  [[2021] 92 ITR(T) 450 (Chennai – Trib.)] ITA Nos.: 2507 & 2508 (CHNY.) of 2018 A.Ys.: 2012-13 and 2013-14, Date of order: 8th September, 2021

Where Assessing Officer failed to bring evidences to support his finding that assessee was involved in rigging price of shares held by her so as to get an undue benefit of exemption u/s 10(38), transactions of sale and purchase of such shares by assessee through recognized stock exchange could not be treated as bogus so as to make additions under Section 68

FACTS
Assessee purchased and sold shares of M/s. Tuni Textile Mills Limited (hereinafter referred to as ‘TTML’). She earned Long Term Capital Gains on the said transaction which was claimed exempt u/s 10(38) of the Act. The Assessing Officer held the transaction to be bogus and added the entire sale consideration u/s 68 of the Act for the reason that TTML was named as a penny stock in the report prepared by investigation wing of the Department and that though the assessee had sold the shares at a higher price in the market, the financials of TTML did not justify such a price rise in a short period of just two years. Aggrieved, the assessee filed appeal before the CIT(A). However, CIT(A) also decided the appeal against the assessee mainly on the basis of mere circumstantial evidences like:

(i) The broker through which assessee carried out the transaction was previously charged by SEBI under the relevant law for being found guilty of violating regulatory requirements.

(ii) The assessee, based in Chennai, carried out the lone instant transaction through a broker in Ahmadabad.

(iii) Shares of TTML have been specifically named as penny stocks by investigation wing of the Department.

(iv) Assessee was not able to explain how a company having negligible financial strength had split its equity shares in the ratio of 1:10 and further, failed to explain how price of shares were quoted at a record 9,400% growth rate in a short span of two years.

Therefore, the CIT(A) opined that mere furnishing certain evidences like broker notes, bank statements, etc is not sufficient to prove genuineness of transaction, when other circumstantial evidences show that transaction of share trading is not genuine.

Aggrieved, the assessee preferred appeal before the ITAT.

HELD
The ITAT observed that the fact of purchase and sale of the shares being through Recognized Stock Exchange was not disputed. However, both the Assessing Officer as well as CIT(A) had proceeded predominantly on the basis of analysis of financial statements of TTML. Even though the fact that the financial statements of TTML did not paint a very rosy picture coupled with the fact that TTML was a penny stock was brought to notice by both the lower authorities, the said facts alone are not sufficient to draw adverse inference against the assessee, unless the AO linked transactions of the assessee to organized racket of artificial increase in share price. It further observed that though the broker may be engaged in fraudulent activities, whether the assessee was a part of those activities was to be seen. There was no evidence on record to show that assessee was part of the organized racket of rigging price of shares in the market. The findings of the Assessing Officer was purely based on suspicion and surmises.

It stated that the Assessing Officer predominantly relied on the theory of human behaviour and preponderance of probabilities for the reason that the assessee was never involved in purchase and sale of shares and the instant transaction in question was the only one. However, the said fact was found to be erroneous by the ITAT.

Therefore, the ITAT concluded that unless the Assessing Officer brings certain evidences to support his finding that the assessee was also involved in rigging share price to get undue benefit of exemption u/s 10(38) of the Act, the transactions of sale and purchase of shares through recognized stock exchange could not be treated as unexplained cash credit u/s 68 of the Act.

Adjustment u/s 143(1)(a) without adjustment is legally invalid

12 Arham Pumps vs. DCIT  [TS-355-ITAT-2022(Ahd)] A.Y.: 2018-19; Date of order: 27th April, 2022 Section: 143(1)(a)

Adjustment u/s 143(1)(a) without adjustment is legally invalid

FACTS
For A.Y. 2018-19, assessee firm filed its return of income declaring therein a total income of Rs. 26,03,941. The said return was processed by CPC under section 143(1) and a sum of Rs. 28,16,680 was determined to be the total income, thereby making an addition of Rs. 2,10,743 to the returned total income on account of late payment of employees contribution to PF and ESIC which were disallowed u/s 36(1)(va) of the Act.

Aggrieved, assessee preferred an appeal to CIT(A), which appeal was migrated to NFAC as per CBDT notification. NFAC gave two opportunities to the assessee and upon not receiving any response decided the matter, against the assessee, based on documents and materials on record.

HELD
The Tribunal noted that the NFAC, in its order, has dealt with the matter very elaborately and has upheld the addition by following the decision of jurisdictional High Court in Gujarat State Road Transport Corporation 41 taxmann.com 100 (Guj.) and Suzlon Energy Ltd. (2020) 115 taxmann.com 340 (Guj.).

It also noted that in the intimation there is no description/explanation/note as to why such disallowance or addition is being made by CPC in 143(1) proceedings. The Tribunal having gone through the provisions of section 143(1) of the Act and the proviso thereto held that a return can be processed u/s 143(1) by making only six types of adjustments. The first proviso to section 143(1)(a) makes it very clear that no such adjustment shall be made unless an intimation has been given to the assessee of such adjustment either in writing or in an electronic mode. In this case, no intimation was given to the assessee either in writing or in electronic mode.

The Tribunal held that CPC had not followed the first proviso to section 143(1)(a). Also, NFAC order is silent about the intimation to the assessee. The Tribunal held that since the intimation is against first proviso to section 143(1)(a), the entire 143(1) proceedings are invalid in law.

It observed that NFAC has not looked into the fundamental principle of “audi alteram partem” which has been provided to the assessee as per 1st proviso to section 143(1)(a) but has proceeded with the case on merits and also confirmed the addition made by the CPC. It held that NFAC erred in conducting the faceless appeal proceedings in a mechanical manner without application of mind. The Tribunal quashed the intimation issued by the CPC and allowed the appeal filed by the assessee.

Proviso to section 201(1) inserted by the Finance (No. 2) Act, 2019 is retrospective as it removes statutory anomaly over sums paid to non-residents

11 Shree Balaji Concepts vs. ITO, International Taxation [TS-393-ITAT-2022(PAN)] A.Y.: 2012-13; Date of order: 13th May, 2022 Sections: 201(1) and 201(1A)    

Proviso to section 201(1) inserted by the Finance (No. 2) Act, 2019 is retrospective as it removes statutory anomaly over sums paid to non-residents

FACTS
The assessee purchased an immovable property from Elrice D’Souza and his wife for a consideration of R10 crore. However, it did not deduct tax at source as was required u/s 195 of the Act. The Assessing Officer (AO) held the assessee to be an assessee in default and levied a tax of Rs.2,26,60,000 u/s 201(1) and interest of Rs. 1,22,36,400 u/s 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the payees in the instant case having filed their return of income and disclosed the consideration in their respective returns and have duly complied with the amended provisions of section 201[1] of the Act, which has been inserted in Finance [No. 2] Act, 2019.

After considering the decisions as relied upon by the appellant for the proposition that any provision which has been inserted with an object to remove any difficulty or anomaly, then the said provision has to be given retrospective effect:

(a) Celltick Mobile Media Pvt. Ltd. vs. DCIT (2021) 127 taxmann.com 598 (Mumbai-Trib.);

(b) CIT vs. Ansal Land Mark Township Pvt. Ltd. (2015) 61 taxmann.com 45 (Delhi);

(c) CIT vs. Calcutta Export Company [2018] 93 taxmann.com 51 (SC);

(d)  DCIT vs. Ananda Marakala (2014) 48 taxmann.com 402 (Bangalore-Trib.).

The Tribunal held that the said proviso to section 201(1) wherein the benefit has also been extended to the payments made to non-residents is meant for removal of anomaly, is required to be given with retrospective effect.

The Tribunal held that the appellant assessee cannot be held as an assessee in default as per proviso to section 201(1) of the Act, in view of the amended provisions of section 201(1) of the Act, being inserted in Finance (No. 2) Act, 2019.

The Tribunal deleted the demand raised by the AO and confirmed by the CIT(A) u/s 201(1) of the Act of Rs. 2,26,60,000.

As regards the sum of Rs. 1,22,36,400 levied as interest u/s 201(1A) of the Act, the Tribunal noted that the said property was sold by the appellant on 17th September, 2011 and the return of income by the two payees have been filed on 30th July, 2012. Thus, interest amount u/s 201(1A) of the Act has to be calculated for the period 7th October, 2011 to 30th July, 2012 being the date of filing of the return by the two payees.

The Tribunal directed the AO, to re-compute the interest u/s 201(1A) of the Act, for the period 7th October, 2011 to 30th July, 2012 till the date of filing of the return by the two payees.

Section 56(2)(vii)(c) does not apply to bonus shares received by an assessee

10 JCIT vs. Bhanu Chopra  [TS-388-ITAT-2022 (DEL)] A.Y.: 2015-16; Date of order: 29th April, 2022 Section: 56(2)(vii)

Section 56(2)(vii)(c) does not apply to bonus shares received by an assessee

FACTS
For A.Y. 2015-16, assessee filed a return of income declaring a total income of R31,99,25,740. While assessing the total income, the Assessing Officer (AO) computed FMV of bonus shares of HCL Technologies in terms of Rule 11UA to be R47,21,93,975 and consequently added this amount to the total income of the assessee by applying the provisions of section 56(2)(vii)(c) of the Act.

The AO observed that the taxable event is receipt of property without consideration or for a consideration which is less than its FMV. According to the AO, the assessee received property in the form of bonus shares and therefore the FMV of the same is taxable u/s 56(2)(vii)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the addition made by the AO.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the CIT(A) has –

(i)    while controverting the findings of the AO and coming to the conclusion that provisions of section
56(2)(vii)(c) are not applicable to the case of the assessee has followed the decision of the Apex Court in CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC);

(ii)    while deciding the issue he has also relied upon the decision in the case of Dr. Rajan vs. Department of Income Tax (ITA No. 1290/Bang/2015) wherein, the judgment referred above of the Apex Court in the case of the CIT vs. Dalmia Investment Co Ltd (supra) was also relied upon by the Tribunal and in the case of Sudhir Menon HUF vs. ACIT (ITA No. 4887/Mum/2013) wherein, it was clearly held by the Tribunal that allotment of bonus shares cannot be considered as received for an inadequate consideration and therefore, it is not taxable as income from other sources u/s 56(2)(vii)(c) of the Act;

(iii)    held that the issue of bonus share is by capitalization of its profit by the issuing company and when the bonus shares are received it is not something which has been received free or for a lesser FMV. Consideration has flown out from the holder of the shares may be unknown to him/her, which is reflected in the depression in the intrinsic value of the original shares held by him/her.

The Tribunal held that –

(i) even the CBDT vide Circular No. 06/2014 dated 11th February, 2014 has clarified that bonus units at the time of issue would not be subjected to additional income tax u/s 115R of the Act, since issue of bonus units is not akin to distribution of income by way of dividend. This may be inferred from provisions of section 55 of the Act which prescribed that “cost of acquisition” of bonus units shall be treated as Nil for purposes of computation of capital gains tax;

(ii) further, the CBDT vide Circular No. 717 dated 14th August, 1995 has clarified that “in order to overcome the problem of complexity, a simple method has been laid down for computing of cost of acquisition of bonus shares. For the sake of clarity and simplicity, the cost of bonus shares is to be taken as “Nil? while the cost of original shares is to be taken as the amount paid to acquire them. This procedure will also be applicable to any other security where a bonus issue has been made;

(iii) the issue under consideration has been elaborately considered by the Tribunal in various cases such as Rajan Pai Bangalore vs. Department of Income Tax and Sudhir Menon HUF (supra) and even by the Apex Court in the case of CIT vs. Dalmia Investment Co. Ltd. (supra) as relied upon by the CIT(A) while holding that the provisions of section 56(2)(vii)(c) of the Act are not applicable to the bonus shares;

(iv) there is neither any material nor any reason to controvert the findings of the CIT(A).

The Tribunal dismissed the appeal filed by the revenue.

Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

9 ITO vs. Rajeev Ratanlal Tulshyan [2021] 92 ITR(T) 332 (Mumbai – Trib.) [ITA No.: 5748 (MUM.) of 2017 Cross Objection No. 118 (Mum.) of 2018 A.Y.: 2014-15; Date of order: 1st October, 2021

Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

FACTS
Assessee, a resident individual, was allotted rights shares of a company. In assessment, it was alleged that consideration being less than Fair Market Value (FMV), the difference between the FMV and consideration paid by the assessee would be taxable u/s 56(2)(vii). In the course of appeal, the assessee submitted that the shares were offered on right basis by the company on a proportionate basis to all existing shareholders. The assessee subscribed to the rights issue only to the extent of proportionate offer and no further. He also drew attention to CBDT Circular No. 5 of 2010 dated 3rd June, 2010 which provided that the newly introduced provisions of section 56(2)(vii) were anti-abuse measures. Similarly, CBDT Circular No. 1 of 2011 provided that these provisions were introduced as a counter evasion mechanism to prevent the laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent was not to tax the transactions entered into in the normal course of business and trade, the profits of which are taxable
under specific head of income. The assessee, inter-alia, relied on the decision of Mumbai Tribunal in Sudhir Menon HUF vs. Asst. CIT [2014] 45 taxmann.com 176/148 ITD 260 (Mum.) wherein it was held that in case of proportionate allotment of shares, there would be no taxability u/s 56(2)(vii)(c). He also submitted that, as held in Dy. CIT vs. Dr. Rajan Pai [IT Appeal No. 1290 (Bang.) of 2015, dated 29-4-2016], since the Gift tax Act was not applicable to issue of shares, the provisions of section 56(2) would not apply to transaction of nature stated above. He also relied on the decision of Hon’ble Supreme Court in Khoday Distilleries Ltd. vs. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312, which held that shares [thus, property, as stipulated in Section 56(2)(vii)] comes into existence only on allotment. However, at
the same time, it was admitted by the assessee that similar argument was rejected by Mumbai Tribunal in Sudhir Menon HUF (supra) wherein the bench held that though allotment of shares is not to be regarded as transfer but since the assessee is receiving property in the form of shares, the provisions of section 56(2)(vii) would apply.

The CIT(A) upheld the addition, however, restricted the same to the extent of gain in value on account of disproportionate allotment of shares to the assessee. Aggrieved, the revenue filed appeal with the ITAT for the amount of addition not sustained by the CIT(A), while the assessee filed cross objection as regards the amount of addition sustained by the CIT(A).

HELD
The ITAT observed that there was a fallacy in the conclusion of the lower authorities that the allotment was disproportionate and skewed in favour of the assessee in that the rights offer made on two occasions during the year in the same proportion to all existing shareholders. It was only because few of the other shareholders did not exercise their right that the assessee’s shareholding in the company increased; there was no disproportionate allotment. Therefore, the ratio of decision in Sudhir Menon (supra) would be applicable.

It also considered the decision of the coordinate bench of Mumbai Tribunal in Asstt. CIT vs. Subodh Menon [2019] 103 taxmann.com 15/175 ITD 449 which, applying the ratio held in Sudhir Menon (supra), held that the provisions of section 56(2)(vii) did not apply to bona fide business transaction. The CBDT Circular No. 1/2011 dated 6th April, 2011 explaining the provision of section 56(2)(vii) specifically stated that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, it is stated that “the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head of income”. Therefore, the aforesaid transactions, carried out in normal course of business, would not attract the rigors of provisions of section 56(2)(vii).

The ITAT, on perusal of orders of lower authorities, did not find any allegations of tax evasion or abuse by the assessee. The transactions were ordinary transactions of issue of rights shares to existing shareholders in proportion to their existing shareholding and therefore, no abuse or tax evasion was found to be made by the assessee.

The ITAT also took into consideration Circular No. 03/2019 dated 21st January, 2019 wherein it was mentioned, inter alia, that intent of introducing the provisions was anti-abusive measures still remain intact, and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent the laundering of unaccounted income. Therefore, the same does not apply to a genuine issue of shares to existing shareholders. The position was also duly supported by the decision of Bangalore Tribunal in Dr. Rajan Pai (supra) which is further affirmed by the Hon’ble Karnataka High Court in Pr. CIT vs. Dr. Rajan Pai IT Appeal No. 501 of 2016, dated 15-12-2020.

On these grounds, the ITAT deleted the addition made by the A.O. and dismissed the appeal filed by revenue and allowed the cross-objections filed by the assessee.

Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

8 Digiqal Solution Services (P.) Ltd. vs. ACIT [2021] 92 ITR(T) 404 (Chandigarh – Trib.) ITA No.: 176 (Chd.) of 2021 A.Y.: 2019-20; Date of order: 4th October, 2021

Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

FACTS
Addition of employees’ contribution to ESI and PF deposited beyond the due date prescribed in Section 36(1)(va), but before the due date of filing return of income u/s 139(1) was made to the assessee’s income in the intimation u/s 143(1). Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) held that the said amendment though effected by the Finance Act, 2021 but when read in the background of the decision of the Hon’ble Apex Court in the case of Allied Motors (P.) Ltd. vs. CIT (1997) 91 taxmann.com 205 / 224 ITR 677, the intention of Legislature set out through memorandum through the Finance Act while introducing the Explanations to section made it clear that the said amendments would apply to all pending matters as on date. The CIT(A) thus upheld the addition. Aggrieved, the assessee filed a further appeal before the Tribunal.

HELD
The ITAT considered the following decisions rendered by co-ordinate benches of the ITAT:

• ValueMomentum Software Services (P.) Ltd. vs. Dy. CIT [ITA No. 2197 (Hyd.) of 2017]

• Hotel Surya vs. Dy. CIT [ITA Nos. 133 & 134 (Chd.) of 2021]

• Insta Exhibition (P.) Ltd. vs. Addl. CIT [ITA No. 6941 (Delhi) of 2017]

• Crescent Roadways (P.) Ltd. vs. Dy. CIT [ITA No. 1952 (Hyd.) of 2018]

These decisions held that the amendment to Section 36(1)(va) and Section 43B of the Act effected by the Finance Act, 2021 are applicable prospectively, reading from the Notes on Clauses at the time of introduction of the Finance Act, 2021, specifically stating the amendment being applicable in relation to A.Y. 2021-22 and subsequent years.

It also considered the following decisions of jurisdictional High Court holding that employee’s contribution to ESI & PF is allowable if paid by the due date of filing return of income u/s 139(1) of the Act:

• CIT vs. Nuchem Ltd. [ITA No. 323 of 2009]
• CIT vs. Hemla Embroidery Mills (P.) Ltd. [2013] 37 taxmann.com 160/217 Taxman 207 (Mag.)/ [2014] 366 ITR 167 (Punj. & Har.)

Following these High court decisions and ITAT decisions, the ITAT allowed the assessee’s claim of deduction and set aside the order of CIT(A).

ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1) The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

7 Bangalore Electricity Supply Co. Ltd. vs. DCIT  [137 taxmann.com 287 (Bangalore – Trib.)] A.Y.: 2008-09; Date of order : 7th April, 2022 Section: 140

ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1)

The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

FACTS
The appeal filed in this case was found by the Tribunal, at the time of hearing on 6th March, 2022, to be defective on the ground that the appeal was not signed by the competent authority and it was signed by the General Manager (CT&GST), BESCOM. The Tribunal asked the AR of the assessee to cure the defect by 16th March, 2022. On 16th March, 2022, none appeared on behalf of the assessee and therefore the Tribunal proceeded to decide the appeal by hearing the DR.

The Tribunal noted that the focus in the present appeal is to decide whether the appeal filed is invalid or defective.

HELD
On going through the provisions of section 140, the Tribunal noted that clauses (a) and (c) contain the provisions for the signing of return by a valid power of attorney holder while other clauses do not have such a provision. Thus, there is a clear line of demarcation between the classes of assessees, who, in certain circumstances, can get their returns signed and verified by the holder of a valid PoA, in which case such PoA is required to be attached to the return and, on the other hand, the classes of assessees who do not enjoy such privilege.

It held that it is not permissible for a non-privileged assessee to issue PoA and get his return filed through the holder of a PoA. It is true that in common parlance if a person can do some work personally, he can get it done through his PoA holder also. But section 140 has made separate categories of assesses, and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the Legislature is not to extend this general rule to all the classes of the assessees. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees.

From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid Power of Attorney holder in the specified circumstances and the other categories of the assessee are not entitled to this privilege.

The Tribunal noted that the provisions of section 140(c) had been amended w.e.f. 1st April, 2020 where it was stated that the return could be filed by any other person as may be prescribed for this purpose. It observed that even if this amendment is held to be applicable retrospectively also, it is not clear whether the General Manager (CT&GST), BESCOM, was holding a valid PoA from the assessee company to verify the appeal of the assessee even as provided u/s 140(c). Since this information was not available on the record, the Tribunal dismissed the appeal.

Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

6 Mrs. Sikha Sanjaya Sharma vs. DCIT  [137 taxmann.com 214 (Ahmedabad – Trib.)] A.Y.: 2016-17; Date of order: 13th April, 2022 Sections: 10(38), 70, 74

Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

FACTS
The assessee, an individual, filed her return of income declaring a total income of Rs 17,25,67,630 and claimed carry forward of long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. The assessee also claimed long term capital gain (in respect of transactions on which STT was paid) of Rs. 2,62,06,472 to be exempt u/s 10(38).

The Assessing Officer (AO) completed the assessment u/s 143(3) by accepting the returned income but reduced the claim of carry forward of loss by setting off exempt long term capital gain of Rs. 2,62,06,472 against long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. Therefore, the AO reduced the quantum of losses claimed to be carried forward by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who relying on the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. In ITA No. 3317/Mum./2009 & 1692/Mum./2010 dated 10.6.2015 and of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani vs. ACIT [(2014) 367 ITR 261] upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the short controversy before it is whether the assessee was legally correct in claiming carry forward of full amount of losses without setting off such losses against long term capital gain exempted u/s 10(38). To resolve the controversy, the Tribunal noted the scheme of the Act and analysed the decisions relied upon, on behalf of the assessee. It noted that the CIT(A) has dismissed the claim of the assessee by relying upon the decision of the Gujarat High Court, in the case of Kishorbhai Bhikhabhai Virani (supra) and the AR appearing on behalf of the assessee has relied upon this decision to support the claim of the assessee. The Tribunal observed that the Hon’ble Court has held that the exempted long term capital loss u/s 10(38) does not enter into the computation of total income. Therefore such loss cannot be set off against taxable income. Likewise the exempted LTCG u/s 10(38) does not enter into the computation of total income and therefore a taxable loss cannot be set off against such income. The Tribunal held the reliance of CIT(A) on this decision to be totally misplaced. It held that the decision was in favour of the assessee.

As regards the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. (supra), the Tribunal observed that the Tribunal, in this case, was persuaded to follow the decision of the Calcutta High Court in preference to the decision of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani (supra). The Tribunal found itself bound by the decision of the jurisdictional High Court.

The Tribunal held that the assessee has rightly claimed the carry forward of Long Term Capital Loss (STT not paid) of Rs. 15,41,625 and Short Term Capital Loss of Rs. 5,06,74,578 without setting off against the exempted long term capital gain (STT paid) of Rs. 2,62,06,472 u/s 10(38).

Where revenue had been duly informed about dissolution of trust and still chose to continue proceeding on dissolved entity which was no more in existence, such trust was a substantive illegality and not a procedural violation of nature adverted to in section 292B

5 Varnika RPG Trust vs. PCIT
[2021] 91 ITR(T) 1 (Delhi-Trib.)
ITA No.: 451 to 453 (Delhi) of 2021
A.Y.: 2016-17;
Date of order: 9th September, 2021  
                
Where revenue had been duly informed about dissolution of trust and still chose to continue proceeding on dissolved entity which was no more in existence, such trust was a substantive illegality and not a procedural violation of nature adverted to in section 292B

FACTS
Assessee trust was formed for the sole benefit of the settlor’s minor grand-daughter.

As per the trust deed, all the trust property including accumulation of yearly income along with the rights of ownership, use, possession and dispossession, were to vest with the granddaughter on attaining majority or on 31st March 2015, whichever was later and the term of the trust would expire on such date. The beneficiary attained majority on 3rd September, 2015 (i.e. A.Y. 2016-17).

Regular Assessment was completed u/s 143(3) in the year 2018 wherein it was brought on record that the trust stood dissolved from 3rd September, 2015 on account of granddaughter attaining majority. However, the PCIT on 15th March, 2021 initiated the revisionary proceedings u/s 263 against the assessee trust and revised the assessment order. The assessee contended that the order passed by the PCIT was invalid as the said trust was not in existence as on the date of initiating such revisionary proceedings.

HELD
The ITAT held that the trust was in existence only upto A.Y. 2016-17 and that the revenue had been duly informed about the dissolution of trust; but still the PCIT chose to continue the proceeding on the dissolved entity which was no more in existence. Hence, impugned order passed by the PCIT u/s 263 in the name of the dissolved trust was a substantive illegality and not a procedural violation of the nature adverted to in section 292B. It therefore held that the order passed on non-existent entity was a nullity.

In arriving at the conclusion, the ITAT applied the ratio of the judgment in Pr. CIT vs. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375/265 Taxman 515/416 ITR 613 (SC).

Proviso to section 68 inserted vide Finance Act, 2012 requiring the Assessee to prove source in respect of share premium money; operates prospectively from A.Y. 2013-14. Merely because the lender parties did not respond to summons/notices of the Assessing Officer; that cannot be sole ground to make addition u/s 68 when otherwise the documentary evidences were duly produced by the Assessee

4 AdhoiVyapar (P.) Ltd. vs. ITO
[2021] 91 ITR(T) 582 (Mumbai-Trib.)
ITA No.: 7308 to 7311 (MUM.) of 2019
A.Ys.: 2009-10 to 2012-13;
Date of order: 1st October, 2021

Proviso to section 68 inserted vide Finance Act, 2012 requiring the Assessee to prove source in respect of share premium money; operates prospectively from A.Y. 2013-14. Merely because the lender parties did not respond to summons/notices of the Assessing Officer; that cannot be sole ground to make addition u/s 68 when otherwise the documentary evidences were duly produced by the Assessee

FACTS
Assessee-company received share application money from various parties. As evidence, the assessee furnished various documents like share application form, PAN Card, confirmation from share-applicants regarding investment, relevant pages of bank passbook/statement, income-tax acknowledgement for the year, statement of income, financials for the relevant year and letter of allotment. It also submitted copies of Board Resolution, Memorandum and Articles of Association in case of corporate applicants. The assessee summarized the net worth position of all the share-applicants which substantiated that all the entities had sufficient net worth to make the investment in the assessee-company and were filing their ITRs since past several years ranging from 5 to 15 years.

Because few of the applicants failed to respond to summons u/s 131, the Assessing Officer concluded that the receipts shown by the assessee were accommodation entry in the garb of share capital /share premium and made addition u/s 68. It also alleged that commission payments must have been made for the same and made some addition u/s 69C also. The CIT(A) upheld the said addition.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The ITAT allowed the assessee’s appeal on the following grounds:

The ITAT observed that the shareholder entities had sufficient net worth to invest in the assessee-company. It was also observed that there was no immediate cash deposits before making investment in the assessee company.

As regards attendance of summons u/s 131, the ITAT concluded that the assessee does not have any legal power to enforce the attendance of the share-applicants.

The ITAT also remarked that as the said year was the first year of operation, it was difficult to presume that the assessee generated unaccounted money in the first year itself and routed the same in the garb of share-application money.

Therefore, on the above grounds, the ITAT concluded that assessee had discharged the initial onus of proving these transactions in terms of the requirements of Section 68 and the onus had shifted on Assessing Officer to dislodge the assessee’s documentary evidences and bring on record cogent material to substantiate his adverse allegations. The additions made could not be sustained merely on the basis of suspicion, conjectures and surmises.

The proviso to Section 68 as inserted vide the Finance Act, 2012 requiring the assessee to substantiate the source of share application/premium money was applicable only from A.Y. 2013-14, and the same is not retrospective in nature. Therefore, the assessee was not even otherwise obligated to prove the source of share application money in the years under consideration which is A.Ys. 2009-10 to 2012-13.

Thus, the addition made u/s 68 was deleted. Consequently, the addition made u/s 69C was also deleted.

Where source of funds is clearly established, clubbing provisions do not apply

3 Abhay Kumar Mittal vs. DCIT
[TS-152-ITAT-2022 (Delhi)]
A.Y.: 2013-14; Date of order: 8th February, 2022
Sections: 10(13A), 64

Where source of funds is clearly established, clubbing provisions do not apply

FACTS
The assessee, an individual, in his return of income, claimed exemption of HRA in respect of rent of Rs. 5,34,000 paid by him to his wife. The Assessing Officer (AO), in the course of assessment proceedings, asked the assessee to explain the capacity of the assessee’s wife to purchase the property giving details of sources of funds for the same. The assessee explained that the property was worth Rs. 1.15 crore of which amount of Rs. 87.50 was funded by the assessee himself, and the balance was invested out of her own sources. The AO noticed that the assessee’s wife, in fact, had no independent source of income to make the investment in FDRs and a major share of Rs. 87.50 lakh was funded by the assessee. The AO held that rental income earned by the assessee’s wife is liable to be clubbed in the hands of the assessee since the investment to have purchased the property was made by her without having an independent source of income. The AO clubbed the rental income of Rs. 5,34,000 after allowing deduction u/s 24 and made an addition of Rs. 3,73,800 in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO by holding that the contention that the investment has been made by her out of her independent source is not acceptable. He relied on the income summary statement of the assessee’s wife for A.Ys. 2001-02 and 2003-04 wherein she had shown income from profession of Rs. 57,400 and Rs. 1,48,900 respectively. He also relied on total income shown in ITR filed from A.Ys. 2001-02 to 2012-13.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal found that the assessee’s wife, who has low returned income, had received a loan from the assessee, which has been repaid by her from the redemption of mutual funds and liquidation of fixed deposits. It held that there is no bar on the part of the assessee to extend a loan from his known sources to his wife. Similarly, there is no bar on the assessee’s wife to repay the loan from her own mutual funds and fixed deposits. The assessee has paid house rent and the recipient, wife of the assessee, declared the same under the head `income from house property’ in her returns which has been accepted by the revenue. It held that the observations of the CIT(A) that the assessee’s wife has got meagre income hence she cannot afford to purchase a house was found to be not acceptable as the source for the purchase of the house in her hands are proved and never doubted. It also held that the contention of the CIT(A) that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention. The Tribunal allowed the appeal filed by the assessee.

For the purpose of section 54, it is the date of possession which should be taken as the date of purchase and not the date of registration of agreement for sale

2 Raj Easow vs. ITO
[TS-155-ITAT-2022 (Mum.)]
A.Y.: 2015-16; Date of order: 8th March, 2022
Section: 54

For the purpose of section 54, it is the date of possession which should be taken as the date of purchase and not the date of registration of agreement for sale

FACTS
In May 2011, the assessee, along with his wife booked a residential flat (Flat No 203) in an under construction building named `Bankston’ at Thane (a new house) for a consideration of Rs. 1,40,51,500. In December 2012, the assessee made majority payments to the builders by availing a mortgage/housing loan. Thereafter, on 21st May, 2014, the assessee and his wife, being co-owners holding 50% share, sold a residential house (original house) and utilised the sale proceeds for making repayment of housing loan taken for new house.

In the return of income for A.Y. 2015-16, the assessee claimed a long-term capital gain of Rs. 79,92,015 arising on transfer of original asset as a deduction u/s 54 of the Act. According to the Assessing Officer (AO), the new house was purchased on 15th February, 2012 being the date on which the agreement for sale dated 7th February, 2012 was registered. Since this date was 2 years and 3 months prior to the date of sale of the original house The AO denied the benefit of deduction u/s 54 on the ground that the assessee has not purchased a new residential house within a period specified in section 54, which is one year before or two years after the date of sale of the original asset.

Aggrieved, the assessee preferred an appeal to CIT(A), who moving on the premise that the date of registration of agreement for sale is to be considered as the date of purchase of new residential house, decided the appeal against the assessee holding that purchase of the property was beyond the specified period of 2 years. The CIT(A) also rejected the alternative argument that since the property being purchased was under construction, the benefit of section 54 of the Act can be extended to the assessee by treating the transaction as a case of ‘construction’ and not ‘purchase’ and since the construction was completed and possession of new house taken on 2nd April, 2016, which date is within 3 years from the date of original asset.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal, having noted that the AO and CIT(A) have taken 15th February, 2011, the date of registration of agreement for sale as the date of purchase, proceeded to examine the nature of this agreement and its terms. It observed that the said agreement is not a sale / conveyance deed but only an agreement for sale entered into between the builders who have agreed to sell to the assessee a flat in a multi-storied building. It also observed that when the agreement for sale was registered, the multi-storied building was not yet constructed and the obligation of the assessee to make the payment is linked to construction. The agreement was required to be registered and was governed by provisions of MOFA. Having noted the provisions of section 4 of MOFA and clause 53 of the agreement for sale, held that the purchaser is put in possession only as a licensee and to that extent, the assessee acquired an interest in the premises on entering into possession. Since by that date the assessee has already paid entire/majority of consideration for purchase, it held that the assessee has on the date of taking possession purchased the property for the purposes of section 54 of the Act as has been held by the Bombay High Court in CIT vs. Smt Beena K. Jain 217 ITR 363. The Tribunal held that the date on which possession is taken by the assessee (i.e. 2nd April, 2016) should be taken as the date of purchase. The requirement of section 54 is that the assessee should purchase a residential house within the specified period, and the source of funds is quite irrelevant. Since the date of purchase falls within 2 years from the date of sale of original house it held that the assessee is entitled to benefit of deduction u/s 54. It observed that the alternate contention of the assessee that the benefit of section 54 be granted to the assessee by treating the transaction as a case of construction is now academic and does not require consideration.

On maturity of life insurance policy, where section 10(10D) does not apply, it is only net income which is chargeable to tax

1 Sandeep Modi vs. DCIT
[TS-184-ITAT-2022 (Kol.)]
A.Y.: 2017-18; Date of order: 4th March, 2022
Sections: 10(10D), 56

On maturity of life insurance policy, where section 10(10D) does not apply, it is only net income which is chargeable to tax

FACTS
The assessee, an individual, took a single premium life insurance policy from SBI Life Insurance Co. Ltd., paying a premium of Rs. 10,00,000. The policy was to mature after three years. No deduction was claimed u/s 80C. During the previous year relevant to the assessment year under consideration, on the maturity of the policy, the assessee received a sum of Rs. 13,09,000 and included a sum of Rs. 3,09,000 in his total income under the head `Income from Other Sources’.

When the return of income was processed by CPC, a sum of Rs. 10,00,000 was added to the total income under the head Income from Other Sources. Aggrieved, the assessee preferred an application for rectification u/s 154 of the Act. The assessee’s application was rejected without giving any specific reason for rejection.

Aggrieved, the assessee preferred an appeal to CIT(A), who confirmed the action of the CPC in enhancing the total income by Rs. 10,00,000, which according to the assessee, was premium paid by the assessee to SBI Life Insurance Co. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since SBI deducted 1% TDS on the entire receipt of Rs. 13,09,000, the CPC, while processing the return of income found that out of Rs. 13,09,000 received by the assessee, only Rs. 3,09,000 has been offered for taxation and, therefore, the balance of Rs. 10,00,000 was added as income of the assessee. It also noted that vide the Finance Bill, 2019, while increasing the TDS rate from 1% to 5% the problem has been taken note of. “…… Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assessee who otherwise has to pay tax on net income (i.e. after deducting the amount of insurance premium paid by him from the total sum received). From the point of view of tax administration as well, it is preferable to deduct tax on net income so that income as per TDS return of the deductor can be matched automatically with the return of the income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee.”

The Tribunal, upon noting the above-stated observations as well as taking note of the contention of the assessee that the addition of Rs. 10,00,000 tantamounts to double taxation and also the fact that the assessee had neither availed any deduction u/s 80C of the Act in respect of premium paid to SBI nor claimed any deduction u/s 10(10D) of the Act and offered Rs. 3,09,000 for tax in his return of income held that the addition made by the AO is not warranted.

Method of valuation of shares adopted by the assessee could be challenged by Assessing Officer only if it was not a recognized method of valuation as per Rule 11UA(2)

30 Him Agri Fesh (P.) Ltd. vs. ITO  [2021] 90 ITR(T) 95 (Amritsar – Trib.) ITA No.: 224 (Asr.) of 2018 A.Y.: 2014-15  Date of order: 7th July, 2021

Method of valuation of shares adopted by the assessee could be challenged by Assessing Officer only if it was not a recognized method of valuation as per Rule 11UA(2)

FACTS
In the course of assessment proceedings, the Assessing Officer doubted the quantum of the premium received on the issue of shares.

During the course of assessment proceedings, though the Assessing Officer asked the assessee to file a certificate as per Rule 11UA but, the assessee had submitted that Rule 11UA was not applicable to the case of the assessee.

Since the assessee failed to comply with provisions of Rule 11UA, the Assessing Officer calculated the Fair Market Value and made an addition on that basis, u/s 56(2)(viib). The CIT (A) dismissed the assessee’s appeal.

Consequently, the assessee filed an appeal before the ITAT.

HELD
The ITAT observed that during the course of assessment proceedings, the assessee was not able to submit the report as made by the Chartered Accountant as per Discounted Cash Flow (DCF) method due to the negligence of the counsel. However, it had filed the copy of the said valuation report with the CIT(A) but the same was neither considered by her nor any comment was given on the same.

The ITAT was of the opinion that once the assessee had opted for valuation of shares under Rule 11 UA by following the DCF method, then it was not open for the assessing officer or the CIT(A) to adopt a different method of valuation, for determining the fair market value. As per Rule 11UA, the choice is given to the assessee and not to the assessing officer. The assessing officer is duty-bound to examine the working of the DCF method but has no right to change the method of calculating the fair market value of the shares. Once an assessee had exercised its option of opting for the DCF method, then the said method is required to be applied; however that the assessing officer has the power to review the calculations and correct adoption of the parameters applied by the assessee for the purpose of arriving at valuation of the shares by applying the DCF method.

It held that the law has specifically conferred an option upon the assessee that for the purpose of section 56(2)(viib) of the Act, an assessee can adopt any of the methods mentioned u/r 11UA(2). Therefore, in the instant case also, the assessee was free to choose any of the methods mentioned u/r 11UA(2). The method of valuation could be challenged by the Assessing Officer only if it was not a recognized method of valuation (as per Rule 11UA(2)) since the very purpose of certification of DCF valuation by a merchant banker or (at the relevant time) by a chartered accountant was to ensure that the valuation is fair and reasonable.

Since, in the instant case, the CIT (A) had not examined the method adopted by the assessee, the same could not be rejected. On this reasoning, the matter was remanded back to the file of the Assessing Officer with a direction to consider the report filed by the assessee.

It was also directed that the Assessing Officer was bound by the decision rendered in the case of Innoviti Payment Solutions (P.) Ltd. vs. ITO [2019] 102 taxmann.com 59/175 ITD 10 (Bang. – Trib.) wherein it was held that the AO can scrutinize the valuation report and if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter- he can adopt his own valuation or obtain fresh valuation report from an independent valuer and confront the assessee. But he has no power to change the method of valuation opted by the assessee if it is one of the methods recognised u/r 11UA(2).  

Expenditure incurred on a new project of starting a hotel chain for expansion of an existing business of real estate development and financing was to be considered as expenditure for the purpose of carrying on existing business and thus allowable as revenue expenditure u/s 37(1)

29 ITO vs. Blue Coast Infrastructure Development Ltd.  [2021] 90 ITR(T) 294 (Chandigarh – Trib.) ITA No.: 143 (Chd) of 2019 A.Y.: 2013-14 Date of order: 23rd July, 2021

Expenditure incurred on a new project of starting a hotel chain for expansion of an existing business of real estate development and financing was to be considered as expenditure for the purpose of carrying on existing business and thus allowable as revenue expenditure u/s 37(1)

FACTS
Assessee-company was engaged in the business of real estate development and financing. It expanded its business into starting a hotel chain. It incurred certain expenses like professional fees in connection with the said project and claimed the same u/s 37 of the Act. However, the Assessing Officer disallowed the same. The CIT (A) deleted the disallowance on the grounds that the business of the assessee was in existence and the expenses were incurred in connection with the expansion of business.

Aggrieved, the revenue filed appeal to the ITAT.

HELD
The ITAT dismissed the revenue’s appeal on the following grounds:

The ITAT observed that the CIT (A) had made findings that the assessee’s business was an existing business, whose expansion was under consideration and expenses for the same were incurred. There was no change in management, and there was interlacing of funds, and the genuineness of the expenses was not doubted. The expenses incurred were in the same line of the existing business of the assessee.

The ITAT held that the decision of the CIT (A) was based on the ratio laid down by the Delhi High Court in CIT vs. SRF Ltd. [2015] 59 taxmann.com 180/232 Taxman 727/372 ITR 425, the Mumbai ITAT in Reliance Footprint Ltd. vs. Asstt. CIT [2014] 41 taxmann.com 553/63 SOT 124 (URO) as also in decision of the co-ordinate bench in DSM Sinochem Pharmaceuticals India (P) Ltd. vs. Dy. CIT [2017] 82 taxmann.com 316 (CHD – Trib.).

In Sinochem Pharmaceuticals (supra), the ITAT relied on Calcutta High Court decision in Kesoram Industries & Cotton Mills Ltd. [1992] 196 ITR 845 (Cal.), wherein it was held that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account but where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. In that case, the expenditure was not related to the setting up a new factory; it pertained to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. Thus, since there was an expansion or extension of the existing business of the assessee, the same was to be considered as revenue expenditure.

To conclude, since the CIT (A) relied on the cases referred to above including the decision of co-ordinate bench, the ITAT upheld the findings of the CIT (A) and dismissed the appeal of the revenue.

Section 43CA does not apply in a situation where allotment letters are issued and part payments received prior to 1st April, 2013

28 Spenta Enterprises vs. ACIT  [TS-63-ITAT-2022(Mum.)] A.Y.: 2014-15; Date of order: 27th January, 2022 Section: 43CA

Section 43CA does not apply in a situation where allotment letters are issued and part payments received prior to 1st April, 2013

FACTS
In the course of assessment proceedings of the assessee, carrying on the business of builders, developers and realtors, the Assessing Officer (AO) noted that there was a difference between agreement value and market value in respect of some of the properties. He issued a show cause to the assessee. In response, the assessee submitted that only in two cases the stamp duty value on the date of allotment was in excess of their respective agreement values. He further submitted that since allotment letters were issued and initial amounts received prior to coming into force of section 43CA, the provisions of section 43CA did not apply even to these two cases. To substantiate, the assessee submitted ledger copies of the buyer’s accounts and bank statements showing receipt of initial amounts from the buyer. The assessee also relied upon the decision of the Mumbai Tribunal in the case of Krishna Enterprises vs. ACIT.

The AO, not being convinced by the submissions made by the assessee, added a sum of Rs. 8,26,329 to the total income of the assessee under section 43CA.

Aggrieved, the assessee preferred an appeal to CIT(A), who confirmed the action of the AO.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted the twin contentions of the assessee, namely that since section 43CA was introduced w.e.f. 1st April, 2013 and the agreements under consideration were entered into prior to 1st April, 2013; the provisions of section 43CA do not apply and because the difference between the ready reckoner rate and sale consideration was only 5%, the same needs to be ignored on the touchstone of the decision of the Mumbai Tribunal in the case of Krishna Enterprises vs. ACIT. The Tribunal held that the assessee succeeds on both the counts. The Tribunal set aside the orders of the authorities below and decided the issue in favour of the assessee.

Sum accepted as a loan, which is found correct in principle, could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The fact that the creditor company’s name is subsequently struck off is contrary to the factual position in the impugned year

27 ITO vs. Hajeebu Venkata Seeta  [TS-50-ITAT-2022(Hyd.)] A.Y.: 2009-10; Date of order: 5th January, 2022 Section: 56

Sum accepted as a loan, which is found correct in principle, could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The fact that the creditor company’s name is subsequently struck off is contrary to the factual position in the impugned year

FACTS
During the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs. 2,84,00,000 from Synchron Infotech Pvt. Ltd. The amount so received was paid to Legend Infra Homes Pvt. Ltd. The purpose of the transactions was to purchase property from Legend Infra Homes Pvt. Ltd. by Synchron Infotech Pvt. Ltd.

This position was confirmed by bank transactions and copies of ledger account in the books of Synchron Infotech Pvt. Ltd., Legend Infra Homes Pvt. Ltd. and the assessee. The entry in the case of the assessee is that the relevant sum was given to Legend Infra “towards advance for purchase of property on behalf of Synchron”. The ledger account of Legend Infra Homes Ltd. reflected the relevant sums as advances towards the purchase of property on behalf of Synchron and not in the name of the assessee.

The Assessing Officer held this sum of Rs. 2,84,00,000 to be taxable u/s 56(2)(vi) of the Act and added it to the assessee’s total income. He also observed that the name of Synchron Infotech Pvt. Ltd. had been struck off.

Aggrieved, the assessee preferred an appeal to CIT(A), who allowed the appeal filed by the assessee and held that the sum of Rs. 2,84,00,000 received by the assessee is not without consideration, and consequently, section 56(2)(vi) of the Act does not apply.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the AO had not invoked section 68 of the Act in order to treat the impugned sums as unexplained cash credit on account of the assessee’s failure to prove the identity, genuineness and creditworthiness of all the parties therein. The Tribunal held that a loan sum accepted as correct in principle could not be treated as an amount received since there is a pre-condition of its return to be made to the creditor party. The Tribunal rejected the arguments on behalf of the revenue and confirmed the action of CIT(A).

Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

26 ITO vs. Smt. Rachna Arora [2021] 90 ITR(T) 575 (Chandigarh – Trib.) ITA No.: 1112 (Chd) of 2019 A.Y.: 2015-16      Date of Order: 31st March, 2021                    

Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law    

FACTS
Assessee sold a residential property and invested entire amount on purchase of a new residential property in joint names of assessee with her daughter and son in law and claimed exemption under Section 54. Assessing Officer held that assessee was entitled for claim of exemption only to extent of her share in new residential property.

The CIT (A) allowed the assessee’s appeal.

Consequently, the revenue filed an appeal before the ITAT.

HELD
The ITAT confirmed the order passed by the CIT(A) and dismissed the revenue’s appeal on the following grounds:

The CIT(A) had followed the ratio contained in the decision of Jurisdictional High Court in the case of CIT vs. Dinesh Verma 2015 233 Taxman 409 (Punj. & Har.)

The Hon’ble High Court in the case of Dinesh Verma (supra) held that the assessee would be entitled to the benefit of exemption u/s 54B only on the amount invested by him after the sale of his original property and not on the amount invested by his wife jointly in the same property. The high court also held that the plain reading of provisions of section 54 of the Act indicated that in order to claim the benefit of exemption u/s 54, the assessee should, invest the capital gain arising out of sale of residential property in purchase of another residential property within stipulated time. Nothing contained in Section 54 precluded the assessee to claim the exemption in case the property was purchased jointly with close family members, who are not strangers or unconnected to her provided the assessee invested the entire amount of Long Term Capital Gain.

Based on the principle, he held that in the instant case, since the entire investment is made by the assessee herself, albeit in joint names with daughter and son-in-law, the assessee is entitled to exemption u/s 54. The ITAT also observed that the Ld. DR was neither able to controvert the facts of the present case as noted by the CIT(A) nor had he pointed out how the decision in the case of Dinesh Verma (supra) was applicable against the assessee in the facts of the present case.

A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

25 Building Committee (Society) Barnala vs. CIT (Exemption) [2021] 89 ITR(T) 1 (Chandigarh – Trib.) ITA No.: 1295 (Chd) of 2019 Date of Order: 18th May, 2021

A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

FACTS
Assessee-society applied for registration u/s 12AA. However, the CIT (Exemption) rejected the application of the assessee inter alia holding that genuineness of the activities of the assessee could not be established; and that the assessee had not incurred any expenditure for activities of general public importance. Main ground for rejecting the application was that purpose for which the society was formed was for the benefit of specific group of professionals which does not come within the purview of ‘advancement of object of general public utility’ under Section 2(15) of the Act.

Aggrieved, the assessee filed appeal to the ITAT.

HELD
The ITAT analysed the case on hand in the context of provisions of Section 2(15) which define ‘charitable purpose’ and Section 12AA which provide for grant of registration.

The ITAT observed that the bye-laws of the society provided that society was established for the welfare, construction and allotment of chambers in the District Court Complex, Barnala for the members of District Bar Association, Barnala. It further provided that all the incomes/earnings would be solely utilized and applied towards the promotion of its aims and objectives only as set forth in the memorandum of association, and that the society will work on no profit and no loss basis. Bye-laws also provided social welfare activities such as growing of trees for environments, de-addiction drug campaign, welfare of girl child, and also provide legal awareness among the general public.

The CIT (Exemptions) proceeded only on the basis that since the society was formed for construction of building for members, benefits thereof only restricted to the members, and not to the general public at large and failed to comprehend the role of Bar Association in judicial dispensation. Attainment of justice for all the parties of the case and the society at large is the main object of our judicial system.

The Bench and Bar were the essential partners in judicial dispensation, and therefore, considering the importance of Bar Association in every adjudicating body, particular space was being earmarked and maintained for Bar Association and for litigants. Thus, since working space for professionals was an integral part of infrastructure for judicial dispensation, the ITAT held that the CIT (Exemptions) was wrong in rejecting the assessee’s application u/s 12AA, disregarding the bye-laws and not considering the object of the assessee from a larger perspective.
    

Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

24 DBS Realty vs. ACIT  [TS-1096-ITAT-2021(Mum)] A.Ys.: 2010-11 and 2011-12; Date of order: 24th November, 2021 Section: 28

Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

FACTS
The assessee, a partnership firm, engaged in the business of real estate development entered into an agreement with the Slum Rehabilitation Authority (SRA) to develop a project over a plot of land spread over 31.9 acres. The said plot of land was purchased by the assessee for a consideration of Rs. 44.21 crore and handed over to SRA as per SRA scheme. As per the terms of the agreement with SRA, the assessee was to develop the SRA project at its own cost. In return of the land surrendered to SRA and the project cost to be incurred the assessee was granted Land TDR of 93,623 sq. mts. and construction TDR of 4,78,527 sq. mts.

Since the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner was sold from time to time to incur the cost of the project. In the process, the assessee received various amounts aggregating to about Rs. 304 crore in financial years 2009-10 to 2013-14.

In the course of assessment proceedings for the assessment year under consideration, the Assessing Officer (AO) called upon the assessee to explain why the amount received from the sale of TDR should not be treated as income of the assessee in respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognising the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR income cannot be treated as income but has to be shown as current liability.

The AO did not accept the contentions of the assessee and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the respective assessment years.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that-

(i) sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation;

(ii) since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR;

(iii) the very idea of granting TDR to the assessee is for enabling it to finance the project;

(iv) since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee.

HELD
The Tribunal noted that the issue for its consideration is whether the amount received by the assessee from the sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee’s method of revenue recognition following percentage of completion method is acceptable. It also noted that the assessee has received certain amount from the sale of TDR in A.Ys. 2012-13 and 2013-14 as well.

While completing the assessment, the AO accepted the method of accounting followed by the assessee. However, PCIT held the assessment orders to be erroneous and prejudicial to the interest of the revenue since AO failed to tax the amount received by the assessee from the sale of TDR. While setting aside the assessments, the PCIT directed the AO to assess the amounts received from the sale of TDR.

However, while deciding the assessee’s appeals challenging the aforesaid direction of PCIT, the Tribunal held that percentage completion method followed by the assessee is a well-recognised method as per ICAI guidelines and judicial precedents; the sale of TDR cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project; the assessee was under obligation to complete the project as per the agreement; the TDR was granted to provide finance to the assessee to complete the project. Thus, the assessee’s income from TDR cannot be considered independently without taking the corresponding expenses, more so when the TDR receipts are directly linked to execution of the project. Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR.

Since the project has been stalled due to dispute and litigations and the assessee has not been able to complete the project, the bench observed that though assessee has earned income from sale of TDR, however, no income from SRA project, as yet, has been offered to tax. It also observed that the Tribunal has in appeals against orders passed under Section 263 has recorded findings touching upon the merits of the issue, which indeed, are favourable to the assessee and the said order of the Tribunal was not available before the AO or CIT(A) the applicability of the said order to the facts of the case needs to be examined.  The Tribunal set aside the order of CIT(A) and restored the issue to the file of the AO for fresh adjudication after examining the applicability of the order of the Tribunal for A.Ys. 2012-13 and 2013-14.

Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

23 Lewis Family Trust vs. ITO  [TS-1121-ITAT-2021(Mum)] A.Y.: 2012-13 ; Date of order: 30th November, 2021 Sections: 23, 24

Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc

Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

FACTS I
The assessee, in its return of income, declared rental income of Rs 57,56,998 under the head `Income from House Property’ and claimed deduction under Section 24(a) of the Act. The Assessing Officer (AO) on perusal of the leave and license agreement, found that the assessee trust had let out premises along with furniture, fixtures and decoration, air-conditioning, etc, and the rent for furniture and fixtures has been separately bifurcated by the assessee. The AO held that rent of premises amounting to Rs. 34,54,199 is only taxable under the head `income from house property’ and deduction under Section 24(a) allowable in respect thereof and rent of furniture, fixtures, etc amounting to Rs. 23,02,799 would get taxed under the head `income from other sources’ and therefore, standard deduction @ 30% thereon would not be allowable.

Aggrieved, the assessee preferred an appeal to CIT(A) where it contended that the total rent has been bifurcated into rent for premises and hire charges for furniture, fixtures, etc. only for the purpose of enabling property tax charged by MCGM at a lower amount and there was no intention to defraud the income-tax department; furniture is attached with the property and cannot be removed without damaging the wall or the floor; and that without furniture rent cannot be equivalent to the amount agreed upon. The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

FACTS II
During the previous year relevant to the assessment year under consideration, the assessee made a payment of Rs. 4,45,266 towards members’ share of contribution for repairing the entire society building. This payment was made by account payee cheque through regular banking channels by the assessee to the housing society. Since repairs costs were to be borne by the tenant, the assessee got a sum of Rs. 4,45,266 reimbursed from the lessee bank. The AO taxed this sum of Rs. 4,45,266 under the head `income from other sources’.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The Tribunal noted that the assessee had received composite rent from its tenant State Bank of Patiala. The lessee bank had treated the entire payment of rental and hire charges as the composite payment and had charged tax at source in terms of Ssection 194I of the Act. It observed that this aspect is not a relevant consideration for determining the taxability of rental under the head of income in the hands of the assessee. However, it noted that for A.Y. 2010-11, the AO, in order giving effect to order of CIT(A), had accepted the stand of the assessee vide his order dated 19th March, 2014 and in scrutiny assessments framed for A.Ys. 2016-17 and 2018-19 also the stand of the assessee has been accepted. Applying the principle laid down by the Apex Court in Radhasoami Satsang [193 ITR 321 (SC)], namely that the revenue cannot take a divergent stand for one particular year, ignoring the rule of consistency, the Tribunal allowed this ground of appeal filed by the assessee.

HELD II
The Tribunal held that since the assessee had merely got the reimbursement of the amount paid by it to the society, there is no income element in it. Hence, it held that the reimbursement received by the assessee cannot be taxed under the head `income from other sources’.

CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

22 Naik Seafoods Pvt. Ltd. vs. PCIT  [TS-1157-ITAT-2021(Mum)] A.Y.: 2016-17; Date of order: 26th November, 2021 Sections: 37, 80G, 263

CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

FACTS
During the previous year relevant to the assessment year under consideration, assessee company in its computation of total income disallowed a sum of Rs. 2.80 lakh being CSR expenses debited to Profit & Loss Account but claimed the same under Section 80G. While assessing assessee’s total income under Section 143(3) of the Act, the Assessing Officer (AO) did not disallow the claim so made under Section 80G.

The PCIT issued a show-cause notice to the assessee interalia observing that claim of Rs. 1.40 lakh has been made under Section 80G regarding CSR expenses of Rs. 2.80 lakh. CSR expenses are the assessee’s responsibility as per the Companies Act, 2013, and if it is spent through other trusts, then also, as per Rule 4(2) of CSR Rules, it is spent on behalf of the assessee. Therefore, the assessee cannot give a donation of CSR expenses even if it is given to a trust eligible for an 80G deduction. Hence, the same is not allowable. Failure of AO to consider CSR expense as disallowable as rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue.

In response, the assessee made its submission (the submission made by the assessee to the PCIT on this issue is not reproduced in the order of the tribunal). However, the PCIT rejected the submission by holding that since both CSR expense and 80G donations are two different modes of ensuring fund for public welfare, treating the same expense under two different heads would defeat the very purpose of it. In the budget memorandum as well, the legislative intent was to ensure that companies with certain strong financials make the expenditure towards this purpose and by allowing deduction, the Government would be subsidizing one-third of it by way of revenue foregone thereon and hence the same was required to be disallowed in the assessment. Failure of the AO to examine the CSR expense as disallowable expense and to examine disallowance of deduction under Section 80G rendered the order erroneous and prejudicial to the interest of the revenue. He set aside the order of the AO with a direction to the AO to examine the above aspects with regard to allowability of deduction claimed under Section 80G as per law and frame a fresh assessment after affording an opportunity to the assessee of being heard.

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on the decisions of the Bangalore Bench of the Tribunal in the case of FNF India Pvt. Ltd. vs. ACIT in ITA No. 1565/Bang./2019 dated 5th January, 2021 and Goldman Sachs Services Pvt. Ltd. vs. JCIT in ITA(TP) No. 2355/Bang./2019 it supported the action of the AO by contending that Explanation 2 under Section 37 is restricted to Section 37 only and nothing more and since the Explanation has been inserted below Section 37, it can be invoked only when expenditure is claimed as deduction as being for the purpose of business under Section 37 of the Act. Since the assessee has not claimed the said expenditure under Section 37 but has claimed it under Section 80G and the Act nowhere states that expenditure disallowed in terms of Explanation 2 to Section
37 cannot be allowed by way of deduction in terms of Section 80G.

HELD
The Tribunal noted that the Bangalore bench of the Tribunal in FNF India Pvt. Ltd. vs. ACIT (supra) while deciding the issue of deduction under Section 80G relating to donations which is part of CSR has remitted the issue to the AO to verify the additions necessary to claim deduction under Section 80G of the Act with a clear direction to the AO. Since in the present case the AO himself allowed the deduction under Section 80G, as claimed by the assessee, and the issue is debatable issue and the AO has taken one of the possible view, the Tribunal held that PCIT cannot invoke the provisions of Section 263 of the Act in order to bring on record his possible view.

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

15 [2020] 82 ITR (Trib) 399 (Del) ACIT vs. Soul Space Projects Ltd. ITA Nos.: 193 & 1849/Del/2015 A.Ys.: 2007-08 & 2008-09 Date of order: 3rd June, 2020

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

FACTS
During assessment proceedings, the A.O. arrived at the conclusion that it was necessary to conduct a special audit u/s 142(2A) of the books of accounts of the assessee. The assessee raised objections to the proposed special audit and the A.O., after rejecting the objections and with the approval of the CIT, ordered a special audit in accordance with the provisions of section 142(2A). Thereafter, the Special Auditor requested for extension of time period and the A.O. forwarded this request to the CIT. The CIT granted extension of time. The assessments were completed after limitation period on account of the extension granted for special audit.

The assessment orders were challenged before the CIT(A) which provided relief to the assessee on merits. The orders of the CIT(A) were challenged by the Revenue before the Tribunal and the assessee filed cross-objections raising the issue of limitation in completing the assessment.

Before the Tribunal, the assessee argued that as per the proviso to section 142(2A) it was only the A.O. who had the power to extend the time period for conducting the audit; hence, the extension granted by the CIT was legally invalid. It was argued that the exercise of the statutory power of an authority at the discretion of another authority vitiates the proceedings.

On the other hand, the Department contended that the A.O. had applied his mind and was satisfied that the matter required extension; however, the extension application was forwarded only for the administrative approval of the CIT; even otherwise, since the CIT was the approving authority for special audit, therefore his involvement for extension of time as per the proviso was inherent. The Revenue argued that since on a substantial basis the requirement of the proviso to section 142(2A) was met, just on account of administrative approval of the CIT for sanctioning the extension, it should not vitiate the extension of time for the special audit.

HELD
The issue before the Tribunal was whether or not the action of the CIT in granting an extension for a further period u/s 142(2A) was legally valid.

The Tribunal held that the proviso to section 142(2A) clearly provides that the A.O. shall extend the said time period if the conditions as mentioned in the said proviso are satisfied. While the initial direction is to be given with the approval of the CCIT / CIT, however, for extension it is only the A.O. who has to take a decision for extension, the sole power to extend vests only with him.

There was no need for the higher authorities to be involved in the issue of extension. It may be an administrative phenomenon to inform the CIT about the extension, but statutorily that power is vested with the A.O.

The Tribunal held that the statutory powers vested with one specified authority cannot be exercised by another authority unless and until the statute provides for the same. The statute has accorded implementation of various provisions to specified authorities which cannot be interchanged. A power which has been given to a specified authority has to be discharged only by him and substitution of that authority by any other officer, even of higher rank, cannot legalise the said order / action.

Accordingly, it was held that the extension given by the CIT was beyond the powers vested as per the statute and therefore the assessment completed after the due date was void ab initio.

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

14 [2020] 82 ITR(T) 235 (Del) Wimco Seedlings Ltd. vs. Joint CIT ITA Nos.: 2755 to 2757 (Delhi) of 2002 A.Ys.: 1989-90 to 1991-92 Date of order: 22nd June, 2020

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

FACTS
The assessee was a company engaged in the business of providing consultancy services in the field of agricultural forestry plants by undertaking research and development (R&D) activities. The A.O. had initiated reassessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 and passed the order u/s 143(3) r.w.s. 147. These orders were challenged by the assessee and the matter went up to the Delhi High Court which remanded the appeals to the ITAT for a fresh adjudication on all issues, including on the aspect of reassessment.

In the remanded appeals, the assessee had challenged the reopening of the assessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 on various grounds wherein the first ground of appeal was that the reasons provided by the A.O. in the course of reassessment proceedings and the reasons filed by the Department before the Delhi High Court were different.

HELD
One of the disputes arising in this case was whether while initiating reassessment proceedings the A.O. is supposed to provide complete details of reasons recorded and not merely a few extracts of the said reasons so that the assessee can prepare its defence effectively against the proposed reopening of the assessment. It was held that in all circumstances the A.O. is supposed to provide the complete reasons recorded for reopening of the assessment to facilitate the assessee to raise appropriate objections to the reopening. It cannot be the case of the Revenue that it gives a few extracts of the reasons to the assessee to defend it and when cornered before the higher authorities, the Revenue comes out with the detailed reasons recorded by the A.O. The reasons produced before the High Court were quite different from the reasons provided to the assessee and hence the ITAT held the reassessment proceedings to be invalid and quashed the assessment orders.

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

13 [2020] 82 ITR (T) 522 (Jai) Prem Chand Jain vs. Asst. CIT ITA No.: 98 (JP) of 2019 A.Y.: 2014-15 Date of order: 8th June, 2020

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

FACTS


The assessee had purchased two plots of land during the year claiming these to be agricultural land. The sale consideration as per the respective sale deeds was Rs. 5,50,000 and their stamp duty value [SDV] as determined by the Stamp Duty Authority amounted to Rs. 8,53,636;  therefore, there was a difference to the tune of Rs. 3,03,636. The A.O. invoked the provisions of section 56(2)(vii)(b) and held that agricultural land falls within the definition of property and, thus, added the differential amount under the head other sources. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before the ITAT.

HELD
The dispute in this case was whether agricultural land was to be included in the definition of immovable property and whether it was covered by the provisions of section 56(2)(vii)(b). It was the contention of the Department that there was no express exclusion provided for agricultural land from the operation of section 56(2)(vii). But it was submitted on behalf of the assessee that vide the Finance Act, 2010 in clause (d) in the Explanation, in the opening portion, for the word ‘means—‘ the words ‘means the following capital asset of the assessee, namely:—’ were substituted with retrospective effect from 1st October, 2009. It was further submitted that the substitution of the words ‘means’ for the words ‘means the following capital asset of the assessee, namely’ made the intention of the Legislature very clear, that henceforth the deeming provision of 56(2)(vii)(b) would apply in case of those nine specified assets, if and only if they were capital assets.

The ITAT referred to the provisions of clause (d) of the Explanation to section 56(2)(vii) where the term ‘property’ was defined to mean capital asset of the assessee, namely, immovable property being land or building or both. Hence, the ITAT held that if the agricultural land purchased by the assessee did not fall in the definition of capital asset u/s 2(14), they cannot be considered as property for the purpose of section 56(2)(vii)(b). The ITAT remanded the matter to the A.O. to determine whether or not the agriculture land so acquired falls in the definition of capital asset. It was further concluded that where it is determined by the A.O. that the agricultural land so acquired doesn’t fall in the definition of capital asset, the difference in the SDV and the sales consideration cannot be brought to tax under the provisions of section 56(2)(vii)(b) and relief should be granted to the assessee.

Further, it was also held that where the assessee had objected to the adoption of SDV as against the sale consideration, the matter should be referred by the A.O. to the Departmental Valuation Officer [DVO] for determination of fair market value.

Editorial Note:
In ITO vs. Trilok Chand Sain [2019] 101 taxmann.com 391/174 ITD 729 (Jaipur-Trib), the Tribunal had upheld the applicability of section 56(2)(vii) to the purchase of agricultural land. The decision in Trilok Chand Sain was not referred to by the ITAT in the above case. However, in another decision in Yogesh Maheshwari vs. DCIT [2021] 125 taxmann.com 273 (Jaipur-Trib), the ITAT, after considering the decision of co-ordinate benches at Pune in Mubarak Gafur Korabu vs. ITO [2020] 117 taxmann.com 828 (Pune-Trib) and at Jaipur in ITO vs. Trilok Chand Sain (Supra) and this decision held that if the agricultural land purchased by the assessee is not a capital asset, the provisions of section 56(2)(vii)(b) are not applicable.

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

12 126 taxmann.com 192 DCIT Circle 3(1) vs. Ozone India Ltd. IT Appeal No. 2081 (Ahd) of 2018 A.Y.: 2013-14 Date of order: 27th January, 2021

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

FACTS
The assessee company was amalgamated with another company (KEPL) and in the process all the assets (except land) and all the liabilities of KEPL were taken in the books of the assessee at book value. Land parcels were taken at revalued price. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of the assessee company as ‘capital reserve’.

The A.O. observed that the assessee received assets worth Rs. 60.26 crores and liabilities worth Rs. 6.05 crores of the amalgamating company, i.e., KEPL. Thus, the assessee received net assets worth Rs. 54.21 crores against the corresponding issue of shares having face value of Rs. 15 crores to the shareholders of KEPL. The A.O. taxed the excess net assets worth Rs. 39.21 crores received on account of amalgamation and credited as capital reserve of the amalgamated company, as being excess consideration for issue of its shares under the provisions of section 56(2)(viib). On appeal to the CIT(A), he held that the provisions of section 56(2)(viib) were not applicable and reversed the additions made by the A.O. Aggrieved, the Revenue preferred an appeal with the Tribunal.

HELD
The issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of the amalgamating company in pursuance of the scheme of amalgamation legally recognised in the Court of Law is outside the ambit of section 56(2)(viib). Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income and its application should be restricted to the underlying purpose. Further, section 56(2)(viib), when read in conjunction with the Memorandum of Explanation to the Finance Bill, 2012 and CBDT Circular No. 3/2012 dated 12th June, 2012, is to be seen as a measure to tax hefty or excessive share premium received by private companies on issue of shares without carrying underlying value to support such premium.

Thus, the provisions of section 56(viib) would not be applicable where the assessee company has admittedly not charged any premium at all and the shares were issued at face value.

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

11 TS-189 ITAT-2021 (Ahd) DCIT vs. GHCL ITA Nos.: 1120/Ahd/2017 & CO 29/Ahd/2018 A.Y.: 2012-13 Date of order: 5th March, 2021

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

FACTS
The assessee invested in the share capital of its subsidiary, namely, Indian Britain BV consisting of 2,285 shares @ Euro 100 each in A.Y. 2006-07. During the year under consideration, the said subsidiary reduced its share capital due to heavy losses. Consequently, the number of shares of the assessee company was reduced to 1,85,644 from 2,21,586 shares acquired in A.Y. 2006-07. Due to the aforesaid capital reduction, the assessee company incurred a loss of Rs. 99.89 crores on investment made in the equity shares of Indian Britain BV. The assessee claimed long-term capital loss of Rs. 157,97,38,428. In the course of assessment proceedings, it revised its claim of loss to Rs. 99,89,96,245 and claimed that loss on account of capital reduction be allowed as a business loss while computing income chargeable to tax under the head ‘profits and gains from business and profession’ on the ground that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of a supply chain system and manufacturing units in the global market, i.e., overseas.

The assessee submitted that it was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered the textile business in 2001. The entire investment in the wholly-owned subsidiary Indian Britain BV was made by the assessee acquiring global units of a soda ash manufacturing and textile business chain as a measure of commercial expediency to further its business objective. In its desire for expansion in the overseas market, the assessee looked for various acquisitions of home textile businesses in the U.S. and retail chains in the U.K. In this effort at expansion, after setting up of the Vapi home textile plant it showed that Indian products can be sold in the U.S. and the U.K. and, as such, India could become the processing hub for home furnishing textile items.

The A.O. rejected the claim made by the assessee in the course of the assessment proceedings by relying on the decision of the Supreme Court in Goetze (India) Ltd. vs. CIT (157 taxman 1).

Aggrieved, the assessee preferred an appeal to the CIT(A) who adjudicated the issue in favour of the assessee.

HELD
The Tribunal observed that it has adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 wherein business loss allowed by the DRP in favour of the assessee was sustained on the ground that the assessee had acquired Rosebys Operation Ltd. to expand its textile business operation globally based on a study carried out by KSA Tech Pak, a renowned global consultant.

The Tribunal observed that:

(i) it is an undisputed fact that the assessee acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) in Romania for soda ash manufacturing and similarly acquired Rosebys U.K. Ltd. in the U.K. and Ban River Inc. in the U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shot up substantially and international concerns started taking the company’s products even after reduction in shares and liquidation of the subsidiary Indian Britain B.V. The assessee had explained its business expansion by making investment in a subsidiary company in Netherland from a commercial angle;

(ii) before the CIT(A), the assessee made a detailed submission demonstrating that loss claimed on account of investment in shares of the wholly-owned subsidiary company was a business loss. The assessee gave a detailed submission pointing out that there was recession in Europe and the U.S. Due to continued financial difficulty and other diverse factors, its subsidiaries incurred huge losses and became sick units. The assessee submitted to the CIT(A) that due to huge loss, its subsidiary company, Indian Britain BV passed a resolution to reduce its share capital of Euro 1,85,64,400 (1,85,644 shares) to 1,85,45,835.60 (1,85,644 shares) out of 2,21,586 shares so that such amount can be set off against the accumulated deposit. This resulted in loss amounting to Rs. 99,89,96,245 due to reduction in the value of the share of its subsidiary company.

The Tribunal held that the assessee has made investments in the subsidiary company for business development out of commercial expediency and thus on reduction of capital of the said subsidiary the loss incurred in the value of shares was in the nature of business loss. In the light of the facts and findings reported in the decision of the CIT(A), the Tribunal did not find any infirmity in the decision of the CIT(A) in allowing the losses on reduction in value of shares on investment in the subsidiary company as business losses in the hand of the assessee company. This ground of the appeal of the Revenue was dismissed.

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

10 TS-205 ITAT-2021 Delhi Pawan Hans Ltd. vs. DCIT A.Y.: 2014-15 Date of order: 18th March, 2021

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

FACTS
The assessee, a public sector undertaking, filed its return of income for A.Y. 2014-15 declaring its total income to be a loss of Rs. 1,89,90,55,165 and paying taxes u/s 115JB on a declared book profit of Rs. 66,18,51,561. In the course of assessment proceedings, the A.O. noticed that the assessee has created a provision for Corporate Social Responsibility (CSR) in its books of accounts. The A.O. held that the said provision was an unascertained liability as the assessee had only created the provision but where the amount was to be spent was unascertained. He rejected the assessee’s contention that the provision had been created on the basis of the guidelines issued by the Department of Public Enterprises (DPE) which the assessee was bound to follow. The A.O. disallowed the sum of Rs. 35,09,480 being provision of CSR u/s 115JB considering it as an unascertained liability.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. who, while holding the disallowance to be justified, noted that the guidelines issued by the DPE were not the determinative factor to decide the allowability of the provisions.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The essential question before the Tribunal was whether or not the provision for CSR as made by the assessee amounting to Rs. 35,09,480 can be considered as an ascertained liability. The Tribunal noted that the assessee has made the impugned provision in terms of the calculation provided as per the DPE guidelines. However, although the amount to be provided towards meeting the liability of the CSR expenditure has been quantified in accordance with the said guidelines, how the amount is to be spent has neither been determined nor specified by the assessee. Considering the meaning of the word ‘ascertained’ as explained by dictionaries, the Tribunal held that, at best, it is just an amount which has been set aside for being spent towards CSR but without any further certainty of its end-use. Thus, it cannot be said that the liability is an ascertained liability. The decisions relied upon on behalf of the assessee were held to be distinguishable on facts as in those cases the nature / mode of expenditure ear-marked for CSR spending was very much determined and specified, i.e., the nature / mode of expenditure was ‘ascertained’. The Tribunal dismissed the ground of appeal filed by the assessee.

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

9 2021 (3) TMI 1008-ITAT Delhi Shahi Exports Pvt. Ltd. vs. PCIT ITA Nos.: 2170/Del/2017 & 2171/Del/2017 A.Y.: 2008-09 Date of order: 24th March, 2021

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

FACTS
In both the appeals filed by the assessee, it raised an additional ground challenging the jurisdiction of the PCIT to review and revise the order passed by the A.O. u/s 153C which assessment order itself was illegal and bad in law due to invalid assumption of jurisdiction as contemplated u/s 153A/153C.

For A.Y. 2008-09, the A.O. on 30th March, 2015 framed an order u/s 153A read with sections 153C and 143(3) wherein the additions made while assessing the total income u/s 143(3) were repeated and consequently the total income assessed was the same as that assessed earlier in an order passed u/s 143(3).

The PCIT invoked provisions of section 263 and set aside the assessment order dated 30th March, 2015 on the ground that after the merger of Sarla Fabrics Pvt. Ltd. with Shahi Exports Pvt. Ltd. whatever additions were made in the hands of Sarla Fabrics Pvt. Ltd. were to be assessed in the hands of Shahi Exports Pvt. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since the income assessed in an assessment framed u/s 153A read with sections 153C and 143(3) was the same as that assessed earlier in an order passed u/s 143(3), the additions made had no link with incriminating material found at the time of the search. The Tribunal noted the ratio of the decision of the Delhi High Court in the case of CIT vs. Kabul Chawla in 380 ITR 573. In view of the ratio of the decision of the Apex Court in the case of Singhad Technical Educational Society (397 ITR 344) holding that in the absence of any incriminating material no jurisdiction can be assumed by the A.O. u/s 153C, the Tribunal quashed the assessment framed u/s 153C by holding it to be without jurisdiction and, therefore, bad in law.

In view of the decision of the Supreme Court in the case of Kiran Singh & others vs. Chaman Paswan & Ors. [(1955) 1 SCR 117] holding that the decree passed by a Court without jurisdiction is a nullity, the Tribunal held that the assumption of jurisdiction u/s 263 in respect of an assessment which is non est is also bad in law as a non est order cannot be erroneous and prejudicial to the interest of the Revenue.

The Tribunal quashed the order framed u/s 263 on the principle of sublato fundamento cadit opus, meaning that in case the foundation is removed, the super structure falls. In this case, since the foundation, i.e., the order u/s 153C has been removed, the super structure, i.e., the order u/s 263, must fall.

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

8. 2021 (3) TMI 1012-ITAT Delhi Virendra Kumar vs. ITO ITA No.: 9901/Del/2019
A.Y.: 2011-12 Date of order: 24th March, 2021

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

FACTS
The assessee is an individual who derives his income from wholesale business. The assessment for A.Y. 2011-12 was reopened on the basis of information that he had deposited Rs. 12,07,200 in cash in his savings bank account with ICICI Bank Ltd. during the F.Y. 2010-11. In response to the said notice u/s 148, the assessee furnished his return of income on 16th October, 2018 declaring the total income at Rs. 1,57,440. In the course of reassessment proceedings, the A.O. asked the assessee to explain the source of deposit. He observed that cash from different places like Delhi, Jaipur and Narnaul was deposited in the account. In the absence of any satisfactory explanation, the A.O. held that the assessee has no valid and genuine explanation with regard to the cash deposit of Rs. 8,57,200 after giving benefit of Rs. 3,50,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that full details were given before the A.O., stating that most of the cash deposit was from sale receipts and an amount of Rs. 3,50,000 was taken from his brother. The complete break-up of the cash deposit in the account was filed before the A.O. and, therefore, the addition made by the A.O. was not justified. The CIT(A), after considering the remand report of the A.O. and the rejoinder of the assessee to the remand report, sustained an addition of Rs. 3,62,000 being cash deposit of Rs. 3,16,000 at Jaipur, Rs. 15,000 at Jamnagar and Rs. 36,000 at Delhi, holding the same to be not out of regular sale.

The aggrieved assessee then preferred an appeal to the Tribunal where it was contended that he has declared gross receipt of Rs. 19,25,140 and has offered income u/s 44AD by applying the net profit rate of 8.16%. Therefore, once the gross receipts are accepted and not disputed and such gross receipt is much more than the total deposits in the bank accounts, no addition is called for merely by stating that the deposits are not out of sale proceeds.

HELD
The Tribunal noted that:
(i) The A.O. accepted an amount of Rs. 3,50,000 received by the assessee as gift from his brother and made an addition of Rs. 8,57,200 on the ground that the assessee could not successfully discharge his onus by providing evidence in support of the cash deposits;
(ii) Of the addition of Rs. 8,57,200 made by the CIT(A), it has already given relief to the extent of Rs. 4,90,200 and the Revenue is not in appeal before the Tribunal;
(iii) The CIT(A) sustained the addition of Rs. 3,67,000 on the ground that the assessee could not substantiate with evidence of sales the cash deposits made at Jamnagar, Delhi and Jaipur;
(iv) The assessee did furnish explanations about the deposits made at Jamnagar and Jaipur.

The Tribunal held that once the total turnover of the assessee is much more than the total cash deposit in the bank account (in this case sales is 227% of the cash deposit), no addition is called for on account of unexplained cash deposit in the bank account. The explanation of the assessee appears to be reasonable. The Tribunal held that the CIT(A) is not justified in sustaining the addition of Rs. 3,67,000, it set aside the order of the CIT(A) and directed the A.O. to delete the addition.

Reserve credited in the books of amalgamated company on account of acquisition of assets and liabilities in a scheme of amalgamation is in the nature of capital reserve only and not revaluation reserve

7. (2020) 82 ITR (T) 557 (Del)(Trib) Hespera Realty Pvt. Ltd. vs. DCIT ITA No.: 764/Del/2020 A.Y.: 2015-16 Date of order: 27th July, 2020

Reserve credited in the books of amalgamated company on account of acquisition of assets and liabilities in a scheme of amalgamation is in the nature of capital reserve only and not revaluation reserve

FACTS

The assessee company took over (acquired) certain other companies under a scheme of amalgamation. The assets and liabilities were taken over at fair value which was higher than their cost in the books of the amalgamating companies. The difference was recorded in the assessee’s books as ‘capital reserve’. These also included shares of Indiabulls Housing Finance Limited. Some of the said shares acquired in the scheme of amalgamation were sold by the assessee company at a profit. While accounting for the said profit in the books, the assessee company considered the cost of acquisition as the actual cost at which they were acquired in the course of amalgamation, which value was necessarily the fair value of the shares (calculated at closing price on NSE on the day prior to the appointed date for the amalgamation).

It was the contention of the Revenue that the scheme of amalgamation was a colourable device to evade tax on book profits u/s 115JB. The A.O. held that the reserve credited in the books was not capital reserve and was essentially revaluation reserve which ought to be added back while computing book profits in view of clause (j) to Explanation 1 of section 115JB. Thus, the difference between the cost of shares in the books of the amalgamating company and their fair value was added back in the hands of the assessee while computing book profits (pertaining to sale of shares).

The CIT(A) concurred with the findings of the A.O. and upheld his order.

Aggrieved, the assessee preferred an appeal before the ITAT.

HELD


The ITAT observed that a ‘Revaluation Reserve’ is created when an enterprise revalues its own assets, already acquired and recorded in its books at certain values. In the instant case, the assessee has not revalued its existing assets but has only recorded the fair values of various assets and liabilities ‘acquired’ by the assessee from the transferor / ‘amalgamating companies’ pursuant to the scheme of amalgamation as its ‘cost of acquisition’ in accordance with the terms of the Court-approved scheme of amalgamation and the provisions of AS 14.

The ITAT examined the provisions of section 115JB vis-à-vis accounting treatment of capital reserve / revaluation reserve.

It was observed that section 115JB requires an assessee company to prepare its P&L account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013. The section further says that for computing book profits under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act, 1956) shall be adopted.

Section 129 of the Companies Act provides that the financial statements of the company shall be prepared to give a true and fair view of the state of affairs and the profit or loss of the company and shall comply with the Accounting Standards as prescribed by the Central Government.

As per the above provisions, for accounting for amalgamation, AS 14 is applicable. As per AS 14 pooling of interest method and purchase method are recognised. In the instant case, as per sections 391 to 394 of the Companies Act, amalgamation was regarded as amalgamation in the nature of purchases and hence purchase method of AS 14 is applicable to the assessee.

As per AS 14 ‘If the amalgamation is an “amalgamation in the nature of purchase”, the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital Reserve.’

Based on the above examination of the requirements of AS 14 and the provisions of section 115JB, the ITAT ruled in favour of the assessee by holding that the reserve credited in the books of the assessee is not in the nature of revaluation reserve but is a capital reserve. In doing so, the Tribunal relied on the order of the co-ordinate Bench in the case of Priapus Developers Pvt. Ltd. 176 ITD 223 dated 12th March, 2019 which had made similar observations on the issue of reserve arising out of the purchase method adopted in the scheme of amalgamation.

Where receipt of consideration was dependent upon fulfilment of certain obligations, the income cannot be said to have accrued in the year in which relevant agreement is entered

6. (2020) 82 ITR (T) 419 (Mum)(Trib) ITO vs. Abdul Kayum Ahmed Mohd. Tambol (Prop. Tamboli Developers) ITA No.: 5851/Mum/2018 A.Y.: 2009-10 Date of order: 6th July, 2020

Where receipt of consideration was dependent upon fulfilment of certain obligations, the income cannot be said to have accrued in the year in which relevant agreement is entered

FACTS

The assessee, an individual, civil contractor, transferred certain development rights for a total consideration of Rs. 3.36 crores vide agreement dated 23rd July, 2008 out of which Rs. 1 crore was received during F.Y. 2008-09. The assessee calculated business receipts after deducting expenditure incurred in connection with the above and finally offered 8% of the net receipts as income u/s 44AD. The A.O. brought to tax the entire consideration of Rs. 3.36 crores on the basis that, as per the terms of the agreement, the assessee parted with development rights and the possession of the land was also given. Therefore, the transfer was completed during the year and the taxability of business receipts would not be dependent upon actual receipt thereof. On further appeal to the CIT(A), the latter concluded the issue in the assessee’s favour. Aggrieved, the Revenue filed an appeal before the ITAT.

HELD

The whole controversy in this matter pertained to year of accrual of the afore-mentioned income and consequent year of taxability of the income. The ITAT took note of an important fact that only part payment, as referred to above, accrued to the
assessee in the year under consideration since the balance receipts were conditional receipts which were payable only in the event of the assessee performing various works, obtaining requisite permissions, etc. The payments were, thus, subject to fulfilment of certain contractual performance by the assessee. The said facts were confirmed by the payer, too, in response to a notice u/s 133(6).

The ITAT also confirmed the view of the CIT(A) that the term ‘transfer’ as defined in section 2(47)(v) would not apply in the case since the same is applicable only in case of capital assets held by the assessee. The development rights in the instant case were held as business assets. The assessee had also offered to tax the balance receipts in the subsequent years. It concluded that since the balance consideration was a conditional receipt and was to accrue only in the event of the assessee performing certain obligations under the agreement, the same did not accrue to the assessee.

Thus, the ITAT dismissed the appeal of the Revenue.

Section 54F of the Income-tax Act, 1961 – Exemption to be granted even if investment in new residential property is made in the name of legal heir – Section 54F does not require investment to be made in assessee’s name

5. 125 taxmann.com 110 Krishnappa Jayaramaiah IT Appeal No. 405 (Bang) of 2020 A.Y.: 2016-17 Date of order: 22nd February, 2021

Section 54F of the Income-tax Act, 1961 – Exemption to be granted even if investment in new residential property is made in the name of legal heir – Section 54F does not require investment to be made in assessee’s name

FACTS

The assessee filed his return of income showing, among other things, income under capital gains from sale of a property acquired on account of partition of the HUF. The assessee claimed a deduction u/s 54F by investing the sale consideration in a new residential property purchased in the name of his widowed daughter. The assessee’s daughter had no independent source of income and was entirely dependent on him. The A.O. denied the claim of deduction to the assessee and determined the total assessed income at Rs. 2,07,75,230. The CIT(A) upheld the A.O.’s order. Aggrieved, the assessee filed an appeal with the Tribunal.

HELD

It was held that there is nothing in section 54F to show that a new residential house should be purchased only in the name of the assessee. The section merely says that the assessee should have purchased / constructed a ‘residential house’. Noting that purposive consideration is to be preferred as against literal consideration, the Tribunal held that the word ‘assessee’ should be given a wide and liberal interpretation and include legal heirs, too. Thus, the A.O. was directed to grant exemption u/s 54F to the assessee for the amount invested in the purchase of a residential house in his daughter’s name.

The assessee’s appeal was allowed.

 

Sections 250, 251 – The appellate authorities are obligated to dispose of all the grounds of appeal raised before them so that multiplicity of litigation may be avoided – There can be no escape on the part of the CIT(A) from discharging the statutory obligation cast upon him to deal with and dispose of all the grounds of appeal on the basis of which the impugned order has been contested by the assessee before him

4. TS-48-ITAT-2021 (Mum) DCIT vs. Tanna Builders Ltd. ITA No. 2816 (Mum) of 2016 A.Y.: 2011-12 Date of order: 19th January, 2021

Sections 250, 251 – The appellate authorities are obligated to dispose of all the grounds of appeal raised before them so that multiplicity of litigation may be avoided – There can be no escape on the part of the CIT(A) from discharging the statutory obligation cast upon him to deal with and dispose of all the grounds of appeal on the basis of which the impugned order has been contested by the assessee before him

FACTS

For A.Y. 2011-12, the assessee company, engaged in the business of builder, masonry and general construction contractor, filed its return of income declaring a total income of Rs. 26,41,130. The assessee had constructed two buildings, viz. Tanna Residency (Phase I) and Raheja Empress. The assessee had made buyers of units / houses shareholders of the company and allotted shares of Rs. 10 each to them. The assessee had issued debentures to those purchasers / shareholders equivalent to the value of the sale consideration of the units / houses sold. Debentures with a face value of Rs. 1,00,000 each were issued and an amount of Rs. 99,990 was collected on each debenture and shown as a liability in the Balance Sheet of the company. This was the case for all the 27 allottees / purchasers of the houses / units in the two buildings on the date of commencement of the respective projects.

During the year under consideration the assessee issued debentures of Rs. 4.20 crores towards the sale of certain units / spaces. The A.O. held that the assessee had been accounting the sale proceeds of its stock as a liability in its Balance Sheet instead of as sales in the P&L account. He called upon the assessee to explain why the amounts received on issuing the debentures during the year under consideration may not be taxed as sales and be subjected to tax. The assessee submitted that it continued to own the buildings and the construction cost had been raised through the shareholders by issuing unsecured redeemable debentures to them. It was also submitted that issuing of debentures by the company and raising money therefrom was neither held as sale of units nor sale of parking spaces by the Department while framing its assessments of preceding years. It was submitted that the assessee has issued 60 debentures to International Export and Estate Agency (IEEA) on the basis of holding 180 shares of the assessee company. On the basis of this holding, the assessee company had given IEEA the right to use, possess and occupy 60 basement parking spaces in its building. Debentures were issued pursuant to a resolution passed in the Board of Directors meeting held on 4th October, 2010 and the resolution passed by the shareholders in the Extraordinary General Meeting held on 29th October, 2010.

The A.O. held that the assessee has sold the units / houses in the aforesaid buildings to the shareholders / debenture holders who were the actual owners of the said properties and the claim of the assessee that it was the owner of the buildings and the debentures / shares were issued for raising funds was clearly a sham transaction that was carried out with an intent to evade taxes. The A.O. also held that the amount received by the assessee company by issuing shares / debentures to the purchasers of the houses / units / spaces was supposed to have been accounted by it as its income in its P&L account. He treated the amount of Rs. 4.20 crores received by the assessee on issuing debentures / shares during the year as the sales income of the assessee company.

Aggrieved, the assessee preferred an appeal to the CIT(A) who found favour with the contentions advanced by the assessee and vacated the addition.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the assessee had, in the course of appellate proceedings before the CIT(A), raised an alternative claim that the A.O. erred in not allowing cost of construction against the amount of Rs. 4.20 crores treated by him as business income. The assessee had filed additional evidence in respect of corresponding cost of parking space. In view of the fact that the CIT(A) had deleted the addition of Rs. 4.20 crores made by the A.O., he would have felt that adjudicating the alternative claim would not be necessary. The Tribunal held that in its opinion piecemeal disposal of the appeal by the first Appellate Authority cannot be accepted.

The Tribunal held that as per the settled position of law the appellate authorities are obligated to dispose of all the grounds of appeal raised by the appellant before them so that multiplicity of litigation may be avoided. For this view it placed reliance on the decision of the Madras High Court in the case of CIT vs. Ramdas Pharmacy [(1970) 77 ITR 276 (Mad)] that the Tribunal should adjudicate all the issues raised before it.

The Tribunal restored the matter to the file of the CIT(A) with a direction to dispose of the alternative ground of appeal that was raised by the assessee before him.

Sections 2(24), 45, 56 – Compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment

3. 2021 (3) TMI 252-ITAT Mumbai Smt. Dellilah Raj Mansukhani vs. ITO ITA No.: 3526/Mum/2017 A.Y.: 2010-11 Date of order: 29th January, 2021

Sections 2(24), 45, 56 – Compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment

FACTS

During the course of appellate proceedings the CIT(A) found, on the basis of details forwarded by M/s Calvin Properties, that the assessee has been given compensation for alternative accommodation of Rs. 2,60,000 as per the terms of the Development Agreement. According to the CIT(A), the amount received was over and above the rent actually paid by the assessee and, therefore, the same has to be taxed accordingly. The CIT(A) having issued notice u/s 251(2) qua the proposed enhancement and considering the reply of the assessee that she received monthly rental compensation during the year aggregating to Rs. 2,60,000 for the alternative accommodation which is a compensation on account of her family displacement from the accommodation and tremendous hardship and inconvenience caused to her, the said compensation is towards meeting / overcoming the hardships and it is a capital receipt and therefore not liable to be taxed.

The assessee relied on the decision of the co-ordinate Bench in the case of Kushal K. Bangia vs. ITO in ITA No. 2349/Mum/2011 for A.Y. 2007-08 wherein the A.O. did not tax the displacement compensation as it was held to be a receipt not in the nature of income. The CIT(A) rejected the contentions of the assessee and enhanced the assessment to the extent of Rs. 2,60,000 by holding that the assessee has not paid any rent.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal held that compensation received by the assessee towards displacement in terms of the Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment. It observed that in a scenario where the property goes into redevelopment, the compensation is normally paid by the builder on account of hardship faced by owner of the flat due to displacement of the occupants of the flat. The said payment is in the nature of hardship allowance / rehabilitation allowance and is not liable to tax. It observed that the case of the assessee is squarely supported by the decision of the co-ordinate Bench in the case of Devshi Lakhamshi Dedhia vs. ACIT ITA No. 5350/Mum/2012 wherein a similar issue has been decided in favour of the assessee. The Tribunal in that case held that the amounts received by the assessee as hardship compensation, rehabilitation compensation and for shifting are not liable to tax. Accordingly, the Tribunal set aside the findings of the CIT(A) and directed the A.O. to delete the addition made of Rs. 2,60,000.

Sections 120 and 250 – CIT(A) has no jurisdiction to pass orders after a direction from DGIT(Inv.) not to pass any further orders during the pendency of the explanation sought from him on the lapses in adjudicating the appeals – The order passed by him contrary to the directions of the superior officer cannot be said to be an order passed by a person having proper jurisdiction

2. TS-90-ITAT-2021 (Bang) DCIT vs. GMR Energy Ltd. ITA No. 3039 (Bang) of 2018 A.Y.: 2014-15 Date of order: 22nd February, 2021


 

Sections 120 and 250 – CIT(A) has no jurisdiction to pass orders after a direction from DGIT(Inv.) not to pass any further orders during the pendency of the explanation sought from him on the lapses in adjudicating the appeals – The order passed by him contrary to the directions of the superior officer cannot be said to be an order passed by a person having proper jurisdiction

 

FACTS

In the appeal under consideration filed by the Revenue and 82 other appeals and cross-objections filed before the Tribunal, the Revenue requested by way of an additional ground that the orders impugned in these appeals which had all been passed by the CIT(A)-11, Bengaluru should be held to be orders passed without proper jurisdiction and should be set aside and remanded to the CIT(A) for fresh decision by the CIT(A) with competent jurisdiction.

 

It was stated that the CIT(A)-11, Bangalore who passed all the impugned orders committed serious lapses and he was directed by the Director-General of Income-tax, Investigation, Karnataka & Goa, Bengaluru by direction dated 18th June, 2018 not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals. It was the plea of the Revenue that all the orders impugned in these appeals were passed after 18th June, 2018 and are therefore orders passed without jurisdiction and on that ground are liable to be set aside.

 

Without prejudice to the above contention, it was the further plea of the Revenue that by Notification dated 16th July, 2018, issued u/s 120 by the Principal Chief Commissioner of Income-tax, Karnataka & Goa, the appeals pending before the CIT(A)-11 were transferred to the CIT(A)-12, Bengaluru.

 

It was the case of the Revenue that

(i) the CIT(A)-11, disregarding the directions issued by the Principal CCIT, has passed orders that are impugned in all these appeals;

(ii) though the impugned orders are purported to have been passed on dates which are prior to 16th July, 2018, they were in fact passed after those dates but were pre-dated. In support of this claim, the Revenue relied on the circumstance that the date of despatch of the impugned orders has not been entered in the dispatch register maintained by the CIT(A)-11;

(iii) in view of the fact that the date of dispatch is not specifically entered during the period when CIT(A)-11 was directed not to pass any orders, the only inference that can be drawn is that the impugned orders were passed after the appeals were transferred u/s 120 to the CIT(A)-12. By implication, the Revenue contended that the orders impugned were back-dated so as to fall before or on the cut-off date of 16th July, 2018;

(iv) since the orders passed in all these appeals are dated after 18th June, 2018 when the DGIT (Investigation), Karnataka & Goa, Bengaluru directed the then CIT(A)-11, Bengaluru not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals, therefore the orders passed after 18th June, 2018 are illegal and are orders passed without jurisdiction and liable to be set aside.

 

HELD

It is undisputed that the impugned orders in all the appeals were passed after 18th June, 2018. The order by which the DGIT (Investigation), Karnataka & Goa, Bengaluru directed the then CIT(A)-11, Bengaluru not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals was dated 18th June, 2018. The CIT(A)-11 thus had no jurisdiction to pass any orders in appeal on or after the aforesaid date. The orders passed by him contrary to the directions of the superior officer cannot be said to be orders passed by a person having proper jurisdiction. The Tribunal noted that the CBDT has in paragraph 7 of its instruction dated 8th March, 2018 [F. No. DGIT (Vig.)/HQW/SI/Appeals/2017 – 18/9959] instructed all Chief Commissioners of Income-tax to conduct regular inspections of the CIT(A)s working under them and keep a watch on the quality and quantity of orders passed by them. The instructions further lay down that failure on the part of the Chief Commissioners of Income-tax to do so would be viewed adversely by the CBDT.

 

The Tribunal held that the very action of then CIT(A)-11 in ignoring the binding directions given by the DGIT and proceeding to pass orders resulted in a serious lapse on his part in administering justice. The Tribunal noticed that all the orders impugned in these appeals had been passed between the 5th and the 13th of July, 2018; they numbered around 50 orders, involving different assessees and different issues, which was a difficult task for any appellate authority. The Tribunal agreed with the submission of the standing counsel that the interests of Revenue were prejudiced by the said action of the then CIT(A)-11. The Tribunal held that all these factors vitiate the appellate orders passed by him after 18th June, 2018, even if the allegation of pre-dating of orders is not accepted / proved.

 

Following the decision of the Delhi Bench of the Tribunal in the case of ACIT vs. Globus Constructions Pvt. Ltd. (ITA No. 1185/Delhi/2020; AY 2015-16; order dated 8th January, 2021) on almost similar facts, the Tribunal set aside the orders of the CIT(A) to the respective jurisdictional CIT(A) to decide the appeals afresh in accordance with law after due opportunity of hearing to the parties.

Section 37 – Input service tax credit is deductible u/s 37(1) when such Input Tax Credit is written off in the books of accounts

1. TS-113-ITAT-2021 (Chny) FIH India Private Limited vs. DCIT ITA No. 1184 (Chny) of 2018 A.Y.: 2010-11 Date of order: 8th February, 2021

Section 37 – Input service tax credit is deductible u/s 37(1) when such Input Tax Credit is written off in the books of accounts

FACTS

The assessee engaged in the business of manufacturing, assembling and trading of parts and accessories for mobile phones operated from two units, both located in SEZs. The assessee filed its return of income after setting off brought-forward losses and unabsorbed depreciation under normal provisions of the Act and book profit of Rs. 80,25,61,835 under the provisions of section 115JB.

The assessee followed the method of accounting wherein expenses were debited to the Profit & Loss account excluding service tax. The service tax paid on expenses was shown as ITC adjustable against output service tax payable on the services rendered by it. Since output services rendered by the assessee were exempt from service tax, the assessee made a claim for refund. Upon the rejection of the claim of refund by the Service Tax Department, the assessee reversed the ITC and debited the P&L account with a sum of Rs. 51,65,869 towards service tax written off and claimed it as an expenditure u/s 37(1). The A.O. called upon the assessee to explain why service tax written off should not be disallowed u/s 37(1).

The A.O. was of the opinion that
(i) rejection of the claim of refund of service tax credit cannot impact the P&L account;
(ii) even if it is to be treated as a P&L account item, it was never treated as income at any point of time for it to be written off;
(iii) if the same is treated as claim of deferred expenditure, the same pertains to earlier years and is therefore a prior period item which is not eligible to be claimed as an item of expenditure.

For the above-stated reasons, the A.O. rejected the claim of Rs. 51,65,869 made by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the A.O. has not disputed the fact that the assessee has not debited the service tax component paid on input services into the P&L account. Therefore, there is no merit in his observation that it is not an item of P&L account. The assessee has paid service tax on input services and hence the question of treating the said service taxes as an item of income does not arise because any taxes paid on purchase of goods or services is part of the cost of goods or services which can be either debited to the P&L account when the assessee has not availed ITC, or if the assessee avails ITC then the service tax component is taken out from the P&L account and treated as current assets pending adjustment against output taxes payable on goods or services.

When the application filed by the assessee for refund was rejected by the Department, the assessee had written off the said ITC and debited it to the P&L account. Therefore, the second observation of the A.O. also fails. When the input service tax credit is carried forward from earlier financial year to the current financial year, it partakes the nature of taxes paid for the current financial year and hence deductible as and when the assessee has debited it into the P&L account.

Further, it is a well-settled principle of law by the decision of various Courts and Tribunals that ITC / CENVAT is deductible u/s 37(1) when such ITC is reversed or written off in the books of accounts. The Tribunal relied upon the decision of the Gujarat High Court in the case of CIT vs. Kaypee Mechanical India (P) Ltd., (2014) 223 taxmann 346 and the decision of the Ahmedabad Bench of the Tribunal in the case of Girdhar Fibres (P) Ltd. vs. ACIT in ITA No. 2027/Ahd/2009. The Tribunal held that input service tax credit is deductible u/s 37(1) when such ITC is written off in the books of accounts.

The Tribunal set aside the issue to the file of the A.O. for the limited purpose of verification of the claim of the assessee regarding rejection of refund claim.

In the absence of any incriminating and corroborative evidence, extrapolation of on-money received in one transaction cannot be done to the entire sales Addition u/s 68 in respect of unsecured loans cannot be made merely on the basis of statement of entry operators Only real income can be subject to tax – Addition cannot be made on the basis of notings in loose sheets which are not corroborated by any credible evidence

21 Mani Square Ltd. vs. Asst. CIT [2020] 83 ITR (T) 241 (Kol-Trib) A.Ys.: 2013-14 to 2017-18; Date of order:  6th August, 2020 Sections 132, 68, 5 and 145

In the absence of any incriminating and corroborative evidence, extrapolation of on-money received in one transaction cannot be done to the entire sales
Addition u/s 68 in respect of unsecured loans cannot be made merely on the basis of statement of entry operators
Only real income can be subject to tax – Addition cannot be made on the basis of notings in loose sheets which are not corroborated by any credible evidence

FACTS
1. The assessee was engaged in real estate development. A search action u/s 132 was undertaken on the assessee. Prior to this, a search action was undertaken on one of the buyers (an HUF) wherefrom certain documents were seized which suggested that the assessee had received on-monies for sale of the flat to that buyer. Based on those documents, the A.O. concluded that a certain percentage of the actual sale consideration for the flat and car parking was received in cash and was unaccounted. Thereafter, the A.O. extrapolated the on-money on the entire sales. The CIT(A) confirmed the addition in respect of the single flat sold to the HUF but deleted the balance addition in case of all other buyers on the ground that a singular instance cannot be extrapolated without evidence.

2. Addition was also made u/s 68 in respect of loans taken from parties allegedly linked to entry operators.

3. A further addition was made by the A.O. in respect of interest income receivable from a party. To put it briefly, in the course of the search at the assessee’s premises a document was recovered, containing notings which suggested a unilateral claim raised by the assessee against a third party. However, there was nothing in these documents which proved that the third party had ever accepted such claim of the appellant and nothing was brought on record by the A.O., too, to prove acceptance of the appellant’s claim by the third party. However, the A.O. made an addition on the basis of notings contained in the recovered document.

HELD
1. Addition u/s 68 on account of alleged on-money on sale of flats
The ITAT observed that the documents found in the course of third party search were loose sheets of paper which could not be construed as incriminating material qua the assessee. These documents neither contained the name of the assessee nor any mention of the assessee’s project, nor did it suggest that the seized document was prepared at the instance of the assessee and hence there was no mention of any cash payment to the assessee. No additions were made in the case of assessments of the parties, alleged to have given cash to the assessee, and hence addition was not warranted in the hands of the assessee, too.

In a subsequent search on the assessee’s premises, no corroborative material was found and in the absence of any incriminating material no addition was warranted. The extrapolation of unaccounted sales across all units sold by the assessee had no legs to stand on.

The A.O. had made an independent inquiry from each flat purchaser; however, he did not find any statement or material which could even suggest receipt of cash consideration not disclosed by the assessee. Therefore, based on legal as well as factual grounds, the ITAT upheld the CIT(A)’s decision to hold that the theory of extrapolation could not be applied on theoretical or hypothetical basis in the absence of any incriminating and corroborative evidence or material brought on record by the A.O.

2. Addition u/s 68 in respect of unsecured loans (from parties linked to entry operators)
The ITAT observed that, other than recording the statement of entry operators on oath, the A.O. had not shown any credible link between the person whose statement was relied upon and the company from whom loans were received by the assessee; the A.O. had neither personally nor independently examined even a single entry operator to verify the correctness of facts contained in the statement and to establish the link with the assessee if any, neither had he allowed the assessee to cross-examine the witnesses whose statements were extracted in the assessment order. The A.O. had also failed to objectively take into consideration the financial net worth of the creditors having regard to the facts and figures available in the audited accounts. Based on these grounds, the ITAT deleted the impugned additions.

3. Addition in respect of interest income
The ITAT held that the subject matter of tax under the Act can only be the ‘real income’ and not hypothetical or illusory income. The two methods recognised in section 145 only prescribe the rules as to when entries can be made in the assessee’s books but not the principles of time of ‘revenue recognition’. The same has to be judged with reference to the totality of the facts and surrounding circumstances of each case. Hence, the overall conduct of the third party and the fact that it has till date not made any payment whatsoever to the assessee indicates that notings on loose papers did not represent ‘real’ income accrued to the assessee and was rightly not offered to tax. The ITAT, accordingly, held that the alleged interest income was not taxable.

Evidence of data transmission and export of software by an assessee outside India is not a requirement to claim deduction u/s 10AA RBI approval for bank account maintained outside India not a requirement to be fulfilled to claim deduction u/s 10AA No requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by assessee are sufficient to compute profits of various STPI / SEZ units

20 IBM (India) Pvt. Ltd. vs. Asst. CIT [2020] 83 ITR(T) 24 (Bang-Trib) A.Y.: 2013-14; Date of order: 31st July, 2020 Section 10AA

Evidence of data transmission and export of software by an assessee outside India is not a requirement to claim deduction u/s 10AA

RBI approval for bank account maintained outside India not a requirement to be fulfilled to claim deduction u/s 10AA
No requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by assessee are sufficient to compute profits of various STPI / SEZ units

FACTS

The assessee company was engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment and export of software services to associated enterprises. It filed its return of income after claiming exemption u/s 10AA. However, the A.O. and the Dispute Resolution Panel denied the said exemption on various grounds which inter alia included the following:
a) There was no evidence of data transmission and export of software by the assessee outside India.
b) The assessee had not obtained RBI approval for the bank account maintained by it outside India with regard to export earnings.
c) Unit-wise P&L account of assessee did not reflect true and correct profits of its SEZ units.

Aggrieved by the above action, the assessee filed an appeal before the ITAT.

HELD


With regard to the objection that there was no evidence of data transmission and export of software by the assessee outside India, the ITAT held that declaration forms submitted before the Software Technology Park of India (STPI) or Special Economic Zone authority were sufficient evidence of data transmission / export of software. Further, it was held that for the purpose of claiming exemption u/s 10AA, such an objection did not have any relevance. Accordingly, this objection was rejected.

Another objection of the Revenue was that since the assessee was crediting export proceeds in a foreign bank account which was not approved by the RBI, therefore exemption could not be granted. The ITAT held that approval of the RBI was required only in order to claim benefit of Explanation 2 to section 10A(3) according to which export proceeds would be deemed to have been received in India if the same were credited to such RBI-approved foreign bank account within the stipulated time. It was held that even though the assessee cannot not avail exemption based on Explanation 2 to section 10A(3), but it could not be denied exemption under the main provision of section 10A(3) which only requires the export proceeds to be brought to India in convertible foreign exchange within the time stipulated in the said section. Accordingly, if the export proceeds were brought to India (even though from the non-approved foreign bank account) within the stipulated time period in convertible foreign exchange, then the exemption as per the main provision of section 10A(3) could not be denied.

As for the objection that the unit-wise profit & loss account of the assessee did not reflect the true and correct profits of its SEZ units and hence exemption u/s 10AA could not be granted, the ITAT held that there was no requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by the assessee are sufficient to compute the profits of various STPI / SEZ units. It was held that since Revenue had not disputed the sale proceeds claimed by the assessee against each STPI / SEZ unit, it could be said that bifurcations of profits of various STPI / SEZ units as given by the assesse were correct. Reliance was also placed on CBDT Circular No. 01/2013 dated 17th January, 2013 which clarifies that there is no requirement in law to maintain separate books of accounts and the same cannot be insisted upon by Revenue.

Capital gain – Investment in residential house – The date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken

19 ACIT vs. Mohan Prabhakar Bhide ITA No. 1043/Mum/2019 A.Y.: 2015-16; Date of order: 3rd March, 2021 Section 54F

Capital gain – Investment in residential house – The date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken

FACTS

The assessee filed his return of income claiming a deduction of Rs. 2,38,30,244 u/s 54F. The A.O., in the course of assessment proceedings, noted that the assessee had advanced a sum of Rs. 1,00,00,000 for purchase of new house property on 20th April, 2012, whereas the sale agreement for five commercial properties sold by the assessee was made in 2014 and 2015.

The A.O. held that the investment in question should have been made within one year before the sale of property or two years after the sale of property. Since this condition was not satisfied, he disallowed the claim for deduction of Rs. 2,38,30,244 made u/s 54F.

Aggrieved, the assessee preferred an appeal to the CIT(A) who noted that the date of agreement for purchase of the new residential house was 22nd July, 2015 and the assessee had taken possession of the new residential house on 22nd July, 2015; both these dates were within two years from the date of transfer. Relying on the decision in CIT vs. Smt. Beena K. Jain [(1996) 217 ITR 363 (Bom)], he allowed the appeal filed by the assessee.

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD


The Tribunal noted that the issue in appeal is squarely covered by the decision of the Bombay High Court in CIT vs. Smt. Beena K. Jain (Supra). The Tribunal held that the date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken. It observed that there is no dispute that this date is 22nd July, 2015 which falls within a period of two years from the date on which the related property was sold. However, the A.O. had proceeded to adopt the date on which the initial payment of Rs. 1,00,00,000 was made. The Tribunal held that the approach so adopted by the A.O. was ex facie incorrect and contrary to the law laid down by the jurisdictional High Court in the case of Beena K. Jain (Supra).

Penalty – Search case – Specified previous year – Addition made by taking the average gross profit rate cannot be considered to be assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA

18 Ace Steel Fab (P) Ltd. vs. DCIT TS-311-ITAT-2021 (Del) A.Y.: 2010-11; Date of order: 12th April, 2021 Section 271AAA

Penalty – Search case – Specified previous year – Addition made by taking the average gross profit rate cannot be considered to be assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA

FACTS

In the course of a search operation u/s 132(1), the value of stock inventory on that particular day was found to be lower than the value of stock as per the books of accounts. The A.O. concluded that the assessee made sales out of the books. He called upon the assessee to show cause why an addition of Rs. 15,53,119 be not made by taking a gross profit rate of 4.6% on the difference of stock of Rs. 3,13,12,889. In response, the assessee submitted that the discrepancy in stock was only due to failure of the accounting software. The A.O. did not accept this contention and made an addition of Rs. 11,52,314. The quantum appeal, filed by the assessee to the CIT(A), was dismissed.

The A.O. imposed a penalty u/s 271AAA which was confirmed by the CIT(A).

Aggrieved by the order of the CIT(A) confirming the imposition of penalty u/s 271AAA, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal noted that the question for its consideration is whether an addition made by taking the average gross profit rate can be considered to be the assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA.

Although the A.O. had not accepted the contention of the assessee that the discrepancy in stock was due to malfunctioning of the ERP software, the assessee had demonstrated with evidence that due to malfunction of the software the accounts could not be completed in time and the assessee had had to approach the Company Law Board with a petition to extend the date for adoption of audited accounts. The petition of the assessee was accepted and the offence was compounded. The Tribunal held that the assessee had a reasonable explanation for the discrepancy found in stock and due credence should have been given to this explanation. It cannot be said that the assessee had no explanation to offer regarding the difference in stock. It also noted that penalty has been imposed only on an ad hoc addition made based on average gross profit rate and does not relate directly to any undisclosed income unearthed during the course of the search. In such a situation, penalty u/s 271AAA was not sustainable, hence the Tribunal set aside the order passed by the CIT(A) and deleted the impugned penalty.

Limited Scrutiny – Revision – Order passed in a limited scrutiny cannot be revised on an issue which was not to be taken up in limited scrutiny – Action of A.O. in not examining an issue which was not to be taken up in limited scrutiny cannot be termed as erroneous

17 Spotlight Vanijya Ltd. vs. PCITTS-310-ITAT-2021 (Kol) A.Y.: 2015-16; Date of order: 9th April, 2021 Sections 143(3), 263

Limited Scrutiny – Revision – Order passed in a limited scrutiny cannot be revised on an issue which was not to be taken up in limited scrutiny – Action of A.O. in not examining an issue which was not to be taken up in limited scrutiny cannot be termed as erroneous

FACTS
In the present case, for the assessment year under consideration the assessee’s case was taken up for limited scrutiny under CASS and a notice u/s 143(2) was issued. Limited scrutiny was taken up for the following three reasons, viz.,
i) income from heads other than business / profession mismatch;
ii) sales turnover mismatch;
iii) investments in unlisted equities.

The A.O., after going through the submissions of the assessee, completed the assessment u/s 143(3), assessing the total income of the assessee to be Rs. 91,95,770 under normal provisions and Rs. 94,94,533 u/s 115JB.

Upon completion of the assessment, the PCIT issued a show cause notice (SCN) u/s 263 wherein he expressed his desire to interfere and revise the assessment order passed by the A.O. on the ground that a deduction of Rs. 10,02,198 has been claimed in respect of flats in Mumbai for which rental income of only Rs. 4,20,000 is offered under the head ‘Income from House Property’ and a standard deduction of Rs. 1,80,000 has been claimed.

The assessee, in response to the SCN, objected to the invocation of revisional jurisdiction on the ground that insurance premium was not one of the three items on which the case was selected for limited scrutiny. It was further stated that the insurance premium for flats is only Rs. 2,198 which has been added back while computing income under the head ‘Profits & Gains of Business or Profession’. The balance amount of Rs. 10,00,000 was premium for Keyman Insurance policy which is allowable as a deduction u/s 37. Consequently, the assessment order was not erroneous or prejudicial to the interest of the Revenue.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The A.O.’s action of not looking into the issue of insurance premium (Keyman policy) cannot be termed as erroneous as such omission is in consonance with the dictum of CBDT on the subject, viz., CBDT Instruction No. 2/2014 dated 26th September, 2014, which directs the field officers to confine their inquiries strictly to CASS reasons and they were not permitted to make inquiries in respect of issues for which a case was not selected for limited scrutiny. Therefore, the order passed by the A.O. cannot be termed as erroneous and prejudicial to the interest of the Revenue and consequently the PCIT could not have invoked revisional jurisdiction.

The Tribunal held that the impugned action of the PCIT is akin to doing indirectly what the A.O. could not have done directly. It said the very initiation of jurisdiction by issuing an SCN itself is bad in law and, therefore, quashed the SCN issued by the PCIT. For this, the Tribunal relied upon the decisions in
i) Sanjib Kumar Khemka [ITA No. 1361/Kol/2016, A.Y. 2011-12, order dated 2nd June, 2017]; and
ii) Chengmari Tea Co. Ltd. [ITA No. 812/Kol/2019, A.Y. 2014-15, order dated 31st January, 2020].

Consequently, all further actions / proceedings, including the impugned order of the PCIT, were held to be non est in the eyes of the law.

Income from Other Sources – Interest on enhanced compensation for acquisition of agricultural land is a capital receipt not chargeable to tax u/s 56(2)(viii) r.w.s. 57(iv)

16 Nariender Kumar vs. ITO TS-298-ITAT-2021 (Del) A.Y.: 2014-15; Date of order: 12th April, 2021 Section 56(2)(viii) r.w.s. 57(iv)

Income from Other Sources – Interest on enhanced compensation for acquisition of agricultural land is a capital receipt not chargeable to tax u/s 56(2)(viii) r.w.s. 57(iv)

FACTS

The assessee filed his return of income for A.Y. 2014-15 declaring a total income of Rs. 12,250 and agricultural income of Rs. 3,50,000. During the previous year relevant to the assessment year under consideration, he had received Rs. 1.42 crores as enhanced compensation on land acquisition which included compensation of Rs. 56.90 lakhs and interest of Rs. 85.32 lakhs. The A.O. made an addition of Rs. 42.66 lakhs being 50% of interest of Rs. 85.32 lakhs u/s 56(2)(viii) r.w.s. 57(iv).

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD


The capital receipt, unless specifically taxable u/s 45 under the head Capital Gains, in principle is outside the scope of income chargeable to tax and cannot be taxed as income unless it is in the nature of revenue receipt or is specifically brought within the ambit of income by way of a specific provision of the Act. Interest received on compensation to the assessee is nothing but a capital receipt.

The Tribunal observed that:
(i) The CIT(A) has not given a finding as to why the A.O. is justified in making the addition;
(ii) The Apex Court in Union of India vs. Hari Singh (Civil Appeal No. 15041/2017, order dated 15th September, 2017) has held that on agricultural land no tax is payable when the compensation / enhanced compensation is received by the assessee;
(iii) The assessee received compensation in respect of his agricultural land which was acquired by the State Government;
(iv) The ratio of the decision of the Apex Court in the case of Hari Singh (Supra) is applicable to the present case.

The Tribunal held the addition to be against the law.

Merely because a property is called a farmhouse it does not become a non-residential house property unless otherwise proved

21 ACIT vs. Rajat Bhandari [TS-892-ITAT-2021 (Del)] A.Y.: 2011-12; Date of order: 16th September, 2021 Section: 54F

Merely because a property is called a farmhouse it does not become a non-residential house property unless otherwise proved

FACTS
The assessee sold a property at Patparganj, Delhi for Rs. 3.10 crores on 20th October, 2010 and claimed exemption u/s 54F stating that he had purchased a new farmhouse at Sainik Farms, New Delhi in September, 2011. The A.O. denied exemption u/s 54F without disputing the fact of the transactions, but merely noting that the assessee has more than one house and is also owner of many residential houses. For this proposition, the A.O. noted the address of the assessee on the return of income, on the bank account, on the insurance receipts as well as on the other legal documents placed before him.
He noted that the assessee has many residential houses and therefore deduction u/s 54F cannot be claimed. Therefore, the A.O. was of the view that the assessee is not entitled to deduction u/s 54F. He held that it is not possible to collect the direct evidence to prove that the assessee owned more than one residential house on the date of transfer of the original asset. He further noted that after taking consideration of the totality of the facts and circumstances of the case, one could draw the inference that the assessee did not fulfil the conditions for exemption u/s 54F. Even otherwise, he held that the assessee has purchased a farmhouse and no deduction u/s 54F should be allowed on that as income from a farm is not taxable.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal. But the Revenue felt aggrieved and preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the DR could not show that the assessee has more than one property. It noted that the A.O. himself says that he could not prove whether the assessee has more than one property. The objection of the A.O., that the assessee has purchased a farmhouse and therefore it is not a residential house property, was devoid of any merit. It held that ‘Farmhouse can be residential house also’. It is not the case of the Revenue that the assessee has purchased excessive land and has constructed a small house thereon, thereby claiming deduction on the total value of the land and the small property constructed thereon. If that had been the case, perhaps the assessee would have been eligible for proportionate deduction to the extent of residential house property as well as land appurtenant thereto.

The Tribunal observed that there is no finding by the A.O. that the assessee has purchased excessive land which would be used as a farmland and has for name’s sake constructed a residential house property. It held that ‘Merely because a property is called a farmhouse, it does not become a non-residential house property unless otherwise proved.’This ground of appeal filed by the Revenue was dismissed.

The scope of the fifth proviso to section 32(1) cannot be extended to transactions of purchases between two unrelated parties

20 TUV Rheinland NIFE Academy Private Limited vs. ACIT [TS-1097-ITAT-2021(Bang)] A.Y.: 2016-17; Date of order: 1st November, 2021 Section: 32

The scope of the fifth proviso to section 32(1) cannot be extended to transactions of purchases between two unrelated parties

FACTS
The assessee, a private limited company, engaged in the business of providing vocational training to students in the fields of fire safety, lift technology, fibre optics, etc., is a subsidiary of TUV Rheinland (India) Pvt. Ltd. The A.O. noticed that the assessee had acquired a vocational training institute giving training to students from a person named Mr. M.V. Thomas who was running the said institution under the name and style of ‘Nife Academy’. It was observed that the holding company of the assessee had entered into a business transfer agreement (BTA) on 4th December, 2013 with Mr. M.V. Thomas for acquiring his academy for a lump sum amount of Rs. 28.50 crores plus some adjustment on slump sale basis. In pursuance of the said agreement, the assessee had paid an aggregate amount of Rs. 30.56 crores (Rs. 25.38 crores plus Rs. 5.18 crores). The purchase consideration paid over and above the value of tangible assets was treated as ‘goodwill’ and depreciation was claimed thereon. The A.O. held that the spirit of the fifth proviso to section 32(1) would suggest that the successor to an asset cannot get more depreciation than the depreciation which the predecessor would have got. He also noticed that the said Academy did not possess the asset of ‘goodwill’ and accordingly held that when an asset does not exist in the depreciation chart of the seller, then it cannot have a place in the depreciation chart of the buyer. Therefore, he disallowed the depreciation claimed on ‘goodwill’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the view of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal observed that in view of the decision of the Delhi High Court in the case of Truine Energy Services Pvt. Ltd. vs. Deputy Commissioner of Income-tax (2016) 65 Taxmann.com 288, the payment made over and above the net asset value, while acquiring a business concern, shall constitute goodwill. Upon considering the language of the fifth proviso to section 32(1), the Tribunal held that a careful perusal of the above proviso would show that the same is applicable to the cases of ‘succession’, ‘amalgamation’ and ‘demerger’, i.e., transactions between related parties. In the instant case, Nife Academy has been acquired through a business transfer agreement by the holding company of the assessee from Mr. M.V. Thomas. It is not the case of the Revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. The Tribunal held that it does not agree with the view of the lower authorities that the spirit of the proviso should be applied to the present case.The Tribunal set aside the order passed by the CIT(A) on this issue and restored the matter to the file of the A.O. to examine certain factual aspects.

The ALV of the property, which could not be let out during the year, would be nil in accordance with the provisions of section 23(1)(c)

19 Purshotamdas Goenka vs. ACIT [TS-984-ITAT-2021 (Mum)] A.Y.: 2016-17; Date of order: 13th October, 2021 Section: 23

The ALV of the property, which could not be let out during the year, would be nil in accordance with the provisions of section 23(1)(c)

FACTS
The assessee owned four properties of which one was let out and three were vacant throughout the previous year relevant to the assessment year under consideration. The assessee offered for taxation the rental income in respect of the let-out property. As for the properties that were vacant, he claimed vacancy allowance u/s 23(1)(c). The A.O., while assessing his total income, made an addition of Rs. 1,09,624 on account of deemed rent for vacant properties after granting deduction for municipal taxes and statutory deductions u/s 24(a).Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The Assessee then
preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the three properties which were vacant during the year under consideration have been let out by the assessee in the subsequent assessment year and their rental income has been offered for taxation. It observed that the issue before it is whether the deemed rent of the assessee has to be taken as annual value (ALV) u/s 23(1)(a) for the purpose of assessment of income u/s 22, or whether the assessee is entitled to vacancy allowance as provided u/s 23(1)(c).It held that the ALV of the property which could not be let out during the year would be nil in accordance with the provisions of section 23(1)(c). The assessee was entitled to vacancy allowance in respect of the said properties. Since the properties have not been let out at all during the year, the ALV has to be taken as nil. It observed that the case is covered by the decision of the coordinate Bench in the case of M/s Metaoxide Pvt. Ltd. vs. ITO in ITA No. 5773/M/2016 A.Y. 2010-11.

The Tribunal set aside the order of the CIT(A) and deleted the addition of Rs. 1,09,624 in respect of the three vacant properties.

An assessee who has voluntarily surrendered the registration granted to it u/s 12A cannot be compelled, by action of or by inaction of Revenue authorities, to continue with the said registration

18 Navajbai Ratan Tata Trust vs. Pr.CIT [(2021) 88 ITR(T) 170 (Mum-Trib)] ITA No.: 7238 (Mum) of 2019 A.Y.: Nil; Date of order: 24th March, 2021

An assessee who has voluntarily surrendered the registration granted to it u/s 12A cannot be compelled, by action of or by inaction of Revenue authorities, to continue with the said registration

FACTS
The assessee, a charitable trust, was granted registration u/s 12A. The trust vide letter dated 11th March, 2015 addressed to the CIT indicated that it did not desire to continue to avail the benefits of the registration made by the trustees in 1975. The trust was called for a hearing on 20th March, 2015 on which date the trust confirmed its agreement to the cancellation / withdrawal of the registration. Returns of income filed subsequent thereto were filed without claiming exemption under sections 11 and 12.

The CIT cancelled the registration of the assessee trust, as granted u/s 12A, with effect from the date of his order, i.e., 31st October, 2019.

The assessee filed an appeal with the ITAT.

HELD
The ITAT tried to ascertain the objective behind the Income-tax Department’s keenness to extend registration u/s 12A for the extended period from March, 2015 to October, 2019, when the assessee did not want it.

It then considered the relevant legislative amendments to ascertain the objective. First, it considered the amendment in section 11. By insertion of sub-section (7) in section 11 with effect from 1st April, 2015, tax exemption u/s 10(34) for ‘dividends from Indian companies’, on which dividend distribution tax was already paid by the company distributing dividends which was available to every other taxpayer, was denied to charitable trusts registered u/s 12A.

It also observed that the continuance of registration u/s 12A, even when the assessee does not want exemption u/s 11, may result in higher tax liability for a trust which has earned dividends from domestic companies otherwise eligible for exemption u/s 10(34), as in the given case. However, the ITAT also took into consideration the rationale behind the said amendment which was to ensure that the assessee does not have the benefit of choice between special provisions and general provisions. The ITAT also noted the Circular No. 1/2015 dated 21st January, 2015 explaining the above amendment. As against this, the ITAT observed the way this provision was interpreted by the tax authorities. The Revenue authorities opined that once an assessee is a registered charitable institution, irrespective of admissibility or even claim for exemption u/s 11, the exemption u/s 10(34) was inadmissible. This put the assessee at a disadvantage since the scheme of sections 11 to 13 which were intended to be an optional benefit to the charitable institutions, in the present case, became a source of an additional tax burden for the trusts in question because of the interpretation given by the Revenue.

The ITAT also noted that introduction of section 115TD would also have a bearing on the tax liability of the trust which would depend on the date of cancellation of registration.

From the above-mentioned Circular the ITAT inferred that the assessee has an inherent right to withdraw from the special dispensation of the scheme of sections 11, 12 and 13, unless such a withdrawal is found to be mala fide. It also observed that the disadvantageous tax implications on the assessee [non-application of section 10(34) and section 115TD] are only as a result of a much later legislative amendment which was not in effect even when the assessee informed the CIT of his disinclination to continue with the registration; an assessee unwilling to avail the ‘benefit’ of registration ‘obtained’ u/s 12A could not be compelled, by action of or by inaction of the Revenue authorities, to continue with the said registration.

The ITAT observed that registration u/s 12A was obtained by the assessee in 1976 and registration u/s 12A simply being a foundational requirement for exemption u/s 11 and not putting the assessee under any obligations, is in the nature of a benefit to the assessee. Referring to the decision of the Supreme Court in the case of CIT vs. Mahendra Mills (2000) 109 taxmann 225 / 243 ITR 56, it held that ‘a privilege cannot be a disadvantage and an option cannot become an obligation’. Thus, in the instant case, registration u/s 12A cannot be thrust upon the unwilling assessee.

It also held that wherever a public authority has a power, that public authority also has a corresponding duty to exercise that power when circumstances so warrant or justify it. Accordingly, in the instant case when the assessee communicated to the CIT of inapplicability of exemptions under sections 11 to 13, the CIT was duty-bound to pass an order in writing withdrawing the registration. In the instant case, not only was the procedure of cancellation of registration kept pending but also the proceedings conducted earlier were ignored and fresh proceedings were started after a long gap, on a standalone basis de hors the pending proceedings. This is more so considering the fact that delay in cancellation of registration has tax implications to the disadvantage of the assessee.

The ITAT thus concluded by holding that the CIT was under a duty to hold that the cancellation of registration is to take effect from the date on which the violation of the statutory requirements for grant of exemption occurred, the date on which such a violation or breach was noticed, or at least the date on which hearing in this regard was concluded. That is, the cancellation of registration was required to be effective, at the most, from 20th March, 2015, i.e., the date fixed for hearing. The inordinate delay in cancellation of registration, which is wholly attributed to the Revenue authorities, cannot be placed to the disadvantage of the assessee. Finally, it was held that the cancellation was effective from 20th March, 2015 and the appeal of the assessee was allowed.

Re-opening of assessee’s case merely on basis of information from Director (Investigation) pertaining to receipt of huge amount of share premium by assessee and the opinion that the amount of share premium was not justifiable considering its lesser income during the year was unjustified

17 Future Tech IT Systems (P) Ltd. vs. ITO [(2021) 89 ITR(T) 676 (Chd-Trib)] ITA Nos. 543, 548 and 549 (Chd) of 2019 A.Y.: 2010-11; Date of order: 22nd April, 2021

Re-opening of assessee’s case merely on basis of information from Director (Investigation) pertaining to receipt of huge amount of share premium by assessee and the opinion that the amount of share premium was not justifiable considering its lesser income during the year was unjustified

FACTS
The assessee-company filed its return of income on 20th September, 2010 declaring an income of Rs. 2,55,860 which was accepted and an assessment order was passed.

Subsequently, the A.O. received information from the Director (Intelligence & Criminal Investigation) that the assessee had received share premium of a huge amount during the year. Notice u/s 148 was issued. The assessee’s objections to the same were disposed of by the A.O. and assessment order was passed after making additions of Rs. 1,17,00,000 in respect of share premium by invoking provisions of section 68. On appeal before the CIT(A), the assessee argued that the A.O. did not mount a valid base for the reasons to come to a rational belief that the income of the appellant has escaped assessment and that there was lack of material to prove that the transaction of receipt of share application money was not genuine. The A.O. acted only on the borrowed satisfaction.

The CIT(A) observed that the A.O. noticed that the book value of the share of the company was Rs. 10 and the company had nothing in its balance sheet to attract such huge share premium. He also observed that the A.O. initiated the proceedings on the basis of specific information, so it could not be said that his action was on the basis of certain surmises and conjectures only and it could also not be said that the material in his possession could just give him reason to suspect and not reason to believe that the income had escaped assessment. Another observation made by him was that the A.O. applied his mind to the information by verifying from the assessment record that the assessee had very low income as against which it received huge share premium and hence his action is valid.

Aggrieved, the assessee preferred an appeal before the ITAT.

HELD
The assessee argued before the ITAT that the A.O. while issuing the notice u/s 148 doubted the share premium only and accepted the share capital received by the assessee, therefore, the initiation of the proceedings u/s 147 were based on suspicion. It was also submitted that the investor company explained the source and the assessee furnished relevant documents to the A.O. The documents furnished by the assessee proved the source of credit for share application money. Thus, according to the assessee, it had proved the identity, genuineness and the credit-worthiness of the shareholders.

The ITAT observed that an identical issue was decided by the ITAT in ITA No. 1616/Chd/2018 for the A.Y. 2010-11 vide order dated 15th June, 2020 in the case of Indo Global Techno Trade Ltd. vs. ITO. Relevant findings of the said case that were considered by the ITAT in the instant case were that mere information (without recording of any details) of the assesse receiving a high premium could not be said to be a reason to form the belief that the income of the assessee had escaped assessment. There is no dispute to the well-settled proposition that reason to believe must have a material bearing on the question of escapement of income. It does not mean a purely subjective satisfaction of the assessing authority, such reason should be held in good faith and cannot merely be a pretence. There could be no doubt that the words ‘reason to believe’ suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour.

The other decision relied on by the assessee and considered by the ITAT was of the Chandigarh Bench of the Tribunal in the case of D.D. Agro Industries Ltd. vs. ACIT ITA Nos. 349 & 350/Chd/2017 order dated 7th September, 2017, wherein, on identical facts and circumstances, the A.O. recorded identical reasons to form belief for re-opening of the assessment. The Tribunal held that the A.O. assumed jurisdiction relying upon the non-specific routine information blindly without caring to first independently consider the specific facts and circumstances of the case and that the assumption of jurisdiction by the A.O. under the circumstances was wrong.

Thus, the ITAT followed the decision in Indo Global Techno Trade Ltd. vs. ITO (Supra).

The ITAT also considered the following other rulings on the issue:

• Rajshikha Enterprises (P) Ltd. vs. ITO for A.Y. 2005-06 vide order dated 23rd February, 2018 (Del ITAT);
• Pr.CIT vs. G&G Pharma India Ltd. (2016) 384 ITR 147 (Del HC);
• Pr.CIT vs. Meenakshi Overseas (P) Ltd. (2017) 395 ITR 677 (Del HC);
• Pr.CIT vs. Laxman Industrial Resources Ltd. (2017) 397 ITR 106 (Del HC); and
• Signature Hotels (P) Ltd. vs. ITO (2011) 338 ITR 51 (Del HC).

The ITAT applied the rationale of the above decisions to the facts of the instant case to conclude that the re-opening initiated by the A.O. was invalid. Thus, the ITAT allowed the appeal of the assessee.

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct him to do so indirectly by exercising power u/s 263. Accordingly, limited scrutiny assessment cannot be revised u/s 263 beyond the scope of scrutiny

16 Antariksh Realtors Private Limited vs. ITO [TS-1029-ITAT-2021 (Mum)] A.Y.: 2015-16; Date of order: 22nd October, 2021 Section: 263

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct him to do so indirectly by exercising power u/s 263. Accordingly, limited scrutiny assessment cannot be revised u/s 263 beyond the scope of scrutiny

FACTS
The assessee, a company engaged in business as a builder and developer, filed its return of income declaring a loss of Rs. 14,34,236. The case was selected under ‘limited scrutiny’ for examination of two issues, viz., (i) Low income in comparison to high loan / advances / investments in shares appearing in balance sheet; and (ii) Minimum Alternate Tax (MAT) liability mismatch. The A.O. upon examining these two issues completed the assessment.

Subsequently, after reviewing the assessment order, the Additional Commissioner of Income-tax in charge of the range found that the increase in loan taken by the assessee from Rs. 8.57 crores in the preceding year to Rs. 10.42 crores in the current year was not verified by the A.O. He observed that the A.O. also did not verify the assessee’s claim that all loans and advances given are for the purpose of business, by calling for details of transactions in subsequent years along with supporting documents. He also observed that the A.O. did not verify the capitalisation of interest paid. In view of these facts, the Additional Commissioner submitted a proposal to the PCIT for exercising the powers u/s 263 to revise the assessment order.

The PCIT issued a show cause notice u/s 263. The assessee submitted that the A.O. had thoroughly inquired into the issues for which the case was selected for scrutiny. However, the PCIT was not convinced. He held that the assessment order was erroneous and prejudicial to the interest of the Revenue due to non-inquiry by the A.O. He set aside the assessment order with a direction to examine the relevant details as observed in the revision order and complete the assessment after conducting proper and necessary inquiry.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the two issues which require examination are whether the limited scrutiny for which the assessee’s case was selected encompassed examination of loans taken by the assessee and capitalisation of interest expenditure, and if it was not so, whether the assessment order can be held to be erroneous and prejudicial to the interest of the Revenue for not examining the issues relating to loan taken and interest expenditure capitalised.

The Tribunal noted that the PCIT while exercising power u/s 263 has attempted to expand the scope of the limited scrutiny. It observed that the A.O. did examine both the issues for which the assessee’s case was selected for scrutiny and the A.O. had also conducted necessary inquiry on the issues for which the case was selected for scrutiny and he completed the assessment after applying his mind to the materials on record.

The A.O. being bound by CBDT Instruction No. 20/2015 dated 29th December, 2015 and CBDT Instruction No. 5 of 2016 dated 14th July, 2016, could not have gone beyond the scope and ambit of limited scrutiny for which the case was selected. He had rightly restricted himself to the scope and ambit of limited scrutiny. Unless the scope of scrutiny is expanded by converting it into a complete scrutiny with the approval of the higher authority, the A.O. could not have travelled beyond his mandate. The Tribunal held that the assessment order cannot be considered to be erroneous and prejudicial to the interest of Revenue for not examining the loans taken by the assessee and their utilisation as well as capitalisation of interest.

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct the A.O. to do so indirectly by exercising power u/s 263. For this proposition the Tribunal relied upon the decision of the Coordinate Bench in the case of Su-Raj Diamond Dealers Pvt. Ltd. vs. PCIT, ITA No. 3098/Mum/2019; order dated 27th November, 2019.

The appeal filed by the assessee was allowed.

The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law

15 Alfa Laval Lund AB vs. CIT (IT/TP) [TS-1024-ITAT-2021 (Pune)] A.Y.: 2012-13; Date of order: 2nd November, 2021 Section: 263

The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law

FACTS
The assessee, a foreign company, filed its return of income declaring Nil total income. The assessment of its total income was completed on 27th March, 2015, again assessing Nil total income. Subsequently, the CIT received a proposal from the A.O. for revision based on which the CIT carried out a revision by observing that the assessee had entered into an agreement on 1st October, 2011 with its related concern in India for supply of software licenses and IT support services. The amount of service fee received from the Indian entity, collected on the basis of number of users, was claimed as not chargeable to tax in India within the meaning of Article 12 of the India-Sweden Double Taxation Avoidance Agreement. The CIT opined that the receipt from the Indian entity was in the nature of ‘Royalty’ and not ‘Fees for Technical Services’. After issuing a show cause notice and considering the reply of the assessee, the CIT set aside the order passed by the A.O. and remitted the matter to the A.O. for treating the amount received from the Indian entity as ‘Royalty’ chargeable to tax u/s 9(1)(vi).

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the order of the CIT mentioned that ‘A proposal for revision under section 263 of the IT Act, 1961 was received from DCIT(IT)-1, Pune through the Jt. CIT(IT), Pune vide letter No. Pn/Jt.CIT(IT)/263/2016-17/61 dated 23rd May,. 2016’. It observed that the edifice of the revision in the present case has been laid on the bedrock of receipt of the proposal from the A.O.

The Tribunal having noted the provisions of section 263(1) held that the process of revision u/s 263 is initiated only when the CIT calls for and examines the record of any proceeding under the Act and considers that any order passed by the A.O. is erroneous and prejudicial to the interest of the Revenue. The twin conditions are sine qua non for the exercise of power under this section. The use of the word ‘and’ between the expression ‘call for and examine the record…’ and the expression ‘if he considers that any order… is erroneous…’ abundantly demonstrates that both these conditions must be cumulatively fulfilled by the CIT and in the same order, that is, the first followed by the second. The kicking point is the CIT calling for and examining the record of the proceedings leading him to consider that the assessment order is erroneous, etc. The consideration that the assessment order is erroneous and prejudicial to the interests of the Revenue should flow from and be the consequence of his examination of the record of the proceedings. If such a consideration is not preceded by the examination of the record of the proceedings under the Act, the condition for revision does not get magnetised.

The Tribunal held that it is trite that a power which vests exclusively in one authority can’t be invoked or caused to be invoked by another, either directly or indirectly. The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law. If the A.O., after passing an assessment order finds something amiss in it to the detriment of the Revenue, he has ample power to either reassess the earlier assessment in terms of section 147 or carry out rectification u/s 154. He can’t usurp the power of the CIT and recommend a revision. No overlapping of powers of the authorities under the Act can be permitted.

As revision proceedings in this case triggered with the A.O. sending a proposal to the CIT and then the latter passing an order u/s 263 on the basis of such a proposal, the Tribunal held that it became a case of jurisdiction defect resulting in vitiating the impugned order.

The Tribunal quashed the impugned order on this legal issue itself.

An assessment order which does not comply with the mandatory procedure laid down in section 144C is non-est and an order u/s 263 revising such an order is a nullity as a non-est order cannot be a subject matter of revision u/s 263

14 Manorama Devi Jaiswal vs. ITO [TS-1054-ITAT-2021 (Kol)] A.Y.: 2014-15; Date of order: 17th November, 2021 Sections: 144C, 263

An assessment order which does not comply with the mandatory procedure laid down in section 144C is non-est and an order u/s 263 revising such an order is a nullity as a non-est order cannot be a subject matter of revision u/s 263

FACTS
In the case of the assessee, the PCIT passed an order u/s 263 wherein he stated that since before completion of final assessment a draft assessment order should have been served on the assessee as per the mandatory provision of section 144C and which the A.O. had not complied with, therefore the assessment order passed by him on 25th September, 2017 was erroneous and prejudicial to the interest of the Revenue.

Aggrieved, the assessee preferred an appeal to the Tribunal where it challenged the assumption of revisionary jurisdiction assumed by the PCIT.

HELD
The Tribunal noted that the Coordinate Bench has in the case of Mohan Jute Bags Mfg. Co. vs. PCIT [ITA No. 416/Kol/2020; A.Y. 2014-15] held that ‘…the A.O.’s omission to frame draft assessment order breached the Rule of Law and consequently, his non-action to frame draft assessment order before passing the final assessment order was in contravention of the mandatory provision of law as stipulated in section 144C of the Act, consequently his action is arbitrary and whimsical exercise of power which offends Articles 14 and 21 of the Constitution of India and therefore an action made without jurisdiction and ergo the assessment order dated 25th September, 2017 is null in the eyes of law and therefore is non-est.’

The Tribunal held that since the mandatory provision of law stipulated in section 144C was not complied with, the assessment order itself becomes a nullity in the eyes of the law and therefore is non-est. When the foundation itself for the assumption of revisionary jurisdiction u/s 263 does not exist, that in this case the assessment order itself is non-est, in such a scenario the PCIT could not have exercised his revisionary jurisdiction in respect of a null and void assessment order. The Tribunal held that the impugned order of the PCIT is also a nullity. The appeal filed by the assessee was allowed.

Whether loss of current year can be set off from the income declared u/s 115BBD is a highly debatable issue which cannot be rectified u/s 154 Interpretation of ‘expenditure’ or ‘allowance’ in section 115BBD to cover current year loss is a highly debatable issue

13 Rakesh Kumar Pandita vs. ACIT [TS-1002-ITAT-2021 (Del)] A.Y.: 2012-13; Date of order: 22nd October, 2021 Sections: 115BBD, 154

Whether loss of current year can be set off from the income declared u/s 115BBD is a highly debatable issue which cannot be rectified u/s 154

Interpretation of ‘expenditure’ or ‘allowance’ in section 115BBD to cover current year loss is a highly debatable issue

FACTS
The assessee company filed its return of income for A.Y. 2012-13 declaring a total income of Rs. 26,26,860. The return was processed u/s 143(1) and the total income was determined to be Rs. 31,51,660. In the intimation though the loss of current year adjusted was mentioned at Rs. 22,53,768, the same was not adjusted while computing the total income assessed. The assessee filed an application for rectification u/s 154.

The A.O. was of the opinion that since the assessee has declared income u/s 115BBD and calculated the tax at the special rate of 15%, the same cannot be set off against losses. He accordingly rejected the application made by the assessee u/s 154.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the question whether current year loss can be set off from the income declared u/s 115BBD is a highly debatable issue and a debatable issue cannot be rectified u/s 154.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that in the intimation the loss of the current year has been mentioned at Rs. 22,53,768 and that the assessee has returned income in respect of dividend received from a foreign company u/s 115BBD. It noted that as per sub-section (2), no deduction in respect of expenditure or allowance should be allowed to the assessee under any provision of the Act in computing its income by way of dividends referred to in sub-section (1). The interpretation of ‘expenditure’ or ‘allowance’ to cover current year loss is a highly debatable issue. The Tribunal dismissed the appeal filed by the assessee.

If an assessee admits certain undisclosed income of the company in which he is a Director, on the basis of incriminating material found and seized during search, since income / entries in such seized material belonged to company, impugned additions made in hands of assessee on account of such undisclosed income of company was unjustified and liable to be deleted

12 JCIT vs. Narayana Reddy Vakati [2021-88-ITR(T) 128 taxmann.com 377 (Hyd-Trib)] ITA No.: 1226 to 1230 (Hyd) of 2018 A.Ys.: 2010-11 to 2014-15; Date of order:
21st April, 2021

If an assessee admits certain undisclosed income of the company in which he is a Director, on the basis of incriminating material found and seized during search, since income / entries in such seized material belonged to company, impugned additions made in hands of assessee on account of such undisclosed income of company was unjustified and liable to be deleted

FACTS
During survey, a loose sheet bundle was impounded containing details of certain receipts and payments. The assessee admitted the same to be income from undisclosed sources. The same was assessed as additional income in the hands of the assessee. However, the assessee did not offer the said income to tax in his return of income. Hence, a show cause notice was issued as to why undisclosed income admitted during the search / post-search proceedings should not be added to his total income. The assessee stated that the income was inappropriately admitted in his hands instead of the company. He also furnished year-wise statements stating that these amounts do not belong to him.

However, the A.O. concluded that the assessee’s reply could not be accepted. The assessee had not retracted from his disclosure of income till filing of return. There was an almost 16-month gap from the search. In this period, he never brought his version before the DDIT (Inv.) or before the A.O. that the amounts disclosed pertained to the company.

Therefore, the A.O. concluded that the assessee adopted this device to evade taxes on admitted income by offering the same in the hands of the company and never furnished the required information such as books of accounts, receipts and payments account, etc., and submitted a reply to the show cause notice at the last minute deliberately to avoid verification of the transactions. Hence, the assessee’s reply was not considered.

On further appeal to the CIT(A), the assessee submitted that though he had admitted certain amount in his hands in the course of his statement u/s 132(4), the seized material forming the basis of the additions belonged to the company. Hence, while filing return of income he had reconciled the material and submitted a letter to the A.O. to the effect and pleaded with him to assess the said admitted income in the hands of the company. He also contended that the A.O. neither accepted his plea nor made any attempt to verify the facts set out by him in the letter. Therefore, in the absence of any seized material found during the course of search belonging to the assessee, no addition can be made.

The CBDT in its Circular in letter F.No.286/98/20l3-lT (Inv-II), dated 18th December, 2014, instructed the A.O. not to obtain disclosures and rather focus on gathering evidences during the search. Thus, the additions in the hands of the assessee were made only on the basis of the statement made uls. 132(4) which was given by the assessee in a state of confusion and without thinking of the consequences and its impact in the future. The CIT(A) observed that the claim of the assessee was not contradicted by the A.O. The income had to be taxed in the right hands irrespective of the admission made during the search, on the basis of evidences found or gathered during the assessment proceedings. The A.O. assessed the income on substantive basis in the hands of the assessee and on protective basis in the hands of the company. As the material and the entries in the statements related to the business of the company, the CIT(A) held that income was not taxable in the individual’s hands and accordingly deleted the addition made by the A.O. Aggrieved, the Revenue filed an appeal to the Tribunal.

HELD
The Tribunal observed that there is not even an indication in the Revenue’s grounds that the impugned additions pertain to the assessee himself rather than his company. The Apex Court’s landmark decision in ITO vs. C.H. Atchaiah [1996] 84 Taxman 630/218 ITR 239 (SC) had held long back that the A.O. can and must tax the right person and the right person alone. The Tribunal also relied on another landmark decision in the case of Saloman vs. Saloman and Co. Ltd. [1897] AC 22, that in corporate parlance a company is very much a body corporate and a distinct entity apart from its Director.

Therefore, it upheld the action of the CIT(A) in deleting the additions made by the A.O.

Provisions of section 56(2)(vii)(b)(ii) will not apply to a case where there was an allotment prior to A.Y. 2014-15 – The amended provisions cannot apply merely because the agreement was registered after the provision came into force

11 Naina Saraf vs. PCIT [TS-897-ITAT-2021 (Jpr)] A.Y.: 2015-16; Date of order: 14th September, 2021 Sections: 56(2)(vii), 263


Provisions of section 56(2)(vii)(b)(ii) will not apply to a case where there was an allotment prior to A.Y. 2014-15 – The amended provisions cannot apply merely because the agreement was registered after the provision came into force

FACTS

The assessee, a practising advocate of Rajasthan High Court, e-filed the return of income declaring therein a total income of Rs. 27,38,450. In the course of assessment proceedings before the A.O., the assessee filed a registered purchase deed in respect of purchase of immovable property and various other details required by the A.O. The A.O. completed the assessment accepting the returned income.
 

Subsequently, the PCIT observed that the assessee had purchased an immovable property for a consideration of Rs. 70,26,233 as co-owner with 50% share in the said property and the stamp duty value thereof was determined at Rs. 1,03,12,220; therefore, the difference of Rs. 32,85,987 was to be treated as income from other sources. The PCIT held that the A.O. having failed to invoke section 56(2)(vii)(b) during assessment proceedings, the order he had passed was erroneous insofar as it is prejudicial to the interest of the Revenue. He invoked the jurisdiction u/s 263 and issued a show cause notice, and after considering the submissions of the assessee, passed an order u/s 263 on the ground that there was no agreement and therefore the assessee cannot be given benefit of the first proviso to section 56(2)(vii)(b)(ii). The PCIT set aside the assessment order passed by the A.O. and directed him to complete the assessment afresh after giving an opportunity to the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that on 23rd September, 2006, the assessee applied for allotment of Flat No. 201 at Somdatt’s Landmark, Jaipur. The flat was allotted vide allotment letter dated 6th March, 2009 on certain terms and conditions mentioned in the allotment letter. The assessee agreed to the allotment by signing the letter of allotment on 11th November, 2009 as a token of acceptance. Prior to the registration of the transaction on 9th December, 2014, the assessee had paid Rs. 45,26,233 against the total sale consideration of Rs. 65,57,500. The allotment letter contained all substantive terms and conditions which created the respective rights and obligations of the parties and bound the respective parties. The allotment letter provided detailed specifications of the property, its identification and terms of the payment, providing possession of the subject property in the stipulated period and so on. The seller had agreed to sell and the assessee agreed to purchase the flat for an agreed price mentioned in the allotment letter.

 
The Tribunal held that,

i) What is important is to gather the intention of the parties and not to go by the nomenclature. There being an offer and acceptance by the competent parties for a lawful purpose with their free consent, the Tribunal held that all the attributes of a lawful agreement are available as per the provisions of the Indian Contract Act, 1872. Such agreement was acted upon by the parties and pursuant to the allotment letter the assessee paid a substantial amount of consideration of Rs. 45,26,233 as early as in the year 2008 itself. For all intents and purposes, such an allotment letter constituted a complete agreement between the parties. Relying on the decisions in the cases of Hasmukh N. Gala vs. ITO [(2015) 173 TTJ 537] and CIT vs. Kuldeep Singh [(2014) 270 CTR 561 (Delhi HC)] rendered in the context of the provisions of section 54, the Tribunal was convinced that the assessee had already entered into an agreement by way of allotment letter on 11th November, 2009 in A.Y. 2010-11;

ii) the pre-amended law which was applicable up to A.Y. 2013-14 never contemplated a situation where immovable property was received for inadequate consideration. It was only in the amended law specifically made applicable from A.Y. 2014-15 that any receipt of immovable property for inadequate consideration has been subjected to the provisions of section 56(2)(vii)(b), but not before that. Therefore, the applicability of the said provisions could not be insisted upon in the assessment years prior to A.Y. 2014-15;

iii) in the present case, since there was a valid and lawful agreement entered into by the parties long back in A.Y. 2010-11 when the subject property was transferred and substantial obligations discharged, the law contained in section 56(2)(vii)(b) as it stood at that point of time did not contemplate a situation of receipt of property by the buyer for inadequate consideration. The Tribunal held that the PCIT erred in applying the said provision;

iv) the Tribunal did not find itself in agreement with the contention of the DR that allotment was provisional as it was subject to further changes because of some unexpected happening which may be instructed by the approving authority, resulting in increase or decrease in the area and so on because, according to the Tribunal, it is a standard practice to save the seller (builder) from unintended consequences;

v) the Tribunal, relying on the decision of the Ranchi Bench in the case of Bajranglal Naredi vs. ITO [(2020) 203 TTJ 925], held that the mere fact that the flat was registered in the year 2014, falling in A.Y. 2015-16, the amended provisions of section 56(2)(vii)(b)(ii) could not be applied;

vi) the assessment order subjected to revision is not erroneous and prejudicial to the interest of the Revenue.

The appeal filed by the assessee was allowed.

Non-compliance with section 194C(7) will not lead to disallowance u/s 40(a)(ia)

10 Mohmed Shakil Mohmed Shafi Mutawalli vs. ITO [TS-889-ITAT-2021 (Ahd)] A.Y.: 2012-13; Date of order: 16th September, 2021 Sections: 40(a)(ia), 194C

Non-compliance with section 194C(7) will not lead to disallowance u/s 40(a)(ia)

FACTS
The original assessment u/s 143(3) was finalised on 26th March, 2014 determining total income of Rs. 9,15,737. Subsequently, the CIT passed an order u/s 263 directing the A.O. to make a fresh assessment after granting an opportunity to the assessee on the issue of non-deduction of tax on freight payment of Rs. 10,63,995. Subsequently, assessment u/s 143(3) was finalised on 16th February, 2015 wherein the A.O. held that only submission of the PAN of the transporter was not sufficient with respect to payment to the transporter. Consequently, the claim of transport expenses of Rs. 10,63,995 was disallowed.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed it, holding that the assesse had not complied with the provisions of section 194C(7).

The assessee then preferred an appeal to the Tribunal and submitted copies of the documents submitted before the lower authorities, which included copies of invoices, transportation bills, along with particulars of truck number, PAN, phone numbers and complete addresses of the transporters.

HELD
The Tribunal observed that,
i) The A.O. has neither disproved the genuineness of the evidences furnished before him nor made any further verification / examination related to claim of such expenditure debited to the P&L Account;
ii) The CIT(A) has sustained the disallowance merely on technical basis that the assessee has failed to comply with the provisions of section 194C(7);
iii) The Kolkata Bench of the Tribunal has, in the case of Soma Ghosh vs. DCIT 74 taxmann.com 90 held that if the assessee complies with the provisions of section 194C(6), no disallowance u/s 40(a)(ia) is permissible even though there is a violation of provisions of section 194C(7). The Karnataka High Court has in the case of CIT vs. Marikamba Transport Co. 57 taxman.com 273 held that in the case of payment made to a sub-contractor, non-filing of Form No. 15I/J is only a technical defect and the provisions of section 40(a)(ia) should not be attracted in such a case.

The Tribunal held that since the assessee has furnished copies of PAN along with copies of invoices of the transportation bill comprising the complete address of the transporter, phone number and complete particulars of the goods loaded through the transporter and the A.O. has not taken any steps to disprove the genuineness of the transportation expenses, it is not appropriate to disallow the claim of transportation expenses simply for a technical lapse u/s 194(7). This ground of appeal filed by the assessee was allowed.

Assessee not liable to deduct tax at source from asset valuer’s fees paid by the lender bank and later recovered from the assessee

9 Hindustan Organic Chemicals Ltd. vs. DCIT [TS-955-ITAT-2021 (Mum)] A.Y.: 2011-12; Date of order: 30th September, 2021 Sections: 40(a)(ia), 194J

Assessee not liable to deduct tax at source from asset valuer’s fees paid by the lender bank and later recovered from the assessee

FACTS
In the course of assessment proceedings, the A.O. observed from Form No. 3CD that the assessee had paid a sum of Rs. 3 lakhs to Sigma Engineering (Rasayani Unit) from which tax had not been deducted at source. The A.O. disallowed the sum of Rs. 3,00,000 u/s 40(a)(ia).

Aggrieved, the assessee preferred an appeal to the CIT(A) and submitted that it had availed credit facilities from State Bank of India (SBI) by mortgaging assets. The SBI had appointed Sigma Engineering Consultant for submitting a valuation report of the assets to secure their advances. Sigma raised a bill of Rs. 3,30,900 which included service tax. SBI made payment of the said amount and debited the sum from the assessee’s account. The assessee submitted that since it was a payment made to a banking company, it was not liable to deduct TDS. The CIT(A) upheld the action of the A.O.

Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the services of the consultant were utilised for the purpose of SBI in order to secure the assets mortgaged to it. The consultant was appointed by SBI and after submission of the report, the bank settled the fee and recovered it from the assessee. Although the charges were ultimately collected from the assessee, but the services were provided exclusively for the purpose of securing mortgaged assets assigned to the bank. TDS provisions would be applicable only when the services are utilised and respective payments are made directly to the service provider. In this case the assessee neither appointed the consultant nor paid the consultancy charges but was only the observer and, therefore, the provisions of section 40(a)(ia) of the Act do not apply.

Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

29. 124 taxmann.com 354 State Bank of India vs. ACIT, TDS IT Appeal No. 1717 (Mum.) of 2019 A.Y.: 2012-13 Date of order: 27th January, 2021

 

Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

 

FACTS

During the course of a survey u/s 133A it was found that certain employees of the assessee have claimed LTC (Leave Travel Concession) facility wherein ‘travel to places outside India was involved’. It was noted that some of the employees had taken a very circuitous route, involving travel abroad to one or more domestic destinations. The A.O. noted that the admissible LTC in these cases was treated as tax-exempt u/s 10(5) and that such exemption was not available in cases where the employee travels out of India. The A.O. contended that to that extent, the assessee was in error in not deducting tax at source in respect of such payment of the LTC facility. The A.O. also noted that ‘the employees travelled to the Indian destinations not by the direct and shortest route but by a circuitous route, including a foreign journey. Thus, the A.O. held that the LTC payment should have been included in the income of the employees concerned while deducting tax at source from the salaries, and the assessee is required to be treated as an assessee in default for not deducting the related tax at source. The assessee carried the matter in appeal before the CIT(A) who upheld the A.O.’s contention.

 

Aggrieved, the assessee preferred an appeal before the Tribunal.

 

HELD

There is no specific bar in the law on travel eligible for exemption u/s 10(5), involving a sector of overseas travel, and in the absence of such a bar the assessee employer cannot be faulted for not inferring such a bar. The reimbursement is restricted to airfare, on the national carrier, by the shortest route as is the mandate of rule 2B. The employee has travelled, as a part of that composite itinerary involving a foreign sector as well, to the destination in India. The guidance available to the assessee employer indicates that in such a situation the exemption u/s 10(5) is available to the employee, though to the extent of farthest Indian destination by the shortest route, and that is what the assessee employer has allowed.

 

Due to the position with respect to taxability of such LTC in the hands of the employee, the assessee employer cannot be faulted for not deducting tax at source from the LTC facility allowed by him to the employees. Once the estimation of income in the hands of the employee under the head ‘income from salaries’ by the employer was bona fide and reasonable, the assessee employer cannot be held to be in default.

 

The appeal of the assessee employer was allowed.

Sections 143(2) and 143(3) – Assessment order passed by a jurisdictional officer in a case where the notice u/s 143(2) was not issued by him but by a non-jurisdictional officer is bad in law and void ab initio

28. [2021] 123 taxmann.com 395 (Luck.)(Trib.) ITO vs. Arti Securities & Services Ltd. A.Y.: 2014-15 Date of order: 6th November, 2020

Sections 143(2) and 143(3) – Assessment order passed by a jurisdictional officer in a case where the notice u/s 143(2) was not issued by him but by a non-jurisdictional officer is bad in law and void ab initio

FACTS

In an appeal filed by the Revenue, the assessee filed an application under Rule 27 of the ITAT Rules and raised two issues – one related to limited scrutiny and another related to jurisdiction. The Tribunal admitted the application of the assessee and heard and decided the jurisdictional ground.

The assessee had e-filed return of income on 26th September, 2014 declaring income of Rs. 11,11,750 and the case was selected for scrutiny u/s 143(2) vide notice issued by DCIT, Circle-4, Kanpur and DCIT-6, Kanpur on the same date, i.e., 3rd September, 2015. As per assessment order dated 29th December, 2016 read with transfer memo dated 16th May, 2016, the case was transferred from DCIT-6, Kanpur to Income-tax Officer-6(1), Kanpur on the ground of monetary limit vide order dated 28th April, 2016 passed by the Pr. CIT-2, Kanpur. The jurisdictional Income-tax Officer, Kanpur did not issue any notice u/s 143(2) and completed the assessment without issuing any notice u/s 143(2).

The jurisdictional A.O. started the proceedings from 18th May, 2016 by mentioning that case records were received from DCIT-6, Kanpur because of change of monetary limit.

In the course of appellate proceedings, it was submitted on behalf of the assessee that on this copy of the order sheet there is no mention of issue of notice u/s 143(2), nor is there any mention of any order passed by the Commissioner u/s 127. Besides, when the first notice u/s 143(2) was issued on 3rd September, 2015, Revenue was aware of the fact that as per monetary limit for ITR of Rs. 11,11,750, the competent A.O. to issue notice u/s 143(2) was the Income-tax Officer-6(1), Kanpur.

HELD

The Tribunal noted that
i) The assessee filed return of income declaring income of Rs.11,11,750;
ii) The jurisdictional A.O. was the Income-tax Officer, Ward-6, Kanpur (as per CBDT instruction No. 1/2011);
iii) Two notices u/s 143(2) were issued by DCIT-4, Kanpur and DCIT-6, Kanpur on the same date, i.e., 3rd September, 2015;
iv) The statutory notice u/s 143(2) has not been issued by the jurisdictional A.O.;
v) No order u/s 127 has been passed by the CIT transferring the case from DCIT-6 to Income-tax Officer-6, Kanpur.

Considering the ratio of the decisions of the Tribunal in the case of Krishnendu Chowdhury vs. ITO [2017] 78 taxmann.com 89 (Kol.); Sukumar Chandra Sahoo vs. Asst. CIT [IT Appeal No. 2073 (Kol.) of 2016, dated 27th September, 2017] and Bajrang Bali Industries vs. ACIT [IT Appeal No. 724 (LKW) of 2017, dated 30th November, 2018], the Tribunal allowed the jurisdictional ground taken by the assessee and held that the notice u/s 143(2) was not issued by an officer having jurisdiction on the assessee and who had passed the assessment order, therefore in view of non-issue of statutory notice u/s 143(2), the assessment order is bad in law and void ab initio and hence all further proceedings including the order passed by the learned CIT(A) is bad in law and, therefore, the appeal filed by Revenue against the order of the CIT(A) does not stand and is dismissed.

The appeal of the Revenue was dismissed by allowing one of the grounds of the assessee raised under Rule 27 of the ITAT Rules.

Section 45 – In a case where notional income has been received by the assessee as per development agreement and no real income has been received as the developer vanished and there was neither any development nor any area received by the assessee, capital gains will not be chargeable to tax if the possession is taken back by the assessee and there was no development

27. [2020] 122 taxmann.com 169 (Hyd.)(Trib.) Santosh Kumar Subbani vs. ITO
A.Y.: 2007-08 Date of order: 13th November, 2020

Section 45 – In a case where notional income has been received by the assessee as per development agreement and no real income has been received as the developer vanished and there was neither any development nor any area received by the assessee, capital gains will not be chargeable to tax if the possession is taken back by the assessee and there was no development

FACTS

For A.Y. 2007-08, the assessee had not filed his original return of income. The A.O., having received information with regard to transfer of property by the assessee through a sale-cum-development-agreement-cum-GPA with M/s 21st Century Investments & Properties Ltd., vide document No. 5126/2007 dated 26th March, 2007, issued a notice u/s 148, in response to which the assessee filed the return of income admitting to total income of Rs. 74,380 from other sources and agricultural income of Rs. 1,65,340.

As per the information received by the A.O., under the development-agreement-cum-GPA, the assessee transferred the land, admeasuring 0.15 guntas, at Nizampet. The agreement provided that the developer has to complete the development within 24 months and the assessee has to receive 5,000 square feet built-up area.

The assessee submitted before the A.O. that the developer did not perform the construction activity and argued that there is no case of capital gains. The A.O. conducted inquiries through an Inspector and found that no development had taken place on the said land. However, since, the assessee has handed over the property as per the agreement dated 26th March, 2007 to the developer, in the view of the A.O.  it was hit by section 2(47)(v) and accordingly he assessed the SRO value of Rs. 11,89,883 as sale consideration and determined a short-term capital gain of Rs. 4,38,029.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal.

HELD


The Tribunal noted that after entering into the agreement, the developer has vanished and no real development took place till date as verified and confirmed by the A.O. through the Departmental Inspector and hence no developed area was received by the assessee. It is clear that there was no real income except notional income as per the development agreement which has never been received by the assessee. According to the Tribunal, the issue which decides the taxability of capital gains is whether the possession is lying with the developer or taken over by the assessee. During the course of appeal proceedings, upon inquiry by the Tribunal, the AR submitted that till date the development agreement was not cancelled and no public notice was issued by the assessee for cancellation of the same.

The Tribunal held that the issue is required to be remitted back to the file of the A.O. with a direction to decide the capital gains after verifying whether or not the possession is taken back by the assessee and whether the assessee has cancelled the development agreement. In case the possession is taken back by the assessee and there has been no development, the assessee succeeds in the appeal.

Section 115JB(2)(i) – Where an amount debited for diminution in value of Investments and Non-Performing Assets is in nature of an actual write-off, clause (i) of Explanation (1) to sub-section (2) of section 115JB is not attracted and thus the aforesaid amount is not to be added back while computing book profits

33 Dy. Commissioner of Income Tax vs. Peerless General Finance and Investment Co. Ltd. [2021] 85 ITR(T) 1 (Kol-Trib)] IT Appeal No. 50 (Kol) of 2009 A.Y.: 2002-03; Date of order: 3rd December, 2020

Section 115JB(2)(i) – Where an amount debited for diminution in value of Investments and Non-Performing Assets is in nature of an actual write-off, clause (i) of Explanation (1) to sub-section (2) of section 115JB is not attracted and thus the aforesaid amount is not to be added back while computing book profits

FACTS

While computing profit for the year, the assessee had debited an amount in the Profit & Loss Account for diminution in value of Investments and Non-Performing Loans & Advances and had reduced the same from the asset side of the balance sheet to the extent of the corresponding amount. The assessee contended that the amount so debited to the P&L account is in the nature of an actual write-off and not in the nature of mere provision and, thus, should not be added back while computing book profits u/s 115JB.

The A.O. added back the amount debited for diminution in Investment and NPA (Non-Performing Assets) while computing the book profits treating it as unascertained liability as envisaged in clause (c) of Explanation (1) to sub-section (2) of section 115JB. The CIT(A) held that the said amount could not be treated as unascertained liability and allowed the assessee’s appeal.

Aggrieved by the order, Revenue filed an appeal before the Tribunal and the Tribunal upheld the action of the A.O. Aggrieved by this order, the assessee filed an appeal before High Court which remanded back the matter with a direction to proceed and determine the issue in the light of the decision of the Gujarat High Court in CIT vs. Vodafone Essar Gujarat Ltd. [2017] 397 ITR 55 (Guj), i.e., whether clause (i) of Explanation (1) to sub-section (2) of section 115JB would be attracted or not in the facts of this case.

HELD


To determine whether the amount so debited to the P&L account for diminution in Investment and NPA was an instance of write-off or a provision, the Tribunal observed that the Gujarat High Court in CIT vs. Vodafone Essar Gujarat Ltd. (Supra) explained a situation where a provision created in respect of assets would be considered as a write-off and not as a provision as per clause (i) of Explanation (1) to sub-section (2) of section 115JB.

The Gujarat High Court had held that
a) where an assessee debits an amount to the P&L account and simultaneously obliterates such provision from its account by reducing the corresponding amount from the respective assets on the asset side of the balance sheet, and
b) consequently, at the end of the year, shows the respective assets as net of the provision, it would amount to an actual write-off and such actual write-off would not attract clause (i) of the Explanation (1) to sub-section (2) of section 115JB.

In the present case, the Tribunal observed that the provision for diminution in Investment / Provision for NPA was not a mere provision but an actual write-off. Provision for Investments / Provision for NPA was created by the assessee by debiting the P&L account and simultaneously the corresponding amount from Investments / Loans & Advances shown on the asset side of the balance sheet was also reduced / adjusted and Investments / Loans & Advances were recorded in the books, net of provision.

Hence, applying the above principle laid down by the Gujarat High Court, the Tribunal finally held that the said provision for diminution in Investments and Provision for NPA would amount to an actual ‘write-off’ and therefore would not attract clause (i) of the Explanation.

Thus, the action of the CIT(A) on the issue was confirmed by the Tribunal and the Revenue’s appeal was dismissed.

ITAT holds that amendments of Finance Act, 2021 to section 43B and 36(1)(va) apply prospectively

32 Crescent Roadways Pvt. Ltd. [2021] TS-510-ITAT-2021 (Hyd)] A.Y.: 2015-16; Date of order: 1st July, 2021 Section 43B, 36(1)(va)

ITAT holds that amendments of Finance Act, 2021 to section 43B and 36(1)(va) apply prospectively

FACTS

The assessee company had remitted employees’ contribution towards PF, ESI before the due date of filing return u/s 139(1) – but after the due date prescribed in the corresponding PF, ESI statutes. For the year under consideration, the A.O. disallowed the amounts on the ground that they had been remitted after the due date prescribed in the corresponding statute, i.e., under the PF / ESI Acts. On appeal, the CIT(A) confirmed the disallowance.

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD


The Tribunal held that the legislative amendments incorporated in sections 36(1)(va) and 43B by the Finance Act, 2021 are prospective in application and are therefore applicable w.e.f. 1st April, 2021. Therefore, the disallowance of employees’ contributions towards PF, ESI for the A.Y. under consideration was not sustainable and accordingly deleted the additions made on account of such disallowance.

ITAT holds that corrigendum to the valuation report to be considered in ascertainment of value u/s 56(2)(viib)

31 I Brands Beverages Pvt. Ltd. [2021] TS-546-ITAT-2021 (Bang)] A.Y.: 2015-16; Date of order: 13th July, 2021 Section 56(2)(viib)

ITAT holds that corrigendum to the valuation report to be considered in ascertainment of value u/s 56(2)(viib)

FACTS

The assessee, who was engaged in the manufacture and sale of beverages, allotted 4,80,000 shares of a nominal value Rs. 10 per share at a premium of Rs. 365 per share following the discounted cash flow method as per the valuation report. The A.O. noted that the value per share as per projections was Rs. 37.49 per share and it was mistakenly arrived at as Rs. 374.95 per share, and therefore assessed the difference of Rs. 16.2 crores as income u/s 56(2)(viib). On appeal with the CIT(A), the assessee submitted a corrigendum to the valuation report as additional evidence, contending it to be read with the original valuation report which showed the fair market value at Rs. 374.95 per share. The CIT(A), based on a remand report called from the A.O., held that additional evidence in the form of corrigendum was not admissible and confirmed the additions made by the A.O.

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


The Tribunal observed that the corrigendum to the original report was issued on account of error and it formed part of the original valuation report. It further held that the corrigendum could not be treated as additional evidence by the CIT(A) and therefore there was no reason to reject it. The Tribunal holds that the corrigendum and the original report shall constitute the full report to be examined by the A.O. and accordingly remits the matter to the A.O. for determination of value per share.

Artheon Battery [TS-863-ITAT-2021 (Pun)] A.Y.: 2014-15; Date of order: 7th September, 2021 Section 28(iv)

8 Artheon Battery [TS-863-ITAT-2021 (Pun)] A.Y.: 2014-15; Date of order: 7th September, 2021 Section 28(iv)

FACTS
The assessee is engaged in the business of manufacturing the complete line of lead-acid batteries, serving domestic and export markets as well. The A.O. found that the assessee had credited an amount of Rs. 25.19 crores being waiver of ECB loan amount. The assessee submitted that the ECB was availed to acquire capital assets and hence was capital in nature. The A.O. did not accept the assessee’s submissions and held that the amount was taxable u/s 28(iv). On appeal, the CIT(A) held the amount to be capital in nature.

Aggrieved, the Revenue preferred an appeal before the Tribunal.

HELD
The Tribunal found that the assessee had transferred the waiver amount of ECB directly to its capital reserve. It referred to the Apex Court ruling in Mahindra & Mahindra (404 ITR 1) wherein it was held that ‘in order to invoke the provisions u/s 28(iv) of the Act, the benefit which is received has to be in some other form rather than in the shape of money’. The Tribunal held that the amount received as cash receipt due to the waiver of loan cannot be taxed under the provisions of section 28(iv), and noted that in the instant case the loan amount waived was credited to capital reserve. Therefore, it held that the ratio of the SC ruling would be applicable as the benefit was received in some form other than in the shape of money. The Tribunal upheld the CIT(A)’s order.
 

Surbhit Impex [130 taxmann.com 315] A.Y.: 2014-15; Date of order: 17th September, 2021 Section 41(1)

7 Surbhit Impex [130 taxmann.com 315] A.Y.: 2014-15; Date of order: 17th September, 2021 Section 41(1)

FACTS
The assessee was engaged in the business of trading. During the course of assessment proceedings, the A.O. noticed that it owed amounts of Rs. 1.25 crores and Rs. 1.88 crores, respectively, to two Chinese entities and which were outstanding. The assessee submitted that since the consignment received was not of good quality, the payment was not made. The A.O. treated the same as ceased liabilities and accordingly made an addition of Rs. 3.13 crores u/s 41(1). On appeal, the CIT(A) deleted the additions. Aggrieved, the Revenue preferred an appeal before the Tribunal.

HELD
The Tribunal noted the undisputed position that at the relevant point of time, proceedings against the assessee for recovery of these amounts were pending before the judicial forums and remarked that these amounts could not have been said to have ceased to be payable by the assessee. The Tribunal further remarked that the very basic, foundational condition that there has to be benefit in respect of such trading liability by way of ‘remission and cessation’ was not satisfied in the relevant year, and thus upheld the CIT(A)’s order.

The Tribunal observed that sometimes Departmental appeals are filed without carefully looking at undisputed basic foundational facts in a routine manner, and remarked that the Income-tax Authorities ought to be more careful in deciding matters to be pursued in further appeals.

Section 142(2A) – Reference to DVO cannot be made by an authority who is not empowered to do so – An invalid valuation report of DVO cannot be considered as incriminating material – In absence of any incriminating material for the unabated assessment years, additions cannot be made

6 ACIT vs. Narula Educational Trust [2021-86ITR(T) 365 (Kol-Trib)] IT(SS) Appeal Nos. 07 to 12 & 42 to 47(Kol) of 2020 A.Ys.: 2008-09 to 2013-14; Date of order:  5th February, 2021

Section 142(2A) – Reference to DVO cannot be made by an authority who is not empowered to do so – An invalid valuation report of DVO cannot be considered as incriminating material – In absence of any incriminating material for the unabated assessment years, additions cannot be made

FACTS
The assessee was an educational institution operating through various institutions. On 13th March, 2014, a search action u/s 132(1) was carried out at its administrative office. During post-search operations, the DGIT(Inv) made reference to the Departmental Valuation Officer (DVO) for valuing the immovable properties. The DVO reported the value of the properties to be higher than the value disclosed by the assessee. Pursuant to the provisions of section 153A, an assessment for the A.Ys. 2008-09 to 2012-13 was undertaken and the A.O. proposed to make an addition based on the report of the DVO. The assessee objected to the valuation methodology adopted by the DVO; accordingly, the A.O. requested the DVO to reconsider the valuation. However, as the DVO did not submit the report within the statutory time limit of six months, the A.O. proceeded to make an addition based on the initial valuation report as called upon by the DGIT(Inv).

Before the CIT(A), the assessee raised the point that since the DVO did not furnish the report to the A.O. within the time limit, hence the reference stood infructuous. The CIT(A), exercising his co-terminus powers (as that of A.O.), himself made reference to the DVO; however, since the DVO did not furnish a reply within the time limit, the CIT(A) deleted the addition on the ground that since the DVO did not furnish a report, hence the earlier report of the DVO [as sought by DGIT(Inv)] stood non-est and could not be relied upon by the A.O.

On appeal by the Revenue before the ITAT, the assessee argued that, firstly, the DGIT(Inv) had no power at that point of time to refer to the DVO for valuation, and secondly, since there was no incriminating material found during the course of the search action, no addition can be made as the assessments for these years were unabated.

HELD
The DGIT(Inv) was empowered to make reference for valuation to the DVO only after the amendment in section 132 made vide the Finance Act, 2017 w.e.f. 1st April, 2017 and not prior to it. Thus, the DGIT(Inv) did not have jurisdiction to make a reference in the year 2014. Accordingly, the impugned additions were directed to be deleted relying on the ratio laid down by the Supreme Court in the case of Smt. Amiya Bala Paul vs. CIT [2003] 262 ITR 407 (SC) where it was held that reference to the DVO cannot be made by an authority that is not empowered to do so.

It was observed that assessments for the relevant years were unabated because no assessments were pending for those years before the A.O. as on the date of the search. Further, the accounts of the assessee were audited, and that neither the search party nor the A.O. pointed out any mistake in the correctness or completeness of the books. On perusal of the panchnama it was evident that the search party did not even visit the educational institutions. Thus, the reference made by the DGIT(Inv) to the DVO was without any incriminating material that was unearthed during the search proceedings. There was no whisper of any incriminating material seized during the search to justify the addition in these unabated assessments other than the invalid valuation report. Such invalid valuation report of the DVO cannot be held to be incriminating material, since it was not a fallout of any incriminating material unearthed during the search to suggest any investment in the building which was over and above the investment shown by the assessee. Therefore, no addition was permissible for unabated assessments unless it was based on relevant incriminating material found during the course of search qua the assessee and qua the assessment year.

Principle of consistency – Where in earlier years in the assessee’s own case the benefit of exemption u/s 11 was allowed, the Revenue’s appeal against the order of CIT(A) was dismissed, thereby upholding the claim of exemption u/s 11, following the principle of consistency

5 ACIT (Exemptions) vs. India Habitat Centre [2021-86-ITR(T) 290 (Del-Trib)] IT Appeal No. 5779 (Del) of 2017 A.Y.: 2014-15; Date of order: 1st February, 2021

Principle of consistency – Where in earlier years in the assessee’s own case the benefit of exemption u/s 11 was allowed, the Revenue’s appeal against the order of CIT(A) was dismissed, thereby upholding the claim of exemption u/s 11, following the principle of consistency

FACTS
The assessee-society was registered u/s 12A vide order dated 13th January, 1989. It had satisfied the requirements of Education, Medical Relief, Environment, Relief of Poor and Claim of General Public Utility and thus, its activities were charitable as mandated in section 2(15).

The Department had started disputing the nature of activities undertaken by the assessee and rejected the claim of exemption under sections 11 and 12 read with the proviso to section 2(15). As an abundant precaution, the assessee started making an alternate claim for exemption under the principle of mutuality, it being a members’ association.

For the relevant A.Y., the A.O. noted that its activities were hybrid, were partly covered by the provisions of section 11 read with section 2(15) and partly by the principle of mutuality. The A.O. denied the exemption u/s 11 and under mutuality since separate books of accounts were not maintained and income could not be bifurcated under the principle of mutuality or otherwise.

Aggrieved, the assessee challenged the assessment order before the CIT(A). The CIT(A) relied on the earlier decisions of the higher appellate forums in its own case and held that the assessee was engaged in charitable activities and granted the benefit of exemption u/s 11. Aggrieved by the order, the Revenue filed an appeal before the Tribunal.

HELD
The Tribunal observed that a coordinate bench of the Tribunal in the assessee’s own case for the A.Y. 2008-09 had reviewed all the case laws and various decisions on this aspect to reach the conclusion that when the society was registered as a charitable trust, its income cannot be computed on the principle of mutuality but was required to be computed under sections 11, 12 and 13. This decision was followed by another decision of a co-ordinate bench in ITA No. 4212/Del/2012 for the A.Y. 2009-10 in the assessee’s own case.

The Tribunal held that the history of the assessee as noted in the submissions of the counsel clearly showed that all the issues raised in the Departmental appeal had been considered and decided in earlier years, therefore, the principle of consistency applied to the same facts. The Tribunal observed that the facts in the relevant assessment year were identical to the facts in the earlier years in the assessee’s own case, the fact that the assessee was a registered society u/s 12A and that the nature of activities and objects of the assessee were the same as had been considered in earlier years.Considering the above background and history of the assessee in the light of various orders referred to by its counsel during the course of arguments and the Order of the ITAT and the Delhi High Court in A.Y. 2012-2013 in the assessee’s own case, the Tribunal did not find any infirmity in the order of the CIT(A) in allowing the appeal of the assessee-society and the Departmental appeal was accordingly dismissed.

In the case of an assessee who had not undertaken any activities except development of flats and construction of various housing projects, expenses incurred by way of professional fees are allowable while computing income offered during survey

4 Anjani Infra vs. DCIT [TS-825-ITAT-2021 (Surat)] A.Y.: 2013-14; Date of order: 26th July, 2021 Sections 37, 68, 115BBE

In the case of an assessee who had not undertaken any activities except development of flats and construction of various housing projects, expenses incurred by way of professional fees are allowable while computing income offered during survey

FACTS

The assessee firm was a part of Shri Lavjibhai Daliya and Shri Jayantibhai Babaria group on whom search action was carried out on 17th July, 2012. In the course of the survey action, a partner of the assessee offered additional unaccounted income of Rs. 8,00,54,000. In the course of assessment proceedings, the A.O. noticed that the assessee has debited expenditure of Rs. 8 lakh from the income disclosed in the survey. In support of the claim, the assessee, in the course of assessment proceedings, submitted that the assessee is engaged only in the business of building construction and developing residential and other housing projects. No other activities or investments are carried out or undertaken by the assessee firm. The disclosure was made towards on-money in the business of real estate. The professional fee of Rs. 8 lakh was paid to their legal consultant. The A.O. treated the additional income declared in the survey as deemed income of the assessee u/s 68 and disallowed professional fees. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The aggrieved assessee then preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the narrow dispute is whether the assessee can claim expenses of professional fees against additional unaccounted income disclosed during the survey. The Tribunal noted that while making disclosure of Rs. 8 crores, the partners gave the bifurcation of undisclosed income. In the statement there is no averment that the assessee will not claim any expense. The assessee had not undertaken any other activities except the development of flats and construction of various housing projects. On similar facts, in the case of DCIT vs. Suyog Corporation [ITA No. 568/Ahd/2012] the Tribunal confirmed the order of the CIT(A) allowing expenses against on-money to the assessee who was also engaged in similar business activities. A similar view was taken in the case of DCIT vs. Jamnadas Muljibhai [(2006) 99 TTJ 197 (Rajkot)] by treating on-money as business receipt of the assessee.

The Tribunal, considering the decisions of the co-ordinate benches and also the fact that professional fees were paid to the firm of consultants after deducting TDS, held that there is no justification in disallowing such expenses.

Explanation 2 to section 37(1) is prospective w.e.f. A.Y. 2015-16

3 National Building Construction Corporation Ltd. vs. Addl. CIT [TS-815-ITAT-2021 (Del)] A.Y.: 2014-15; Date of order: 11th August, 2021 Section: Explanation 2 to section 37(1)

Explanation 2 to section 37(1) is prospective w.e.f. A.Y. 2015-16

FACTS

The assessee in its return of income claimed deduction of Rs. 5,72,32,442 incurred on account of expenses on corporate social responsibility (CSR). It was submitted before the A.O. that CSR expenses were incurred for the purpose of projecting its business and said the expenditure was incurred in accordance with the guidelines of the Ministry of Heavy Industry and Public Enterprises. It was also submitted that the expenses have enhanced the brand image of the company, which in turn has had a positive long-term impact on the business of the assessee.The A.O. held Explanation 2 to section 37(1) to be clarificatory and consequently disallowed the claim of the CSR expenses of Rs. 5,72,32,442.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal noted that the co-ordinate bench of the Tribunal has in the case of Addl. CIT vs. Rites Limited [ITA Nos. 6447 and 6448/Del/2017; A.Y. 2013-14] held that Explanation 2 to section 37(1) is prospective in nature and applies w.e.f. A.Y. 2015-16. It also noted that the expenses have been incurred on the direction of the relevant Ministry / Government of India and neither the A.O. nor the D.R. have rebutted the contention of the assessee that expenses have been incurred for enhancing the brand image of the company which are wholly and exclusively for the purpose of the business of the assessee – but both the authorities have disallowed the expenses on the ground that Explanation 2 is clarificatory and retrospective in nature.The Tribunal, following the decision of the co-ordinate bench, held that Explanation 2 is prospective in nature and accordingly CSR expenses incurred in the year under consideration cannot be disallowed by invoking Explanation 2 to section 37(1).

This ground of appeal filed by the assessee was allowed.

Claim for deduction of interest u/s 24(b) is allowable even though assessee had not got possession of the house property

2 Abeezar Faizullabhoy vs. CIT(A) [TS-859-ITAT-2021 (Mum)] A.Y.: 2015-16; Date of order: 1st September, 2021 Section 24

Claim for deduction of interest u/s 24(b) is allowable even though assessee had not got possession of the house property

FACTS

The assessee purchased a residential house vide a registered agreement dated 20th September, 2009 for a consideration of Rs. 1,60,89,250. For acquiring the property, the assessee took a loan on which interest of Rs. 2,69,842 was paid by him during the year under consideration. In the return of income the assessee claimed deduction of Rs. 2,00,000 u/s 24(b) which was declined by the A.O. on the ground that the assessee had not taken possession of the property in question.Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal on perusal of section 24(b) held that for claiming deduction of interest u/s 24(b) there is neither any such precondition nor an eligibility criterion prescribed that the assessee should have taken possession of the property purchased or acquired by him. The first and second provisos to section 24(b) only contemplate an innate upper limit of the amount of deduction qua properties referred to in section 23(2). These provisos by no means jeopardise the entitlement of the assessee to claim deduction of interest payable by him on capital borrowed for the purposes mentioned in the section, provided the property does not fall within the realm of section 23(2).

The view of the CIT(A), viz., that in the absence of any control / domain over the property in question the assessee would not be in receipt of any income from the same, therefore, the fact that allowing deduction u/s 24(b) qua the said property would be beyond comprehension was held by the Tribunal to be absolutely misconceived and divorced of any force of law. It held that the logic given by the CIT(A) for declining the claim for deduction militates against the mandate of sections 22 to 24.

The Tribunal further held that determination of annual value is dependent on the ‘ownership’ of the property, irrespective of the fact of whether or not the assessee has taken possession. As per the plain literal interpretation of section 24(b), there is no bar on an assessee to claim deduction of interest payable on a loan taken for purchasing a residential property, although the possession of the same might not have been vested with him.

The Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the assessee’s claim for deduction of Rs. 2 lakh u/s 24(b).

Reassessment made merely on the basis of AIR information was quashed as having been made on invalid assumption of jurisdiction

1 Tapan Chakraborty vs. ITO [TS-644-ITAT-2021 (Kol)] A.Y.: 2009-10; Date of order: 7th July, 2021 Section: 147

Reassessment made merely on the basis of AIR information was quashed as having been made on invalid assumption of jurisdiction

FACTS

For the A.Y. 2009-10, the assessee, a transport contractor, filed his return of income declaring a total income of Rs. 1,85,199 u/s 44AE. Reassessment proceedings were commenced on the basis of AIR information that the assessee has deposited a sum of Rs. 10,64,200 in his savings account which deposit was held by the Revenue to be cash credit u/s 68.

In the reasons recorded, the A.O. noticed that the assessee has declared business income of Rs. 1,85,199 and has a savings bank account with Oriental Bank of Commerce, perusal of the bank statement whereof shows a deposit of Rs. 10,64,200 to be in cash out of the total deposits of Rs. 16,11,720.

According to the A.O., the assessee failed to substantiate the cash deposit with any supporting evidence and hence concluded the amounts to be cash credit u/s 68.

HELD


Quietus of the completed assessments can be disturbed only when there is information or evidence / material regarding undisclosed income or the A.O. has information in his possession showing escapement of income. The statutory mandate is that the A.O. must record ‘reason to believe’ the escapement of income. The Tribunal observed that if adverse information may trigger ‘reason to suspect’, then the A.O. has to make reasonable inquiry and collect material which would make him believe that there is in fact an escapement of income. ‘Reason’ is the link between the information and the conclusion. ‘Reason to believe’ postulates a foundation based on information and a belief based on a reason. After a foundation based on information is made, there must still be some reason which should warrant the holding of a belief that income chargeable to tax has escaped assessment. The Tribunal noted that the Supreme Court in M/s Ganga Saran & Sons (P) Ltd. vs. 130 ITR 1 (SC) has held that the expression ‘reason to believe’ occurring in section 147 is stronger than the expression ‘is satisfied’ and such requirement has to be met by the A.O. before he usurps the jurisdiction to reopen an assessment. The Tribunal held that the A.O. did not meet the conditions precedent in the reasons recorded by him and therefore, assumption of jurisdiction by the A.O. to reopen is invalid and consequently reopening was held to be bad in law and was quashed.

Provisions of section 68 would not apply in case where shares are allotted in lieu of self-generated goodwill wherein there is no movement of actual sum of money

39 ITO vs. Zexus Air Services (P) Ltd. [(2021) 88 ITR(T) 1 (Del-Trib)] IT Appeal No. 2608 (Del) of 2018 A.Y.: 2014-15; Date of order: 23rd April, 2021

Provisions of section 68 would not apply in case where shares are allotted in lieu of self-generated goodwill wherein there is no movement of actual sum of money

FACTS
The assessee company wanted to establish itself in the aviation industry for which an aviation license from the Ministry of Civil Aviation was required. A precondition for procuring this license was that the company must have authorised share capital of at least Rs. 20 crores. One of the directors of the assessee company who had expertise and experience of the industry, helped it to procure the said aviation license. The assessee company allotted shares of Rs. 20 crores to this director by recognising the efforts made by him in the form of ‘goodwill’. Accordingly, Rs. 20 crores was credited to the share capital and a corresponding debit entry was made in the form of self-generated ‘goodwill’. There was no actual flow of money and this was merely a book entry. Documents filed by the assessee company before the ROC in relation to increase in the authorised capital also mentioned that the said shares were allotted in lieu of the ‘blessings and efforts’ of the said director.

But the A.O. held that the assessee company could not substantiate the basis or provide any evidence to justify the value of the goodwill. It was contended that the company had adopted a colourable device to evade taxes. Accordingly, an addition of Rs. 20 crores u/s 68 was made.

The assessee company argued that the provisions of section 68 would not apply in the present facts of the case because there was no actual movement of money and hence it was a tax-neutral transaction. Reliance was placed on the decision of the Delhi High Court in the case of Maruti Insurance Distribution Services Ltd. vs. CIT [2014] 47 taxmann.com 140 (Delhi) wherein it was held that it was the decision of the businessmen to decide and value its goodwill. Concurring with this contention, the CIT(A) deleted the addition made u/s 68.

HELD
It was an undisputed fact that there was no actual receipt of any money by the assessee company; and when the cash did not pass at any stage and when the respective parties did not receive cash nor did they pay any cash, there was no real credit of cash in the cash book and, therefore, the provisions of section 68 would not be attracted. Reliance was placed on the following decisions:

a) ITO vs. V.R. Global Energy (P) Ltd. [2020] 407 ITR 145 (Madras High Court), and
b) ACIT vs. Suren Goel [ITA No. 1767 (Delhi) of 2011].

Reference was also made to the decision in the case of ACIT vs. Mahendra Kumar Agrawal [2012] 23 taxmann.com 285 (Jaipur-Trib) wherein it was held that the term ‘any sum’ used in section 68 cannot be taken as parallel to ‘any entry’.

An identical matter had come up before the Kolkata Tribunal in the case of ITO vs. Anand Enterprises Ltd. [ITA No. 1614 (Kol) of 2016] wherein, referring to the decision of the Supreme Court in the case of Shri H.H. Rama Varma vs. CIT 187 ITR 308 (SC), the Tribunal held that the term ‘any sum’ means ‘sum of money’; accordingly, in the absence of any cash / monetary inflow, addition u/s 68 cannot be made.

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

38 Prakash Chand Bethala vs. Dy. CIT [(2021) 88 ITR(T) 290 (Bang-Trib)] IT Appeal No. 999 (Bang) of 2019 A.Y.: 2007-08; Date of order: 28th January, 2021

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

FACTS
The assessee was an HUF that had acquired a property by participating in a BDA auction. The agreement for acquisition of the property took place on 24th July, 1984 and the assessee had acquired possession on 29th August, 1984.

One R.K. Sipani (RKS) acquired the aforesaid property from the assessee through M/s K. Prakashchand Bethala Properties Pvt. Ltd. (KPCBBL) through an oral agreement in the month of September, 1989 for the consideration of Rs. 9.80 lakhs. The assessee gave the possession of the property to RKS on 24th October, 1989. Thereafter, on 8th March, 1993, an unregistered sale agreement was made between the assessee and RKS to bring clarity on the aforementioned transaction. Then, on 9th March, 2007, a sale deed was executed in which the aforesaid site was sold to M/s Suraj Properties (a proprietary concern of RKS’s wife) for the consideration of Rs. 9.80 lakhs.

The A.O. noticed that the guidance value of the property as per the executed sale deed on 9th March, 2007 was Rs. 2.77 crores and the sale consideration was less than the guidance value; thus, the provisions of section 50C were attracted. On appeal, the CIT(A) also confirmed the action of the A.O. Aggrieved by the order, the assessee filed an appeal before the Tribunal.

HELD
The question before the Tribunal was what could be the full value of such consideration, i.e., whether the value on which the stamp duty was paid at the time of the sale deed or the value declared in the sale agreement.

The Tribunal observed that the assessee had entered into the sale agreement on 8th March, 1993 and a major portion of the agreed consideration had been received by the assessee through account payee cheque and possession of the property was also handed over to RKS on 24th October, 1989. There is no dispute regarding these facts. The only action pending was actual registration of the sale deed.

The Tribunal observed that section 50C(1) provides that if there is a gap between the date of execution of the sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of the agreement has to be considered as the full consideration of the capital asset. In the present case,
1) the enforceable agreement was entered into on 8th March, 1993 by payment of a major portion of the sale consideration,
2) the possession of the property had already been handed over on 24th October, 1989,
3) only the formal sale deed was executed on 9th March, 2007.

Therefore, the Tribunal held that the transfer had taken place vide the sale agreement dated 8th March, 1993 and full value of consideration for the purpose of computing long-term capital gain in the hands of the assessee has to be adopted only on the basis of the guidance value of the property as on the date of the sale agreement, i.e., 8th March, 1993, and not on the date of the sale deed of 9th March, 2007. Accordingly, there was no applicability of section 50C in the year 2007-08.

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

37 Stalwart Impex Pvt. Ltd. vs. ITO [(2021) TS-615-ITAT-2021 (Mum)] A.Y.: 2016-17; Date of order: 2nd July, 2021 Section 43CA

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

FACTS
During the previous year relevant to the assessment year under consideration, the assessee, engaged in the construction of commercial and residential housing projects, sold flats to various buyers. In respect of three flats the A.O. held that the stamp duty value (SDV) is more than their agreement value. The total agreement value of the said three flats was Rs. 97,11,500 whereas their SDV was Rs. 1,09,83,000. Upon an objection being raised by the assessee, the A.O. made a reference to the Department Valuation Officer (DVO) for determining the market value of the said flats. The DVO determined the market value of the three flats to be Rs. 1,03,93,000. However, before receipt of the report of the DVO, the A.O. made the addition of the difference between the SDV and the agreement value of the said three flats, i.e., Rs. 12,71,500, u/s 43CA.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the difference between the agreement value and the value determined by the DVO is approximately 7%. On behalf of the assessee it was contended that since the difference is less than 10%, no addition should be made. The Tribunal noted that a similar issue had come up before the Tribunal in the case of Radhika Sales Corporation vs. Addl. CIT [ITA No. 1474/Pune/2016, A.Y. 2011-12, order dated 16th November, 2018 and the Tribunal while deciding the issue deleted the addition made and observed that ‘since difference between the value declared by the assessee and the value determined by the DVO is less than 10%, no addition in respect of long-term capital gain is warranted.’ The Tribunal observed that while the said decision was rendered in the context of section 50C and the addition in the instant case is u/s 43CA, both the provisions are pari materia and therefore the decision rendered u/s 50C would hold good for interpreting section 43CA as well. The Tribunal held that where the difference between the sale consideration declared by the assessee and the SDV of an asset (other than capital asset), being land or building, or both, is less than 10%, no addition u/s 43CA is warranted.

The Tribunal observed that the Finance Act, 2018 inserted a proviso to section 43CA(1) providing 5% tolerance limit in variation between declared sale consideration vis-à-vis SDV for making no addition. A similar proviso was inserted by the Finance Act, 2018 to section 50C(1). The said tolerance band was enhanced from 5% to 10% by the Finance Act, 2020 w.e.f. 1st April, 2021. The Tribunal in the case of Maria Fernandes Cheryl vs. ITO (International Taxation) 123 taxmann.com 252 (Mum) after considering various decisions and the CBDT Circular No. 8 of 2018 dated 26th December, 2018 held that the amendment is retrospective in nature and relates back to the date of insertion of the statutory section to the Act.

The Tribunal held that both sections are similarly worded except that both the sections have application on different sets of assessees. The proviso has been inserted and subsequently the tolerance band limit has been enhanced to mitigate the hardship of genuine transactions in the real estate sector. Considering the reasoning given for insertion of the proviso and exposition by the Tribunal for retrospective application of the same, the Tribunal held that the proviso to section 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014.

The Tribunal allowed the appeal filed by the assessee.

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

36 Owens-Corning (India) Pvt. Ltd. vs. ITO [(2021) TS-517_ITAT-2021 (Mum)] A.Y.: 2003-04; Date of order: 25th June, 2021 Section 37

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

FACTS
The assessee company availed a loan from a US bank on floating rate of interest. During the previous year relevant to the assessment year under consideration, the assessee chose to convert the said loan carrying floating rate of interest into fixed rate of interest. The assessee was asked to pay certain swap charges for the said conversion from floating to fixed rate. The swap charges liability had been duly incurred by the assessee during the year. The assessee characterised the swap charges as being in the nature of interest.

But the A.O. while assessing the total income disallowed the swap charges claimed on the ground that the said expenditure is capital in nature.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the assessee converting the loan from floating rate of interest to fixed rate of interest has derived enduring benefit and hence the expenditure incurred by the assessee falls in the capital field warranting capitalisation thereon and hence cannot be allowed u/s 37(1).

HELD
The Tribunal noted the calculation of swap charges and observed that the swap charges incurred by the assessee for conversion from floating to fixed rate of interest would necessarily partake the character of interest. The interest paid by the assessee when the loan was in floating rate was duly allowed by the A.O. Hence, the character of the transaction does not change pursuant to this swap from floating to fixed rate. The utilisation of the loan for the purposes of business has not been disputed, hence there is no question of disallowance of any interest whatever the nomenclature, interest or swap charges. The nomenclature of the transaction is absolutely irrelevant to the substance of the transaction.

The Tribunal, following the decision of the Jurisdictional High Court in the case of CIT vs. D. Chetan & Co. 390 ITR 36 (Bom) held that the assessee is entitled to deduction of swap charges. This ground of appeal filed by the assessee was allowed.

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

35 Batliboi Ltd. vs. ITO [(2021) TS-410-ITAT-2021 (Mum)] A.Y.: 2013-14; Date of order: 21st May, 2021 Sections 4, 45, 115JB

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt

Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

FACTS
The assessee company owned land along with super structure which was acquired by it vide a sale deed dated 15th April, 1967. During the financial year relevant to the assessment year under consideration, the assessee company proposed to sell the said land along with its super structure. In the course of negotiations it became aware that post acquisition of land and constructed building, the Development Control Regulations (DCR) in the city of Coimbatore had undergone a change resulting in the company obtaining an additional benefit by way of additional FSI of 0.8.

The company sold the said land along with super structure vide a deed of sale on 23rd January, 2013 for a consideration of Rs. 11,14,00,000. Taking the help of the valuer, Rs. 4,76,25,000 out of this composite consideration was attributed to the additional FSI obtained as a result of the amendment in the DCR. In the return of income filed, the assessee regarded the sum of Rs. 4,76,25,000 received towards additional FSI as a capital receipt. However, while computing the book profit u/s 115JB, the said sum of Rs. 4,76,25,000 was included in the book profit.

The A.O. brought this sum of Rs. 4,76,25,000 to tax as long-term capital gains. This amount was also treated as part of book profits u/s 115JB since it was already offered to tax voluntarily by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O.

The aggrieved assessee preferred an appeal to the Tribunal where it also raised an additional ground, viz., that the sum of Rs. 4,76,25,000 being a capital receipt is not part of the operating results of the assessee and therefore is not includible in computing its book profits u/s 115JB.

HELD
The Tribunal observed that the total sale consideration of Rs. 11,14,00,000 has not been doubted by the Revenue. The break-up of consideration, as done by the assessee, by relying on the independent valuer’s report was also not doubted by the Revenue. The only dispute was whether the said sum of Rs. 4,76,25,000 could be treated as a capital receipt thereby making it non-exigible to tax both under normal provisions as well as in the computation of book profits u/s 115JB.

The Tribunal held that the assessee could not have pre-empted any change in the DCR in the city of Coimbatore at the time of purchase or before sale. Admittedly, no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of additional FSI on the land and building owned by him is only a windfall gain by operation of law and which had not cost him any money. The Tribunal found that the entire issue in dispute is squarely covered by the decision of the Jurisdictional High Court in the case of Kailash Jyoti No. 2 CHS Ltd. and others dated 24th April, 2015. Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 received by the assessee on the sale of additional FSI is not exigible for long-term capital gains. It directed that the same be excluded under the normal provisions of the Act.

While deciding the additional ground, the Tribunal observed that there is absolutely no dispute that the receipt of Rs. 4,76,25,000 is indeed a capital receipt and the same does not form part of the operational working results of the assessee company. Even according to the Revenue, the said receipt is only inseparable from the land and building and accordingly it only partakes the character of a capital receipt. The Tribunal held that merely because a particular receipt, which is in the capital field, has been offered to tax by the assessee voluntarily in the return of income while computing book profits u/s 115JB it cannot be brought to tax merely on that ground. It is very well settled that there is no estoppel against the statute. It noted that the dispute is covered by the Tribunal in the assessee’s own case in ITA No. 5428/Mum/2015 for A.Y. 2011-12, order dated 17th December, 2021.

Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 being a capital receipt from its inception is to be excluded while computing book profits u/s 115JB and also on the ground that it does not form part of the operational working results of the company.

The Tribunal allowed both the grounds of appeal filed by the assessee.

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacityAlleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

34 Bankimbhai D. Patel vs. ITO [(2021) TS-403-ITAT-2021 (Ahd)] A.Ys.: 2003-04 and 2004-05; Date of order: 19th May, 2021 Section 4

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

FACTS
In this case, the original assessment for A.Y. 2003-04 was completed u/s 143(3) r/w/s 147 assessing total income at Rs. 29,86,640 against a returned income of Rs. 47,120. The case of the A.O. was that the assessee was a power of attorney (PoA) holder of certain pieces of land on which construction was done and these were sold. He received on-money and that on-money has not been accounted for by the assessee. The A.O. recorded the statement of one Rasikbhai Patel who confessed that he paid Rs. 8,71,695 but documents were executed only for Rs. 1,32,500. On the basis of this statement, the A.O. harboured the belief that the difference of these two amounts, i.e., Rs. 7,39,195, was collected by way of on-money. He applied this rate to all the plots sold during the year and believed that the assessee has retained on-money which deserves to be assessed in the hands of the assessee. A similar exercise was done for the A.Y. 2004-05.

When the matter reached the Tribunal, it restored the matter back to the file of the A.O. with a direction to find out as to what was the arrangement between the landowners and the PoA holder and who has received the sale consideration; and whether the recipient of sale consideration has offered capital gains; after examining all these aspects and also after finding out what has happened in the hands of the owners, the A.O. should decide the issue afresh and pass necessary orders.

In the set-aside proceedings from which this appeal has arisen, the A.O. made reference to evidence collected in the first round of the assessment proceedings and added the undisclosed and unrecorded income by way of on-money to the total income of the assessee on the ground that the landowners have not filed their return of income for A.Y. 2003-04.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that both the authorities have failed to analytically examine the issue as per the direction of the ITAT in the first round. The A.O. was specifically directed to examine the understanding between the landowners and the assessee; whether it has been agreed that the landowners would receive only the amount mentioned in the sale deed. It noted that the A.O. has not recorded the statement of any of the landowners though he was given all the details. He recorded the statement of one of the purchasers in the first round but that is not a relevant evidence as that evidence can be taken for determination of quantum but cannot be used to determine who received that quantum. The Tribunal found the action of the A.O. in holding that since the landowners have not paid capital gains, on-money is to be taxed as income of the assessee to be illogical.

The Tribunal held that the law contemplates that the A.O. has to first determine in whose hand the income has to be assessed and who is the rightful owner. The assessee being a PoA holder, cannot be treated as the rightful owner of the income which has arisen on the sale of a particular property. His action was only in a representative capacity. It observed that it could have appreciated the stand of the A.O. if he had been able to bring on record the terms of agreement between the assessee as well as landowners specifying the distribution of amount between the assessee in his capacity as PoA holder vis-à-vis the actual owner. No such steps were taken in spite of the specific direction of the Tribunal in the first round. Considering all these aspects, the Tribunal held that there is no justification for sustaining addition in both the assessment years in the hands of the assessee. The appeal filed by the assessee was allowed.

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

30 IKEA Trading (India) (P) Ltd. vs. DCIT [2020] 83 ITR(T) 415 (Del-Trib) IT(SS) Appeal Nos. 5568 and 5877 (Del) of 2011 A.Y.: 2004-05; Date of order: 30th June, 2020

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

FACTS I
In the course of assessment proceedings, the A.O. asked the assessee to explain certain amounts of sundry creditors. Notices u/s 133(6) were issued, but many of them were not complied with. Consequently, the A.O. made addition for the amount of sundry creditors. On further appeal by the assessee, the Commissioner (Appeals) confirmed the additions only in respect of two parties and deleted the entire balance addition. This was done considering the details filed by the assessee before him. The additions that were sustained were on account of failure of the assessee to furnish account details and relevant pay-out details.

Aggrieved, the assessee as well as Revenue preferred appeals before the ITAT.

HELD I
The Tribunal took into consideration the fact that the A.O. simply added the balance as on 31st March, 2004 without realising that the entire credit balance was out of the purchases made during the year, which were accepted as genuine and no adverse inference was drawn in respect thereof. Further, the assessee had paid all the outstanding amounts in the immediately succeeding years. Therefore, the ITAT allowed the assessee’s appeal and dismissed the Revenue’s ground of appeal. In reaching this conclusion, apart from the facts stated above, it also placed heavy reliance on the decision of the Delhi ITAT Special Bench in the case of Manoj Aggarwal vs. Dy. CIT (2008) 113 ITD 377. The principle upheld in that case was that once a certain amount was accepted as genuine, the same cannot be questioned later on. (The case was in respect of amount offered to tax under a Voluntary Disclosure of Income Scheme, which was credited in the books of accounts as per the requirement of the respective law on the scheme. It was held that once the amount is taxed under the scheme, the same could not be taxed again u/s 68.)

Therefore, by the same rationale, once purchases were accepted as genuine in the instant case, addition of credit balance which was entirely out of purchases for the year could not be made.

Section 40A(2)(b): Where the A.O. had not brought any comparable case to demonstrate that payments made by assessee to directors were excessive / unreasonable, no disallowance could be made

FACTS II
The assessee claimed certain amount expended towards directors’ remuneration. On asking for an explanation in respect of the same, the assessee furnished the details of remuneration paid to the directors and claimed that the same was as per industry norms and was not in excess of either the limits prescribed under the Act, or the industry norms for the particular class of industry. However, the A.O. was of the opinion that the assessee failed to justify the nature of services rendered by the directors so as to command such a huge remuneration. Therefore, the A.O. disallowed a part of the remuneration on the basis that it was excessive.

Before the Commissioner (Appeals), the assessee contended that the A.O. did not give any cogent reasons to justify the disallowance and that he grossly failed to show that such expenditure was excessive and / or unreasonable. Thus, the Commissioner (Appeals) deleted the disallowance made.

The Revenue filed a further appeal before the ITAT.

HELD II
The ITAT observed that the A.O. did not bring any comparable case to demonstrate that the payments made by the assessee were excessive / unreasonable, which is an onus cast upon him by the mandate of section 40A(2)(b).

A further observation was that the payees were also assessed to tax at the same rate of tax. The CBDT Circular No. 6-P dated 6th July, 1968 states that no disallowance is to be made u/s 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. Considering the totality of the facts in light of the CBDT Circular (Supra), the ITAT dismissed the ground of appeal raised by the Revenue, thereby allowing the assessee’s claim of remuneration.

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

29 Kundan Rice Mills Ltd. vs. Asst. CIT [2020] 83 ITR(T) 466 (Del-Trib) IT(TP) Appeal No. 853 (Del) of 2020 A.Y.: 2015-16; Date of order: 9th July, 2020

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

FACTS
The assessee company was engaged inter alia in trading in shares, futures and options. During the year under consideration, it claimed loss on account of trading in stock options. The A.O. found that SEBI had passed an ex parte interim order in the matter of illiquid stock options wherein the name of the assessee company also figured in the list of entities which had entered into non-genuine, fraudulent trades to generate fictitious profits / losses for the purpose of tax evasion / facilitating tax evasion.

However, the assessee explained before the A.O. that (i) it had acted as a bona fide trader as it had been doing in the past and complied with all procedures and requirements of the stock exchange, (ii) at the time of the relevant transactions / trades, the assessee could not have had any idea about any profit or loss in the said transactions, and (iii) the assessee was not connected with the counter-parties in the trade and there was no grievance of any of the investors or BSE. It also claimed that only 4.85% sale transactions allegedly matched with entities named by SEBI. The A.O., however, rejected this submission of the assessee and disallowed loss in trading from stock options. The Commissioner (Appeals) upheld the addition made by the A.O. on the basis that since detailed investigation was carried out by SEBI, no separate investigation was required to be done by the A.O. to disallow the bogus losses.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The disallowance of loss made by the A.O. was deleted by the ITAT. In doing so, it observed that:

1. Trading in stock futures and options was done by the assessee regularly since past several years. The transactions were recorded in the books of accounts. The intrinsic value mentioned in the SEBI order was only one of the ways of calculating and there is no set formula / law / rule / circular which defines intrinsic value or prohibits trading below intrinsic value.
2. The A.O., in the assessment order, had observed that in screen-based electronic trading, ideally, it was not possible to choose the counter party for trade. The circuit breaker limits set by SEBI were not applicable to the Futures and Options (F&O) segment.
3. SEBI subsequently directed that there was no need to continue with the directions issued against the assessee company and others (these were the same orders relied upon by the Income-tax authorities). Thus, in principle, the interim order and subsequent orders of the SEBI which were the basis of passing the assessment order in question, were vacated by SEBI itself.
4. The assessee filed complete documentary evidence before the authorities like carrying out transactions through banking channels, fulfilling margin requirements mandated by SEBI, etc. The same were supported by contract notes. There was also no allegation made by BSE against any of the transactions carried out by the assessee company. The A.O. as well
as the Commissioner (Appeals) did not conduct any investigation on the documentary evidences filed by the assessee.
5. Loss on account of similar nature of transactions was incurred in the preceding year, which was not disallowed and hence, the A.O. ought to have followed the principle of consistency.
6. The ad interim order of SEBI was passed without hearing the objections of the assessee and when
those objections were considered, the interim order was diluted by giving permission to the assessee to deal
in the transactions. Since both the orders of SEBI relied upon by the A.O. were vacated by the SEBI, there was no material available with the authorities below so as to conclude that the assessee has entered into any dubious or other transactions deliberately to show business losses.
7. The ad interim order which was passed by SEBI ex parte would not disclose any precedent or ratio which may be binding on the Income-tax Department.

Based on the above observations, the disallowance was finally deleted.

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

28 Shri Bhavarlal Mangilal Jain [2021] TS-420-ITAT-2021 (Mum)b A.Y.: 2012-13; Date of order: 4th May, 2021 Section 36(1)(iii)

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

FACTS
The assessee, an individual, had wrongly claimed certain interest expenditure under ‘income from other sources’ which was disallowed by the A.O. during assessment. At the appellate proceedings with the CIT(A), the assessee raised an additional ground that such interest be allowed under the head ‘Profits & Gains of Business / Profession’. The CIT(A) allowed the interest expenditure, but restricted the rate of interest to 12% p.a. The interest paid in excess of 12% was disallowed on the grounds that the rate of interest is higher (the assessee had paid interest ranging from 5% to 24%) than the interest received on Partnership Capital Account. The CIT(A), thus made a disallowance of interest in excess of 12% p.a.

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD
The Tribunal observed that the Department had accepted the genuineness of the loan transactions and also the same being for business purposes. Once the expenditure has been accepted to be business expenditure, the interest rate cannot be arbitrarily restricted. In order to disallow interest beyond a certain rate, it has to be shown that such interest was excessive or for extraneous consideration. Based on facts, the Tribunal noted that some of the parties to whom interest was paid at a rate of more than 12% included banks, non-banking financial institutions and some private lenders, and none of these parties was related to the assessee within the provisions of section 40A. Thus, the assessee’s appeal was allowed.

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

27 Hima Bindu Putta [2021] TS-428-ITAT-2021 (Hyd) A.Y.: 2009-10; Date of order: 3rd May, 2021 Section 23

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

FACTS

The assessee, an individual, filed her return of income declaring loss under the head ‘house property’. She was in ownership of a property which was let-out by her to a company in which her husband was a director-employee. The company in turn provided this property by way of accommodation to her husband, Mr. A, with whom she resided in the property. The assessee treated this property as a let-out property and offered the rental income in her computation. The A.O. treated 50% of the property as let-out and the balance 50% as self-occupied, as the assessee was also residing in the property. Accordingly, he restricted deductions u/s 24 to 50% of the allowable amounts. The CIT(A) dismissed the assessee’s appeal.

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


The Tribunal, relying on the material available on record, found that there was no dispute that the assessee was the owner of the property and she had purchased it with borrowed capital. Further, the property had been let-out to the company and she had offered the rental income in her computation for the relevant assessment year. ‘The assessee is the wife of Mr. A, who was given the property as residential accommodation by the company, and therefore it cannot he held that the assessee herself is occupying the property.’

The Tribunal ruled in favour of the assessee, stating that such income has to be treated as income from ‘house property’ and all eligible deductions including interest on borrowed capital was to be allowed in computing such income.

The assessee’s appeal was thus allowed.

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

26 BSC C&C Krunali Toll Road Ltd. vs. DCIT TS-381-ITAT-2021 (Del) A.Ys.: 2012-13 & 2013-14; Date of order: 18th May, 2021 Section: 32

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

FACTS

The assessee company developed a toll road on the Kurla-Kiratpur section in Punjab on BOOT basis. The contract was awarded by the National Highways Authority of India (NHAI). The entire cost of construction was Rs. 441,27,05,614, including a grant of Rs. 43.92 crores from the NHAI. The assessee, in its return of income, claimed depreciation thereon @ 25%. While assessing its total income u/s 143(3), the A.O., following the judgment of the Allahabad High Court in CIT vs. Noida Toll Bridge Co. Ltd. 213 Taxman 333, restricted depreciation on the toll road to 10%.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O.

The assessee then preferred an appeal to the Tribunal where it contended that the lower authorities erred in holding that it was the owner of the road. Actually, the assessee had only been given the right to collect toll fee from vehicles entering the road which right could not be equated with ownership. On behalf of the assessee, reliance was placed on the following decisions:

(a) North Karnataka Expressway Ltd. vs. CIT [Appeal No. 499 of 2012]; (b) West Gujarat Expressway Ltd. [ITA Nos. 5904 & 6204/M/2012; order dated 15th April, 2015]; (c) Progressive Construction Ltd. [ITA No. 214/Hyd/2014; order dated 7th November, 2014]; (d) Kalyan Toll Infrastructure Ltd. vs. ACIT [ITA Nos. 201 & 247/Ind/2008; order dated 14th December, 2010]; and (e) Mokama Munger Highway Ltd. vs. ACIT [ITA Nos. 1729, 2145 & 2146/Hyd/2018; order dated
3rd July, 2019].

HELD


The Tribunal noted that there were conflicting decisions rendered by the High Court and the Special Bench of the Tribunal. The Bench then noted the ratio of the decisions of the Tribunal in the case of ACIT vs. West Gujarat Expressway Ltd. (Supra) and also of the Special Bench decision of the Tribunal in ACIT vs. Progressive Construction Ltd. Following the ratio of the decision of the Bombay High Court and also the Special Bench decision, the Tribunal held that the assessee is entitled to claim depreciation @ 25%.

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

25 Aditya Balkrishna Shroff vs. ITO [2021] 127 taxmann.com 343 (Mum-Trib) A.Y.: 2013-14; Date of order: 17th May, 2021 Sections: 2(24), 4, 56

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

FACTS
In the course of assessment proceedings, the A.O. noticed that as per AIR Information and as per capital account filed by the assessee, he was in receipt of Rs. 1,12,35,326. Upon seeking an explanation, the assessee informed that on 29th March, 2010, he had granted an interest-free loan of US $2,00,000 to his cousin in Singapore. The remittance was made under the Liberalised Remittance Scheme of the RBI. The rate of exchange prevailing on that date was Rs. 45.14. On 24th May, 2012 the assessee received back the said loan of US $2,00,000. The exchange rate on the date of receiving back the loan was Rs. 56.18. Accordingly, the capital account of the assessee was credited with a sum of Rs. 1,12,35,326.

The A.O. was of the view that the difference in amount of Rs. 22,04,568 was of the nature of income. The assessee explained that the loan was given on a personal account to his cousin and was not a business transaction and there was no motive of any economic gain in the transaction. It was done in terms of the Liberalised Remittance Scheme of the RBI inasmuch as it was a permitted transaction and specifically on capital account. It was further explained that the transaction was capital in nature, therefore ‘the gain is in the nature of capital receipt and hence not offered for taxation’.

But these submissions did not impress the A.O. who held that ‘the gain on realisation of loan would partake the character of income under the head “income from other sources”’. Accordingly, he added a sum of Rs. 1,12,35,326 to the total income of the assessee as ‘income from other sources’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD


The Tribunal held that when a receipt is in the capital field, even if that be a gain, it is in the nature of a capital gain, but then as the definition of income stands u/s 2(24)(vi), only such capital gains can be brought to tax as are permissible to be taxed u/s 45. In other words, a capital gain which is not taxable under the specific provisions of section 45 or which is not specifically included in the definition of income by way of a specific deeming fiction, is outside the ambit of taxable income. All ‘gains’ are not covered by the scope of ‘income’. Take, for example, capital gains. It is not even the case of the authorities below that the capital gains in question are taxable u/s 45. Thus, the reasoning adopted by the A.O. was incorrect.

The Tribunal observed that the CIT(A)’s line of reasoning was no better. While he accepts that the transaction in question was in the capital field, he proceeds to hold that ‘income’ arising out of the loan transaction is required to be treated as ‘interest’ or ‘income from other sources’, but all this was a little premature because he proceeded to decide as to what is the nature of the income or under which head it is to be taxed, without dealing with the foundational plea that the scope of income does not include gains in the capital field. According to the Tribunal, if the transaction was in the capital field, as he accepts, ‘where is the question of a capital receipt being taxed as income unless there is a specific provision of bringing such a capital receipt to tax?’

The Tribunal held that where the loan is in a foreign currency and the amount received back as repayment is exactly the same, there is no question of any interest component at all.

The Tribunal allowed this ground of appeal filed by the assessee.

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

24 Shri Sitaram Pahariya (HUF) vs. ITO [2021] 127 taxmann.com 618 (Agra) A.Y.: 2012-13; Date of order: 31st May, 2021 Section: 54B

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

FACTS
During the previous year relevant to the assessment year under consideration, the assessee HUF sold agricultural land and claimed benefit u/s 54B on subsequent purchase of another plot of land. The A.O., while assessing the total income of the assessee, denied the claim made by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the denial of claim on the ground that for the assessment year under consideration, section 54B does not apply to HUFs.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal held as under:

(i) the Hindu undivided family was entitled to the benefit of 54B even prior to the insertion of ‘the assessee being an individual or his parent, or a Hindu undivided family’ by the Finance Act, 2013;
(ii) the assessee is a person subjected to tax under the Act, and the person includes the individual as well as the Hindu undivided family. Therefore, the benefit of provisions of 54B cannot be restricted to only individual assessees;
(iii) the Revenue is duty-bound to make out a clear case of debarring the HUF from availing the benefit of section 54F / 54B and the assessee cannot be denied the benefit merely based on its interpretation. If the Revenue wanted to tax the assessee (HUF), then the statute should have provided specifically that the assessee in 54B is only restricted to a living individual and is not applicable to a Hindu undivided family;
(iv) further, the High Court had not considered that individual assessee and HUF can both be used as and when the context so desires and it will not lead to any absurdity. In case the assessee is a Hindu undivided family, the second part of section 54B, i.e., ‘of parents of his’, would not be applicable. Harmonious interpretation is required to be invoked so that the word used in the provisions would not become redundant or otiose;
(v) in case of doubt or confusion, the benefit in respect of taxability or exemption should be given to the assessee rather than to Revenue;
(vi) the Co-ordinate Bench in the matter of Sandeep Bhargava (‘HUF’) [(2020) 117 taxmann.com 677 (Chandigarh-Trib)] has held that an HUF is entitled to claim benefit of section 54B;
(vii) on the facts of the present case, the Tribunal found that the assessee, within two years of the sale of agricultural land, had invested the amount and purchased land in accordance with the requirement of section 54B and was entitled to the benefit of 54B;
(viii) the assessee HUF is entitled to the benefit of section 54B for the assessment year under consideration as the word assessee used in 54B had always included HUF, and further, the amendment brought on by the Finance Act, 2013 in section 54 by inserting ‘the assessee being an individual or his parent, or a Hindu undivided family’ was classificatory in nature and was introduced by the Ministry with a view to extend the benefit to the Hindu undivided family;
(ix) the Hindu undivided family (HUF) has been recognised as a separate tax entity; therefore, before and after the amendment, if the agricultural land which was being used by the HUF for two years prior to the transfer has been transferred by it and it purchases any other agricultural land within two years of such transfer, then it shall be entitled to the benefit of section 54B/54F.

Receipt in the form of share premium cannot be brought to tax as revenue receipt

23 ACIT vs. Covestro India Private Limited (formerly Bayer Sheets India Private Limited) TS-394-ITAT-2021 (Mum) A.Y.: 2011-12; Date of order: 27th April, 2021
Section: 4

Receipt in the form of share premium cannot be brought to tax as revenue receipt

FACTS
The assessee, a private limited company engaged in the business of manufacturing and trading of polycarbonate sheets, articles and high impact polystyrene articles, commenced business operations in the previous year relevant to the assessment year under consideration. For the A.Y. 2011-12, it filed its return of income declaring therein a loss of Rs. 17,39,073.

During the year under consideration, the assesse had issued 7,00,000 equity shares of Rs. 10 each at a premium of Rs. 115.361351 per share. Of the 7,00,000 equity shares issued, 3,57,000 were issued to a foreign company Bayer Material Science for a monetary consideration; 3,08,000 shares were issued to Malibu Plastica Private Limited (‘MPPL’) and 35,000 to Malibu Tech Private Limited (‘MTPL’) for non-monetary consideration, i.e., for purchase of polycarbonate extrusion and thermo-forming sheet material from the said Indian companies.

While assessing the total income of the assessee, the A.O. treated share premium of Rs. 8,07,52,945 (7,00,000 x 115.361351) as taxable u/s 56 on the ground that the assessee sought to justify the issue price of the shares by adopting the DCF method without furnishing business plans and projections to justify the premium; the year of issue of shares was the first year of business of the assessee; and the assessee has utilised the share premium for purposes other than those specified u/s 78 of the Companies Act, 1956; hence, the receipt of share premium partakes the character of revenue receipt taxable as income.

Aggrieved, the assessee preferred an appeal to the CIT(A), who upheld the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the addition had been made by the A.O. u/s 56(1) and hence what is to be adjudicated is limited and confined to the fact as to whether receipt of share premium per se could be treated as revenue receipt so as to make it taxable u/s 56(1).

It held that receipt of share premium per se cannot be treated as income or revenue receipt. In order to make a particular receipt taxable within the ambit of section 56(1), the receipt should be in the nature of income as defined in section 2(24). Share premium received by the company admittedly forms part of share capital and shareholders’ funds of the assessee company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as revenue receipt and consequently be treated as income u/s 56(1).

The Tribunal noted that the Co-ordinate Bench of the Tribunal in the case of Credit Suisse Business Analysis (India) (P) Ltd. vs. ACIT [72 taxmann.com 131 (Mum-Trib)] has addressed the very same issue and decided in favour of the assessee. This order was the subject matter of challenge by the Revenue before the High Court and the question of law was not admitted by the High Court on the addition made u/s 56(1). A similar view has been taken by the Tribunal in the case of Green Infra Ltd. vs. ITO [38 taxmann.com 253].

The Tribunal dismissed in limine the observation made by the A.O. in his order that receipt of premium was akin to a gift and hence taxable u/s 56(1). It held that receipt of share capital and share premium is normal in case of a limited company and the same by no stretch of imagination can be equated with a gift. Moreover, a gift can be received only by individuals or HUFs and not by a company.

The Tribunal held that the case of Cornerstone Property Investment Pvt. Ltd. vs. ITO [ITA No. 665/Bang/2017 dated 9th February, 2018], on which reliance was placed by the Revenue, is distinguishable on facts as in that case addition had been made u/s 68 by doubting the genuineness of the parties from whom share premium had been received.

The ground of appeal filed by the assessee was allowed.