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Exemption under section 10(26) is available to the individual members of the Scheduled Tribe and this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act.

7 M/s Hotel Centre Point, Shillong & Another vs. ITO

ITA Nos.: 348 to 350 / Gty / 2018

A.Y.s: 2013–14 to 2015–16

Date of Order: 19^th March 2024

Section 10(26)

[Bench of 3 members]

Exemption under section 10(26) is available to the individual members of the Scheduled Tribe and this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act.

FACTS

The assessee-partnership firm was running a hotel business in Shillong. It consisted of two partners who were brothers and belonged to the Khasi tribe, a Scheduled Tribe in the State of Meghalaya, and thus, were entitled to exemption under section 10(26) in their individual capacity.

Assessee claimed before AO that since a partnership firm in itself is not a separate juridical person and it is only a collective or compendious name for all of its partners having no independent existence without them, and since the partners of the assessee-firm were entitled to exemption under section 10(26), the same exemption was available to a partnership firm formed by such partners. It also relied on the decision of the Guwahati High Court in CIT v. Mahari & Sons, (1992) 195 ITR 630 (Gau).

The AO did not agree with the assessee and observed that the exemption under section 10(26) was available to individual members of the recognized Scheduled Tribes and not to a partnership firm which is a separate entity under the Income Tax Act.

CIT(A) upheld the order of the Assessing Officer (AO). Division Bench of the Tribunal vide its order dated 13^th September, 2019 upheld the order of the CIT(A).

On a further appeal, Meghalaya High Court vide its judgment dated 06^th July, 2023 set aside the order of the Tribunal and remanded the matter back to the Tribunal, with a request to the President of the Tribunal to constitute a larger bench.

In view of the directions of Meghalaya High Court, a larger bench of the Tribunal (3 members) proceeded to decide the issues afresh.

HELD

The Tribunal observed as follows-

Under the Income-tax Act, a partnership firm is a separate and distinct “person” assessable to Income Tax. There are separate provisions relating to the rate of income tax, deduction, allowances etc. in relation to a firm as compared to an individual. The benefits in the shape of deductions or exemptions available to an individual are not transferrable or inter-changeable to the firm nor vice versa. The firm in general law may not be treated as a separate juristic person, however, under the Income-tax Act, it is assessable as a separate and distinct juristic person. The Income-tax Act is a special legislation, therefore, the interpretation given in general law cannot be imported when the special law defines the “firm” as a separate person assessable to income tax;

When the relevant provisions of the Partnership Act, 1932 are read together with the relevant provisions of the Income Tax Act and the Code of Civil Procedure, 1908, it leaves no doubt that for the purpose of the Income Tax Act, a partnership firm is a separate assessable legal entity which can sue or be sued in its own name,can hold properties, and is subjected to certain restrictions for want of non-registration. Merely because the liability of the partners is unlimited or to say that the rights against the firm can be enforced against the individual partners also, is not enough to hold that the partnership is not a distinct entity from its individual members under the Income-tax Act, especially when in the definition of “person” under the Income-tax Act, corporate and non-corporate, juridical and non-juridical persons, have been included as separate assessable entities;

Even in the case of a partnership Firm having partners of a Khasi family only, the mother or wife, as the case may be, being the head named “Kur” would not have any dominant position. All the partners, subject to the terms of the contract between them, will have equal status and rights inter se and even equal duties and liabilities towards the firm. The profits of the partnership firm are shared as per the agreement/capital contributed by the partners. Neither the capita nor the profits of the firm can be held to be the joint property of the family;

The ratio decidendi in CIT vs. Mahari & Sons (supra) in the context of a ‘Khasi family’ would not be applicable in the case of a partnership firm, though consisting solely of partners, who in their individual capacity are entitled to exemption under section10(26);

In a partnership, the relation between the partners is purely contractual and no obligation arises out of the family status or relationship, inter se of the partners;

Though it is true, as held in various decisions of the Supreme Court, that the beneficial and promotional exemption provision should be given liberal interpretation; however, liberal interpretation does not mean that the benefit of such exemption provision could be extended to bypass the express provisions of the fiscal law, which have to be construed strictly;

The advantages and disadvantages conferred under the Income-tax Act on separate classes of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person under the Act, even after liberal interpretation as it may defeat the mechanism and process provided under the Income Tax Act for the assessment of different class / category of persons.

BCAJ Admin

The Tribunal has the power to condone the delay in filing the application for final approval under clause (iii) of the first proviso to section80G (5)

6 Swachh Vapi Mission Trust vs. CIT(Exemption)

ITA No.:583 / Srt / 2023

Date of Order: 11^th March 2024

Section 80G

The Tribunal has the power to condone the delay in filing the application for final approval under clause (iii) of the first proviso to section80G (5)

FACTS

The assessee trust was formed on 15^th March, 2021. The assessee received donations / other income of ₹40,401 and spent formation expenses (advocate fees) and other general expenses in FY 2021–22. However, it entered into a service agreement in furtherance of its objects only on 7^th November, 2022.

It was granted provisional approval under section 80G on 6^th April, 2022 under clause (iv) of the first proviso to section 80G(5) for the period commencing from 6^th April, 2022 to AY 2025–26.

An application for final approval under section 80G under clause (iii) of first proviso to section 80G (5) (which requires an assessee to file the application for final approval at least six months prior to expiry of period of the provisional approval or within six months of commencements of its activities, whichever is earlier) was filed by the assessee in Form No.10AB on 2^nd December, 2022.

CIT(E), vide his order dated 28^th June, 2023, rejectedthe application dated 2^nd December, 2022 on the ground that the activities of the assessee had commenced long back and therefore, it was required to file the said application on or before the extended deadline of 30^th September, 2022 allowed by CBDT vide Circular No.8/2022 dated 31^st March, 2022.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The Tribunal agreed with the findings of CIT(E) in as much as since the application was filed beyond 30^th September, 2022, there was a delay in filing the application. However, following the order of co-ordinate bench in Vananchal Kelavani Trust vs. CIT(E), ITA No.728/SRT/2023 (order dated 09^th January, 2024), it held that such delay can be condoned by the Tribunal. Accordingly, the Tribunal condoned the delay in filing the said application under section 80G and remitted the matter back to CIT(E) to adjudicate the issue afresh on merits.

BCAJ Admin

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

68 Tapi JWIL JV vs. Income-tax Officer

[2023] 108 ITR(T) 27 (Delhi – Trib.)

ITA NO. 6722 (DELHI) OF 2018

A.Y.: 2014-15

Date of Order: 16^th October, 2023

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

FACTS

M/s TAPI Prestressed Products Ltd. (‘TPPL’) and M/s JITF Water Infrastructure Ltd. (‘JWIL’) had entered into an agreement to form a Joint Venture (JV) with the specific purpose of bidding for construction of 318 MLD 70 MGD Sewage Pumping Station etc. on design, build and operate basis. The contract was awarded by Delhi Jal Board to the assessee JV. TPPL had executed the work and raised bills for ₹15,02,04,381/- to the assessee JV. The assessee JV had raised bills for ₹15,52,33,963/- to Delhi Jal Board. The assessee JV had filed its ITR declaring total income of ₹1,75,600/-.

The AO had passed the assessment order u/s 143(3) in the status of AOP, determining the total income at ₹1,20,77,763/- while making disallowance u/s 40A(2)(b) at ₹1,18,92,163/-. AO held that the assessee JV had suppressed its profit by making excessive payment to TPPL. To work out the amount to be disallowed u/s 40A(2)(b), the AO had applied the net profit rate of 8% on the Sub-Contract Expenses (net) of ₹14,86,52,038/-, and thus arrived at a figure of ₹1,18,92,163/-.

On appeal the CIT(A) held that profit in the hands of the assessee JV should also be calculated by applying a rate of 3.78 per cent and worked out the total income of the assessee JV at ₹ 56,19,047.

Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the AO never alleged nor enquired into the issues nor:

i. recorded his finding that the books of account were not correct and complete

ii. doubted the genuineness of the expenses incurred by the assessee JV

iii. brought on record any material to prove that the expenses incurred by the assessee JV were excessive or unreasonable having regard to the fair market value; and

iv. recorded his finding that he was rejecting the books of account

The ITAT observed that the provisions of section 40A(2)(b) are applicable to the expenses which are considered to be excessive or unreasonable, having regard to the fair market value of the goods / services or facilities for which the payments are made. The AO had made disallowance u/s 40A(2)(b), by opining that the assessee JV should have earned income from sub-contracting.

The ITAT held that section 40A(2)(b) had no application to the income aspect of the assessee JV. The AO had not brought any comparable figures to disallow the expenditure, moreover with the structuring of the JV, provisions of Section 40A(2)(b) were not attracted.

Hence, the ITAT held that the AO had fallen into error in determining the profit @ 8 per cent and also invoking the provisions of Section 40A(2)(b) and the CIT(A) had also erred in determining the profit of the assessee @ 3.78 per cent equal to the profit of one of the parties to the JV.

In the result, the appeal of the assessee was allowed.

BCAJ Admin

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

67 Montu Shallu Knitwears vs. DCIT

[2024] 109 ITR(T) 1 (Chd – Trib.)

ITA NO. 21 (CHD) OF 2023

A.Y.: 2019-20

Date of Order: 1^st December, 2023

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

FACTS

The assessee is a partnership firm engaged in the business of manufacturing of wearing apparels. A survey action u/s 133A was carried out at the business premises of the assessee on 29.08.2018. During the course of the survey, certain discrepancies were encountered in physical verification of stock and in order to buy peace of mind, the assessee had surrendered an amount of ₹50,00,000/- as additional business income for the FY 2018-19. The assessee had credited said amount of ₹50,00,000/- in its profit & loss account for the year ending 31^st March, 2019 and the assessee had paid tax at normal rates on such surrendered amount in its Return of Income filed on 30^th September, 2019.

The assessee’s case was selected for scrutiny and notice u/s 143(2) was issued on 29^th September, 2020. The case of the assessee was finalised and assessment order dated 28^th September, 2021 was passed, wherein the AO had assessed total income at ₹1,90,22,390/- after making additions of ₹50,00,000/- on account of disallowance u/s 37 of the Act and applied provisions of section 115BBE of the Act on alleged application of Section 69B of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) in its order deleted the disallowance of ₹50,00,000/- u/s 37 of the Act and upheld the application of Section 69B r.w.s. 115BBE on account of the amount surrendered by the assessee during the course of survey proceedings.

Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that it is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.

The ITAT observed that the stock physically found had been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the assessee had been offered to tax.

The ITAT held that the Revenue had not pointed out that the excess stock had any nexus with any other receipts other than the business being carried on by the assessee. There was thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found was clearly in the nature of business income.

The ITAT held that no physical distinction in unaccounted stock was found by the Revenue. The difference in stock so found out by the authorities had no independent identity and was part and parcel of the entire stock in the normal course of business. It could not be said that there was an undisclosed asset which existed independently. Thus, what was not declared to the department was receipt from business and not any investment as it could not be correlated with any specific asset and the difference should be treated as business income. Therefore, the income of ₹50,00,000/- surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same had to be assessed to tax under the head “business income”. In the absence of deeming provisions, the question of application of section 115BBE did not arise and normal tax rate was applied.

In the result, the appeal of the assessee was allowed.

BCAJ Admin

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

66 ApeejaySurrendra Management Services Pvt. Ltd. vs. DCIT

ITA Nos.: 987 & 988 / Kol/ 2023

A.Y.s: 2013-14 and 2014-15

Date of Order: 19^th February, 2024

Section 2(22)(e)

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

FACTS

The assessee-company received a sum of ₹5.50 crores as loans / advances from another group company, “APL”.

The assessee was not a registered shareholder of the lender company, APL. However, there was a common shareholder, “KSWPL”, who held substantial interest in both the assessee (57.86 per cent shares) and the lender company (99.96 per cent shares). The lender company had sufficient accumulated profits for distribution in its books.

The Assessing Officer treated the loan / advance as deemed dividend under section 2(22)(e) in the hands of the assessee.

Aggrieved, assessee filed an appeal before CIT(A) who confirmed the addition.

The assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) Considering the provisions of the Companies Act, 2013 and the legislative intent of section 2(22)(e), the beneficial ownership was with KSWPL under whose substantial control, loan from APL was granted to the concern, i.e. assessee. The assessee could not influence the decision making of company KSWPL. Similarly, APL could not influence the decision making process of KSWPL. In both the companies, the controlling interest (substantial interest) was held by KSWPL. It is, in fact, KSWPL who was in a position to influence the decision making process of the two companies. Therefore, the deeming fiction of section 2(22)(e) could be applied only in the hands of KSWPL who was the beneficial owner of shares in both, the lender and the receiving company.

(b) A loan or advance received by assessee (a concern) was not per se in the nature of income. It was, in fact, deemed accrual of income under section 5(1)(b) in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who was a non- shareholder.

(c) Even going by the observations of the Supreme Court in CIT vs. National Travel Services (2018) 89 taxmann.com 332 (SC), the beneficial shareholder was KSWPL under whose controlling interest and influence APL had given loan / advance to the assessee. Accordingly, the deeming provisions of section 2(22)(e) were attracted on KSWPL.

Accordingly, the Tribunal held that no addition under section 2(22)(e) can be made in the hands of the assessee-company.

BCAJ Admin

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

65 DCIT vs. National Fisheries Development Board

ITA No.: 244 / Hyd / 2023

A.Y.: 2015-16

Date of Order: 13^th February, 2024

Section 11, 13(1)(d)

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

FACTS

The assessee was a Board established by the Central Government to act as a nodal agency in developing activities of fisheries among various states in the country.

The major source of receipt of the assessee was grants from the Central Government, and the outflow was release of grants to the State Governments.

In accordance with the accounting procedure and directions issued by the Government of India, the assessee followed the following treatment in its books of accounts-

(a) When the grants from Central Government were received, the same were kept on the liability side;

(b) When the grants were paid to the State Governments for implementing the projects, the same were kept in advances account;

(c) When the amount sanctioned to the State Governments was spent by the implementing agencies / State Governments, utilisation certificate was submitted to the Central Government through the assessee. Such amount was treated as expenditure in the Income & Expenditure Account of the assessee.

(d) The amount so spent (including the administrative expenses of the assessee) was recognised as income in the Income & Expenditure Account.

For assessment year 2015-16, assessee filed the return of income declaring NIL income by claiming exemption under section 11 on the basis of the accounting principles followed by the assessee.

The Assessing Officer did not accept the treatmentof the assessee and contended that the assesse had not utilised 85 per cent of the income, being the total grants-in-aid / refunds received during the year and therefore, the shortfall in application below 85 per cent was liable to be taxed. He also contended thatthe assessee had invested ₹1.55 crores in equity shares in one Sasoon Dock Matsya Sahakara Samstha Ltd., and continued to hold the investment so made, and thereby contravened section 13(1)(d) read with section 11(5).

CIT(A) allowed the appeal of the assessee observing that the treatment of the assessee was based on commercial principles of accountancy and made in compliance with the regulations of the Government of India.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows-

(a) The assessee had been treating only such part of grants that were utilized by the implementing agencies as income and only such part of the funds released to the implementing agencies in respect of which the utilisation certificates were received as expenditure. This method of accounting followed by the assessee in treating the income and expenditure irrespective of the year of receipt of grant had not been appreciated or referred to by the Assessing Officer so as to find out any defects or reasons to reject the same.

(b) Given the position of the assessee in respect of the funds vis-à-vis the implementing agencies, it wasn’t possible to treat all the grants as receipts and all the allocations as expenditure. Such an approach was not at all scientific, because there was no income element on grant of funds by the Central Government, nor any expenditure incurred merely by allocation. Therefore, there was no illegality or irregularity in the method of accountancy followed by the assessee in treating the funds utilised by the implementing agencies as income and the funds covered by the utilisation certificate as expenditure.

(c) If the contention of the tax department was accepted, then as against the actual grants during the current year to the tune of ₹ 146.40 crores, the assessee had spent a sum of ₹178.13 crores which included the expenditure on account of the grants received for the current year as against the earlier year, which was more than 85 per cent of the grants received. Further, such treatment disturbed the method of accounting consistently followed by the assessee.

(d) Vis-à-vis the contention under section 13(1)(d),there was no contradiction to the plea taken by the assessee that such an investment was made in Sasoon Dock Matsya Sahakara Samstha Ltd., in the financial year 2008-09 and not during the current year and never in the earlier years any objection on that aspect was taken. It was also not in dispute that registration under section 12AA granted by the authorities in favour of assessee was continuing. In these circumstances, the ground raised by the Assessing Officer was liable to be rejected.

Accordingly, the appeal of the revenue was dismissed.

BCAJ Admin

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record. In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

64 Bhavnaben K Punjani vs. PCIT

ITA No.: 138 / Rjt / 2017

A.Y.: 2007-08

Date of Order: 15^th February, 2024

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record.

In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

FACTS

During the financial year 2006-07, the assessee sold certain immovable property purportedly for less than stamp value.

The assessee passed away on 15^th October, 2013. However, no intimation regarding the demise wasgiven to the tax department by the legal heirs of the assessee.

The Assessing Officer initiated reassessment proceedings under section 147 seeking to adopt stamp value of the property under section 50C; accordingly, he passed best judgment assessment under section 143(3) / 144 read with section 147 vide order dated 23^rd February, 2015 in the name of the assessee, that is, after the assessee expired.

PCIT passed an order under section 263 dated 24^th March, 2017 revising the said assessment order on the ground that while framing the assessment order, the Assessing Officer did not ascertain the cost and year of acquisition of the property and therefore, the order was made without proper inquiry and investigation.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The Tribunal observed that-

(a) in absence of any specific statutory provision under the Income Tax Act which requires the legal heirs to intimate the income tax department about the death of the assessee, the assessment order cannot be held to be valid in the eyes of law only for the reason that the legal heirs of the deceased assessee had not informed the income tax department about the death of the assessee.

(b) Since no assessment can be framed in the name of a person who has since expired, any assessment order framed in the name of a deceased person without bringing the legal heirs of such person on record, is invalid in the eyes of law.

Accordingly, since the original assessment order was not valid in law, the Tribunal also set aside the order of PCIT passed under section 263.

BCAJ Admin

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

63 Khadi Grammodhyog Prathisthan vs. CPC

[2024] 108 ITR(T) 94 (Jodhpur – Trib.)

ITA NO.: 87 (JODH.) OF 2023

A.Y.: 2019-20

Date of Order: 31st July, 2023

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

FACTS

The assessee filed its original return of income for the assessment year 2019–20 on 30^th October, 2019. Thereafter, the assessee revised the return on 15^th January, 2020, which was considered by the CPC as the original return and accordingly, it denied the current year loss of ₹3,51,811. Aggrieved by the intimation, the assessee filed an appeal before the CIT(A).

The CIT(A) considered the revised return filed on15th January, 2020 as the original return and that it was filed after the due date u/s 139(1) of the Act which was 31st October, 2019. The CIT(A) sustained the intimation u/s 143(1) and denied the carry forward of current-year losses. The assessee then filed an appeal before the ITAT.

HELD

The ITAT observed that the apple of discord in this appeal was that the assessee had filed its original return of income on 30^th October, 2019 which was within the extended due date of filing the return of income u/s 139(1). Thereafter, the assessee revised the return of income on 15th January, 2020 which the CPC considered as an original return filed beyond the due date u/s 139(1) and thereby denied the current year loss of ₹3,51,811.

The ITAT held that the return filed on 15^th January, 2020 was not the original return but was a revised one and therefore, the denial of loss was not correct based on the set of facts and evidence available on records. The appeal of the assessee was allowed.

BCAJ Admin

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

62 Santosh Jain vs. ITO

[2023] 108 ITR(T) 636 (Raipur – Trib.)

ITA NO.: 143, 145 & 147 (RPR) OF 2023

A.Y.: 1993–94 to 1995–96

Date of Order: 24th July 2023

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

FACTS

The AO imposed the penalties upon the assessee u/s 271A for failure to maintain his books of account and other documents as required u/s 44AA and u/s 271B for failure to get his books of account audited as per provisions of section 44AB.

The assessee filed an appeal before the CIT(A) against the penalty order u/s 271B dated 27th July, 2015 on the averment that as the assessee had been penalized for failure on his part to maintain books of account u/s 271A, the AO was divested from further saddling him with a penalty for getting such non-existing books of accounts audited as per the mandate of law. The CIT(A) upheld the view taken by the AO. Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the judgment of the Hon’ble High Court of Allahabad in the case of S.K Gupta & Co. [2010] 322 ITR 86 wherein it was observed that the requirement of getting the books of account audited could arise only where the books of account are maintained. It was further observed that if for some reason the assessee had not maintained books of account, then the appropriate provision under which penalty proceedings could be initiated was section 271A of the Act. Accordingly, the ITAT allowed the assessee’s appeal and deleted the penalty levied u/s 271B.

BCAJ Admin

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

61 ACIT vs. Evermore Stock Brokers (P.) Ltd

[2023] 108 ITR(T) 13 (Delhi – Trib.)

ITA NO.: 5152 (DELHI) OF 2018

A.Y.: 2015–16

Date of Order: 19th September, 2023

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

FACTS

The assessee was engaged in investments and financial activities and had filed its return of income on 29th September, 2015 declaring total income of ₹96,19,580 for AY 2015–16. The case was selected for limited scrutiny to verify the genuineness of the amount received of ₹47,72,95,676 from M/s. Pioneer Fincon Services Pvt. Ltd. [PFSPL].

The assessee had asserted that the funds were advanced to PFSPL with a view to earn interest on idle funds, rather than obtaining loans and the credit entries appearing in the ledger account of the assessee denote a mere return of pre-existing loans advanced. In the process of such advance of its funds, the assessee also earned the interest of ₹2,39,640 from transactions carried with PFSPL.

To discharge its onus to prove the genuineness of the financial transactions, the assessee submitted the following documents:

i. Assessee’s books of accounts

ii. ledger account of PFSPL as appearing in its books

iii. financial statement of PFSPL

iv. extract of bank statements of both parties to the transaction

The AO, however, alleged that the financial statement of PFSPL does not inspire much confidence in its creditworthiness. The AO issued the summons u/s 131 in the name of the Principal Officer of PFSPL. Shri Sagar Ramdas Bomble attended and submitted that the entity namely PFSPL has been stricken off from the records of the Registrar of Companies and recorded a statement on oath. The AO ultimately concluded that PFSPL is a mere paper company which was used only to route money to the assessee. The AO accordingly considered an amount of R47,72,95,676 as unexplained credit and added the same to the total income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) observed that the assessee was never required to explain the sources of funds in the bank account of PFSPL. The CIT(A) observed from the recorded statement of Shri Sagar Ramdas Bomble that PFSPL took a loan from the assessee and repaid the same to the assessee within the financial year along with Interest. Receiving interest by the assessee from PFSPL was an indication that the loans were given by the assessee and not vice versa. The CIT(A) was satisfied that the identity of PFSPL was established as it was regularly filing ROI, genuineness of the transactions stands proved by the fact that all transactions were done through banking channels, the account was squared up during the same year and PFSPL paid interest on such transactions to the assessee while deducting tax at source and creditworthiness cannot be judged only from the site of its balance sheet at the year-end. The CIT(A) allowed the appeal and deleted the addition.

Aggrieved by the order, the revenue filed an appeal before the ITAT.

HELD

The ITAT observed that the AO failed to understandthat firstly, the credits represented the repayment of the loan advanced by the assessee and secondly, the outstanding at any point in time was only ₹2.06 crore. The AO had made high-pitched additions onmisplaced assumptions of facts. The transactions were carried out through a banking channel and both the assessee as well as the borrower PFSPL, were regularly assessed to tax. The so-called loans were ultimately repaid by PFSPL and there was no outstanding at the end of the year.

The ITAT observed that the order of the CIT(A) clearly brings out the fact that PFSPL was not a stranger entity to the assessee. PFSPL had availed loans from the assessee on commercial considerations, and the interest paid had been subjected to deduction of tax at source. The presence of the Accountant and CFO of the erstwhile PFSPL reflected cooperation of the borrower with the Revenue Authorities. The ITAT also observed that the repayment and squaring up of loans was an overriding point of significance. The factum of repayment thus also validated the stance of bona fide.

The ITAT held that the facts in the present case thus spoke for itself and there appeared no need to amplify the findings of CIT(A) and the reasoning advanced on behalf of revenue lacked merits. Thus, the appeal of the revenue was dismissed.

BCAJ Admin

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

60 Tata Sons Ltd. vs. CIT

ITA No.: 3468/Mum/2016

A.Y.: 2009-10

Date of Order: 23^rd January, 2024

Section: 2(47), section 48 and section 263

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

FACTS

The assessee-company owned 288,13,17,286 equity shares in TTSL acquired at various points of time, which were held as capital assets.

Since TTSL had incurred substantial loss in the course of its business for providing telecom services, a large part of the paid-up share capital of TTSL was utilized so as to finance / bear the said loss.

In view of such losses, a scheme of arrangement and restructuring between TTSL and its shareholders was entered under sections 100 to 103 of the Companies Act, 1956, which was approved by the High Court.

As per the scheme—

— the equity shares of TTSL of ₹10 each from 634,71,52,316 shares was reduced to 317,35,76,158 shares.

— no consideration was payable to the shareholders in respect of the shares which were to be cancelled.

Consequently, the shareholding of the assessee was also reduced to half.

The assessee claimed such a reduction of capital as long-term capital loss, which was set off against other long-term capital gain.

During the course of assessment proceedings under section 143(3), AO specifically raised the issue relating to the assessee’s claim for allowability of long term capital loss. However, after examining the submissions of the assessee, he allowed such loss.

PCIT initiated revision proceedings under section 263 and held that since no consideration was received by or accrued to the assessee by way of reduction of capital, the computation mechanism provided under section 48 fails and consequently, long term capital loss cannot be worked out.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) There can be no dispute that there was a loss on the capital account by way of a reduction of capital invested and therefore any loss on the capital account, is a capital loss and not a notional loss.

(b) If the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares, it amounts to the transfer of shares within the meaning of section 2(47) and therefore, computation of capital gains has to be made.

(c) Following the observations of Gujarat High Court in CIT vs. JaykrishnaHarivallabhdas,(1997) 231 ITR 108 (Guj), it held that even when the assessee has not received any consideration on reduction of capital its investment has reduced resulting into capital loss, while computing the capital gain, such capital loss has to be allowed or set-off against any other capital gain.

Accordingly, the Tribunal held that AO had rightly allowed the computation of long-term capital loss to be set off against the capital gain and consequently, it set aside the order of PCIT under section 263.

BCAJ Admin

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes. Section 54F does not allow pro-rata exemption.

59 ACIT vs. Shri Iqbal Ali Khan

ITA No.: 505 / Hyd / 2020

A.Y.: 2013-14

Date of Order: 12th January, 2024

Section: 54F

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes.

Section 54F does not allow pro-rata exemption.

FACTS

The assessee sold two properties for a total consideration of ₹8.81 crores, resulting in capital gain of ₹7.21 crores.

He claimed exemption under section 54F to the extent of ₹5.47 crores, by constructing a building consisting of ground floor plus three floors in Hyderabad.

The assessee had not taken any municipal permission before starting the construction.

However, subsequently, in the application forregularization dated 31st December, 2015 filed with the municipal authorities, it was stated that the property consisted of a mosque, orphanage school and staff quarters.

The Assessing Officer disallowed the exemption under section 54F.

On appeal, by relying on the remand report and verification / enquiry report of the inspector, CIT(A) held partly in favour of the assessee by allowing pro-rata exemption under section 54F in respect of first, second and third floors.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal held that –

(a) the property was predominantly being used for religious purposes, namely, mosque, orphanage school and staff quarters and therefore, it did not fit within the definition of “residential house” as contemplated under section 54F.

(b) Further, there was no evidence to show that the assessee had invested in construction of a residential house and therefore, he was not entitled to any relief under section 54F.

(c) The literal reading of section 54F makes it abundantly clear that there was no scope of grant of pro-rata deduction, more particularly when no provision of residence can be made in a mosque.

Accordingly, the grounds of appeal of the revenue were allowed and the order of the Assessing Officer was upheld by the Tribunal.

BCAJ Admin

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

58 K.P. Muhammed Ali vs. ITO

ITA No.: 1008 / Coch / 2022

A.Y.: 2012-13

Date of Order: 12th January, 2024

Section: 2(47)(v) / (vi)

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

FACTS

On 27^th June, 2011, the assessee and a developer entered into a Joint Development Agreement (JDA) and a General Power of Attorney (GPA) in respect of a piece of land in Kasaba village for the construction of a residential complex. Both JDA and GPA were not registered.

Under the said agreements, the assessee transferred his rights into 62 per cent of the land in lieu of 38 per cent of the developed area to be constructed over a period of time.

The construction was completed only in 2017. Thereafter, as and when the assessee executed assignment deeds in favour of the various parties who purchased the assessee’s share of apartments, he had declared capital gains in his returns of income for such year(s).

The question before the Tribunal was whether the arrangement can be regarded as transfer under section 2(47) exigible for capital gain in the year of execution of JDA / GPA.

HELD

The Tribunal observed that-

(a) Though the assessee fulfilled the other conditions of section 53A of Transfer of Property Act, 1882 as propounded in Chaturbhuj Dwarkadas Kapadia vs. CIT, (2003) 260 ITR 491 (Bom), with effect from 24th September, 2001, section 53A does not recognize unregistered contracts. Hence, section 2(47)(v) would not apply to the facts of the assessee wherein both the JDA and GPA were unregistered.

(b) However, the constraining factor of registration of a contract would not be relevant in the case of section 2(47)(vi) which applies to any agreement or arrangement or a transaction in any other manner which has effect of transferring or enabling the enjoyment of immovable property, as explained in P. George Jacob vs. ITO (in ITA No. 558/Coch/2022, dated 2.3.2023).

(c) It is well-settled that income is to be taxed in the hands of the right person and for the right year, and it is being offered to tax in the hands of another person or year would be of no relevance in law.

The Tribunal held that the transaction between the assessee and developer under JDA / GPA constituted a transfer under section 2(47)(vi) and was liable to capital gain in the year of entering into the agreements.

With regard to the quantification of capital gain, the matter was set aside to the file of the Assessing Officer with an observation that since land in question was acquired prior to 1st April, 2001, fair market value on that date would be considered cost of acquisition (and further indexed under section 48); and sale consideration would be compared to stamp value on transfer date under section 50C.

BCAJ Admin

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii)

57 M/s. Ariff & Company vs. ACIT

ITA No.: 140 / Chny/ 2022

A.Y.: 2007–08

Date of Order: 15th December, 2023

Section: 36(1)(iii)

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii).

FACTS

Mr R along with his wife and three children constituted the assessee-partnership firm in 1974, which carried on business of running a hotel called “Hotel President”.

Four partners decided to retire from the firm because they were migrating to the USA, leaving the management completely in the hands of Mr A.

Accordingly, after negotiations, the firm was reconstituted in 2006 with the retirement of four partners and the induction of a new partner, Mrs A.

Before reconstitution of the firm, the assets and liabilities of the firm were revalued and credited in the capital account of partners, and the capital account of the outgoing partners was treated as debt of the partnership firm.

To settle outgoing partners’ capital account, the firm borrowed a loan from Punjab National Bank and paid interest thereon. It had also taken capital contribution from incoming partner, Mrs A and paid interest to her in accordance with section 40(b).

The AO disallowed the interest paid by the assessee-firm to the capital account of partners and on loan borrowed from the Bank on the ground that payment to outgoing partners was nothing but a family settlement.

The disallowance was upheld by CIT(A).

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) interest paid on capital account of partners partakes the nature of funds borrowed for the purpose of business of the assessee, and consequently, interest paid thereon is allowable under section 36(1)(iii);

(b) any loan borrowed for the purpose of settling outgoing partners’ capital account which has been treated as debt in the books of accounts of the firm assumes the character of loan borrowed for the purpose of business of the assessee, and consequently, interest paid on borrowed capital account is allowable under section 36(1)(iii);

(c) when the assets were owned by the partnership firm, any settlement of such assets to the outgoing partners cannot be considered as settlement of family property, just because the partners were family members.

(d) merely because the assets of the firm had been revalued before reconstitution of partnership firm (to ascertain the fair market value of assets of the firm and shares of the outgoing partners), it cannot be a reason for the AO to treat the settlement of firm properties among partners as settlement of family property.

In the result, the appeal filed by the assessee was allowed.

BCAJ Admin

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component

56 Tata Sons Pvt. Ltd. vs. DCIT

ITA No.: 2362 / Mum / 2023

A.Y.: 1993–94

Date of Order: 6th December, 2023

Section: 244A

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component.

FACTS

The return of income of the assessee for A.Y. 1993–94 was filed on 31st December, 1993, returning NIL income.

The return was subject to assessment / re-assessment and rectification over a period of time.

Tribunal, through orders dated 4th February, 2015, and 1st January, 2016, gave relief to the assessee.

The AO passed an order giving effect (OGE) dated 8th March, 2016, granting the refund of ₹30,45,62,594, and the assessee received the said refund on 18th August, 2022.

Aggrieved by the short credit of interest on refund, the assessee filed an appeal before CIT(A) / NFAC.

The CIT(A) / NFAC held against the assessee.

Aggrieved, the assessee filed an appeal before the Tribunal, alleging that:

(a) The AO had incorrectly adjusted the earlier refunds, resulting in a short credit of interest of ₹9,93,09,258;

(b) The AO had not calculated the interest for the interim period from when OGE was passed, that is, 8th March, 2016, and the actual receipt of refund, that is, 18th August, 2022, resulting in short credit of interest of ₹11,27,21,927.

HELD

Dealing with each of the grievances, the Tribunal held as follows:

(a) The amount of interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, shall be adjusted towards the tax component; accordingly, the assessee would be entitled for interest on the unpaid refunds in accordance with the principle laid out in Grasim Industries Ltd vs. DCIT (2021) 123 taxmann.com 312(Mum);

(b) In light of the issue being squarely covered in favour of the assessee in CIT vs. Pfizer Limited (1991) 191 ITR 626 (Bom), City Bank NA Mumbai vs. CIT, ITA No. 6 of 2001 and CIT vs. K.E.C International in ITA No. 1038 of 2000 (Bom HC), the assessee was justified in seeking interest under section 244A up to the date of receipt of the refund order, i.e. 18th August, 2022;

(c) Applying the ratio laid down by coordinate bench in ACIT vs. Bharat Petroleum Corporation Ltd, ITA No. 5231 to 5233 of 2019, section 244A(1A) would be applicable in assessee’s case from 1st June, 2016, till the date of actual receipt of refund.

Accordingly, the Tribunal directed the AO to recompute the interest on refund in accordance with the order and as per law.

BCAJ Admin

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022

55 Amala Jyothi Vidya Kendra Trust vs. PCIT

ITA Nos.: 458 / Bang / 2023

A.Y.: 2021–22

Date of Order: 1st December, 2023

Section: 12AB(4)

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022.

FACTS

The assessee-trust was registered vide trust deed dated 1st April, 2005.

It was registered under the erstwhile section 12AA. Due to the amended provisions with effect from 1st April, 2021, requiring re-registration, the assessee filed an application for registration under section 12A / 12AB, which was granted to it by DIT from A.Y. 2022–23 to A.Y. 2026–27.

On 28th December, 2021, a search was carried out under section 132 in the office premises of assessee-trust in Bangalore.

During the course of search, various incriminating materials were found which were confronted to the trustees and secretary of the assessee-trust, and it was found that they were using the funds of the trust for personal benefit.

Consequently, assessment proceedings were initiated by the AO for A.Y. 2021–22, calling for various details and confronting the evidence collected during the search.

Subsequently, vide letter dated 20th December, 2022, the AO sent a reference to PCIT for A.Y. 2021–22 communicating her satisfaction as per second proviso to section 143(3) of the Act that this was a fit case for cancellation of registration under section 12AB.

Accordingly, on 28th December, 2022, show cause notice was issued by the PCIT requiring the assessee-trust to explain as to why the registration granted to it should not be cancelled under section 12AB.

After considering the reply, the PCIT, invoking the amended provisions of section 12AB(4)(ii) [introduced by the Finance Act, 2022 w.e.f. 1st April, 2022], cancelled the registration granted to the assessee-trust w.e.f. A.Y. 2020–21 and that of subsequent years.

Aggrieved by this, the assessee-trust filed an appeal before the ITAT.

HELD

The Tribunal observed that:

(a) In income-tax matters, law to be applied is the law in force in the assessment year unless otherwise stated or implied. In the present case, the PCIT cancelled the registration granted under section 12AA/12AB w.e.f. previous year 2020–21 relevant to assessment year 2021–22 and therefore, the law as stated in the A.Y. 2021–22 is to be applied and not the law as stood in A.Y. 2022–23;

(b) No retrospective cancellation could be made under section 12AB(4)(ii) since it has not been provided or is seen to have explicitly provided to have a retrospective character or intended. Therefore, without a specific mention of the amended provisions to operate retrospectively, no cancellation for the earlier years could be made;

(c) Since the PCIT invoked section 12AB(4)(ii) which has been introduced by the Finance Act, 2022 w.e.f. 1st April, 2022, so as to cancel the registration with retrospective effect from A.Y. 2021–22, such order is bad in law and deserved to be quashed.

The Tribunal also noted that the same view has been taken by Mumbai ITAT in the case of Heard Foundation of India, ITA No.1524/Mum/2023 vide order dated 27th July, 2023.

In the result, the appeal of the assessee-trust was allowed.

BCAJ Admin

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable

54 Lalit Kumar Kalwar vs. Income-tax Officer

[2023] 106 ITR(T) 373 (Jaipur – Trib.)

ITA No.: 379 (JP) OF 2018

A.Y.: 2013–14

Date of Order: 30th May, 2023

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable.

FACTS

The assessee had sold shops and received actual sale consideration of ₹12 lakhs, which was less than the value accepted by the DLC of ₹20.78 lakhs. The assessee claimed long term capital gain (LTCG) at nil after seeking exemption under section 54F, contending that the entire actual sale consideration was invested in the purchase and construction of the residential house.

The Assessing Officer (AO) disallowed the claim of the assessee for the reason that the assessee had not deposited the sale consideration received on transfer of the property in capital gain account as per provisions of section 54F(4).

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT (A) also upheld the order of the AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

After analysing the provisions of S. 54F(1) of the Act, the ITAT found that in Explanation to S. 54F(1), the term “net consideration” means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. The meaning of full value of consideration in Explanation to S. 54F(1) was not to be governed by the meaning of words “full value of consideration” as mentioned in S. 50C.

The ITAT also held that the fiction under S. 50C of the Act is extended only to the aspect of computation of capital gains and the same does not extend to the charging section or the exemptions to the charging section. The legislature consciously intended to apply the fiction under S. 50C of the Act only to the expression used in S. 48 of the Act and not in any other place. The ITAT further observed that the cost of new asset was not less than the net consideration, and thus, the whole of the capital gains was not to be charged even if the capital gains had been computed by adopting the value adopted by stamp registration authority. The requirement of law is that net consideration is required to be appropriated towards the purchase of the new asset. Thus, deduction under S. 54F was clearly applicable.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper

53 Deepak Setia vs. Deputy Commissioner of Income-tax

[2023] 106 ITR(T) 125 (Amritsar – Trib.)ITA NO. 112 (ASR.) OF 2023

A.Y.: 2019–20

Date of Order: 17th June, 2023

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper.

FACTS

A survey was conducted on the assessee’s premises u/s 133A. The assessee surrendered the amount of ₹29 lakhs and offered it for taxation as business income. Subsequently, the case was selected for scrutiny and out of ₹29 lakhs, amount of ₹14.23 lakhs which was related to miscellaneous business income (MBI) was taken as income from an undisclosed source under section 69A, and tax was calculated as per section 115BBE at a special rate. The rest of the surrendered amount was taken as normal business income, and tax was calculated at normal rate.

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT(A) also upheld the order of the AO.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that during survey proceedings, the assessee had surrendered total income of ₹29 lakhs out of which amounted to ₹14.23 lakhs related to other discrepancies / MBI, which was treated as income from undisclosed source u/s 69A and tax thereon was calculated as per section 115BBE at special rate during assessment. The entire addition was certainly without forming proper basis for conversion of business income to non-business income. The revenue was not able to submit any evidence during assessment and appeal proceeding that the said income was not connected with the business income of the assessee or was accumulated from a non-recognising source.

The ITAT held that when all the incomes earned by the assessee were only from the business income of the assessee, there did not arise any question as to the application of provisions of section 69A by following the settled principle that “when there is no other / separate source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only”.

The ITAT had relied on the following Judicial precedents:

1. Harish Sharma vs. ITO [IT Appeal No. 327 (Chd.) of 2020, dated 11th May, 2021]

2. Daulatram Rawatmull vs. CIT [1967] 64 ITR 593 (Cal.)

3. Mansfield & Sons vs. CIT [1963] 48 ITR 254 (Cal.)

4. Sham Jewellers vs. Dy. CIT [IT Appeal No. 375 (Chd.) of 2022, dated 22nd August, 2022]

The ITAT held that the conversion of business income into other income and application of section 69A was bad and illegal and accordingly, levy of tax u/s 115BBE on the business income was liable to be quashed.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material

52 Arun Manohar Pathak vs. ACIT

[2023] 106 ITR(T) 14 (Mumbai – Trib.)

ITA NO.: 489 (MUM.) of 2023

A.Y.: 2017–18

Date of Order: 24th May, 2023

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was carrying on the milk distribution business. He deposited cash of a certain amount in his bank account during the demonetization period in old currency notes, i.e. specified bank notes (SBNs). The assessee submitted that he was a retailer of milk and the said cash deposits in SBNs were out of collection from sale of milk to persons during the demonetization period, and the same had been used to make payment towards purchase of milk to Gujarat Co-operative Milk Marketing Ltd. (GCMM) by way of demand drafts as reflected in the bank statement of the assessee. However, the Assessing Officer (AO) treated cash deposited in the bank during the demonetisation period in SBNs as unexplained and added the same under section 69A of the IT act.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) upheld the order of the AO on the grounds that the assessee was not able to show that he was entitled to claim benefit of Notification No. S.O. 3408(E), issued by the Ministry of Finance (Department of Economic Affairs), dated 8th November, 2016, as the assessee had not filed any material to establish that the assessee qualifies as a milk booth operator under authorisation of Central or State Government.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee had placed on record all the documents which supported the averments made by the assessee before the AO and CIT(A). The assessee had submitted the following documentary evidences to substantiate that he was carrying out milk distribution services and, therefore, was entitled to claim benefit of the notification:

1. Copy of License No. 11512018000623 issued by Government of Maharashtra.

2. Cash book, bank book and bank statement of the assessee.

3. Ledger Account of purchases made from GCMM.

Upon perusal of documents / details on record, the ITAT held that the assessee was able to substantiate the stand during the assessment proceedings, and the burden of proof was on the Revenue.

The ITAT observed that the CIT(A) had not dealt with the documents / details furnished by the assessee and failed to either carry out any inquiry / verification into purchase / sale of milk by the assessee to controvert the averments made by the assessee, or to point out any infirmity in the aforesaid documents / details.

The ITAT held that AO as well as CIT(A) were incorrect in holding that the assessee was not covered by the notification. Even if for the sake of arguments, it is believed that though the assessee was not covered by the aforesaid notification, the assessee had a bona fide belief that the assessee was entitled to the benefit of the notification, and therefore, permitted to receive SBNs, and that the assessee did accept SBNs as valid tender.

The ITAT held that the averments made by the assessee, supported by the documents furnished, went uncontroverted and, accordingly, deleted the addition made under section 69A of the act.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income

51 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017–18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income.

Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by section 270A(6)(a).

FACTS

The assessee filed its return of income declaring total income to be a loss of ₹72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had offered rental income of ₹29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013–14. However, in the instant year, the assessee had declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts are related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the AO assessed the rental income under the head ‘income from business’.

The AO assessed rental income under the head ‘business’ and consequently, the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for levy of penalty under section 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of ₹1,83,550 under section 270A of the Act.

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 observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct’”, there is merit in the contention of the assessee that levying of penalty is not automatic, and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised his discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head ‘income from house property’ and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub-section (6) of section 270A of the Act. The Tribunal noted that the Chennai bench of Tribunal has in the case of S Saroja [2023 (5) TMI 1262 – ITAT CHENNAI] held that a bonafide mistake committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement

50 Rekha Singh vs. ITO

ITA No. 2406/Mum/2023

A.Y.: 2015–16

Date of Order: 30th October, 2023

Section: 56(2)(vii)(b)

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement.

FACTS

The assessee, an individual, filed a return of income declaring therein a total income of ₹5,93,520 on 27th August, 2015. The case was subjected to limited scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has purchased an immovable property for a consideration of ₹84,15,300 as a co-owner jointly with her husband. The consideration was paid by both co-owners. The assessee was a co-owner for the property being 50 per cent share. The AO noticed that while the consideration was ₹84,15,300 whereas the value of property determined by the stamp valuation authority was ₹1,32,82,000. The AO was of the view that section 56(2)(vii)(b) was to be applied.

The assessee explained that as per the proviso to section 56(2)(vii)(b), the stamp duty value on the date of agreement may be taken for the purpose of this clause. It was explained that the date of agreement (letter of allotment) was 16th December, 2010, whereas the purchase deed was registered on 29th December, 2014, and the first payment of R1 lakh was paid through a banking channel on 18th October, 2010, by the husband of the assessee.

The AO did not agree with the submission of the assessee and since property was transferred for a consideration less than its stamp duty value, therefore, 50 per cent of the total difference was assessable as income in assessee’s hands.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the initial payment before date of registration was made only by the other co-owner, husband of the assessee, the assessee was not entitled to the benefit of the proviso. He, accordingly, confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

In the course of hearing before the Tribunal, on behalf of the assessee, it was submitted that the property was purchased by the assessee in the joint name of the assessee with her husband, and it is immaterial that the initial consideration was paid by the husband of the assessee who was other co-owner. Reliance was placed on the decision of the co-ordinate bench, Mumbai, in the case of Poonam Ramesh Shahjwanv. ITO(IT) 4(2)(1) A.Y. 2014–15 in ITA No. 2252/Mum/2019 and the decision of ITAT, Pune in the case of Sanjay Dattatrya Dapodikarv. ITO, Ward 6(2) [(2019) 107 taxmann.com 219 (Pune Trib.)].

The Tribunal having perused the decision of ITAT in the case of Poonam Ramesh Shahjwan (supra) wherein on the similar facts, the value of the flat was determined on the date of booking of flat after taking into consideration the payment made by the assessee through banking channel before the registration of the flat as laid down in the proviso to section 56(2)(vii)(b) of the Act. The Tribunal also considered the decision of ITAT, Pune bench in the case of Sanjay Dattatraya Dapodikar (supra) wherein it is held that where the date of agreement for fixing the amount of consideration for purchase of a plot of land and the date of registration of sale deed were different but assessee, prior to date of agreement, had paid a part of consideration by cheque, provisos to section 56(2)(vii)(b) being fulfilled, the stamp value as on date of agreement should be applied for purpose of said section.

The Tribunal directed the AO that the stamp duty value on the date of allotment, in the case of the assessee on 16th October, 2010, be taken for the purpose of section 56(2)(vii)(b) of the Act and not stamp value as on the date of registration of sale deed. Further, the Tribunal did not find any merit in the findings of the CIT(A) that before the registration of the flat only other co-owner, i.e., Ajay Kumar Singh, husband of the assessee has made the payment. Since, it was joint property owned by assessee and her husband, it is immaterial who had made payment before the date of registration of the property.

The Tribunal decided this ground of appeal in favour of the assessee.

BCAJ Admin

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

49 Ravinder Kumar vs. ITO

ITA No. 2265/Del/2023

A.Y.: 2011–12

Date of Order: 8th November, 2023

Section: 54B

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

FACTS

The assessee sold agricultural land which gave rise to long-term capital gain of ₹12,78,456. The assessee claimed that it had purchased another agricultural land and, therefore, the entire long term capital gain of ₹12,78,456 is exempt under section 54B of the Act. The Assessing Officer (AO) denied the claim for deduction under section 54B on the grounds that the land had been purchased in the name of the wife of the assessee.

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 where, on behalf of the assessee, reliance was placed on the decision of Ashok Kumar vs. ITO [ITA No. 7460/Del/2018; AY: 2009–10; Order dated 28th December, 2022] and on behalf of the revenue, reliance was placed on dismissal of SLP by the SC in the case of Bahadur Singh vs. CIT(A) [(2023) 154 taxmann.com 457 (SC)] against the decision of the Punjab & Haryana High Court wherein purchase of agricultural land in the name of the assessee’s wife was not allowed under section 54B relief to the assessee.

HELD

The Tribunal noted the ratio of the decision of the Tribunal in the case of Ashok Kumar (supra). The Tribunal observed that in the decision relied upon by the DR, it was a dismissal of SLP simpliciter by Hon’ble Apex Court against the decision of Hon’ble Punjab & Haryana High Court. The Tribunal noted that dismissal of SLP simpliciter by Hon’ble Supreme Court does not merge the order of Hon’ble High Court with that of Hon’ble Supreme Court. It also noted that there is no jurisdictional High Court decision on this issue. Further, in case of conflicting, Hon’ble High Court decision one in favour of assessee has to be adopted as per Hon’ble Supreme Court decision in Vegetable Products. Accordingly, the Tribunal followed the precedent relied upon by the assessee which also draws support from Hon’ble High Court decisions referred therein.

The Tribunal set aside the order of the Revenue authorities and decided the issue in favour of the assessee.

BCAJ Admin

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue. When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

48 Sarita Gupta vs. PCIT

ITA No. 1174/Del/2022

A.Y.: 2012–13

Date of Order: 7th December, 2023

Sections: 54, 263

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue.

When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

FACTS

The assessee, a resident, filed a return of income declaring total income of ₹6,42,740. The AO upon receiving information that the assessee has sold immovable property for a consideration of ₹62,06,000 issued a notice under section 147. The assessee, in response, filed a return of income declaring the income to be the same as that declared in the original return of income.

In the course of assessment proceedings, the AO asked the assessee to submit details relating to property sold and capital gain arising out of such property. From the documents, the AO observed that the assessee along with one another had purchased the property for ₹20 lakh of which ₹10 lakh was contributed by the assessee. The property was sold for ₹62,06,000, out of which, the share of the assessee was ₹31,03,000. After reducing the indexed cost of acquisition, the long-term capital gain aggregated to ₹14,59,324. The assessee made purchase of a new residential property and consequently claimed that the entire long-term capital gain to be exempt under section 54. The AO completed the assessment accepting the returned income.

Subsequently, PCIT called for an examined assessment record and found that the amount of capital gain was not deposited in the capital gain account scheme during the interim period till its utilisation in purchase / construction of new property. The PCIT was of the view that these facts were not looked into by the AO and therefore the assessment order is erroneous and prejudicial to the interest of the revenue. After issuing a show cause notice and considering the response of the assessee thereto, the PCIT set aside the assessment order with a direction to disallow the deduction claimed under section 54 of the Act as the assessee has failed to deposit the amount of capital gain in the capital gain account scheme.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in the course of assessment proceedings, the AO had thoroughly examined the issue of the sale of immovable property and the resultant capital gain arising from such sale. The AO had called upon the assessee to furnish details of exemption claimed under section 54 of the Act with supporting evidence. The Tribunal held that the AO has duly examined the issue relating to capital gain from the sale of the property as well as assessee’s claim of deduction under section 54 of the Act.

The Tribunal noted that the PCIT had not doubted the amount of capital gain arising in the hands of the assessee, and also the fact that such capital gain was invested in purchase / construction of residential house within the time limit mentioned in section 54(1) of the Act. It is only because the capital gain was not deposited in the capital gain account scheme, the revisionary authority has treated the assessment order to be erroneous and prejudicial to the interest of the revenue.

The Tribunal held that in its view, the PCIT adopted a hyper technical approach while dealing with the issue. The Tribunal held that when the basic conditions of section 54(1) have been satisfied, the assessee remains entitled to claim deduction under section 54 of the Act. The Tribunal also held that in any case of the matter, there is no prejudice caused to the Revenue as the assessee in terms of section 54(1) of the Act is entitled to deduction. The Tribunal held that exercise of power under section 263 of the Act to revise the assessment order to be invalid. The Tribunal quashed the order passed under section 263 of the Act and restored the assessment order.

The appeal filed by the assessee was allowed.

BCAJ Admin

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act. Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

47 JCIT vs. Vijay Kumar Saini

ITA No. 371/Jaipur/2023

A.Y.: 2020–21

Date of Order: 8th November, 2023

Section: 271AAB

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act.

Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

FACTS

A search under section 132 of the Act was carried out at the premises of the assessee in connection with search and seizure action on Saini Gupta Malpani — Somani Group of Ajmer on 13th February, 2020. During the year, under consideration, the assessee filed the return of income on 25th February, 2021, declaring a total income of ₹3,34,40,150. During the course of assessment proceedings, the assessee only furnished revised computation of the total income but the revised return of income was not found on the e-filing portal, nor was it furnished by the assessee. Revised computation of total income was not given cognizance and the assessment of total income was completed by making an addition of ₹2,87,50,000 to the returned income on account of an undisclosed business income, and assessing the total income at ₹6,21,90,150 vide order dated 29th September, 2021 passed under section 143(3) of the Act. The AO also initiated proceedings for levy of penalty under section 271AAB(1A) by issuing a show cause notice without specifying the default prescribed under section 271AAB(1A) of the Act.

In response to the show cause notice, the assessee furnished the reply but the same did not find favour with the AO and he held that the assessee is liable for penalty under section 271AAB(1A) @ 60 per cent of the undisclosed income of ₹2,87,50,000 and he levied a penalty of ₹1,72,50,000. In the penalty order, the AO did not point out any specific document and the nature of transactions recorded therein which may substantiate the charge that undisclosed income was detected during the course of search.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the order of CIT(A) by observing the appellant to be guilty of mischief of clause (a) of section 271AAB(1A) instead of clause (b) under which penalty was supposedly levied by the AO. Thus, CIT(A) granted partial relief to the assessee.

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

HELD

At the outset, the Tribunal observed that this appeal by the revenue is a cross appeal against order passed by CIT(A) against which order, the assessee preferred an appeal being ITA No. 303/Jp/2023 raising common issue as raised by the revenue and the said appeal of the assessee has been disposed off vide Tribunal’s order dated 25th July, 2023. It observed that the appeal of the assessee has been decided on legal issues as well as on merits in favour of the assessee after elaborately discussing the matter at great length, and after considering the identical issues as have been decided by the co-ordinate benches in the case of Ravi Mathur vs. DCIT [ITA No. 969/Jp./2017; Order dated 9th April, 2019, and Rajendra Kumar Gupta vs. DCIT [ITA No. 359/Jp./2017; Order dated 18th January, 2019.

The Tribunal noted the decision in the appeal filed by the assessee wherein the Tribunal interalia observed that the assessee, in the course of search, admitted an undisclosed sales of ₹5 crore and offered the same for taxation, and therefore, penalty cannot be levied under section 271AAB of the Act. The Tribunal held that —

(i) it is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of `undisclosed income’ as defined in Explanation to section 271AAB(1A) of the Act;

(ii) the question whether the income disclosed by the assessee is undisclosed income in terms of definition of section 271AAB has to be considered and decided in penalty proceedings;

(iii) since the assessee has offered the said income to buy peace and avoid litigation with the department, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise, and only when AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per definition in section 271AAB. Therefore, the AO in proceedings under section 271AAB has to examine all the facts of the case as well as the basis of surrender and then arrive at the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income.

(iv) it did not agree with the CIT(A) that levy of penalty under section 271AAB is mandatory simply because AO has to first issue a show cause notice and then has to make a decision for levy of penalty after considering the fact that all the conditions provided for in section 271AAB are satisfied. It relied on the ratio of the decision of the co-ordinate bench of the Tribunal in the case of Ravi Mathur vs. DCIT.

As regards the second issue regarding validity of initiation, the Tribunal while deciding the appeal of the assessee held —

“We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. Thus it is clear that the show cause notice issued by the AO for initiation of penalty proceedings under section 271AAB(1A) is very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 6th December, 2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed.”

Since Revenue did not place any material to controvert the submissions of the assessee, the Tribunal on the basis of observations made while deciding the appeal filed by the assessee, allowed the appeal of the assessee and dismissed the appeal filed by the Revenue as it had become infructuous.

BCAJ Admin

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government

46 Vishal Pachisia vs. ITO

ITA No.: 764/Kol/2023

A.Y.: 2016–17

Date of Order: 7th November, 2023

Section: 205

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government.

FACTS

The assessee, a salaried employee, received a salary of ₹17,40,264. The employer deducted tax at source of ₹3,96,700. The employer did not deposit the tax deducted in the government treasury. The assessee in its return of income claimed credit of taxes deducted at source which interalia included the tax of ₹3,96,700 deducted at source by the employer. The AO, CPC denied the credit in respect of the tax deducted at source by the employer on the ground that the same was not deposited by the employer in the government treasury.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that since the employer of the assessee has not deposited the tax so deducted into the government treasury, the assessee is not entitled to claim the credit.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the case of the assessee is covered in its favour by Departmental Circular No. F.No. 275/29//2014–IT(B) and also by decision in Unique Buildcon Private Limited vs. ITO in W.P.(C) 7797/2003 order dated 31st March, 2023, and also decision of co-ordinate bench Pune in the case of Mukesh Padamchand Sogani vs. ACIT in ITA No. 29/Pune/2022 order dated 30th January, 2023.

The Tribunal observed that in all the above cases the issue of non-deposit of TDS by the deductor has been allowed in favour of the assessee by holding that once TDS is deducted then liability resulting from non-deposit of TDS by the deductor cannot be fastened upon the assessee.

The Tribunal having reproduced the operative part of the decision of the Pune bench in the case of Mukesh Padamchand Sognai (supra) followed the said decision and set aside the order of CIT(A) and directed the AO to allow the credit of TDS to the assessee.

The appeal filed by the assessee was allowed.

BCAJ Admin

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search. S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act

45 ACIT vs. Atul Kumar Gupta (Delhi – Trib.)

[2023] 103 ITR(T) 13 (Delhi – Trib.)

ITA No.: 1164 and 1931 (Delhi) of 2020 and 205, 206 & 1395 (Delhi) of 2021

A.Ys.: 2011-12, 2014-15 to 2016-17

Date of Order: 13th March, 2023

S. 69B, 132 – Additions to total income not sustainable when no incriminating material was found during the search.

S. 153A, 153C – Additions based on documents found during a search on a third party to be made under section 153C and not 153A of the Act.

FACTS

A search was conducted by income tax authorities in a group case inter alia including the assessee. It was contended that the assessee had purchased shares of some companies at a price which was less than book value and, therefore, the difference between book value and purchase price represented unaccounted investment was added to the total income under section 69B of the Act.

Further, certain additions were made to the total income of the assessee based on ledger accounts found in the course of a third-party search.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) ruled in favour of the assessee and deleted both the additions on the basis that no incriminating material was found during the search to make the impugned addition. CIT(A) further observed that there was no reference to any document that was suggestive of any undisclosed income as a result of the purchase of shares.

Aggrieved, the Revenue, filed an appeal before the ITAT.

HELD

The ITAT observed that the CIT(A) has passed a well-reasoned order appreciating the material on record. The basis for addition as stated by the Assessing Officer was incriminating material found during the search and post search enquiry. However, no material or documents or any other details were specifically indicated or provided by the Assessing officer.

The ITAT further observed that merely stating that seized materials are there and post-search enquiry has shown that the purchase prices have been suppressed, cannot be the basis of addition.

The ITAT thus concurred with the findings of the CIT(A) on the first aspect.

On the next aspect of additions based on ledger accounts found in the course of a third-party search, the ITAT observed that no addition can be made de hors the material found during the search. When a separate independent search was not conducted on the assessee and additions are sought to be made based on ledger accounts found in the course of third-party search, the same have to be made under section 153C of the Act and not under section 153A of the Act.

Accordingly, the ITAT deleted the addition on the second aspect.

The ITAT relied on multiple judicial decisions inter alia includingK.P. Varghese vs. ITO [1981] 131 ITR 597 (SC), CIT vs. Kabul Chawla [2015] 380 ITR 573 (Delhi), CIT vs. Gulshan Kumar [2002] 257 ITR 703 (Delhi), CIT vs. Naresh Khattar HUF [2023] 261 ITR 664 (Delhi) and Pr. CIT vs. SMC Power Generation Ltd.[IT Appeal No. 406 of 2019, dated 23rd July, 2019]

BCAJ Admin

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted

44 ISGEC Heavy Engineering Ltd. vs. ITO

[2023] 103 ITR(T) 152 (Chandigarh – Trib.)

ITA No.: 577 (CHH) OF 2022

A.Y.: 2014-15

Date of Order: 13th March, 2023

S. 271(1)(c) — Penalty levied without any independent and specific finding being recorded as to how disallowance made by the Assessing Officer (AO) which was upheld by the Tribunal, would lead to a charge of furnishing of inaccurate particulars of income by the assessee, was unjustified and to be deleted.

FACTS

The assessee-company’s case was selected for scrutiny proceedings and an assessment order under section 143(3) was passed on 30th December, 2016 making various additions. Thereafter, the AO had passed a rectification order u/s 154 wherein the AO had reduced the addition made u/s 14A r.w. Rule 8D from Rs1,42,26,765 to Rs.63,21,654. On appeal before CIT(A), all the additions were deleted except for the addition made u/s 14A r.w. Rule 8D. On further appeal before the Tribunal, the addition u/s 14A r.w. Rule 8D was restricted to an amount of Rs.5,00,000 on an estimated and lump sum basis.

The AO had initiated penalty proceedings u/s 271(1)(c) vide show cause notice dated 30th December, 2016 and 10th June, 2021. Without taking into account, the reply of the assessee company, the AO passed the order u/s 271(1)(c) and levied a penalty of Rs.1,54,500 on restricted addition of Rs.5,00,000 holding that the assessee had furnished inaccurate particulars of income.

Aggrieved, the assessee company filed an appeal before CIT(A). The CIT(A) confirmed the penalty levied without assigning any reasons.

Aggrieved, the assessee company filed an appeal before the ITAT.

HELD

The ITAT observed that the AO had levied the penalty merely on the basis of the addition of Rs.5,00,000 in the quantum proceedings. The ITAT observed that there was no independent and specific finding which had been recorded by the AO, as to why he was of the belief that the charge of furnished inaccurate particulars of income can be fastened on the assessee company and the reasons for arriving at such a finding given that penalty provisions have to be strictly construed.

The ITAT held that it is a settled legal proposition that the quantum and penalty proceedings are independent proceedings. Though the initiation of penalty proceedings happens during the course of assessment proceedings and has to be evident and emerge from the assessment order, before the penalty is fastened on the assessee, the AO has to record independent finding justifying the charge of furnishing of inaccurate particulars of income or for concealment of particulars of income.

The ITAT further held that before the AO proceeded to calculate the disallowance under Rule 8D(2)(iii), he was supposed to consider the assessee company’s submission and examine the accounts of the assessee company. The AO had to record his reasoning that he was not satisfied with the submissions of the assessee company, but no such exercise was done by the AO.

The ITAT following the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products (P.) Ltd. [2010] 189 Taxman 322/322 ITR 158directed to delete the penalty levied u/s 271(1)(c) and allowed the appeal.

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income. Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by s. 270A(6)(a)

43 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017-18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’ it cannot be said that the assessee has suppressed or under-reported any income.

FACTS

The assessee filed its return of income declaring total income to be a loss of Rs.72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has offered rental income of Rs.29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013-14. However, in the instant year, the assessee has declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The AO assessed rental income under the head `business’ and consequently the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for the levy of penalty under s. 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of Rs.1,83,550 under section 270A of the Act.

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 observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct” — there is merit in the contention of the assessee that levying of penalty is not automatic and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to a change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised its discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head Income from House property and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub. sec. (6) of sec. 270A of the Act. The Chennai bench of the Tribunal has held in the case of S Saroja (supra) that if a bona fide mistake is committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income

42 DCIT vs. Tapesh Tyagi

TS-642-ITAT-2023 (DEL)

A.Y.: 2017-18

Date of Order: 27th October, 2023

Sections: 69A, 132, 115BBE

The rate of tax mentioned in s. 115BBE does not apply to income surrendered in the course of the search, in a statement made under section 132(4), and the Department has no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

FACTS

In the course of search action on the assessee, an individual, a loose paper was found in the possession of the assessee with an amount Rs.30.20 mentioned with the description “Com Trade”. In the statement recorded under section 132(4) of the Act, when the assessee was confronted with the said paper, the assessee submitted that it indicates profit earned by him from “Commodity Trade”. This amount was surrendered as an income in the statement recorded. This amount was also offered for taxation in the return of income filed by the assessee subsequent to the search. However, tax on this amount was paid at a normal rate and not at the rate mentioned in section 115BBE.

According to the Assessing Officer (AO), income surrendered by the assessee is in the nature of unexplained money in terms of section 69A of the Act. Though he did not make any separate addition of the said amount in the assessment order, he treated it as income under Section 69A of the Act. However, he did not make any change to the tax rate applied by the assessee. Subsequently, the AO passed an order under Section 154 of the Act, wherein, he applied the rate of tax as prescribed under Section 115BBE of the Act.

Aggrieved with the higher rate of tax being levied, the assessee preferred an appeal to the CIT(A) who held that the income subjected to tax at the rate prescribed under Section 115BBE of the Act cannot be treated as income of the nature provided under Section 69A of the Act. Hence, a normal tax rate would be applicable to such income. The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the short issue arising for consideration is whether a special rate of tax provided under Section 115BBE of the Act would be applicable to the income surrendered by the assessee in the course of search and seizure operation and offered in the return of income.

The Tribunal held that the facts clearly establish that at the time of the search and seizure operation itself, the assessee has explained the source of the amount offered as income to be the profit derived from “commodity trade”, which is in the nature of business income. It observed that It also appears that the departmental authorities have no dispute with regard to the explanation of the assessee regarding the source of the surrendered income.

As rightly observed by the learned First Appellate Authority, section 69A uses the word “may”, which implies that if the explanation offered by the assessee regarding the source of money, bullion, jewellery or other valuable articles is satisfactory, it cannot be treated as unexplained money under Section 69A of the Act. In the facts of the present appeal, there is nothing on record to suggest that the assessee’s explanation regarding the source of the income offered has either been doubted or disputed at the time of the search and seizure operation or even during the assessment proceedings. Therefore, in our view, the income offered by the assessee cannot be treated as unexplained money under Section 69A of the Act. Therefore, as a natural corollary, section 115BBE of the Act would not be applicable.

The Tribunal observed that in the facts of the present appeal, admittedly, the assessee has not offered the income under Section 69A of the Act. It observedthat even, the AO has not made any separate additionunder Section 69A of the Act but has merely re-characterized the nature of income offered by the assessee. The Tribunal held that the provisions of sections 115BBE would not be applicable to the facts of the present appeal.

The Tribunal dismissed the appeal filed by the Revenue.

BCAJ Admin

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee

41 DCIT vs. Mighty Construction Pvt. Ltd.

TS-522-ITAT-2023 (Mum)

A.Ys.: 2011-12 to 2013-14

Date of Order: 25th August, 2023

Section: 28

Where the assessee sold flats at varied rates and the variation in rate was significant, Revenue directed to apply the weighted average rate of all the units for estimating the value of sales (except for one unit which is incomparable) and thus, to be valued at actual instead of the maximum rate applied by the Revenue to estimate sale value of the flats sold at varied rates by the assessee.

FACTS

The assessee, a builder and developer, constructed a building known as `Universal Majestic’. During the assessment year 2011-12, the AO noticed that the flats in this building have been sold at varied rates ranging from Rs.13,513 per sq. feet to Rs.27,951 per sq. feet. He noted the comparable sale instances in the assessment order.

In the reply to the show cause notice, the assessee gave various factors and reasons for the variation in the prices for example, firstly, some units had additional flower bed area; secondly, due to various Vaastu angles and passage for the flat which commanded different prices; thirdly, certain units had additional areas like store room, flower bed and passage area, and lastly, some of the units had no natural ventilation and due to certain market conditions also, the price bookings and rates are varied. Apart from that, it was also submitted that the project was off-location and no good development and construction in the surrounding area was there during that period and it was covered with slums all around the building premises.

The Assessing Officer (AO) rejected all the contentions after giving his detailed reasoning stating that, firstly, the project was centrally located and directly accessible to Eastern Express Highway and easily accessible from Mumbai International Airport and Domestic Airport, and newly built freeway flyovers have come connecting to various important places. Apart from that, he also rebutted the assessee’s contention of the additional flower bed area and passage area on the grounds that as per the Municipal rules, a builder can only sell areas as per the approved plans, and any encroachment done on the flower bed or any alteration without the permission of the Municipal authorities is not permissible and the passage area is only common area property for the society wherein nobody can encroach. Regarding the Vaastu factor also, he has given his detailed analysis by bringing in certain comparable instances of the flats sold by the assessee itself. Thus, he held that the justifications and the submissions given by the assessee to prove the variation in the rates are only an afterthought.

The AO held that the rate per sq. ft should be Rs.27,951, this being the highest rate per sq. ft, as of 31st August, 2010, since most of the other bookings were somewhere close to this date and accordingly, he worked out the sale cost of each unit. The AO added a sum of Rs.46,75,48,737 to the returned total income on this account.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that a huge variation in the sale price of different units of the same project was not found to be justifiable by the AO. The AO has rebutted the explanation given by the assessee but the CIT(A) without much factual analysis has deleted the addition made by the AO.

The Tribunal held that though there could be some variation in the rates per unit depending upon various factors which cannot be brushed aside, but to accept that there would be such huge variation is beyond any prudence and reality. Thus, such a huge difference is certainly not justified and even the action of the AO to take the maximum rate of units sold is also not justified. Because factors like total area, extra accessible and useable area of particular unit and location and ventilation of the unit etc., do have variation in the price and the premium paid. Therefore, it would be very difficult to apply any kind of logic to accept the version of both assessee as well as AO.

The Tribunal asked the AR to submit a weighted average rate at which the flats were sold and noted that the weighted average rate comes to Rs.17,712 per sq. feet. It found that there is one unit which is a shop cum garage and definitely it cannot be compared with other units where the agreement rate was very low and therefore, the same rate of Rs.17,172 cannot be applied. The Tribunal held that in the weighted average, this particular unit sold would be excluded while calculating the weighted average, and the actual price should be taken, and for all other 12 units, the rate for estimating the sales to be taken at Rs.17,172. The Tribunal directed the AO to work out the consequential relief.

BCAJ Admin

S. 69A – Where there was a huge amount available with the assessee in the form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by the assessee was out of some undisclosed source without any adverse material.

40 Om Prakash Nahar vs. ITO

[2022] 100 ITR (T) 345 (Delhi – Trib.)

ITA No.: 960 (Del) of 2021

A.Y.: 2017-18

Date of Order: 27th January, 2022

S. 69A – Where there was a huge amount available with the assessee in the form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by the assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was an individual. The assessee was a senior citizen, aged about 79 years old and a retired Govt. servant and had declared income of ₹19,06,400 from income from Pension and earnings from bank interest. The assessee’s case was selected under CASS for limited scrutiny to verify cash deposits during the demonetisation period.

The assessee explained that the amount of ₹63,63,000 was deposited in Bank of Baroda out of withdrawals from the same account from time to time made during the years 2014, 2015 and 2016, because of his suffering from serious illness — juvenile diabetes and old age. It has also been submitted by the assessee that he had undergone bypass surgery and operation in the past and looking to his ailment and staying alone with his wife, therefore, he has been withdrawing and keeping cash for his personal and psychological security. The AO rejected the assessee’s explanation and held that there is no substantial justification given by the assessee and accordingly, added the entire amount of ₹63,63,000 under section 69A/115BB of the Act.

Aggrieved, the assessee filed an appeal before CIT(A). The CIT(A) restricted the addition to ₹44,13,000 after holding that the cash withdrawn from the bank account from 1st April, 2016 to 9th November, 2016 for sums aggregating to ₹19,50,000 can be held to be out of money withdrawn from the bank account, which was deposited after demonetisation.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee looking at his old age and suffering from various ailments as he had suffered a heart attack and had juvenile diabetes, for his mental security, he was in the habit of keeping huge cash with him. The ITAT also observed that the assessee had been withdrawing cash and keeping it with him after withdrawing from his bank account.

From the perusal of the history of cash withdrawals starting from the financial year 2014-15, the ITAT observed that the assessee has been regularly withdrawing huge cash amounts on various dates and there was hardly any credit balance left in his bank account. The ITAT held that the fund’s flow statement as submitted by the assessee clearly showed that each and every withdrawal has been mentioned and utilisation thereof and the money being withdrawn from the bank account. Even after household withdrawal, there was a huge amount available with the assessee in the form of cash. Under these facts and circumstances stated by the assessee, the ITAT held that it cannot be held to be improbable that the assessee did not have any availability of cash at the time of demonetisation. Further, it was never brought on record whether the assessee was carrying out any business or profession or was having income from undisclosed sources of income which can be said to be available with the assessee in the form of cash. The ITAT found the explanation of the assessee to be reasonable and plausible and preponderance of probability was in the favour of the assessee and without any adverse material, it cannot be presumed that the cash deposited by the assessee is out of his undisclosed source. Accordingly, the addition of ₹44,13,000 as sustained by the CIT (Appeals) was deleted.

The appeal of the assessee was allowed.

BCAJ Admin

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

39 Emporis Properties (P.) Ltd. vs. PCIT

[2022] 100 ITR(T) 1 (Kolkata – Trib.)

ITA No.: 299 (Kol.) of 2022

A.Y.: 2014-15

Date of Order: 22nd September, 2022

S. 2(14), 50C, 43CA, 2(47), 263 — Where the assessee being an owner of the land had entered into a joint development agreement (JDA) with a developer, such an agreement of transfer of possession for development of property does not constitute transfer as per the Act as to attract provisions of section 43CA and said the order could not be treated as prejudicial to the interest of revenue.

FACTS

The assessee had entered into a joint development agreement (JDA) with a developer, wherein after the construction of the housing complex, a 55 per cent portion of the same would pertain to the assessee and the balance will pertain to the developer. In the course of the assessment, the Assessing Officer (AO) was of the primary view that the execution of JDA amounted to the transfer of the capital asset and therefore taxable as capital gains.

The assessee replied stating that there was no transfer of any capital asset on handing over possession of land to the developer. Further, it was submitted that the said land was stock-in-trade and therefore the same cannot be treated as a capital asset u/s 2(14) of the Act.

The AO accepted the said contention and did not make any additions to the total income of the assessee.

Thereafter, the Commissioner invoked his jurisdiction u/s 263 of the Act and stated that the said transaction was not examined in the light of section 43CA of the Act, making the order prejudicial to the interest of Revenue. Accordingly, the matter was set aside for the AO to ascertain the applicability of provisions of section 43CA of the Act to the JDA.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT, on the perusal of the terms of the JDA, observed that the assessee had continued to be the owner of the property throughout the development of the property. The possession was only transferred for the development of the property.

It was also observed by the ITAT that there was no transfer / sale of the land under the JDA. Under the agreement, the developer would develop the land making it saleable and in lieu of the construction of the same, the developer will be provided a part of the stock-in-trade. Further, since the JDA cannot be considered as a transfer, the provisions of section 43CA will not have any applicability.

The ITAT held that merely, because the JDA has been registered with the municipal authorities and stamp duty has been paid on the agreement that does not attract the provisions of section 43CA of the Act.

Neither the terms and conditions of the JDA nor the registration authority has treated the JDA as transfer / conveyance.

The ITAT quashed the revision order and allowed the appeal of the assessee.

BCAJ Admin

S. 68 – Where the assessee-company had produced all the documents and evidence to establish the identity, genuineness and creditworthiness of investors by filing complete details including their bank statement and audited financial statements, share application money cannot be treated as unexplained or non-genuine merely on the ground that the directors could not appear before the Assessing Officer personally.

38 Dharmvir Merchandise (P.) Ltd. vs. ITO

[2023] 101 ITR (T) 279 (Kolkata – Trib.)

ITA No.: 1938(KOL) OF 2018

A.Y.: 2012-13

Date of Order: 13th December, 2022

S. 68 – Where the assessee-company had produced all the documents and evidence to establish the identity, genuineness and creditworthiness of investors by filing complete details including their bank statement and audited financial statements, share application money cannot be treated as unexplained or non-genuine merely on the ground that the directors could not appear before the Assessing Officer personally.

FACTS

The assessee-company had issued fresh share capital during the year and received a certain sum from three companies. In the course of assessment proceedings, the assessee-company was called upon to explain the source of the said amount of share capital. The assessee company had provided all the details pertaining to the share capital issue.

Further, summons were issued to the directors of the company u/s 131 of the Act. The directors complied with the summons and had furnished their replies to the Assessing Officer (AO).

The AO, without pointing out any defect in the submissions of the assessee company and the directors, solely stressed upon the personal appearance of the directors. Since the directors were unable to appear personally before the AO, the sum received against share capital was added to the total income of the Assessee company u/s 68 of the Act.

Aggrieved, the assessee company filed an appeal before CIT(A). The CIT(A) upheld the action of the AO due to non-appearance of the assessee on the date of hearing.

Aggrieved, the assessee company filed an appeal before the ITAT.

HELD

The ITAT observed that the primary onus of establishing the identity, genuineness and creditworthiness of investors was discharged by the assessee company by filing complete details of the share subscriber companies including their bank statement, audited financial statements, Form No. 18 in support of registered office address, source and utilisation of funds, copies of ITRs and copies of all relevant company returns.

It was also observed by the ITAT that once the primary onus is discharged by the assessee, the onus shifts on the AO to disprove the documents furnished by the assessee, so as to draw an adverse view or rebut the submissions of the assessee.

Further, it was observed by the ITAT that shareholders were duly served notice under section 133(6) thereby establishing the identity of such shareholders. Since transactions have been executed through a banking channel which is traceable from the origin to the destination of such payments and further confirmed from the documents furnished, this proves the genuineness of the transaction. Creditworthiness of the transaction was established from the fact that all the shareholder companies were having more than sufficient share capital and reserve and surplus funds for giving share application money.

The ITAT relied on the following decisions:

• CIT vs. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 (SC)

• Dy. CIT vs. Rohini Builders [2002] 256 ITR 360 (Guj HC)

• CIT vs. Kamdhenu Steel & Alloys Limited ITA No. 972 of 2009 (Del HC)

• PCIT vs. Chain House International (P.) Ltd. 98 taxmann.com 47 (MP HC)

• CIT vs. Gagandeep Infrastructure (P.) Ltd. 80 taxmann.com 272 (Bombay)

• Tradelink Carrying (P.) Ltd. vs. ITO [2020] 181 ITD 408 (Kol. – Trib.)

• Satyam Smertex (P.) Ltd. vs. Dy. CIT [2020] 184 ITD 357 (Kol. – Trib.)

The ITAT held that the additions made were based on conjectures and surmises and that the invocation of section 68 of the Act was not justified.

In result, the appeal filed by the assessee company was allowed.

BCAJ Admin

A bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

37 Bank of India vs. DCIT (TDS)

TS-582-ITAT-2023 (Nag.)

A.Y.: 2012-13

Date of Order: 28th August, 2023

Sections: 191, 194A, 197A, 201(1A)

A bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

FACTS

The assessee bank was required to deduct tax at source under section 194A of the Act. Based on spot verification, it was found that in four cases, the assessee has not deducted tax at source in respect of amounts paid/credited in excess of basic exemption limits on the ground that the assessee had received declarations in Form No. 15G/15H. After considering the reply of the assessee, the Assessing Officer (AO) held the assessee to be in default under section 201 to the tune of R1,90,801.

Aggrieved, the assessee preferred an appeal to the CIT(A) who did not admit the appeal on the ground that there was a delay of about 633 days in filing the appeal. Even after granting credit in respect of the corona period, there was a delay of 324 days which he did not condone.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

Explanation to section 191 clearly provides that the person responsible for the deduction of tax at source can be treated as assessee in default under section 201(1) in respect of such tax, only if he does not deduct or fails to pay thereafter, and the recipient has also failed to pay such tax directly. It is only upon the cumulative satisfaction of both conditions that the person responsible can be treated as assessee in default. In the present case, admittedly the assessee did not deduct tax at source but there is no material to show that the recipient also paid such tax directly. The Tribunal held that the contention of the AR that on receipt of Form No. 15G/15H, its obligation is discharged and the assessee cannot be treated as an assessee in default u/s. 201(1), does not pass the scrutiny of the mandate of Explanation to section 191, which clearly provides that the recipient “has also failed to pay such tax directly”.

On reading sub-section (1A) in juxtaposition to sub-section (1B) of section 197A, it transpires that even if the tax on the estimated total income of the recipient including interest other than interest on securities will be Nil, but the deduction of tax at source would still be required where the amount of interest income exceeds the basic exemption limit.

Thus, on a harmonious construction of the above provisions, it is manifested that a bank can receive Form No. 15G and need not deduct tax at source only in the cases, where the declaration is given that the tax liability on total income including the interest income will be Nil, provided the interest income does not exceed the basic exemption limit. But where the interest income exceeds the basic exemption limit, the bank needs to deduct tax at source notwithstanding the furnishing of declaration in Form No. 15G and the bank will be treated as assessee in default u/s 201(1), where not only it failed to deduct tax at source but the customer also failed to pay such tax directly.

The net effect of the Explanation to section 191, section 194A read with sections 197A and 201 is that there will be no obligation to deduct tax at source on furnishing the necessary declaration by customers where either the interest income does not exceed the basic exemption limit, or the depositor is more than the prescribed age and he furnishes the declaration that tax on his total income including interest from the bank will be Nil.

In order to treat a person as an assessee in default, firstly, there should be an obligation to deduct tax at source and despite such obligation, the person fails to deduct tax at source or pay after such deduction, and further the payee has also not paid tax directly.

The question of whether the assessee is in default in terms of section 201(1) needs to be determined in the light of Explanation to section 191. However, the cases covered u/s 197A(1A) [i.e. the eligible person furnishing declaration in Form No. 15G that his tax liability on total income, including the interest, will be Nil] but not hit by section 197A(1B) [i.e. interest income other than interest on securities as referred to in section 194A does not exceed the basic exemption limit], will at the outset be excluded from consideration as not entailing any obligation to deduct tax at source. Similarly, the cases covered u/s 194A(1C) [i.e. persons exceeding the specified age furnishing Form No. 15H to the effect that tax on their total income including such interest will be Nil] will also be excluded.

Interest u/s 201(1A) is payable by the assessee — even w.r.t. the cases where it is not in default in terms of Explanation to section 191 – from the date when the tax was deductible up to the date of filing of return by the payee including the interest income in his total income. However, the cases in which there is no obligation to deduct tax at source will not be considered for interest u/s 201(1A) of the Act.

The Tribunal set aside the impugned order and sent the matter back to the AO for passing a fresh order u/s 201(1)/(1A) in the light of the above directions. In case, it is found that the recipients included such an amount of interest in their total income, then the assessee should not be treated in default in terms of section 201(1).

BCAJ Admin

AO not having rejected books of accounts could not make any estimated additions or resort to section 44AD.

36 Bulu Ghosh vs. ITO

2023 Taxscan (ITAT) 2508 (Kol – Trib.)

ITA No.: 729/Kol./2023

A.Y.: 2016-17

Date of Order: 18th October, 2023

Sections: 44AD, 145A

AO not having rejected books of accounts could not make any estimated additions or resort to section 44AD.

FACTS

The assessee filed a return of income for the A.Y. 2016-17 which was duly processed u/s 143(1) of the Act. In the course of proceedings for scrutiny assessment, the assessee furnished the necessary details asked for, by providing a copy of the audit report along with P & L A/c and balance sheet for the year ended 31st March, 2016. The Assessing Officer (AO) examined the documents which were produced before him during the assessment proceeding and found that the assessee had reflected a net loss of ₹13,80,362 from contractual business, whereas, as per 26AS, the total value of contract works is ₹22,13,069. On this issue, the AO asked the assessee to explain the discrepancy. However, the assessee could not furnish any documentary evidence to reconcile the same within the stipulated time provided by the AO. Thus the AO decided to add an amount of ₹1,77,046 by calculating 8 per cent of the total contract value of ₹22,13,070 by resorting to the provisions of section 44AD of the Act.

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 observed that the main grievance of the assessee in the appeal is that the assessee maintained complete books of accounts and also filed an audit report. There is no whisper in the assessment order about the mistake in the books of account. The AO has not invoked the provision of section 145(3) of the Act and without rejecting the books of accounts, an addition cannot be made as held by the Rajasthan High Court in the case of CIT vs. Maharaja Shree Umaid Mills Ltd. [192 ITR 565].

The Tribunal held that in the present case, the assessee has filed duly audited balance sheets along with P & L A/c before the AO at the time of framing of the assessment order. However, such books of accounts were never rejected by the AO in accordance with the law, and even the AO as well as CIT(A) has not given any findings on the issue. In view of the decision of the Rajasthan High Court in the case of CIT vs. Maharaja Shree Umaid Mills Ltd. (supra), profits cannot be estimated without rejecting books of account. Following the said judgement and based on the discussion of facts recorded, the Tribunal accepted the contentions of the assessee and directed the AO to delete the additions made.

BCAJ Admin

AO having not disputed that the provisions of section 44AD are not applicable, could not have called upon the assessee to produce P&L Account to show the source of expenditure. The addition, if challenged, would have been deleted. Penalty proceedings are independent proceedings. Such incorrect addition is not liable to penalty under section 270A.

35 Prem Kumar Goutam vs. DCIT

2023 Taxscan (ITAT) 2510 (Kol – Trib.)

ITA No.: 156/Pat./2023

A.Y.: 2017-18

Date of Order: 12th October, 2023

Section: 270A

AO having not disputed that the provisions of section 44AD are not applicable, could not have called upon the assessee to produce P&L Account to show the source of expenditure. The addition, if challenged, would have been deleted. Penalty proceedings are independent proceedings. Such incorrect addition is not liable to penalty under section 270A.

FACTS

The assessee, a brick kiln dealer and composition dealer, under Bihar Value Added Tax, 2005, filed his return of income under section 139(4) on 29th March, 2018, under section 44AD of the Act. The assessee disclosed gross receipts of ₹ 49,45,000 and offered income thereon at 8 per cent, i.e. ₹3,95,600. The Assessing Officer (AO) in an order passed under section 143(3) of the Act made an addition of ₹76,000, a payment made to the Mining Department, ₹25,000 as VAT and ₹2,500 as the profession tax on the ground that the assessee has failed to explain the sources of these payments. The AO held that these amounts were incurred by the assessee out of unexplained income. He, accordingly, taxed these amounts under section 69C. He also initiated penalty proceedings under section 270A of the Act and levied a penalty under section 270A.

Aggrieved by the levy of penalty, 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 observed that the dispute is, whether the benefit of any inherent jurisdictional lacuna committed by the AO could again be availed by the assessee for absolving himself from the levy of penalty under section 270A of the Income-tax Act. The AO nowhere disputed that the assessee does not fall in the category provided under section 44AD.

In case, where income is offered @ 8 per cent of the gross receipts under section 44AD and the AO did not record a finding that this benefit u/s 44AD is not available to the assessee, then, he cannot direct the assessee to produce Profit & Loss Account and show the sources of the expenditure. The estimated rate of 8 per cent in itself takes care of all expenses incurred by an assessee. No further inquiry is required to be made. There was an incorrect approach adopted by the AO while passing the assessment order. The assessee did not dispute the determination of income otherwise the addition would have been deleted.

But the penalty proceeding is an independent proceeding. The assessee can take all jurisdictional pleas to absolve him from the levy of penalty. The assessee cannot be charged that he has under-reported the income and is liable to be visited for the penalty under section 270A of the Income-tax Act.

The appeal filed by the assessee was allowed.

BCAJ Admin

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

34. ITO vs. Babita Gupta

[2022] 100 ITR(T) 252 (Delhi – Trib.)

ITA No.: 5313 (Delhi) of 2019

A.Y.: 2014–15

Date of Order: 18th October, 2022

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

FACTS

In the course of assessment proceedings, the AO noticed that the assessee had sold agricultural land measuring 8 bighas situated in the Revenue Estate of Bakkarvala Village, Delhi for a consideration of ₹8,76,56,250 and claimed long-term capital gain of ₹8,48,80,881 as deduction u/s 54B of the Act. The assessee submitted the documentary evidences such as the copy of the agreement to sell, to purchase the agricultural land in the year 2000, copy of General Power of Attorney, copy of possession letter, affidavit of Shri Kali Ram Ganga Bishan (HUF) in proof of purchase of land by the assessee and copy of sale deed, dated 7th November, 2013, executed in the name of Pearls Life Style Developers (P) Ltd [Old Agricultural Land] and copy of the sale deed, dated 15th November, 2013, for the purchase of new agricultural land from Smt. Sumitra Devi Gupta, copy of General Power of Attorney, copy of possession letter, affidavit of Smt. Sumitra Devi Gupta in proof of purchase of land by the assessee[New Agricultural Land].

The AO while completing the assessment u/s 143(3) of the Act accepted the first transaction i.e., the sale of Old Agricultural land as genuine and fulfilled all the criteria and the second transaction i.e., the purchase of New Agricultural Land was not accepted on the ground that this transaction was made through General Power of Attorney only to claim deduction u/s 54B of the Act.

Aggrieved by the order of AO, the assessee filed an appeal before CIT(A). The CIT(A) considering the submissions of the assessee, the evidence furnished before him and following the decision of the Hon’ble Delhi High Court in the case of CIT vs. Ram Gopal [2015] 55 taxmann.com 536/230 Taxman 205/372 ITR 498 allowed deduction u/s 54B of the Act as claimed by the assessee.

Aggrieved by the order of CIT(A), the revenue filed a further appeal before the Tribunal.

HELD

The ITAT observed that the assessee immediately upon receiving the payments (through the banking channel) on account of sale consideration in respect of old agricultural land the assessee had invested the whole of the sale consideration received in respect of her old agricultural land towards the purchase of new agricultural land. Since the assessee had purchased the new agricultural land by investing the whole of the sale consideration in respect of the old agricultural land within the next few days, she had become eligible and entitled to claim the deduction / exemption u/s 54B of the Act, and accordingly, the assessee had claimed the deduction / exemption u/s 54B in her ITR filed for A.Y. 2014–15, which was denied by the AO.

The Tribunal observed that the AO accepted the transactions pertaining to old agricultural land and disbelieved the transaction of purchase of agricultural land from Smt. Sumitra Devi Gupta made by the assessee during the assessment year under consideration for the reason that there was no mutation in the Revenue Records and the purchaser of the property, Smt. Sumitra Devi Gupta, did not respond to the notice issued u/s 133(6) of the Act.

The ITAT further observed that in the course of appellate proceedings, the assessee had furnished the Return of Income filed by Smt. Sumitra Devi Gupta from whom the land was purchased by assessee, wherein the capital gain was declared by Smt. Sumitra Devi Gupta in her return of income for the A.Y. 2014–15.

The ITAT relied on the decision of the Delhi High Court in the case of Ram Gopal (supra) wherein it was observed that the Hon’ble Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd (340 ITR 1 SC) is of no consequence because the Hon’ble Apex Court had dealt with whether a sale or transfer based upon confirming a GPA amounted to sale / conveyance but the Hon’ble Apex Court did not consider and had no occasion to deal with section 2(14) and section 2(47) of the Act in the context of a claim of acquisition of rights of property and interest in a capital asset for the purpose of Income-tax Act, 1961. Applying the principles of this decision, the ITAT held that there was no infirmity in the order passed by the CIT(A) in allowing the exemption claimed u/s 54B of the Act as claimed by the assessee.

In the result, the appeal filed by the revenue was dismissed.

BCAJ Admin

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

33. DSG Papers (P) Ltd vs. ACIT/DCIT

[2022] 99 ITR(T) 241 (Chandigarh – Trib.)

ITA No.: 82 to 86 (Chd.) of 2022

A.Ys.: 2013–14 to 2017–18

Date of Order: 29th July, 2022

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

FACTS

The assessee-company was engaged in the business of manufacturing paper and paper products. For the A.Y. 2013–14, the assessee company’s case was selected for scrutiny proceedings u/s 143(3) and was completed on 20th March, 2016, at the returned income. Subsequently, the PCIT, Patiala set aside the assessment order and directed the Assessing Officer (AO) to pass a fresh assessment order vide order u/s 263, dated 31st August, 2017. The assessment subsequent to the revisionary proceedings was completed on 26th December, 2018, wherein the income of the assessee company as per the original assessment order passed u/s 143(3) on 20th March, 2016, was confirmed.

Meanwhile, there was a search and seizure operation on 5th August, 2016, on the business premises of the assessee-company, and the search was also conducted on Shri Sanjay Dhawan, an ex-president of the assessee company as well as three-four dealers of the assessee company and some ex-employees of the assessee company. During the course of the search at the residential premises of Shri Sanjay Dhawan, parallel invoices of goods manufactured and sold by the assessee-company were allegedly recovered. The evidence of undervaluation of sales was allegedly in the form of statements of third parties recorded u/s 14 of the Central Excise Act, 1944. There was also allegedly evidence of unaccounted sales and undervaluation of accounted sales made to third parties in the form of e-mail communication between the assessee-company and third parties. The information was passed on by the Intelligence Wing of GST to the Income-tax Department that the assessee-company had been allegedly suppressing its turnover by way of not accounting for the sales by under-invoicing the sales. Relying upon the said information and the said statements, the AO had initiated the reassessment proceedings u/s 147.

During the course of reassessment proceedings, the assessee-company had specifically requested to cross-examine the persons on whose statements the AO had relied. However, the AO brushed aside the request of the assessee for the opportunity to cross-examine these persons by simply observing that since the assessee had no explanation to offer, there was no requirement for giving any such opportunity. The AO proceeded to reject the books of account maintained by the assessee-company u/s 145(3) of the Act and, thereafter, proceeded to complete the assessment after making an addition of ₹31,40,021 on account of additional net profit by applying the net profit rate of 4.42 per cent. The alleged undisclosed sales for the year were computed at ₹3,62,60,331.

Aggrieved, the assessee-company filed an appeal before CIT(A). The CIT(A) upheld the action of the AO in rejecting the books of account but gave partial relief with respect to additional net profit by holding that the average net profit rate of 3.64 per cent was to be applied rather than 4.42 per cent.

Aggrieved, the assessee-company filed an appeal before the ITAT.

HELD

The ITAT had observed that it was an undisputed fact that during the course of search proceedings conducted by the Central Excise Authorities, neither at the premises of the assessee-company nor from any other premises, any other evidence with regard to undisclosed sales was found except for the invoices recovered from the residence of Shri Sanjay Dhawan and the impugned additions on account of the undisclosed / additional net profit on alleged unaccounted sales have been made only on the basis of invoices recovered from the residence of Shri Sanjay Dhawan.

The ITAT also observed that it was an undisputed fact that the assessee-company had specifically requested the AO to provide an opportunity to it to cross-examine these persons but such an opportunity was not granted. The ITAT further observed the following:

i. the assessee–company had demonstrated with ample evidence that Shri Sanjay Dhawan was a disgruntled employee of the company whose intentions were to put the assessee-company into unnecessary financial trouble and litigation,

ii. that the allegation that the unrecorded goods were being transported by vehicles owned by the assessee-company is incorrect in as much as it was physically impossible for the same vehicle to have delivered goods at two different stations within a short span of time on the same day, when time is required not only for movement of goods from one station to another but time is also required for loading and unloading of goods,

iii. that the statement of one of the ex-employees was in contradiction to the statement of Shri Sanjay Dhawan and the Income-tax authorities had relied on both, which does not hold good.

The ITAT observed that the denial of cross-examination by the Income-tax authorities has a significant bearing on the final outcome of this batch of appeals for the simple reason that the AO has relied upon those statements which had been recorded at the back of the assessee and the assessee was not given any opportunity to effectively rebut. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon. The ITAT had relied on the following decisions:

i. Andaman Timber Industries vs. CCE [2015] 62 taxmann.com 3/52 GST 355 (SC),

ii. CIT vs. Rajesh Kumar [2008] 172 Taxman 74/306 ITR 27 (Delhi.),

iii. CIT vs. Dharam Pal Prem Chand Ltd [2008] 167 Taxman 168 / [2007] 295 ITR 105 (Delhi HC),

iv. Prakash Chand Nahta vs. CIT [2008] 170 Taxman 520 / 301 ITR 134 (Madhya Pradesh HC).

The ITAT held that in the absence of such cross-examination having been allowed to the assessee-company and also in view of no incriminating material having been recovered from any of the premises searched; coupled with the fact that the assessee-company had filed an FIR against Shri Sanjay Dhawan and the statement of ex-employee itself stated that the parallel invoices used to be destroyed after the delivery of the consignments, the Income-tax authorities should not have placed complete reliance without any corroborative evidence on such statements.

In the result, the appeal filed by the assessee-company was allowed.

BCAJ Admin

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

32. Vishnu DattatrayaPonkshe vs. CPC

ITA No.: 1570/Mum./2023

A.Y.: 2017–18

Date of Order: 29th August, 2023

Sections: 44AD, 44ADA

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

FACTS

The Assessee e-filed its return of income declaring income, u/s 44AD of the Act, @8 per cent on receipts of ₹8,30,800 from the business of consultancy qua stamp duty and registration. The amount of ₹8,30,800 included the receipt of ₹4,81,280 on which TDS was deducted u/s 194J of the Act (fees for professional and technical services), and therefore, the AO / CPC added the income @50 per cent u/s 44 ADA of the Act, which resulted in making the addition of ₹2,40,640.

Aggrieved, the Assessee preferred an appeal to CIT(A), who by taking into consideration that all the deductors are big corporates and deducted tax u/s 194J of the Act, construed that the receipts of ₹4,81,280 related to professional and technical services and are covered u/s 44ADA of the Act and, therefore, taxable @50 per cent. The Commissioner ultimately computed the total income of the Assessee to the tune of ₹2,68,640 (₹2,40,640 + ₹27,982 @8 per cent of ₹3,49,500) and restricted the income of ₹3,49,500 u/s 139(1) of the Act to the tune of ₹2,68,602 only.

HELD

The Tribunal observed that the amount of ₹4,81,280 on which TDS was deducted u/s 194J of the Act, in fact, is part of the total receipt of ₹8,30,800 on which the Assessee has declared income @8 per cent u/s 44AD. However, both the authorities below applied the provisions of section 44ADA of the Act, which deals with persons carrying on legal, medical, engineering or architectural profession or profession of accountancy, technical consultancy or interior decoration or any other profession as is notified by the Board in the official gazette. The Tribunal noted that, admittedly, the Assessee is just a 10th/matriculation passed and does not have any qualification to act as a legal, medical, engineering or architectural professional or professional accountancy or technical consultancy of interior decoration or any other profession as is notified by the Board in the official gazette, as prescribed u/s 44AA of the Act.

The Tribunal held that the Assessee’s case does not fall under the provisions of section 44ADA of the Act. It deleted the addition of R2,40,640 sustained by the Commissioner.

BCAJ Admin

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

31. ND’s Art World Pvt Ltd vs. ACIT

ITA No.: 6850/Mum./2019

A.Y.: 2016–17

Date of Order: 23rd August, 2023

Sections: 56(2)(viib), Rule 11UA

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

FACTS

The assessee, a company engaged in the business of art direction, set construction, studio and equipment hire, filed its return of income on 17th October, 2016, declaring a total income of ₹8,41,17,500. The Assessing Officer (AO) vide order passed u/s 143(3) of the Act determined the total income at ₹23,68,86,730 by making various additions / disallowances.

During the year under consideration, the assessee had issued 1,780 shares of a face value of ₹10 at a premium of ₹98,280 per share. On perusal of the financials called for, the AO noticed that the assessee had in the financial year relevant to A.Y. 2015–16 revalued upwards the assets held by the assessee and had created a revaluation reserve. The immovable assets in the balance sheet pertained to land situated at Karjat along with the other assets, buildings, sets, etc., which were shown at WDV. Should the assessee while computing the book value of the assets for determining the fair market value of the shares consider the book value or should it be a revalued amount which is not reduced by the upward revaluation of the assets. The AO held that the assessee has increased the value of the assets in the previous year by creating an upward revaluation, and as a result, has determined the higher price per share. The AO stated that the valuer had not considered the prevailing stamp duty value at the time of the valuation of the land and building of the assessee and had not specified as to what methodology or reference was made to substantiate the value of the assets. According to the AO, the valuer has merely arrived at the market value of the land at ₹6,500 per square feet without considering the value of the land, current market price and various other criteria and has also not made a comparable analysis of nearby land sold during that period. The AO stated that the valuer has not justified the charging of an additional premium in his report and has merely increased the value of the sets and buildings which are depreciable assets, the value of which does not increase over a period of time. A similar observation was made by the AO on the value of the vehicles, plant and machinery, office equipment, etc., which are properties subject to depreciation. The AO held that the assessee has failed to substantiate the increase in the value. The AO further stated that the Rule 11UA specifies that the revaluation of the assets is not to be considered for the calculation of the share premium.

The AO calculated the fair market value of the shares after removing the revaluation value of the assets and arrived at the share price of ₹17,815 per share as against the assessee’s determination of the value per share amounting to ₹80,465. He made an addition to the difference of share premium of ₹80,465 per share aggregating to ₹14,33,27,700 u/s 56(2)(viib) of the Act on the grounds that the premium value under Rule 11UA cannot be taken using the revaluation of the assets, thereby recomputing the premium value at ₹17,815 per share as against the assessee’s valuation of ₹98,280 per share.

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 where it was contended, on behalf of the assessee, that theassessee would not be covered u/s 56(2)(viib) of the Act for the reason that the shares were transferred only amongst the family members of the assessee, and the assessee is a company. So then how can it have relatives? And even otherwise, neither the AO nor the CIT(A) has referred the matter to the DVO for the purpose of determining the valuation of the assets. It was submitted that Rule 11UA does not mention that the revaluation reserve is to be reduced and that only Rule 11UAA inserted w.e.f. 1st April, 2018, lays down the Rules for valuation and that Rule 11UAA was not applicable to the assessee for the impugned year. Reliance was placed on the decision of the coordinate bench in the case of DCIT vs. Pali Fabrics Pvt. Ltd. [2019] 110 taxmann.com 310 (Mum)(Trib).

HELD

The Tribunal noted that the DR contended that AO had challenged the validity of the valuation report and that the AO is entitled with the power of the valuer and can determine the value himself. Without prejudice, he stated that this issue may be remanded to the file of the AO for determining the valuation after referring the same to the DVO. The DR relied on the decision of the Delhi Tribunal in the case of Agro Portfolio Pvt Ltd vs. ITO [(2018) 94 taxmann.com 112 (Del Trib)].

The Tribunal observed that the difference of share premium was added u/s 56(2)(viib) of the Act since the AO has rejected the valuation determined by the assessee as per the valuation report submitted by the assessee vide letter, dated 13th December, 2018. The AO further has failed to accept the valuation report of the assessee for the reason that the valuer has not adopted any methodology or reference for the purpose of calculation of the land value without considering the factors such as value of the land as per stamp authority, land market price, location factors and the value at which the neighbouring lands were sold during that period, etc. It is observed from the said fact that the AO has not referred the said matter for valuation to the DVO while he has merely rejected the valuation report submitted by the assessee. The Tribunal found it pertinent to point out that the lower authorities have failed to exercise the option of referring the matter to the DVO for the purpose of valuation of the assets which are very much within the purview of the jurisdiction of the lower authorities.

The Tribunal considered it fit to remand this issue back to the file of the AO for the purpose of valuation of the assets by referring the same to the DVO and to consider the said issue in light of the valuation report of the DVO.

BCAJ Admin

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

30. DCIT vs. Smt. Aruna Chandhok

ITA No.: 387/Del./2021

A.Y.: 2015–16

Date of Order: 5th September, 2023

Sections: 56(2)(vii)(c)

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

FACTS

The assessee, an individual, filed her return of income for the A.Y. 2015–16 on 16th October, 2015, declaring income under the head salary, house property, capital gains and other sources.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the previous year relevant to the assessment year under consideration, received bonus shares and bonus units from Tech Mahindra Ltd. and JM Arbitrage Advantage Fund – Bonus options. The assessee was given a show cause as to why the value of these bonus shares and bonus units should not be added u/s 56(2)(vii)(c) of the Act. The assessee submitted that the provisions of section 56(2)(vii)(c) are not applicable to bonus shares / bonus units as these are received on capitalisation of profits. The value of the shares would remain the same, and there would be no increase in the wealth of the shareholders on account of bonus shares and his percentage of holding the shares in the company remains constant. Pursuant to bonus shares and bonus units, the share / unit gets divided in the same proportion for all the shareholders. There would be no receipt of any property by the shareholder and what is received is only split shares out of her own holding. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. General Insurance Corporation Ltd [286 ITR 232 (SC)], which held that the issuance of bonus shares by a company does not result in any inflow of fresh funds and nothing comes to the shareholders. It was also submitted that the market price of any share after the bonus issue gets reduced almost in proportion to the bonus issue, and hence, there would be no increase in the market value of shares held by the assessee pursuant to the bonus issue. The overall wealth of a shareholder post-bonus or pre-bonus remains the same. Hence, the assessee received no additional benefit or income on the allotment of bonus shares, because it is only a split of his total rights in the wealth of a company, which remains the same even after the bonus issue.

The AO did not accept the contentions made by the assessee and taxed ₹36,10,63,656 u/s 56(2)(vii)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who distinguished the decisions relied upon by the AO and relied on the decision of the Delhi Tribunal, dated 27th January, 2017, in the case of Meenu Satija vs. PCIT. The CIT(A) held that the AO had misread the judgment of the Bangalore Bench of the Tribunal in the case of Dr Rajan Pai.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal held that bonus shares are issued on capitalisation of existing reserves of the company. It noted that the AO had not disputed that the overall wealth of the shareholder post-bonus or pre-bonus remains the same. Having held so, the Tribunal observed that it was wrong on the part of the AO to invoke section 56(2)(vii)(c) on the grounds that there is a double benefit derived by the assessee due to the bonus shares. The Tribunal noted that the issue is covered by the ratio of the decision of the Karnataka High Court in the case of PCIT vs. Dr. Ranjan Pai in ITA No. 501 of 2016, dated 15th December, 2020. The Tribunal held that the CIT(A) had rightly appreciated the contentions of the assessee.

The Tribunal not finding any infirmity in the order of the CIT(A) dismissed the grounds of appeal filed by the revenue and upheld the relief granted by the CIT(A) to the assessee.

BCAJ Admin

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

24. Information Technology Park Ltd vs. ITO
[2022] 99 ITR (T) 633 (Bangalore – Trib.)
ITA Nos.: 1357 & 1358 (BANG.) of 2018
A.Ys.: 2009-10 & 2010-11
Date of order: 24th August, 2022

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

FACTS

The assessee was a public limited company incorporated in the year 1994. It was engaged in the business of developing, operating and maintaining industrial parks/Special Economic Zones. The assessee was a subsidiary of Ascendas Property Fund (India) Pvt Ltd. [APFI]. The assessee had issued 0.5 per cent redeemable non-cumulative preference shares on 6th January, 2003 and the same was subscribed by APFI. The preference shares were issued at a face value of Rs. 100 per share and were redeemable at any time after 24 months but not later than 9 months from the date of allotment. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of the international transaction entered into by assessee with AFPI. The assessee had during the previous year relevant to A.Y. 2010-11 redeemed some of the preference shares at a premium based on the valuation done the expert valuer by adopting the Net Asset Value (NAV) method. The TPO accepted the method of valuation adopted by the assessee i.e., NAV method, but reworked the redemption value based on book value of assets. The TPO arrived at the redemption value at Rs. 286.80 per share which resulted in an adjustment of Rs. 29,95,66,000 that arose out of the difference between the redemption value adopted by the assessee and the TPO. The AO passed the final assessment order giving effect to the TP adjustment based on the letter filed by the assessee that the assessee would not be filing objections before the DRP and would prefer appeal with the CIT(Appeals).

The CIT(Appeals) held that the TP adjustment made by the TPO determining the value at which the preference shares should have been redeemed cannot be treated as income in the hands of the assessee by relying on the decision of the Bombay High Court in the case of Vodafone India Services (P.) Ltd vs. Union of India [2015] 53 taxmann.com 286/231 Taxman 645/[2014] 369 ITR 511. However, since the ALP of the share price determined by the TPO was lesser than the price determined by the assessee, the CIT(A) proposed to make addition to the extent of the same amount by treating it as deemed dividend. In this regard the CIT(Appeals) relied on the decision of the Tribunal in the case of Fidelity Business Services India (P) Ltd vs. Asstt. CIT [2017] 80 taxmann.com 230/164 ITD 270 (Bang – Trib). The assessee filed its response to the show cause notice before the CIT(Appeals) by submitting that the premium of redemption of preference shares cannot be considered as deemed dividend as per the provisions of section 2(22) of the Act and revenue authorities cannot re-characterize the transaction as deemed dividend. The assessee made detailed submissions before the CIT(Appeals) in this regard which were rejected by the CIT(Appeals) who proceeded to treat the premium on preference shares as deemed dividend. Aggrieved by the order, the assessee was in appeal before the Tribunal.

HELD

The Tribunal observed that a combined reading of the rule 11UA(1)(c)(b) with rule 11UA(1)(c)(c) can be taken to mean that for the purpose of valuation of preference shares also the immovable properties to be considered at guideline value since the value based on the guidance represents the economic and commercial value of the preference shares on the date of valuation.

The method of valuation adopted as NAV was not disputed as the TPO had also applied the same method and impugned addition had arisen only due to the value of land and building considered by the TPO for arriving at the NAV. The guideline value of land and building for the purpose of valuation of preference shares under NAV method was right. Therefore, the addition made by the TPO computing the differential premium basis the book value of assets was not sustainable. Since there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend under section.2(22)(e) also would not survive. The appeal was allowed in favour of the assessee.

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