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Category: Tribunal News: Part A-Domestic Taxation

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

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

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

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

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

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

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

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

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

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

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

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

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

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

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


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

FACTS

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

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

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

 
The Tribunal held that,

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

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

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

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

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

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

The appeal filed by the assessee was allowed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

FACTS

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

 

Aggrieved, the assessee preferred an appeal before the Tribunal.

 

HELD

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

 

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

 

The appeal of the assessee employer was allowed.

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

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

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

FACTS

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

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

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

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

HELD

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

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

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

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

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

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

FACTS

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

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

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

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

HELD


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

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

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

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

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

FACTS

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

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

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

HELD


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

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

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

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

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

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

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

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

FACTS

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

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD


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

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

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

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

FACTS

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

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


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

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

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

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

Aggrieved, the Revenue preferred an appeal before the Tribunal.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FACTS

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

HELD


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

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

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

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

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

FACTS

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

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

HELD


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

This ground of appeal filed by the assessee was allowed.

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

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

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

FACTS

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

HELD


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

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

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

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

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

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

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

FACTS

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

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

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

HELD


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

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

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

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

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

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

The assessee company argued that the provisions of section 68 would not apply in the present facts of the case because there was no actual movement of money and hence it was a tax-neutral transaction. Reliance was placed on the decision of the Delhi High Court in the case of Maruti Insurance Distribution Services Ltd. vs. CIT [2014] 47 taxmann.com 140 (Delhi) wherein it was held that it was the decision of the businessmen to decide and value its goodwill. Concurring with this contention, the CIT(A) deleted the addition made u/s 68.

HELD
It was an undisputed fact that there was no actual receipt of any money by the assessee company; and when the cash did not pass at any stage and when the respective parties did not receive cash nor did they pay any cash, there was no real credit of cash in the cash book and, therefore, the provisions of section 68 would not be attracted. Reliance was placed on the following decisions:

a) ITO vs. V.R. Global Energy (P) Ltd. [2020] 407 ITR 145 (Madras High Court), and
b) ACIT vs. Suren Goel [ITA No. 1767 (Delhi) of 2011].

Reference was also made to the decision in the case of ACIT vs. Mahendra Kumar Agrawal [2012] 23 taxmann.com 285 (Jaipur-Trib) wherein it was held that the term ‘any sum’ used in section 68 cannot be taken as parallel to ‘any entry’.

An identical matter had come up before the Kolkata Tribunal in the case of ITO vs. Anand Enterprises Ltd. [ITA No. 1614 (Kol) of 2016] wherein, referring to the decision of the Supreme Court in the case of Shri H.H. Rama Varma vs. CIT 187 ITR 308 (SC), the Tribunal held that the term ‘any sum’ means ‘sum of money’; accordingly, in the absence of any cash / monetary inflow, addition u/s 68 cannot be made.

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

38 Prakash Chand Bethala vs. Dy. CIT [(2021) 88 ITR(T) 290 (Bang-Trib)] IT Appeal No. 999 (Bang) of 2019 A.Y.: 2007-08; Date of order: 28th January, 2021

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

FACTS
The assessee was an HUF that had acquired a property by participating in a BDA auction. The agreement for acquisition of the property took place on 24th July, 1984 and the assessee had acquired possession on 29th August, 1984.

One R.K. Sipani (RKS) acquired the aforesaid property from the assessee through M/s K. Prakashchand Bethala Properties Pvt. Ltd. (KPCBBL) through an oral agreement in the month of September, 1989 for the consideration of Rs. 9.80 lakhs. The assessee gave the possession of the property to RKS on 24th October, 1989. Thereafter, on 8th March, 1993, an unregistered sale agreement was made between the assessee and RKS to bring clarity on the aforementioned transaction. Then, on 9th March, 2007, a sale deed was executed in which the aforesaid site was sold to M/s Suraj Properties (a proprietary concern of RKS’s wife) for the consideration of Rs. 9.80 lakhs.

The A.O. noticed that the guidance value of the property as per the executed sale deed on 9th March, 2007 was Rs. 2.77 crores and the sale consideration was less than the guidance value; thus, the provisions of section 50C were attracted. On appeal, the CIT(A) also confirmed the action of the A.O. Aggrieved by the order, the assessee filed an appeal before the Tribunal.

HELD
The question before the Tribunal was what could be the full value of such consideration, i.e., whether the value on which the stamp duty was paid at the time of the sale deed or the value declared in the sale agreement.

The Tribunal observed that the assessee had entered into the sale agreement on 8th March, 1993 and a major portion of the agreed consideration had been received by the assessee through account payee cheque and possession of the property was also handed over to RKS on 24th October, 1989. There is no dispute regarding these facts. The only action pending was actual registration of the sale deed.

The Tribunal observed that section 50C(1) provides that if there is a gap between the date of execution of the sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of the agreement has to be considered as the full consideration of the capital asset. In the present case,
1) the enforceable agreement was entered into on 8th March, 1993 by payment of a major portion of the sale consideration,
2) the possession of the property had already been handed over on 24th October, 1989,
3) only the formal sale deed was executed on 9th March, 2007.

Therefore, the Tribunal held that the transfer had taken place vide the sale agreement dated 8th March, 1993 and full value of consideration for the purpose of computing long-term capital gain in the hands of the assessee has to be adopted only on the basis of the guidance value of the property as on the date of the sale agreement, i.e., 8th March, 1993, and not on the date of the sale deed of 9th March, 2007. Accordingly, there was no applicability of section 50C in the year 2007-08.

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

37 Stalwart Impex Pvt. Ltd. vs. ITO [(2021) TS-615-ITAT-2021 (Mum)] A.Y.: 2016-17; Date of order: 2nd July, 2021 Section 43CA

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

FACTS
During the previous year relevant to the assessment year under consideration, the assessee, engaged in the construction of commercial and residential housing projects, sold flats to various buyers. In respect of three flats the A.O. held that the stamp duty value (SDV) is more than their agreement value. The total agreement value of the said three flats was Rs. 97,11,500 whereas their SDV was Rs. 1,09,83,000. Upon an objection being raised by the assessee, the A.O. made a reference to the Department Valuation Officer (DVO) for determining the market value of the said flats. The DVO determined the market value of the three flats to be Rs. 1,03,93,000. However, before receipt of the report of the DVO, the A.O. made the addition of the difference between the SDV and the agreement value of the said three flats, i.e., Rs. 12,71,500, u/s 43CA.

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

HELD
The Tribunal observed that the difference between the agreement value and the value determined by the DVO is approximately 7%. On behalf of the assessee it was contended that since the difference is less than 10%, no addition should be made. The Tribunal noted that a similar issue had come up before the Tribunal in the case of Radhika Sales Corporation vs. Addl. CIT [ITA No. 1474/Pune/2016, A.Y. 2011-12, order dated 16th November, 2018 and the Tribunal while deciding the issue deleted the addition made and observed that ‘since difference between the value declared by the assessee and the value determined by the DVO is less than 10%, no addition in respect of long-term capital gain is warranted.’ The Tribunal observed that while the said decision was rendered in the context of section 50C and the addition in the instant case is u/s 43CA, both the provisions are pari materia and therefore the decision rendered u/s 50C would hold good for interpreting section 43CA as well. The Tribunal held that where the difference between the sale consideration declared by the assessee and the SDV of an asset (other than capital asset), being land or building, or both, is less than 10%, no addition u/s 43CA is warranted.

The Tribunal observed that the Finance Act, 2018 inserted a proviso to section 43CA(1) providing 5% tolerance limit in variation between declared sale consideration vis-à-vis SDV for making no addition. A similar proviso was inserted by the Finance Act, 2018 to section 50C(1). The said tolerance band was enhanced from 5% to 10% by the Finance Act, 2020 w.e.f. 1st April, 2021. The Tribunal in the case of Maria Fernandes Cheryl vs. ITO (International Taxation) 123 taxmann.com 252 (Mum) after considering various decisions and the CBDT Circular No. 8 of 2018 dated 26th December, 2018 held that the amendment is retrospective in nature and relates back to the date of insertion of the statutory section to the Act.

The Tribunal held that both sections are similarly worded except that both the sections have application on different sets of assessees. The proviso has been inserted and subsequently the tolerance band limit has been enhanced to mitigate the hardship of genuine transactions in the real estate sector. Considering the reasoning given for insertion of the proviso and exposition by the Tribunal for retrospective application of the same, the Tribunal held that the proviso to section 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014.

The Tribunal allowed the appeal filed by the assessee.

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

36 Owens-Corning (India) Pvt. Ltd. vs. ITO [(2021) TS-517_ITAT-2021 (Mum)] A.Y.: 2003-04; Date of order: 25th June, 2021 Section 37

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

FACTS
The assessee company availed a loan from a US bank on floating rate of interest. During the previous year relevant to the assessment year under consideration, the assessee chose to convert the said loan carrying floating rate of interest into fixed rate of interest. The assessee was asked to pay certain swap charges for the said conversion from floating to fixed rate. The swap charges liability had been duly incurred by the assessee during the year. The assessee characterised the swap charges as being in the nature of interest.

But the A.O. while assessing the total income disallowed the swap charges claimed on the ground that the said expenditure is capital in nature.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the assessee converting the loan from floating rate of interest to fixed rate of interest has derived enduring benefit and hence the expenditure incurred by the assessee falls in the capital field warranting capitalisation thereon and hence cannot be allowed u/s 37(1).

HELD
The Tribunal noted the calculation of swap charges and observed that the swap charges incurred by the assessee for conversion from floating to fixed rate of interest would necessarily partake the character of interest. The interest paid by the assessee when the loan was in floating rate was duly allowed by the A.O. Hence, the character of the transaction does not change pursuant to this swap from floating to fixed rate. The utilisation of the loan for the purposes of business has not been disputed, hence there is no question of disallowance of any interest whatever the nomenclature, interest or swap charges. The nomenclature of the transaction is absolutely irrelevant to the substance of the transaction.

The Tribunal, following the decision of the Jurisdictional High Court in the case of CIT vs. D. Chetan & Co. 390 ITR 36 (Bom) held that the assessee is entitled to deduction of swap charges. This ground of appeal filed by the assessee was allowed.

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

35 Batliboi Ltd. vs. ITO [(2021) TS-410-ITAT-2021 (Mum)] A.Y.: 2013-14; Date of order: 21st May, 2021 Sections 4, 45, 115JB

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt

Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

FACTS
The assessee company owned land along with super structure which was acquired by it vide a sale deed dated 15th April, 1967. During the financial year relevant to the assessment year under consideration, the assessee company proposed to sell the said land along with its super structure. In the course of negotiations it became aware that post acquisition of land and constructed building, the Development Control Regulations (DCR) in the city of Coimbatore had undergone a change resulting in the company obtaining an additional benefit by way of additional FSI of 0.8.

The company sold the said land along with super structure vide a deed of sale on 23rd January, 2013 for a consideration of Rs. 11,14,00,000. Taking the help of the valuer, Rs. 4,76,25,000 out of this composite consideration was attributed to the additional FSI obtained as a result of the amendment in the DCR. In the return of income filed, the assessee regarded the sum of Rs. 4,76,25,000 received towards additional FSI as a capital receipt. However, while computing the book profit u/s 115JB, the said sum of Rs. 4,76,25,000 was included in the book profit.

The A.O. brought this sum of Rs. 4,76,25,000 to tax as long-term capital gains. This amount was also treated as part of book profits u/s 115JB since it was already offered to tax voluntarily by the assessee.

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

The aggrieved assessee preferred an appeal to the Tribunal where it also raised an additional ground, viz., that the sum of Rs. 4,76,25,000 being a capital receipt is not part of the operating results of the assessee and therefore is not includible in computing its book profits u/s 115JB.

HELD
The Tribunal observed that the total sale consideration of Rs. 11,14,00,000 has not been doubted by the Revenue. The break-up of consideration, as done by the assessee, by relying on the independent valuer’s report was also not doubted by the Revenue. The only dispute was whether the said sum of Rs. 4,76,25,000 could be treated as a capital receipt thereby making it non-exigible to tax both under normal provisions as well as in the computation of book profits u/s 115JB.

The Tribunal held that the assessee could not have pre-empted any change in the DCR in the city of Coimbatore at the time of purchase or before sale. Admittedly, no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of additional FSI on the land and building owned by him is only a windfall gain by operation of law and which had not cost him any money. The Tribunal found that the entire issue in dispute is squarely covered by the decision of the Jurisdictional High Court in the case of Kailash Jyoti No. 2 CHS Ltd. and others dated 24th April, 2015. Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 received by the assessee on the sale of additional FSI is not exigible for long-term capital gains. It directed that the same be excluded under the normal provisions of the Act.

While deciding the additional ground, the Tribunal observed that there is absolutely no dispute that the receipt of Rs. 4,76,25,000 is indeed a capital receipt and the same does not form part of the operational working results of the assessee company. Even according to the Revenue, the said receipt is only inseparable from the land and building and accordingly it only partakes the character of a capital receipt. The Tribunal held that merely because a particular receipt, which is in the capital field, has been offered to tax by the assessee voluntarily in the return of income while computing book profits u/s 115JB it cannot be brought to tax merely on that ground. It is very well settled that there is no estoppel against the statute. It noted that the dispute is covered by the Tribunal in the assessee’s own case in ITA No. 5428/Mum/2015 for A.Y. 2011-12, order dated 17th December, 2021.

Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 being a capital receipt from its inception is to be excluded while computing book profits u/s 115JB and also on the ground that it does not form part of the operational working results of the company.

The Tribunal allowed both the grounds of appeal filed by the assessee.

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacityAlleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

34 Bankimbhai D. Patel vs. ITO [(2021) TS-403-ITAT-2021 (Ahd)] A.Ys.: 2003-04 and 2004-05; Date of order: 19th May, 2021 Section 4

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

FACTS
In this case, the original assessment for A.Y. 2003-04 was completed u/s 143(3) r/w/s 147 assessing total income at Rs. 29,86,640 against a returned income of Rs. 47,120. The case of the A.O. was that the assessee was a power of attorney (PoA) holder of certain pieces of land on which construction was done and these were sold. He received on-money and that on-money has not been accounted for by the assessee. The A.O. recorded the statement of one Rasikbhai Patel who confessed that he paid Rs. 8,71,695 but documents were executed only for Rs. 1,32,500. On the basis of this statement, the A.O. harboured the belief that the difference of these two amounts, i.e., Rs. 7,39,195, was collected by way of on-money. He applied this rate to all the plots sold during the year and believed that the assessee has retained on-money which deserves to be assessed in the hands of the assessee. A similar exercise was done for the A.Y. 2004-05.

When the matter reached the Tribunal, it restored the matter back to the file of the A.O. with a direction to find out as to what was the arrangement between the landowners and the PoA holder and who has received the sale consideration; and whether the recipient of sale consideration has offered capital gains; after examining all these aspects and also after finding out what has happened in the hands of the owners, the A.O. should decide the issue afresh and pass necessary orders.

In the set-aside proceedings from which this appeal has arisen, the A.O. made reference to evidence collected in the first round of the assessment proceedings and added the undisclosed and unrecorded income by way of on-money to the total income of the assessee on the ground that the landowners have not filed their return of income for A.Y. 2003-04.

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

HELD
The Tribunal observed that both the authorities have failed to analytically examine the issue as per the direction of the ITAT in the first round. The A.O. was specifically directed to examine the understanding between the landowners and the assessee; whether it has been agreed that the landowners would receive only the amount mentioned in the sale deed. It noted that the A.O. has not recorded the statement of any of the landowners though he was given all the details. He recorded the statement of one of the purchasers in the first round but that is not a relevant evidence as that evidence can be taken for determination of quantum but cannot be used to determine who received that quantum. The Tribunal found the action of the A.O. in holding that since the landowners have not paid capital gains, on-money is to be taxed as income of the assessee to be illogical.

The Tribunal held that the law contemplates that the A.O. has to first determine in whose hand the income has to be assessed and who is the rightful owner. The assessee being a PoA holder, cannot be treated as the rightful owner of the income which has arisen on the sale of a particular property. His action was only in a representative capacity. It observed that it could have appreciated the stand of the A.O. if he had been able to bring on record the terms of agreement between the assessee as well as landowners specifying the distribution of amount between the assessee in his capacity as PoA holder vis-à-vis the actual owner. No such steps were taken in spite of the specific direction of the Tribunal in the first round. Considering all these aspects, the Tribunal held that there is no justification for sustaining addition in both the assessment years in the hands of the assessee. The appeal filed by the assessee was allowed.

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

30 IKEA Trading (India) (P) Ltd. vs. DCIT [2020] 83 ITR(T) 415 (Del-Trib) IT(SS) Appeal Nos. 5568 and 5877 (Del) of 2011 A.Y.: 2004-05; Date of order: 30th June, 2020

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

FACTS I
In the course of assessment proceedings, the A.O. asked the assessee to explain certain amounts of sundry creditors. Notices u/s 133(6) were issued, but many of them were not complied with. Consequently, the A.O. made addition for the amount of sundry creditors. On further appeal by the assessee, the Commissioner (Appeals) confirmed the additions only in respect of two parties and deleted the entire balance addition. This was done considering the details filed by the assessee before him. The additions that were sustained were on account of failure of the assessee to furnish account details and relevant pay-out details.

Aggrieved, the assessee as well as Revenue preferred appeals before the ITAT.

HELD I
The Tribunal took into consideration the fact that the A.O. simply added the balance as on 31st March, 2004 without realising that the entire credit balance was out of the purchases made during the year, which were accepted as genuine and no adverse inference was drawn in respect thereof. Further, the assessee had paid all the outstanding amounts in the immediately succeeding years. Therefore, the ITAT allowed the assessee’s appeal and dismissed the Revenue’s ground of appeal. In reaching this conclusion, apart from the facts stated above, it also placed heavy reliance on the decision of the Delhi ITAT Special Bench in the case of Manoj Aggarwal vs. Dy. CIT (2008) 113 ITD 377. The principle upheld in that case was that once a certain amount was accepted as genuine, the same cannot be questioned later on. (The case was in respect of amount offered to tax under a Voluntary Disclosure of Income Scheme, which was credited in the books of accounts as per the requirement of the respective law on the scheme. It was held that once the amount is taxed under the scheme, the same could not be taxed again u/s 68.)

Therefore, by the same rationale, once purchases were accepted as genuine in the instant case, addition of credit balance which was entirely out of purchases for the year could not be made.

Section 40A(2)(b): Where the A.O. had not brought any comparable case to demonstrate that payments made by assessee to directors were excessive / unreasonable, no disallowance could be made

FACTS II
The assessee claimed certain amount expended towards directors’ remuneration. On asking for an explanation in respect of the same, the assessee furnished the details of remuneration paid to the directors and claimed that the same was as per industry norms and was not in excess of either the limits prescribed under the Act, or the industry norms for the particular class of industry. However, the A.O. was of the opinion that the assessee failed to justify the nature of services rendered by the directors so as to command such a huge remuneration. Therefore, the A.O. disallowed a part of the remuneration on the basis that it was excessive.

Before the Commissioner (Appeals), the assessee contended that the A.O. did not give any cogent reasons to justify the disallowance and that he grossly failed to show that such expenditure was excessive and / or unreasonable. Thus, the Commissioner (Appeals) deleted the disallowance made.

The Revenue filed a further appeal before the ITAT.

HELD II
The ITAT observed that the A.O. did not bring any comparable case to demonstrate that the payments made by the assessee were excessive / unreasonable, which is an onus cast upon him by the mandate of section 40A(2)(b).

A further observation was that the payees were also assessed to tax at the same rate of tax. The CBDT Circular No. 6-P dated 6th July, 1968 states that no disallowance is to be made u/s 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. Considering the totality of the facts in light of the CBDT Circular (Supra), the ITAT dismissed the ground of appeal raised by the Revenue, thereby allowing the assessee’s claim of remuneration.

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

29 Kundan Rice Mills Ltd. vs. Asst. CIT [2020] 83 ITR(T) 466 (Del-Trib) IT(TP) Appeal No. 853 (Del) of 2020 A.Y.: 2015-16; Date of order: 9th July, 2020

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

FACTS
The assessee company was engaged inter alia in trading in shares, futures and options. During the year under consideration, it claimed loss on account of trading in stock options. The A.O. found that SEBI had passed an ex parte interim order in the matter of illiquid stock options wherein the name of the assessee company also figured in the list of entities which had entered into non-genuine, fraudulent trades to generate fictitious profits / losses for the purpose of tax evasion / facilitating tax evasion.

However, the assessee explained before the A.O. that (i) it had acted as a bona fide trader as it had been doing in the past and complied with all procedures and requirements of the stock exchange, (ii) at the time of the relevant transactions / trades, the assessee could not have had any idea about any profit or loss in the said transactions, and (iii) the assessee was not connected with the counter-parties in the trade and there was no grievance of any of the investors or BSE. It also claimed that only 4.85% sale transactions allegedly matched with entities named by SEBI. The A.O., however, rejected this submission of the assessee and disallowed loss in trading from stock options. The Commissioner (Appeals) upheld the addition made by the A.O. on the basis that since detailed investigation was carried out by SEBI, no separate investigation was required to be done by the A.O. to disallow the bogus losses.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The disallowance of loss made by the A.O. was deleted by the ITAT. In doing so, it observed that:

1. Trading in stock futures and options was done by the assessee regularly since past several years. The transactions were recorded in the books of accounts. The intrinsic value mentioned in the SEBI order was only one of the ways of calculating and there is no set formula / law / rule / circular which defines intrinsic value or prohibits trading below intrinsic value.
2. The A.O., in the assessment order, had observed that in screen-based electronic trading, ideally, it was not possible to choose the counter party for trade. The circuit breaker limits set by SEBI were not applicable to the Futures and Options (F&O) segment.
3. SEBI subsequently directed that there was no need to continue with the directions issued against the assessee company and others (these were the same orders relied upon by the Income-tax authorities). Thus, in principle, the interim order and subsequent orders of the SEBI which were the basis of passing the assessment order in question, were vacated by SEBI itself.
4. The assessee filed complete documentary evidence before the authorities like carrying out transactions through banking channels, fulfilling margin requirements mandated by SEBI, etc. The same were supported by contract notes. There was also no allegation made by BSE against any of the transactions carried out by the assessee company. The A.O. as well
as the Commissioner (Appeals) did not conduct any investigation on the documentary evidences filed by the assessee.
5. Loss on account of similar nature of transactions was incurred in the preceding year, which was not disallowed and hence, the A.O. ought to have followed the principle of consistency.
6. The ad interim order of SEBI was passed without hearing the objections of the assessee and when
those objections were considered, the interim order was diluted by giving permission to the assessee to deal
in the transactions. Since both the orders of SEBI relied upon by the A.O. were vacated by the SEBI, there was no material available with the authorities below so as to conclude that the assessee has entered into any dubious or other transactions deliberately to show business losses.
7. The ad interim order which was passed by SEBI ex parte would not disclose any precedent or ratio which may be binding on the Income-tax Department.

Based on the above observations, the disallowance was finally deleted.

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

28 Shri Bhavarlal Mangilal Jain [2021] TS-420-ITAT-2021 (Mum)b A.Y.: 2012-13; Date of order: 4th May, 2021 Section 36(1)(iii)

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

FACTS
The assessee, an individual, had wrongly claimed certain interest expenditure under ‘income from other sources’ which was disallowed by the A.O. during assessment. At the appellate proceedings with the CIT(A), the assessee raised an additional ground that such interest be allowed under the head ‘Profits & Gains of Business / Profession’. The CIT(A) allowed the interest expenditure, but restricted the rate of interest to 12% p.a. The interest paid in excess of 12% was disallowed on the grounds that the rate of interest is higher (the assessee had paid interest ranging from 5% to 24%) than the interest received on Partnership Capital Account. The CIT(A), thus made a disallowance of interest in excess of 12% p.a.

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD
The Tribunal observed that the Department had accepted the genuineness of the loan transactions and also the same being for business purposes. Once the expenditure has been accepted to be business expenditure, the interest rate cannot be arbitrarily restricted. In order to disallow interest beyond a certain rate, it has to be shown that such interest was excessive or for extraneous consideration. Based on facts, the Tribunal noted that some of the parties to whom interest was paid at a rate of more than 12% included banks, non-banking financial institutions and some private lenders, and none of these parties was related to the assessee within the provisions of section 40A. Thus, the assessee’s appeal was allowed.

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

27 Hima Bindu Putta [2021] TS-428-ITAT-2021 (Hyd) A.Y.: 2009-10; Date of order: 3rd May, 2021 Section 23

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

FACTS

The assessee, an individual, filed her return of income declaring loss under the head ‘house property’. She was in ownership of a property which was let-out by her to a company in which her husband was a director-employee. The company in turn provided this property by way of accommodation to her husband, Mr. A, with whom she resided in the property. The assessee treated this property as a let-out property and offered the rental income in her computation. The A.O. treated 50% of the property as let-out and the balance 50% as self-occupied, as the assessee was also residing in the property. Accordingly, he restricted deductions u/s 24 to 50% of the allowable amounts. The CIT(A) dismissed the assessee’s appeal.

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


The Tribunal, relying on the material available on record, found that there was no dispute that the assessee was the owner of the property and she had purchased it with borrowed capital. Further, the property had been let-out to the company and she had offered the rental income in her computation for the relevant assessment year. ‘The assessee is the wife of Mr. A, who was given the property as residential accommodation by the company, and therefore it cannot he held that the assessee herself is occupying the property.’

The Tribunal ruled in favour of the assessee, stating that such income has to be treated as income from ‘house property’ and all eligible deductions including interest on borrowed capital was to be allowed in computing such income.

The assessee’s appeal was thus allowed.

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

26 BSC C&C Krunali Toll Road Ltd. vs. DCIT TS-381-ITAT-2021 (Del) A.Ys.: 2012-13 & 2013-14; Date of order: 18th May, 2021 Section: 32

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

FACTS

The assessee company developed a toll road on the Kurla-Kiratpur section in Punjab on BOOT basis. The contract was awarded by the National Highways Authority of India (NHAI). The entire cost of construction was Rs. 441,27,05,614, including a grant of Rs. 43.92 crores from the NHAI. The assessee, in its return of income, claimed depreciation thereon @ 25%. While assessing its total income u/s 143(3), the A.O., following the judgment of the Allahabad High Court in CIT vs. Noida Toll Bridge Co. Ltd. 213 Taxman 333, restricted depreciation on the toll road to 10%.

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

The assessee then preferred an appeal to the Tribunal where it contended that the lower authorities erred in holding that it was the owner of the road. Actually, the assessee had only been given the right to collect toll fee from vehicles entering the road which right could not be equated with ownership. On behalf of the assessee, reliance was placed on the following decisions:

(a) North Karnataka Expressway Ltd. vs. CIT [Appeal No. 499 of 2012]; (b) West Gujarat Expressway Ltd. [ITA Nos. 5904 & 6204/M/2012; order dated 15th April, 2015]; (c) Progressive Construction Ltd. [ITA No. 214/Hyd/2014; order dated 7th November, 2014]; (d) Kalyan Toll Infrastructure Ltd. vs. ACIT [ITA Nos. 201 & 247/Ind/2008; order dated 14th December, 2010]; and (e) Mokama Munger Highway Ltd. vs. ACIT [ITA Nos. 1729, 2145 & 2146/Hyd/2018; order dated
3rd July, 2019].

HELD


The Tribunal noted that there were conflicting decisions rendered by the High Court and the Special Bench of the Tribunal. The Bench then noted the ratio of the decisions of the Tribunal in the case of ACIT vs. West Gujarat Expressway Ltd. (Supra) and also of the Special Bench decision of the Tribunal in ACIT vs. Progressive Construction Ltd. Following the ratio of the decision of the Bombay High Court and also the Special Bench decision, the Tribunal held that the assessee is entitled to claim depreciation @ 25%.

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

25 Aditya Balkrishna Shroff vs. ITO [2021] 127 taxmann.com 343 (Mum-Trib) A.Y.: 2013-14; Date of order: 17th May, 2021 Sections: 2(24), 4, 56

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

FACTS
In the course of assessment proceedings, the A.O. noticed that as per AIR Information and as per capital account filed by the assessee, he was in receipt of Rs. 1,12,35,326. Upon seeking an explanation, the assessee informed that on 29th March, 2010, he had granted an interest-free loan of US $2,00,000 to his cousin in Singapore. The remittance was made under the Liberalised Remittance Scheme of the RBI. The rate of exchange prevailing on that date was Rs. 45.14. On 24th May, 2012 the assessee received back the said loan of US $2,00,000. The exchange rate on the date of receiving back the loan was Rs. 56.18. Accordingly, the capital account of the assessee was credited with a sum of Rs. 1,12,35,326.

The A.O. was of the view that the difference in amount of Rs. 22,04,568 was of the nature of income. The assessee explained that the loan was given on a personal account to his cousin and was not a business transaction and there was no motive of any economic gain in the transaction. It was done in terms of the Liberalised Remittance Scheme of the RBI inasmuch as it was a permitted transaction and specifically on capital account. It was further explained that the transaction was capital in nature, therefore ‘the gain is in the nature of capital receipt and hence not offered for taxation’.

But these submissions did not impress the A.O. who held that ‘the gain on realisation of loan would partake the character of income under the head “income from other sources”’. Accordingly, he added a sum of Rs. 1,12,35,326 to the total income of the assessee as ‘income from other sources’.

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

HELD


The Tribunal held that when a receipt is in the capital field, even if that be a gain, it is in the nature of a capital gain, but then as the definition of income stands u/s 2(24)(vi), only such capital gains can be brought to tax as are permissible to be taxed u/s 45. In other words, a capital gain which is not taxable under the specific provisions of section 45 or which is not specifically included in the definition of income by way of a specific deeming fiction, is outside the ambit of taxable income. All ‘gains’ are not covered by the scope of ‘income’. Take, for example, capital gains. It is not even the case of the authorities below that the capital gains in question are taxable u/s 45. Thus, the reasoning adopted by the A.O. was incorrect.

The Tribunal observed that the CIT(A)’s line of reasoning was no better. While he accepts that the transaction in question was in the capital field, he proceeds to hold that ‘income’ arising out of the loan transaction is required to be treated as ‘interest’ or ‘income from other sources’, but all this was a little premature because he proceeded to decide as to what is the nature of the income or under which head it is to be taxed, without dealing with the foundational plea that the scope of income does not include gains in the capital field. According to the Tribunal, if the transaction was in the capital field, as he accepts, ‘where is the question of a capital receipt being taxed as income unless there is a specific provision of bringing such a capital receipt to tax?’

The Tribunal held that where the loan is in a foreign currency and the amount received back as repayment is exactly the same, there is no question of any interest component at all.

The Tribunal allowed this ground of appeal filed by the assessee.

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

24 Shri Sitaram Pahariya (HUF) vs. ITO [2021] 127 taxmann.com 618 (Agra) A.Y.: 2012-13; Date of order: 31st May, 2021 Section: 54B

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

FACTS
During the previous year relevant to the assessment year under consideration, the assessee HUF sold agricultural land and claimed benefit u/s 54B on subsequent purchase of another plot of land. The A.O., while assessing the total income of the assessee, denied the claim made by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the denial of claim on the ground that for the assessment year under consideration, section 54B does not apply to HUFs.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal held as under:

(i) the Hindu undivided family was entitled to the benefit of 54B even prior to the insertion of ‘the assessee being an individual or his parent, or a Hindu undivided family’ by the Finance Act, 2013;
(ii) the assessee is a person subjected to tax under the Act, and the person includes the individual as well as the Hindu undivided family. Therefore, the benefit of provisions of 54B cannot be restricted to only individual assessees;
(iii) the Revenue is duty-bound to make out a clear case of debarring the HUF from availing the benefit of section 54F / 54B and the assessee cannot be denied the benefit merely based on its interpretation. If the Revenue wanted to tax the assessee (HUF), then the statute should have provided specifically that the assessee in 54B is only restricted to a living individual and is not applicable to a Hindu undivided family;
(iv) further, the High Court had not considered that individual assessee and HUF can both be used as and when the context so desires and it will not lead to any absurdity. In case the assessee is a Hindu undivided family, the second part of section 54B, i.e., ‘of parents of his’, would not be applicable. Harmonious interpretation is required to be invoked so that the word used in the provisions would not become redundant or otiose;
(v) in case of doubt or confusion, the benefit in respect of taxability or exemption should be given to the assessee rather than to Revenue;
(vi) the Co-ordinate Bench in the matter of Sandeep Bhargava (‘HUF’) [(2020) 117 taxmann.com 677 (Chandigarh-Trib)] has held that an HUF is entitled to claim benefit of section 54B;
(vii) on the facts of the present case, the Tribunal found that the assessee, within two years of the sale of agricultural land, had invested the amount and purchased land in accordance with the requirement of section 54B and was entitled to the benefit of 54B;
(viii) the assessee HUF is entitled to the benefit of section 54B for the assessment year under consideration as the word assessee used in 54B had always included HUF, and further, the amendment brought on by the Finance Act, 2013 in section 54 by inserting ‘the assessee being an individual or his parent, or a Hindu undivided family’ was classificatory in nature and was introduced by the Ministry with a view to extend the benefit to the Hindu undivided family;
(ix) the Hindu undivided family (HUF) has been recognised as a separate tax entity; therefore, before and after the amendment, if the agricultural land which was being used by the HUF for two years prior to the transfer has been transferred by it and it purchases any other agricultural land within two years of such transfer, then it shall be entitled to the benefit of section 54B/54F.

Receipt in the form of share premium cannot be brought to tax as revenue receipt

23 ACIT vs. Covestro India Private Limited (formerly Bayer Sheets India Private Limited) TS-394-ITAT-2021 (Mum) A.Y.: 2011-12; Date of order: 27th April, 2021
Section: 4

Receipt in the form of share premium cannot be brought to tax as revenue receipt

FACTS
The assessee, a private limited company engaged in the business of manufacturing and trading of polycarbonate sheets, articles and high impact polystyrene articles, commenced business operations in the previous year relevant to the assessment year under consideration. For the A.Y. 2011-12, it filed its return of income declaring therein a loss of Rs. 17,39,073.

During the year under consideration, the assesse had issued 7,00,000 equity shares of Rs. 10 each at a premium of Rs. 115.361351 per share. Of the 7,00,000 equity shares issued, 3,57,000 were issued to a foreign company Bayer Material Science for a monetary consideration; 3,08,000 shares were issued to Malibu Plastica Private Limited (‘MPPL’) and 35,000 to Malibu Tech Private Limited (‘MTPL’) for non-monetary consideration, i.e., for purchase of polycarbonate extrusion and thermo-forming sheet material from the said Indian companies.

While assessing the total income of the assessee, the A.O. treated share premium of Rs. 8,07,52,945 (7,00,000 x 115.361351) as taxable u/s 56 on the ground that the assessee sought to justify the issue price of the shares by adopting the DCF method without furnishing business plans and projections to justify the premium; the year of issue of shares was the first year of business of the assessee; and the assessee has utilised the share premium for purposes other than those specified u/s 78 of the Companies Act, 1956; hence, the receipt of share premium partakes the character of revenue receipt taxable as income.

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

HELD
The Tribunal noted that the addition had been made by the A.O. u/s 56(1) and hence what is to be adjudicated is limited and confined to the fact as to whether receipt of share premium per se could be treated as revenue receipt so as to make it taxable u/s 56(1).

It held that receipt of share premium per se cannot be treated as income or revenue receipt. In order to make a particular receipt taxable within the ambit of section 56(1), the receipt should be in the nature of income as defined in section 2(24). Share premium received by the company admittedly forms part of share capital and shareholders’ funds of the assessee company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as revenue receipt and consequently be treated as income u/s 56(1).

The Tribunal noted that the Co-ordinate Bench of the Tribunal in the case of Credit Suisse Business Analysis (India) (P) Ltd. vs. ACIT [72 taxmann.com 131 (Mum-Trib)] has addressed the very same issue and decided in favour of the assessee. This order was the subject matter of challenge by the Revenue before the High Court and the question of law was not admitted by the High Court on the addition made u/s 56(1). A similar view has been taken by the Tribunal in the case of Green Infra Ltd. vs. ITO [38 taxmann.com 253].

The Tribunal dismissed in limine the observation made by the A.O. in his order that receipt of premium was akin to a gift and hence taxable u/s 56(1). It held that receipt of share capital and share premium is normal in case of a limited company and the same by no stretch of imagination can be equated with a gift. Moreover, a gift can be received only by individuals or HUFs and not by a company.

The Tribunal held that the case of Cornerstone Property Investment Pvt. Ltd. vs. ITO [ITA No. 665/Bang/2017 dated 9th February, 2018], on which reliance was placed by the Revenue, is distinguishable on facts as in that case addition had been made u/s 68 by doubting the genuineness of the parties from whom share premium had been received.

The ground of appeal filed by the assessee was allowed.

Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax

22 Nutan Warehousing Co. Pvt. Ltd. vs. ACIT TS-396-ITAT-2021 (Pune) A.Y.: 2013-14: Date of order: 11th May, 2021 Section: 4

Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax

FACTS

The assessee company filed its return of income for A.Y. 2013-14 declaring a total income of Rs. 66,41,800. The A.O., in the course of assessment proceedings, observed from 26AS data that the assessee has not shown bank interest amounting to Rs. 26,125 from deposits with The Rupee Co-operative Bank Ltd. He added this sum of Rs. 26,125 to the total income returned.

Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) was of the view that the assessee is following the mercantile system of accounting. Once interest has accrued to the assessee, it becomes chargeable to tax, notwithstanding its non-receipt. He upheld the action of the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the bank had become defunct, no financial transactions were allowed and RBI had banned its transactions. Due to the ban, even the principal amount deposited by the assessee became doubtful of recovery, much less the interest in question that was not received. It noted that the assessee stated before the CIT(A) during the course of the first appellate proceedings in the year 2017 that the interest was not received even till that time.

The Tribunal held that the concept of ‘accrual of income’ needs to be considered in the light of the ‘real income theory’. Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax. In the case of the mercantile system of accounting, an accruing income can be charged to tax only when it is likely to be received under the given circumstances. In a case where receipt of income, after its accrual, is marred with complete uncertainty as to its realisation, such an accrual gets deferred to the point of clearing of the clouds of uncertainty over it.

On consideration of the mercantile system of accounting in juxtaposition with the ‘real income theory’, the Tribunal held that the inescapable conclusion which follows is that the interest income of Rs. 26,125 cannot be included in the total income of the assessee for the year under consideration. Such income may be appropriately charged to tax on the regularisation of the operations of the bank, coupled with the possibility of receipt of income in the foreseeable future. For the year under consideration, the interest cannot be charged to tax.

Section 115JB – Where additional revenue was not shown by assessee in books of accounts, the A.O. could not tinker with book profit by adding additional revenue on account of subsequent realisation of export while computing book profit u/s 115JB

26. [2020] 80 ITR (Trib.) 528 (Bang.)(Trib.) DCIT vs. Yahoo Software Development (P) Ltd. ITA No.: 2510 (Bang.) of 2017 A.Y.: 2009-10 Date of order: 27th April, 2020


 

Section 115JB – Where additional revenue was not shown by assessee in books of accounts, the A.O. could not tinker with book profit by adding additional revenue on account of subsequent realisation of export while computing book profit u/s 115JB

 

FACTS

The assessee filed a revised return of income by including certain additional revenue in the total income (and claimed deduction u/s 10A in respect of the additional revenue).

 

But it did not modify the books of accounts, nor did it modify the calculation of book profit u/s 115JB.

 

However, the A.O. increased the book profit by adding the additional revenue on account of subsequent realisation of export. The CIT(A) sustained the addition made by the A.O. Aggrieved, the assessee preferred an appeal before the ITAT.

 

HELD

The ITAT, following the ratio of the Supreme Court decision in Apollo Tyres Ltd. vs. CIT [2002] 122 Taxman 562/255 ITR 273, allowed the assessee’s appeal.

 

In the said decision, the Court was concerned with the issue of the power of the A.O. to question the correctness of the profit and loss account prepared by the assessee in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act (in the context of section 115J as then applicable).

 

In Apollo Tyres (Supra), the Court observed that it was not open to the A.O. to re-scrutinise the accounts and satisfy himself that these accounts had been maintained in accordance with the provisions of the Companies Act. Sub-section (1A) of section 115J did not empower the A.O. to embark upon a fresh inquiry in regard to the entries made in the books of accounts of the company and to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities. If the Legislature intended the A.O. to reassess the company’s income, then it would have stated in section 115J that ‘income of the company as accepted by the A.O. Thus, according to the Apex Court, the A.O. did not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.’

 

Thus, applying the ratio of the abovementioned judgment, the ITAT took the view that the A.O. cannot tinker with / re-compute book profit arrived at on the basis of books maintained in accordance with the Companies Act.

 

Section 54F – Where possession of flat was taken within period of two years from date of transfer of original asset, assessee was entitled to benefit of section 54F irrespective of the date of agreement

25. [2020] 80 ITR(T) 427 (Del.)(Trib.) Rajiv Madhok vs. ACIT ITA No.: 2291 (Del.) of 2017 A.Y.: 2012-13 Date of order: 29th May, 2020

Section 54F – Where possession of flat was taken within period of two years from date of transfer of original asset, assessee was entitled to benefit of section 54F irrespective of the date of agreement

 

FACTS

The assessee offered to tax long-term capital gain (LTCG) on sale of shares effected on 2nd September, 2011. He also claimed deduction u/s 54F on purchase of a new residential house, on the premise that the property was constructed within the time allowed u/s 54F. However, according to the A.O. the residential house was purchased prior to the time period provided in section 54F. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before ITAT.

 

HELD

The only dispute arising in this case was pertaining to the date of purchase of the new residential property as contemplated u/s 54F – whether the date of agreement with the builder was to be considered as the date of purchase of the new asset or the date of payment in entirety and the date of possession received subsequently was to be considered as the date of purchase of the new asset. The stand taken by the Department was that the date of agreement with the builder was to be considered as the date of purchase of the new asset, while that of the assessee was that the date of payment in entirety and the date of possession received subsequently was to be considered as the date of purchase of the new asset.

 

In the instant case, the assessee sold shares on 17th August, 2011 and entered into an agreement with the builder on 29th September, 2009. However, the final amount of consideration was paid to the builder in April, 2012 and possession of the flat received in July, 2012.

 

The ITAT took into consideration the relevant clause in the deed for purchase of the new house which read as under:

‘46.0 The allottee understands and confirms that the execution of this agreement shall not be construed as sale or transfer under any applicable law and the title to the allottee hereby allotted shall be conveyed and transferred to the allottee only upon his fully discharging all the obligations undertaken by the allottee, including payment of the entire sale price and other applicable charges / dues, as mentioned herein and only upon the registration of the conveyance / sale deed in his favour. Prior to such conveyance, the allottee shall have no right or title in the apartment.’

 

The ITAT observed that in the backdrop of the aforesaid clause the date of possession of the flat was the date of actual purchase for the purpose of claiming exemption u/s 54F. In arriving at the decision, the ITAT analysed the decision rendered by the Bombay High Court in the case of CIT vs. Smt. Beena K. Jain [1994] 75 Taxman 145 [1996] 217 ITR 363, upholding the decision of the ITAT. In the said decision, the High Court observed that: ‘the Tribunal has looked at the substance of the transaction and come to the conclusion that the purchase was substantially effected when the agreement of purchase was carried out or completed by payment of full consideration on 29th July, 1988 and handing over of possession of the flat on the next day.’

 

The ITAT also observed that clause 46.0 of the buyer’s agreement in the assessee’s case was identical to clause 12 of the deed of agreement between the assessee and the builder as noted in the case of Ayushi Patni vs. DCIT [2020] 117 taxmann.com 231 (Pune-Trib.) ITA No. 1424 & 1707 (Pune) of 2016 and held that in view of identical facts and circumstances, the ratio of the above decision in the case of Ayushi Patni (Supra) was squarely applicable to the facts of the instant case.

 

Thus, the ITAT concluded that the new asset was purchased within two years from the date of transfer of the original asset, i.e., shares, and thus the assessee was entitled to benefit of section 54F.

Section 54 – Exemption from capital gains cannot be denied where the assessee sold more than two residential properties and made reinvestment in one residential property

FACTS
The assessee, an individual deriving income from various heads of income, had submitted his return of income for the year under consideration. The return was duly processed u/s 143(1). Subsequently, the assessment was sought to be reopened based on information about the sale of immovable property and the assessee was asked to reconcile the same. The assessee filed a reply stating that he had not made any transaction for the year concerned and the transaction might have been wrongly reflected using his PAN. The assessee further requested the A.O. to recheck with the sub-registrar. Accordingly, the A.O. issued notice u/s 133(6) to the Sub-Registrar and received information that the assessee had effected sale of an immovable property being a residential flat for which no capital gains tax had been offered. The assessee furnished a capital gains working, submitting that the amount had been reinvested in purchasing another residential property. The A.O. contented that since the claim of capital gains and reinvestment thereof was not made in the return of income, the same was to be rejected and made an addition of Rs. 35 lakhs.

The A.O. also received information from the ITO that during the assessment proceedings of the assessee’s wife, it was found that a property jointly owned by the two had been sold during the year and the proceeds were reinvested in acquiring the same property for which exemption was claimed in the assessee’s case.

On appeal before the CIT(A), the CIT(A) accepted the capital gains workings submitted by the assessee and held that the assessee is eligible for exemption, even though the same was not claimed in the return of income. The A.O. had relied on the Supreme Court decision in the case of  Goetze (India) Ltd. vs. CIT to deny the claim for exemption. The CIT(A) held that the decision had categorically held that the appellate authorities could accept such a claim.

As far as the jointly owned property was concerned, the CIT(A) observed that since the capital gains on the same had been reinvested, the assessee would be eligible for capital gains exemption. Thus, the CIT(A) held that the assessee would be eligible for exemption u/s 54 on the sale of the second property also.

Aggrieved, the Revenue filed an appeal before the Tribunal.

HELD
The Tribunal held that exemption u/s 54 is granted to the assessee for reinvestment made in the residential house. The section nowhere restricts that the assessee should have sold only one property and claimed the exemption u/s 54 for only one property. In the instant case, the assessee has sold two residential properties and reinvested in one residential property. The entire conditions of section 54, both pre and post the amendment to section 54 [vide Finance Act (No. 2) of 2014, w.e.f. A.Y. 2015-16] had been satisfied. Thus, the order of the CIT(A) was upheld and Revenue’s appeal was dismissed.

Section 56(2) – The A.O. was erroneous in mechanically applying the provisions of section 56(2) to the difference between the stamp duty value and the actual sale consideration – The addition made by the A.O. without making a reference to the DVO despite the assessee submitting valuation report was unjustified

23. [2020] 208 TTJ 835 (Mum.)(Trib.) Mohd. Ilyad Ansari vs. ITO A.Y.: 2014-15 Date of order: 6th November, 2020

Section 56(2) – The A.O. was erroneous in mechanically applying the provisions of section 56(2) to the difference between the stamp duty value and the actual sale consideration – The addition made by the A.O. without making a reference to the DVO despite the assessee submitting valuation report was unjustified

FACTS

The assessee was engaged in the business of readymade garments. During the year under consideration, he purchased a flat jointly with his wife for a total consideration of Rs. 40,00,000 which was part of an SRA project. The builder, unable to complete the project, decided to exit from it at the half-way stage. An attempt to revive the project also failed, leading to the flat being sold at a distress price of Rs. 40,00,000 to the assessee. The sale was registered and thereafter the builder disappeared without completing the project. The agreement was made by the builder for a flat admeasuring 1,360 sq. feet. However, when the assessee got the possession, he found that it had been sold to two persons. The actual area of the flat, too, was only 784 sq. feet against the agreement area of 1,360 sq. feet. During the course of assessment proceedings, the A.O. noticed that the stamp duty valuation of the flat is Rs. 2,20,49,999 but the assessee had purchased it only for Rs. 40,00,000.

The assessee was required to explain why the difference is not to be treated as income u/s 56(2)(vii). The assessee filed a valuation report of Perfect Valuation & Consultants, a Government registered valuer, who valued the flat at Rs. 82.60 lakhs. During the assessment proceedings, the assessee filed this valuation report disputing the valuation made by the Stamp Valuation Authority (SVA). However, the A.O. did not refer the matter of valuation to the District Valuation Officer, though the valuation of the SVA was disputed by the assessee by way of the valuation report. The A.O. made an addition of Rs. 1,80,49,999 u/s 56(2)(vii)(b) in the hands of the assessee. The assessee filed an appeal before the CIT(A) against this order. But the CIT(A) also did not consider the valuation report submitted by the assessee, holding that the assessee had not disputed the valuation made by the SVA and confirmed the addition. Aggrieved, the assessee filed an appeal before the Tribunal.

HELD


The A.O. ignored the valuation report of the Government registered valuer submitted by the assessee. The provisions of section 56(2) had been mechanically applied without making any effort to determine the actual cost of the property. It ought to have been done since the property was acquired in semi-construction stage and later abandoned due to disputes amongst the builders. Besides, there was a dispute as regards the area acquired by the assessee as the same flat had been sold to two parties. In view of these circumstances, it was even more necessary for the A.O. to refer it to the valuation officer. Even at the stage of appellate proceedings when the assessee produced the valuation officer’s report that valued other flats in the very same building at Rs. 1,00,76,000, the CIT(A) should have called for remand report and in turn the valuation officer’s report which the CIT(A) had failed to do.

Thus, it was held that the addition made by the A.O. was totally unjustified and the assessee’s appeal was allowed.

Section 36(1)(iii) – Interest on funds borrowed for acquisition of land held as inventory is allowable u/s 36(1)(iii) – The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations. It is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail – There is no restriction in the provisions of section 36(1)(iii) that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16

22. [2020] 118 taxmann.com 541 (Bang.)(Trib.) DCIT vs. Cornerstone Property Investment (P) Ltd. A.Ys.: 2013-14 and 2014-15 Date of order: 14th August, 2020

Section 36(1)(iii) – Interest on funds borrowed for acquisition of land held as inventory is allowable u/s 36(1)(iii) – The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations. It is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail – There is no restriction in the provisions of section 36(1)(iii) that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16

FACTS

The facts as observed by the A.O. in the assessment order were that the assessee held land as inventory. It utilised the proceeds from the issue of debentures for acquiring lands and for making advances for purchase of lands and repayment of loans borrowed earlier. The A.O. also observed that in the earlier year, too, the borrowed funds were utilised for purchase of lands. The total interest expenditure of Rs. 16,39,35,373 being interest on ICDs, interest on NCDs and other ancillary borrowings was directly attributable to purchase of lands. There was no dispute about the use of borrowed funds for which the entire interest expenditure of Rs. 16,39,35,373 was incurred.

Of this total interest expenditure, the assessee claimed deduction for only a part, i.e., Rs. 6,81,01,384, which was disallowed by the A.O.

The CIT(A) deleted the amount of interest disallowed by the A.O. relying on various judgments.

Aggrieved, the Revenue preferred an appeal to the Tribunal where the assessee contended that the facts of the present case are squarely covered by the order of the Tribunal rendered in the case of DLF Ltd. vs. Addl. CIT [IT Appeal No. 2677 (Delhi) of 2011, order dated 11th March, 2016].

HELD


Inventory is a qualifying asset as it is held for more than 12 months and therefore interest attributable to it is required to be capitalised in the books of accounts as per AS 16. The Tribunal rejected the argument of the authorised representative of the assessee that AS 16 does not apply to inventory. It held that the provisions of Accounting Standards are the provisions which are applicable for the maintenance of the accounts of the company and interest is allowable according to section 36(1)(iii). The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations and it is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail. Since in the present case the interest is paid not for the purpose of acquisition of any capital asset but for inventory, the Tribunal did not find any restriction in provisions contained in section 36(1)(iii) which provide that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16. The Tribunal noted that there is not even an allegation that the interest is not paid on capital borrowed for the purpose of business. The Tribunal noted the observations in the case of DLF Ltd. (Supra) and also the ratio of various benches of the Tribunal where deduction of interest has been allowed u/s 36(1)(iii) even where the assessee has followed project completion method.

The Tribunal, following the decision of the Bombay High Court and also of various co-ordinate benches of the Tribunal, declined to interfere with the order of the CIT(A).

Proceedings under the Income-tax Act cannot be continued during the moratorium period declared under the Insolvency and Bankruptcy Code, 2016

21. [2020] 78 ITR(T) 214 (Del.)(Trib.) Shamken Multifab Ltd. vs. DCIT ITA (SS) Nos. 149, 150, 3549, 3550 &
3551 (Delhi) of 2007 A.Y.: 2003-04 Date of order: 22nd October,
2019

 

Proceedings
under the Income-tax Act cannot be continued during the moratorium period
declared under the Insolvency and Bankruptcy Code, 2016

 

FACTS

A petition
to initiate Corporate Insolvency Resolution Process (CIRP) in accordance with
provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) against the
assessee was admitted by the National Company Law Tribunal and the CIRP had
commenced w.e.f. 29th May, 2018; accordingly, a moratorium period
was declared.

 

The
assessee contended that the appeals filed by the Income-tax Department against
the company cannot continue in view of the provisions of section 14 of the IBC.

 

Revenue
argued that the expression ‘proceeding’ envisaged in section 14 of the IBC will
not include Income-tax proceedings and hence it can be continued even during
the moratorium period. Citing Rule 26 of the Income-tax Appellate Tribunal
Rules, 1963 it was contended that the proceedings before the ITAT can continue
even after the declaration of insolvency.

 

The
question before the Tribunal was whether Income-tax proceedings can be
continued during the moratorium period declared under the IBC.

 

HELD

Considering
section 14 of the IBC, the Tribunal held that the institution of suits or
continuation of pending suits or proceedings against the corporate debtor
(i.e., the assessee), including execution of any judgment or decree or order in
any court of law, tribunal, arbitration panel or other authority,is prohibited
during the moratorium period.

 

Reliance
was placed on the decision of the Supreme Court in the case of Alchemist Asset Reconstruction Co. Ltd. vs. Hotel Gaudavan (P)
Ltd. [2017] 88
taxmann.com 202 wherein it was held that even
arbitration proceedings cannot be initiated after imposition of the moratorium
period.

 

The
Tribunal held that the Apex Court in the case of Pr.
CIT vs. Monnet Ispat & Energy Ltd. [SLP (C) No. 6487 of 2018, dated 10th
August, 2018] had upheld the overriding nature
and supremacy of the provisions of the IBC over any other enactment in case of
conflicting provisions, by virtue of a non-obstante
clause contained in section 238 of the IBC; and hence even proceedings under
the Income-tax Act cannot be continued during the period of moratorium.

 

Reference
was also made to a recent amendment in the IBC according to which any
resolution plan or liquidation order as decided by the competent authority will
be binding on all stakeholders, including the Government. This amendment
prevents even the Direct & Indirect Tax Departments from questioning the
Resolution Plan or liquidation order as well as the jurisdiction of Tribunals
with regard to IBC. Accordingly, all the appeals filed by the Revenue were
dismissed by the Tribunal.

 

It was
also held that even appeals filed by the assessee cannot be sustained as the
assessee did not furnish any permission from the National Company Law Tribunal
in this regard. [Reliance was placed on the decision of the Madras High Court
in the case of Mrs. Jai Rajkumar vs. Standic Bank Ghana
Ltd. [2019] 101
taxmann.com 329 (Mad.).].

 

Accordingly,
all the appeals of the Revenue as well as of the assessee were dismissed.

Non-furnishing of Form 15G/15H before CIT by the deductor is merely procedural defect and cannot lead to disallowance u/s 40(a)(ia)

20. [2020] 79 ITR(T) 207 (Bang.)(Trib.) JCIT
vs. Karnataka Vikas Grameena Bank ITA Nos.: 1391 & 1392 (Bang.) of 2016
A.Ys.: 2012-13 and 2013-14 Date of order: 23rd January, 2020

 

Non-furnishing
of Form 15G/15H before CIT by the deductor is merely procedural defect and
cannot lead to disallowance u/s 40(a)(ia)

 

FACTS


The assessee
was engaged in the business of banking. As per the provisions of section 194A,
the assesse was liable to deduct tax at source on interest paid in excess of
Rs. 10,000 to its depositors. However, some depositors had provided Form
15G/15H to the assesse and hence tax was not deducted from interest paid to
such depositors. The A.O. contended that the assessee ought to have furnished
those Forms 15G/15H to the Commissioner of Income-tax within the prescribed
time which the assessee failed to do and hence the interest paid to such
depositors was subject to disallowance u/s 40(a)(ia) on account of failure to
deduct tax at source.

 

The CIT(A)
deleted the disallowance made by the A.O. by holding that there was no breach
committed by the assessee by not filing Form No. 15G/H before the Commissioner
of Income-tax.

 

HELD

The issue was covered by the decision of the Tribunal in the assessee’s
own case for A.Y. 2010-11 in ITA Nos.: 673 & 674/Bang/2014.
In this case, the Tribunal had relied upon the decision of the Karnataka High
Court in CIT vs. Sri Marikamba Transport Co. [ITA No. 553/2015; order
dated 13th April, 2015] wherein, in the context of section
194C, it was held that once the conditions of section 194C(3) were satisfied,
the liability of the deductor to deduct tax at source would cease and,
accordingly, disallowance u/s 40(a)(ia) would also not arise; filing of Form
No. 15-I/J was held as directory and not mandatory.

 

Accordingly,the Tribunal held that no disallowance can be made u/s
40(a)(ia) merely because the assessee did not furnish Form 15G/15H to the
Commissioner. The requirement of filing of such forms before the prescribed
authority is only procedural and that cannot result in a disallowance u/s
40(a)(ia). Accordingly, disallowance u/s 40(a)(ia) was held unsustainable.

 

Section 56(2)(viia) – Where share in profits of a firm during its subsistence and share in assets after its dissolution were consideration for capital contribution, such ‘consideration’ was ‘indeterminate’ – The provisions of section 56(2)(viia) could not be applicable to determine inadequacy or otherwise of such consideration and also to capital contribution of a partner made in the firm

19. [2020] 121 taxmann.com 150 (Hyd.)(Trib.) ITO vs. Shrilekha Business Consultancy
(P) Ltd. A.Ys.: 2014-15 and 2015-16 Date of order: 4th November, 2020

 

Section
56(2)(viia) – Where share in profits of a firm during its subsistence and share
in assets after its dissolution were consideration for capital contribution,
such ‘consideration’ was ‘indeterminate’ – The provisions of section
56(2)(viia) could not be applicable to determine inadequacy or otherwise of
such consideration and also to capital contribution of a partner made in the
firm

 

FACTS

The
assessee, a partnership firm later converted into a private company, was
engaged in financing and holding investments. Certain capital contribution was
made by Piramal Enterprise Ltd. (PEL) during A.Y. 2015-16. PEL had decided to
acquire 20% stake in Shriram Capital Ltd. (SCL) through investment in the
assessee (Rs. 6.22 crores recorded as partner’s capital and Rs. 2,111.23 crores
as capital reserve representing 75% share). This capital contribution was then
utilised to make investment in the shares of Novus (a group company of SCL)
which in turn invested in SCL through private placement and got ultimately
merged with SCL in 2014.

 

The A.O.
observed that the assessee’s Group as a whole was supposed to pay tax on the
aggregate consideration received of Rs. 2,100 crores from PEL and that in order
to avoid tax liability on the same, SCL and the assessee firm had devised a new
method to avoid tax liability. The A.O. made an addition of amounts credited in
capital reserve, treating the same as income u/s 56.

 

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

 

HELD

The
Tribunal held that even though the assessee firm had acted as an intermediate
entity, it could not be construed as a conduit between PEL and SCL and the
entire transactions are to be understood in a holistic manner and cannot be
construed as a colourable device or a sham transaction as admittedly there is
no element of any income within the meaning of section 2(24) in the entire
gamut of the transaction.

 

As far as the applicability of section 56(2)(viia) was concerned, it was
observed that when a partner retires from the firm, he does not walk away with
the credit balance in his capital account alone, instead, he would be entitled
to the share of the profits / losses, besides the assets of the firm. The
provisions of the section 56(2)(viia) deal with transaction / contract between
the existing ‘firm’ and ‘any person’ which are not in the nature of capital
contribution. The term ‘person’ mentioned in section 56(2)(viia) does not cover
‘partner’ in respect of capital contribution and, accordingly, section
56(2)(viia) cannot be made applicable in the case of capital contribution made
by a partner to the firm. The provisions of section 56(2)(viia) could not be
made applicable at all in the case of capital contribution made by a partner in
kind.

 

The appeal
of the Revenue was dismissed.

Section 56(2)(vii)(b)(ii) – The provisions of section 56(2)(vii)(b)(ii) will apply if they were on the statute as on the date of entering into the agreement

18. [2020] 118 taxmann.com 463
(Visak.)(Trib.) ACIT vs. Anala Anjibabu A.Y.: 2014-15 Date of order: 17th August, 2020

 

Section
56(2)(vii)(b)(ii) – The provisions of section 56(2)(vii)(b)(ii) will apply if
they were on the statute as on the date of entering into the agreement

 

FACTS

In the course of assessment
proceedings, the A.O. found that the assessee has purchased an immovable
property at Srivalli Nagar from Smt. Simhadri Sunitha for a consideration of
Rs. 5 crores and the transaction was registered on 28th October,
2013. The value of the said property for registration purpose was fixed at Rs.
12,67,82,500. The A.O. invoked the provisions of section 56(2)(vii)(b) and
taxed the difference between the consideration paid and the SRO value as on the
date of agreement and completed the assessment.

 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who allowed the appeal following the ratio of the decision of the
Visakhapatnam Bench of the Tribunal in the case of M. Siva Parvathi vs. ITO [2010] 129 TTJ 463 (Visakhapatnam),
rendered in the context of section 50C. He held that since the agreement for
sale was entered into by the assessee for the purpose of purchase of the
property in August, 2012 related to the F.Y. 2012-13, relevant to the A.Y.
2013-14, which is prior to insertion of section 56(2)(vii)(b), section
56(2)(vii)(b) has no application in the assessee’s case.

 

Aggrieved, the Revenue
preferred an appeal to the Tribunal contending that section 50C and section
56(2)(vii)(b) are independent provisions related to different situations and
the case law decided for the application of section 50C cannot be applied for
deciding the issue relating to the provisions of section 56(2)(vii)(b).

 

HELD

The Tribunal observed –

(i) that the question to be decided is whether or
not, in the facts and circumstances of the case, the provisions of section
56(2)(vii)(b)(ii) are applicable;

(ii)         that the provisions of section
56(2)(vii)(b)(ii) came into the statute by the Finance Act, 2013 w.e.f. 1st
April, 2014, i.e., A.Y. 2014-15. In the instant case, the assessee had
entered into the agreement for the purchase of the property on 13th
August, 2012 for a consideration of Rs. 5 crores and paid part of the sale
consideration by cheque. In the assessment order, the A.O. acknowledged the
fact that the assessee had entered into an agreement for purchase of the
property and paid the advance of Rs. 5 crores on 13th August, 2012.
There is no dispute with regard to the existence of the agreement;

(iii) from
the order of the CIT(A) it became clear that the property was in dispute due to
a bank loan and the original title deeds were not available for complying with
the sale formalities. Therefore, there was a delay in obtaining the title deeds
for completing the registration. Thus, there is a genuine cause for delay in
getting the property registered;

(iv) As
per the provisions of the Act, from the A.Y. 2014-15, sub clause (ii) has been
introduced so as to enable the A.O. to tax the difference in consideration if
the consideration paid is less than the stamp duty value. The A.O. is not
permitted to invoke the provisions of section 56(2)(vii)(b)(ii) in the absence
of sub-clause (ii) in the
Act as on the date of agreement.

 

The
Tribunal held that in this case the agreement was entered into on 13th
August, 2012 for purchase of the property and part consideration was paid.
Hence, the provisions existing as on the date of entering into the agreement
required to be applied for deciding the taxable income. The Tribunal in the
case of D.S.N. Malleswara Rao has held
that the law as applicable as on the date of agreement required to be applied
for taxing the income. The Department has not made out any case for application
of 56(2)(vii)(b) and since the provisions of section 56(2)(vii)(b)(ii) were not
available in the statute as on the date of entering into the agreement,
following the reasoning given in the case of M.
Siva Parvathi (Supra), the same cannot be made
applicable to the assessee. The Department has not brought any evidence to show
that there was extra consideration paid by the assessee over and above the sale
agreement or sale deed.

 

It held that the CIT(A) has rightly applied the
decision of this Tribunal in the assessee’s case and deleted the addition

Section 56(2)(viia), Rule 11UA – Valuation report prepared under DCF method should be scrutinised by the A.O. and if necessary he can carry out a fresh valuation either by himself or by calling for a determination from an independent valuer to confront the assessee – However, he cannot change the method of valuation but has to follow the DCF method only

17. [2020] 120 taxmann.com 238
(Bang.)(Trib.) Valencia Nutrition Ltd. vs. DCIT A.Y.: 2015-16 Date of order: 9th October, 2020

 

Section
56(2)(viia), Rule 11UA – Valuation report prepared under DCF method should be
scrutinised by the A.O. and if necessary he can carry out a fresh valuation
either by himself or by calling for a determination from an independent valuer
to confront the assessee – However, he cannot change the method of valuation
but has to follow the DCF method only

 

FACTS

During the financial year
relevant to A.Y. 2015-16, the assessee company, engaged in the business of
manufacturing of energy drinks with the brand name ‘Bounce & Vita-Me’,
collected share capital along with share premium to the tune of Rs. 1.55 crores
by issue of 24,538 shares having a face value of Rs. 10 each at a share premium
of Rs. 622 per share.

 

The A.O. noticed that the
assessee has followed the ‘Discounted Cash Flow’ method (DCF method) for
determining the share price. As per the valuation report prepared under the DCF
method, the value of one share was determined at Rs. 634. Accordingly, the
assessee had issued shares @ Rs. 632 per share, which included share premium of
Rs. 622. The A.O. held that the value of the share @ Rs. 632 was an inflated
value since the share valuation under the DCF method has been carried out on
the basis of projections and estimations given by the management. He held that
the value of the share should be based on ‘Net Asset Method’ mentioned in Rule
11UA of the Income-tax Rules. Accordingly, the A.O. worked out the value of the
shares at Rs. 75 per share under the Net Asset Method. Since the par value of
the share is
Rs. 10, the A.O. took the view that the assessee should have collected a
maximum share premium of Rs. 65 per share. He held that the share premium
collected in excess of Rs. 65, i.e., Rs. 557 per share, is excess share premium
and he assessed Rs. 1,36,67,666 being the total amount of excess share premium
u/s 56(2)(viib).

 

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

 

Aggrieved, the assessee
preferred an appeal to the Tribunal and prayed that this issue may be restored
to the file of the A.O. with a direction to examine the valuation report furnished
by the assessee under the DCF method.

 

HELD

The Tribunal noticed that
the coordinate bench has examined the issue of valuation of shares under the
DCF method in the case of Innoviti Payment Solutions
(P) Ltd. [ITA No. 1278/Bang/2018 dated 9th January, 2019]
and has followed the decision rendered by the Bombay High Court in the case of Vodafone M Pesa Ltd. vs. PCIT 164 DTR 257
and has held that the A.O. should scrutinise the valuation report prepared
under the DCF method and, if necessary, he can carry out fresh valuation either
by himself or by calling for a final determination from an independent valuer
to confront the assessee. The A.O. cannot change the method of valuation and he
has follow only the DCF method.

 

The decision rendered in
the case of Innoviti Payment Solutions (P) Ltd.
(Supra) was followed by another coordinate bench in the case of Futura Business Solutions (P) Ltd. [ITA No. 3404 (Bang.) 2018].

 

The Tribunal noted that in
the case of this assessee,too, the A.O. has proceeded to determine the value of
shares in both the years by adopting different methods without scrutinising the
valuation report furnished by the assessee under the DCF method. Accordingly,
following the decisions rendered by the coordinate benches, the Tribunal set
aside the order passed by the CIT(A) and restored the impugned issue to the
file of the A.O. with the direction to examine it afresh as per the directions
given by the coordinate bench in the case of Innoviti
Payment Solutions (P) Ltd. (Supra).

Section 56(2)(vii)(b)(ii) – Even if there is no separate agreement between the parties in writing, but the agreement which is registered itself shows that the terms and conditions as contained in the said agreement were agreed between the parties at the time of booking of the flat

16. [2020] 120 taxmann.com 216 (Jai.)(Trib.) Radha Kishan Kungwani vs. ITO A.Y.: 2015-16 Date of order: 19th August, 2020

 

Section
56(2)(vii)(b)(ii) – Even if there is no separate agreement between the parties
in writing, but the agreement which is registered itself shows that the terms
and conditions as contained in the said agreement were agreed between the
parties at the time of booking of the flat

 

FACTS

The assessee, vide sale agreement dated 16th
September, 2014 purchased a flat from HDIL for a consideration of Rs.
1,38,03,550. The stamp duty value of the flat at the time of the registration
of the sale agreement was Rs. 1,53,43,036. The A.O. invoked the provisions of
section 56(2)(vii) for making an addition of the differential amount between
the stamp duty valuation and purchase consideration paid by the assessee.

 

The
assessee claimed that he booked the flat on 6th September, 2010 and
made advance payments of Rs. 2,51,000 on 10th October, 2010 and Rs.
9,87,090 on 14th October, 2010, the total amounting to Rs. 12,38,090,
and contended that the stamp duty value as on the date of agreement be
considered instead of the stamp duty value as on the date of registration. The
A.O. rejected this contention and made an addition of Rs. 15,39,486, being the
difference between the stamp duty value on the date of registration of the agreement and the amount of
consideration paid by the assessee u/s 56(2)(vii).

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

 

The assessee then preferred
an appeal to the Tribunal.

 

HELD

The
Tribunal noted that vide letter dated 16th October, 2017, the builder
has specifically confirmed that the cost of the flat is Rs. 1,38,03,550 and the
booking was done by payment of Rs. 2,51,000 by cheque dated 10th
October, 2010 drawn on Andhra Bank. This fact was not disputed by the A.O. This
payment is even reflected in the final sale agreement which is registered. The
terms and conditions which are reduced in writing in the agreement registered
on 16th September, 2014 relate to the performance of both the
parties right from the beginning, i.e., the date of booking of the flat. All
these facts are duly acknowledged by the parties in the registered agreement,
that earlier there was a booking of the flat and the assessee made part payment
of the consideration.

 

The Tribunal held that all
these facts clearly established that at the time of booking there was an
agreement between the parties regarding the sale and purchase of the flat and
payment of the purchase consideration as per the agreed schedule. Thus, even if
there is no separate agreement between the parties in writing but the agreement
which is registered itself shows that the terms and conditions as contained in
the said agreement were agreed between the parties at the time of the booking.
On this basis, part payment was made by the assessee on 10th
October, 2010 and subsequently on 14th October, both through cheque.

 

In view of the above, the
Tribunal held that the first and second provisos
to section 56(2)(vii) would be applicable in this case and the stamp duty
valuation or the fair market value of the property shall be considered as on
the date of booking and payment made by the assessee towards the booking.

 

The Tribunal set aside the
order passed by the CIT(A) and remanded the matter to the record of the A.O. to
apply the stamp duty valuation as on 10th October, 2010 when the
assessee booked the flat and made the part payment. Consequently, if there is
any difference on account of the stamp duty valuation being higher than the
purchase consideration paid by the assessee, the same would be added to the
income of the assessee under the provisions of section 56(2)(vii)(b).

Section 56(2)(vii)(c) – The provisions of section 56(2)(vii)(c) get attracted only when a higher than proportionate allotment of fresh shares issued by a company is received by a shareholder

15. [2020] 119 taxmann.com 362 (Jai.)(Trib.)
DCIT vs. Smt. Veena Goyal A.Y.: 2013-14 Date of order: 15th September,
2020

 

Section 56(2)(vii)(c) – The provisions of section
56(2)(vii)(c) get attracted only when a higher than proportionate allotment of
fresh shares issued by a company is received by a shareholder

 

FACTS

The assessee was allotted 11,20,000 shares @ Rs. 10
per share, whereas the A.O. determined the fair market value of each share to
be Rs. 20.37. He made an addition of Rs. 1,16,14,400 being the difference
calculated between fair market value and face value u/s 56(2)(vii)(c).

 

The aggrieved assessee preferred an appeal to the
CIT(A) who, observing that the shareholding percentage of the appellant in the
company was the same both before and after the allotment, allowed the appeal.

 

Aggrieved, Revenue preferred an appeal to the
Tribunal.

 

HELD

The Tribunal observed that the issue was the
subject matter of dispute before the ITAT, Mumbai bench in the case of Sudhir
Menon HUF vs. ACIT [2014] 148 ITD 260 wherein the Tribunal held that as
long as there is no disproportional allotment of shares, there was no scope for
any property being received by the taxpayer as there was only an apportionment
of the value of the existing shareholder over a larger number of shares,
consequently no addition u/s 56(2)(vii)(c) would arise.

 

The Tribunal also noted
that in the case of ACIT vs. Subhodh Menon [2019] 175 ITD 449
(Mum.-Trib.) it has held that only when a higher than proportionate
allotment of fresh shares issued by a company is received by a shareholder do
the provisions of section 56(2)(vii) get attracted.

 

In the present case, since
the percentage of shareholding before and after the allotment of new shares
thereof remained the same, the Tribunal upheld the order passed by the CIT(A)
and dismissed the appeal filed by the Revenue.

 

Assessee being mere trader of scrap would not be liable to collect tax at source u/s 206C when such scrap was not a result of manufacture or mechanical working of materials

14. [2020] 78 ITR (Trib.) 451
(Luck.)(Trib.) Lala Bharat Lal & Sons vs. ITO ITA No. 14, 15 & 16/LKW/2019 A.Ys.: 2014-15 to 2016-17 Date of order: 19th February,
2020

 

Assessee
being mere trader of scrap would not be liable to collect tax at source u/s
206C when such scrap was not a result of manufacture or mechanical working of
materials

 

FACTS

The assessee was in the
business of dealing / trading in metal scrap. For the relevant assessment years
the A.O. held that the assessee was liable to collect tax at source @ 1% of the
sale amount as per the provisions of section 206C(1). The assessee contended
that the sale / trading done by him did not tantamount to sale of scrap as defined
in Explanation (b) to section 206C, as the same had not been generated from
manufacture or mechanical work. This contention was rejected by the CIT(A). The
assessee then filed an appeal before the Tribunal.

 

The assessee relied on the
decision of the Ahmedabad Tribunal in Navine Fluorine International Ltd.
vs. ACIT [2011] 45 SOT 86 wherein it was held that for invoking the
provisions of Explanation (b) to section 206C, it was necessary that waste and
scrap sold by the assessee should arise from the manufacturing or mechanical
working done by the assessee. Reliance was also placed on Nathulal P.
Lavti vs. ITO [2011] 48 SOT 83 (URO) (Rajkot).

 

On the other hand, Revenue
placed reliance on the decision of the special bench of the Tribunal in the
case of Bharti Auto Products vs. CIT [2013] 145 ITD 1 (Rajkot)(SB)
which held that all the traders in scrap were also liable to collect tax at
source under the provisions of section 206C.

Against the arguments of
the Revenue, the assessee relied on the decision of the Gujarat High Court in CIT
vs. Priya Blue Industries (P) Ltd. [2016] 381 ITR 210 (Gujarat) wherein
the plea of the Revenue to consider the decision of the special bench in case
of Bharti Auto Products vs. CIT (Supra) was dismissed. Reliance
was also placed on the decision of the Ahmedabad Tribunal in the case of Azizbhai
A. Lada vs. ITO [ITA 765/Ahd/2015] and Dhasawal Traders vs. ITO
[2016] 161 ITD 142 wherein the judgment of the Gujarat High Court in
the case of Priya Blue Industries (P) Ltd. (Supra) was considered
and relief was granted to the assessee.

 

HELD

The Tribunal held that it
was an undisputed fact that the assessee was not a manufacturer and was only a
dealer in scrap.

 

In the case of Navine
Fluorine International Ltd. (Supra), it was held that to fall under the
definition of scrap as given in the Explanation to section 206C, the term
‘waste’ and ‘scrap’ are one and it should arise from manufacture and if the
scrap is not coming out of manufacture, then the items do not fall under the
definition of scrap and thus are not liable to TCS.

 

Further, in the case of ITO
(TDS) vs. Priya Blue Industries (P) Ltd. [ITA No. 2207/ADH/2011], the
Tribunal had held that the words ‘waste’ and ‘scrap’ should have nexus with
manufacturing or mechanical working of materials.

 

The Tribunal relied upon
the decision of the Gujarat High Court in CIT vs. Priya Blue Industries
(P) Ltd. (Supra), which held that the expression ‘scrap’ defined in
clause (b) of the Explanation to section 206C means ‘waste’ and ‘scrap’ from manufacture
of mechanical working of materials, which is not useable as such and the
expression ‘scrap’ contained in clause (b) of the Explanation to section 206C
shows that any material which is useable as such would not fall within the
ambit of ‘scrap’.

 

Next, the Tribunal referred
to the decision in the case of Dhasawal Traders vs. ITO (Supra)
which held that when the assessee had not generated any scrap in manufacturing
activity and he was only a trader having sold products which were re-useable as
such, hence he was not supposed to collect tax at source.

 

It was also held that the
Gujarat High Court had duly considered the decision of the special bench.
Accordingly, the Tribunal, following the decision in CIT vs. Priya Blue
Industries (P) Ltd. (Supra) held that the assessee being a trader of
scrap not involved in manufacturing activity, cannot be fastened with the
provisions of section 206C(1).

 

CIT(E) cannot pass an order denying registration u/s 12AA (without following the procedure of cancellation provided in the Act) from a particular assessment year by taking the ground that lease rental income exceeding Rs. 25 lakhs received from properties held by the trust violated provisions of section 2(15) when such registration was granted in the same order for prior assessment years

13. [2020] 77 ITR (Trib.) 407
(Cuttack)(Trib.) Orissa Olympic Association vs. CIT(E) ITA No.: 323/CTK/2017 A.Y.: 2009-10 Date of order: 6th December,
2019

 

CIT(E)
cannot pass an order denying registration u/s 12AA (without following the
procedure of cancellation provided in the Act) from a particular assessment
year by taking the ground that lease rental income exceeding Rs. 25 lakhs
received from properties held by the trust violated provisions of section 2(15)
when such registration was granted in the same order for prior assessment years

 

FACTS

The assessee was an
association registered under the Societies Registration Act, 1860 since 1961.
It had made an application for registration u/s 12A in the year 1997 which was
pending disposal. On appeal against the order of assessment for A.Ys. 2002-03
to 2007-08, the Tribunal set aside the assessment pending the disposal of the
petition filed by the assessee u/s 12A by the Income-tax authority.
Accordingly, following the directions of the Tribunal, the CIT(E) called for
information from the assessee society and after considering the submissions,
rejected the application of the association. Aggrieved by this order, the
assessee approached the Tribunal which, vide order in ITA
334/CTK/2011 directed the CIT(E) to look into the matter of
registration afresh, considering the second proviso to section 2(15) as
prospective from 1st April, 2009.

 

Accordingly, after
considering the objects of the assessee, the CIT(E) passed an order stating
that the objects of the assessee were charitable in nature and the activities
were not carried out with the object to earn profits. Registration was granted
from A.Ys. 1998-99 to 2008-09. However, from A.Y. 2009-10 onwards, registration
was denied on the ground that income received by the assessee as commercial
lease rent was in the nature of trade, commerce, or business and it exceeded
Rs. 25 lakhs in all the previous years, thereby violating the provisions of
section 2(15) as amended w.e.f. 1st April, 2009. The assessee filed
an appeal against this order before the Tribunal.

 

HELD

The Tribunal noted that it
was an undisputed fact that the CIT(E) had granted registration from A.Y.
1998-99 to 2008-09 after noting that the objects of the assessee were
charitable in nature and were not carried out with an object to earn profits.
It was held that the lease rent incomes received from the property held under
the trust was wholly for charitable or religious purposes and were applied for
charitable purposes, hence the same was not exempt in the hands of the
assessee. Except lease rent incomes, there was no allegation of the CIT(E) to
support that the incomes received by the assessee as commercial lease rent were
in the nature of trade or commerce or trade. It was held that the income earned
by the assessee from commercial lease rent, which was the only ground of
denying the continuance of registration from A.Y. 2009-10 was not sustainable
for denying the registration already granted.

 

It was observed that
registration was granted for limited period but was denied thereafter without
affording an opportunity to the assessee which was contrary to the mandate of
section 12AA(3) and hence denial of registration was unsustainable.

 

Reliance was placed on the
following:

 

1. Dahisar Sports Foundation vs. ITO [2017]
167 ITD 710 (Mum.)(Trib.) wherein it was held that if the objects of
the trust are charitable, the fact that it collected certain charges or
receipts (or income) does not alter the character of the trust.

 

2. DIT (Exemptions) vs. Khar Gymkhana [2016]
385 ITR 162 (Bom. HC) wherein it was held that where there is no change
in the nature of activities of the trust and the registration is already
granted u/s12A, then the same cannot be disqualified without examination where
receipts from commercial activities exceed Rs. 25 lakhs as per CBDT Circular
No. 21 of 2016 dated 27th May, 2016.

 

3. Mumbai Port Trust vs. DIT (Exemptions)
[IT Appeal No. 262 (Mum.) of 2012] wherein it was held that the process
of cancellation of registration has to be done in accordance with the
provisions of sections 12AA(3) and (4) after carefully examining the
applicability of these provisions.

 

Accordingly, it was held
that once the registration is granted, then the same is required to be
continued till it is cancelled by following the procedure provided in
sub-sections (3) and (4) of section 12AA; without following such procedure, the
registration cannot be restricted and cannot be discontinued by way of
cancelling the same for a subsequent period in the same order.

 

Section 23, Rule 4 – Amount of rent, as per leave and license agreement, which is not received cannot be considered as forming part of annual value merely on the ground that the assessee has not taken legal steps to recover the rent or that the licensee has deducted tax at source thereon

12. TS-577-ITAT-2020-(Mum.) Vishwaroop Infotech Pvt. Ltd. vs. ACIT,
LTU A.Y.: 2012-13 Date of order: 6th November,
2020

 

Section
23, Rule 4 – Amount of rent, as per leave and license agreement, which is not
received cannot be considered as forming part of annual value merely on the
ground that the assessee has not taken legal steps to recover the rent or that
the licensee has deducted tax at source thereon

 

FACTS

The assessee gave four
floors of its property at Vashi, Navi Mumbai on leave and license basis to
Spanco Telesystems and Solutions Ltd. Subsequently, the licensee company
informed the assessee about slump sale of its business to Spanco BPO Services
Ltd. and Spanco Respondez BPO Pvt. Ltd. and requested the assessee to
substitute the names of these new companies as licensee in its place w.e.f. 1st
April, 2008.

 

Due to financial problems
in the new companies, the new companies stopped paying rent from financial year
2010-11 relevant to assessment year 2011-12. As on 31st March, 2011,
the total outstanding dues receivable by the assessee from these two companies
amounted to Rs. 15.60 crores.

 

During the previous year
relevant to the assessment year under consideration, the assessee did not
receive anything from the licensee and therefore did not offer the license fee
to the extent of Rs. 3,85,85,341 for taxation. The licensees had, however,
deducted TDS on this amount and had reflected this amount in the TDS statement
filed by them. While the assessee did not offer the sum of Rs. 3,85,85,341 for
taxation, it did claim credit of TDS to the extent of Rs. 38.58 lakhs.

 

Of the sum of Rs. 15.60
crores receivable by the assessee from the licensee, the assessee, after a lot
of negotiation and persuasion, managed to get Rs 10.51 crores during the
previous year relevant to the assessment year under consideration. Since the
assessee could not recover rent for the period under consideration, it did not
declare rental income for the assessment year under consideration.

 

The A.O. brought to tax
this sum of Rs. 3,85,85,341 on the ground that the assessee did not satisfy the
fourth condition of Rule 4, i.e., the assessee has neither furnished any
documentary evidence for instituting legal proceedings against the tenant for
recovery of outstanding rent, nor proved that the institution of legal
proceedings would be useless and that the licensees had deducted TDS on
unrealised rent which TDS is reflected in the ITS Data.

 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who upheld the action of the A.O. on the
ground that the licensee has deducted TDS on unrealised rent.

 

Aggrieved, the assessee
preferred an appeal to the Tribunal challenging the addition of unrealised rent
receivable from the licensees. It was also contended that the assessee did not
initiate legal proceedings against the licensees because the licensees were in
possession of the premises which were worth more than Rs. 200 crores. Civil
litigation would have taken decades for the assessee during which period the
assessee would have been deprived of the possession of the premises. Civil
litigation would have also involved huge litigation and opportunity costs. It
was in these circumstances that the assessee agreed with the licensees, on 20th
November, 2011, to give up all its claims in lieu of possession
of the premises.

 

HELD

The Tribunal observed that
considering the fact that the assessee has to safeguard its interest and
initiating litigation against the big business house that, too, having
financial problems will be fruitless and it will be at huge cost. It is also in
the interest of the assessee if it could recover the rent, for it will be
beneficial to the assessee first. No one leaves any money unrecovered. The
reasons disclosed by the assessee to close the dispute amicably and recovering
the amount of Rs. 10.51 crores from the company, which was having a financial
problem, itself was a huge task.

 

The Tribunal held that in
its view the situation in the present case amply displays that institution of
legal proceedings would be useless and the A.O. has failed to understand the
situation and failed to appreciate the settlement reached by the assessee. The
Tribunal observed that the A.O. has also not brought on record whether the
assessee is likely to receive the rent in near future; rather, he accepted the
fact that it is irrecoverable. The Tribunal held that the rental income can be
brought to tax only when the assessee has actually received or is likely to
receive or there is certainty of receiving it in the near future. In the given
case, since the assessee has no certainty of receipt of any rent, as and when
the assessee reaches an agreement to settle the dispute it is equal to
satisfying the fourth condition of Rule 4 of the Income-tax Rules, 1962.

 

The Tribunal said that the
addition of rent was unjustified and directed the A.O. to delete the addition.

 

The Tribunal noticed that
the assessee has taken TDS credit to the extent of Rs. 38.58 lakhs. It held
that the A.O. can treat the amount of Rs. 38.58 lakhs as income under the head
`Income from House Property’.

 

Section 45, Rule 115 – Foreign exchange gain realised on remittance of amount received on redemption of shares, at par, in foreign subsidiary is a capital receipt not liable to tax

11. TS-580-ITAT-2020-(Del.) Havells India Ltd. vs. ACIT, LTU A.Y.: 2008-09 Date of order: 10th November,
2020

 

Section
45, Rule 115 – Foreign exchange gain realised on remittance of amount received
on redemption of shares, at par, in foreign subsidiary is a capital receipt not
liable to tax

 

FACTS

During the previous year
relevant to assessment year 2008-09, the assessee invested in 3,55,22,067
shares of one of its subsidiary companies, M/s Havells Holdings Ltd., out of
which 1,54,23,053 shares were redeemed at par value in the same year. Upon remittance
of the consideration of shares redeemed the assessee realised foreign exchange
gain of Rs. 2,55,82,186.

 

Since this gain was not on
account of increase in value of the shares, as the shares were redeemed at par
value but merely on account of repatriation of proceeds received on exchange
fluctuation, the gain was treated as a capital receipt in the return of income.

 

The A.O. held that the
assessee had purchased shares in a foreign company for which purchase
consideration was remitted from India and further, on redemption, the sale /
redemption proceeds so received in foreign currency were remitted back to India
which resulted in gain which is taxable as capital gains in terms of section
45.

 

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

 

HELD

The
Tribunal noted the undisputed fact that investment made by the assessee in the
shares of Havells Holdings Ltd. was made in Euros and redemption of such shares
was also made in Euros. It held that the actual profit or loss on sale /
redemption of such shares therefore has to necessarily be computed in Euros
and, thereafter, converted to INR for the purposes of section 45. In other
words, the cost of acquisition of shares and consideration received thereon
should necessarily be converted into Euros and the resultant gain / loss
thereon should thereafter be converted into INR at the prevailing rate. In the
present case, the net gain / loss on redemption of shares was Nil since the
shares were redeemed at par value and thereby there was no capital gain taxable u/s 45.

 

From a perusal of section
45 it can be seen that for taxation of any profits or gains arising from the
transfer of a capital asset, only gains accruing as a result of transfer of the
asset can be taxed. In the present case, there was no ‘gain’ on transfer /
redemption of the shares insofar as the shares were redeemed at par value.
Thus, there was no gain which accrued to the assessee as a result of redemption
of such shares, since the shares were redeemed at par value. The said
contention is supported by Rule 115 of the Income-tax Rules, 1962 which
provides the rate of exchange for conversion of income expressed in foreign
currency. Clause (f) of Explanation 2 to Rule 115(1) clearly provides that ‘in
respect of the income chargeable under the head “capital gains……”.’ rate of
exchange is to be applied. In the present case, since capital gain in GBP /
Euro was Nil, the resultant gain in Indian rupees is Nil. The exchange gain of
Rs. 2,55,82,186 was only a consequence of repatriation of the consideration
received (in Euros) in Indian rupees and cannot be construed to be part of
consideration received on redemption of shares. Thus, the applicability of
section 45 does not come into the picture in the present case.

 

The Tribunal held that the
A.O. was not right in applying section 45 for making the addition. This ground
of appeal filed by the assessee was allowed.

Sections 50, 112 – Capital gains computed u/s 50 on transfer of buildings which were held for more than three years are taxable @ 21.63% u/s 112 and not @ 32.45%, the normal rate

10. TS-566-ITAT-2020-(Mum.) Voltas Ltd. vs. DCIT A.Y.: 2013-14 Date of order: 6th October,
2020

 

Sections
50, 112 – Capital gains computed u/s 50 on transfer of buildings which were
held for more than three years are taxable @ 21.63% u/s 112 and not @ 32.45%,
the normal rate

 

FACTS

For the assessment year
2013-14, the assessee company in the course of an appeal before the Tribunal
raised an additional ground contending that the capital gains computed u/s 50
on sale of buildings should be taxed @ 21.63% u/s 112 instead of @ 32.45%, as
the said buildings were held for more than three years.

 

HELD

The Tribunal, after
referring to the provisions of section 50 and having noted that the Bombay High
Court in the case of CIT vs. V.S. Dempo Company Ltd. [387 ITR 354] has
observed that section 50 which is a special provision for computing the capital
gains in the case of depreciable assets, is restricted for the purposes of
section 48 or section 49 as specifically stated therein and the said fiction
created in sub-sections (1) and (2) of section 50 has limited application only
in the context of the mode of computation of capital gains contained in
sections 48 and 49 and would have nothing to do with the exemption that is
provided in a totally different provision, i.e. section 54E. Section 48 deals
with the mode of computation and section 49 relates to cost with reference to
certain modes of acquisition.

 

The Tribunal also noted
that the Supreme Court in the case of CIT vs. Manali Investment [ITA No.
1658 of 2012] has held that the assessee is entitled to set-off u/s 74
in respect of capital gains arising out of transfer of capital assets on which
depreciation has been allowed in the first year itself and which is deemed as
short-term capital gains u/s 50.

 

The Tribunal held that the
deeming fiction of section 50 is limited and cannot be extended beyond the
method of computation of gain and that the distinction between short-term and
long-term capital gain is not obliterated by this section. Following the ratio
of these decisions, the Tribunal allowed the additional ground of appeal filed
by the assessee and directed the A.O. to re-examine the detailed facts and
allow the claim.

 

Section 37 – Expenditure incurred on cost of adhesive stamps for obtaining conveyance deed for assignment of receivables is allowable as the same is in connection with facilitating recovery of receivables which is a part of current asset and has been incurred for facilitating the business of the assessee

9. [2020] 120 taxmann.com 33 (Mum.)(Trib.) Demag
Delaval Industries Turbomachinery (P) Ltd. A.Y.: 2004-05 Date of order: 16th September,
2020

 

Section 37 – Expenditure incurred on cost
of adhesive stamps for obtaining conveyance deed for assignment of receivables
is allowable as the same is in connection with facilitating recovery of
receivables which is a part of current asset and has been incurred for
facilitating the business of the assessee

 

FACTS

The assessee
acquired an industrial turbine unit of Alstom Project India Limited for a lump
sum consideration. The assessee incurred expenditure of Rs. 59,17,000 being
cost of adhesive stamp affixed on the conveyance deed for assignment of
receivables and claimed it as a deduction on the ground that it was an
expenditure in connection with the acquisition of business and is a revenue
expenditure.

 

The A.O. and the
CIT(A) denied the claim of the assessee on the ground that it is for
acquisition of industrial turbine unit from Alstom Project India Limited. He
held that the stamp duty is nothing but an expenditure incurred in order to
cure or complete the title to capital. Hence, it is capital expenditure.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal and contended that the expenditure
in this regard has been incurred in connection with the conveyance deed of
receivables which are part of the current assets, therefore the expenditure
cannot be treated as expenditure for the purpose of acquisition of capital
assets. Expenditure was very much incurred for the purpose of the business of
the assessee and the same should be allowed as such. In this regard, reliance
was placed on the case of CIT vs. Bombay Dyeing and Manufacturing Co.
(219 ITR 521) and India Cement Ltd. vs. CIT (60 ITR 52).

 

HELD

The Tribunal, after going through the conveyance deed, held that the
deed involving duty of Rs. 59,17,000 was for the purpose of assignment of
receivables and that the CIT(A)’s conclusion that the expenditure is to cure
and complete the title to capital is without appreciating the facts of the
case.

 

The Tribunal held that this assignment is admittedly for facilitating
the business of the assessee by assigning receivables. The expenditure is in
connection with facilitating recovery of receivables which is a part of the
current assets. Hence, the expenditure in this regard cannot be said to be in
the capital field of acquiring the business. It is in fact for facilitating the
business of the assessee and in this view of the matter expenditure is
allowable as business expenditure. The ratio of the decisions in the
case of Bombay Dyeing Mfg. (Supra) and India Cements Ltd.
(Supra), relied upon on behalf of the assessee, are accordingly germane
and support the case of the assessee. The CIT(A) has been in error in holding
that the case laws are not applicable here.

 

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

Section 115JB – When income which is exempt u/s 10 is credited to Profit & Loss Account, the Book Profit u/s 115JB is to be computed by reducing the amount of such income to which section 10 applies

8. [2020] 120 taxmann.com 31 (Del.)(Trib.) ITO vs. Buniyad Developers (P) Ltd. A.Y.: 2009-10 Date of order: 21st September,
2020

 

Section 115JB – When income which is exempt
u/s 10 is credited to Profit & Loss Account, the  Book Profit u/s 115JB is to be computed by
reducing the amount of such income to which section 10 applies

 

FACTS

For the assessment
year 2009-10, the assessee company filed its return of income on 30th
September, 2009 declaring Nil income but paid tax on book profits u/s 115JB at
Rs. 5,73,70,009. The return was processed u/s 143(1). The A.O., in the course
of assessment proceedings for A.Y. 2010-11, having noticed that the lands were
sold in part and that there has been no income declared in respect of its profits
of Rs. 5,58,61,180 earned on sale of land, issued notice u/s 148 and, after
hearing the assessee, made an addition of Rs. 5,41,38,217 with interest income
of Rs. 21,90,212.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who, taking note of the remand
assessment in A.Y. 2010-11, found that since the village where the land sold
was located was eight km. away from the municipal limits, the very basis of the
A.O. reopening the assessment proceedings for A.Y. 2009-10 has no locus
standi as the A.O. has himself in the remand assessment for A.Y. 2010-11
admitted the said fact. He, therefore, allowed the contention of the assessee
on that ground. He also accepted the contention of the assessee that under the
provisions of section 115JB(2)(k)(ii), the profits derived from sale of
agricultural land, which is exempt u/s 10, has to be reduced from the book
profits and, therefore, the assessee is entitled to relief even in respect of
the amount that was offered to tax. He directed the A.O. to compute the tax in
accordance with law by reducing the amount of income to which provisions of
section 10 of the Act apply, if the said amount is credited to the profit and
loss account.

 

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that it is an admitted fact that the land that
was sold was located in village Kishora, which is more than eight km. away from
the municipal limits and the profits earned on the sale of such land are exempt
u/s 10. It noted that in view of the provisions of section 115JB(2)(k)(ii),
the assessee committed a mistake when it computed the book profits including
the sale consideration of agricultural land, which was credited to the profit
and loss account and offered the same to tax.

 

The Tribunal held that

i)   in view of the decision of
the Supreme Court in the case of CIT vs. Shelly Products (2003) 129
Taxman 271, such a mistake has to be rectified by the Revenue
authorities when it is brought to their notice and they are satisfied with the
genuineness of the claim;

ii)   when the CIT(A) is satisfied
that the income which is exempt u/s 10 is included in the book profit u/s
115JB, which should not be done, the CIT(A) is justified in directing the A.O.
to follow the law and to compute the tax in accordance with the provisions of
section 115JB by reducing the amount of income to which section 10 applies, if
such amount is credited to the profit and loss account.

iii)  the action of the CIT(A) is
perfectly legal and does not suffer any infirmity.

 

The Tribunal declined to interfere with the findings of the CIT(A) and
found the appeal of the Revenue to be devoid of merit.

I. Section 194H r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including festival discount and bonus points to customers cannot be considered as commission and therefore not liable for deduction of tax II. Section 36(1)(iii) – Assessee had filed necessary evidence to prove availability of owned funds to cover investment made in capital WIP. Thus, interest paid on borrowed funds was to be allowed u/s 36(1)(iii)

7. [2020] 119 taxmann.com 424 (Mum.)(Trib.) Tata Sky Ltd. vs. ACIT, Circle 7(3) A.Ys.: 2009-10 and 2010-11 Date of order: 10th September,
2020

 

I. Section 194H
r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including
festival discount and bonus points to customers cannot be considered as
commission and therefore not liable for deduction of tax

II. Section 36(1)(iii) – Assessee had filed
necessary evidence to prove availability of owned funds to cover investment
made in capital WIP. Thus, interest paid on borrowed funds was to be allowed
u/s 36(1)(iii)

 

FACTS

I.   The assessee was engaged in the business of
providing Direct to Home (DTH) services. The set-top box (STB) installed at the
premises of the subscribers receives television signals through the
broadcasters which are uplinked to the satellite. The main source of income for
the assessee was from the sale of STB’s and sale of recharge coupons to
subscribers. The assessee claimed deduction of discounts offered on sale of
STB’s and recharge coupons. The A.O. contended that the very nature of discount
given by the assessee to distributors is in the nature of commission and
disallowed the expenditure as no tax deduction was made by the assessee. The
CIT(A) upheld the decision of the A.O.

 

Aggrieved, the
assessee preferred an appeal with the Tribunal.

 

II.   The assessee had certain capital WIP and the
A.O. had observed that no interest expenditure was allocated against it. The
assessee had incurred huge interest expenditure on various loans and the A.O.
disallowed proportionate interest expenditure u/s 36(1)(iii). The CIT(A)
confirmed the disallowance. The assessee preferred an appeal with the Tribunal..

 

HELD

I. The transactions
between the assessee and its distributors were on principal-to-principal basis
and all the risk, loss and damages are transferred to the distributor on
delivery. Further, the distributors were free to sell the STB’s at any price below
the maximum retail price. The assessee had filed the sample copy of invoices
for sale of STB’s and other recharge coupons to prove that it was a sale and
not services to be covered u/s 194H. Therefore, the assessee was not required
to deduct TDS on discount allowed on the sale of STB’s and hardware, recharge
coupon vouchers and disallowance of bonus or credit provided to subscribers,
including sales promotion expenses. The A.O. was directed to delete the
addition made on account of the disallowances.

 

II.   Based on the facts in the case, it was clear
that the assessee had not borrowed specific loan for acquiring capital assets.
The A.O. had disallowed proportionate interest paid on other loans including
loans borrowed for working capital purpose on the ground that the assessee had
used interest-bearing funds for acquisition of capital asset. The A.O. did not
bring on record any evidence to prove that borrowed funds were used for
acquisition of capital work in progress. The assessee filed evidence to the
effect that capital work in progress had been acquired out of the share capital
raised which was sufficient to cover investment in the capital work in
progress. Therefore, the A.O. erred in disallowing proportionate interest
expenses u/s 36(1)(iii).

 

Section 54F: Where the genuineness of the transactions is established, to avail exemption u/s 54F it is not mandatory that the agreement must be registered or possession must be obtained

6. [2020] 77 ITR (Trib.) 394 (Pune)(Trib.) Lalitkumar Kesarimal Jain vs. DCIT ITA No. 1345-1347/Pune/2017 A.Y.: 2012-13 Date of order: 24th September,
2019

 

Section 54F: Where the genuineness of the
transactions is established, to avail exemption u/s 54F it is not mandatory
that the agreement must be registered or possession must be obtained

 

FACTS

The assessee earned
long-term capital gains on sale of certain assets and in his return of income
claimed exemption u/s 54F to the tune of Rs. 18.96 crores for purchase of new
residential property. The A.O. rejected the said claim citing the following
reasons: (1) The agreements for purchase were unregistered; (2) The seller had
not given possession of the property; and (3) The assessee was an interested party
in the seller’s concern. The assessee substantiated that he had already paid
Rs. 22.10 crores to the seller before the due date of filing return of income
for the relevant assessment year and the same was not returned. In an
affidavit, the assessee explained the reason for not getting possession from
the seller. However, the CIT(A) upheld the order of the A.O., rejecting the
exemption u/s 54F.

 

The assessee
therefore filed an appeal before the ITAT.

 

HELD

(i)  Section 54F is incorporated to promote housing
projects and development activities and according to it once a person sells
some assets and earns capital gains, that money should be utilised for
procuring some new assets. The assessee should part with that money or a
substantial amount of it, for procuring a new residential house. What
essentially is looked into in this regard is the bona fide nature of the
assessee and the genuineness of the transaction/s.

 

(ii)  It was an undisputed fact that the assessee
had paid a sum of Rs. 22.10 crores to the seller and the Department had not
brought on record any evidence to prove that the said money came back to the
assessee.

 

(iii) The entire ambit of the Income-tax Act is based
within the larger framework of welfare legislation. The object of each
provision is ultimately the development of the society as well as the
individual and at the same time taking care of the interests of taxpayers.

 

(iv) Merely because the assessee had an interest in
the seller concern by itself cannot be reason to deny the benefit of deduction
when the genuineness of the transactions was established and there were several
other persons who were purchasing flats from the same seller and who had
already paid advance amounts.

 

(v) It was further found that the delay in
completion of the project was absolutely circumstantial and neither the
assessee nor the seller had any mala fide intention for delay of the
project.

 

(vi) Referring to the decision of the Supreme Court
in the case of Fibre Boards (P) Ltd. vs. CIT [2015] 376 ITR 596 (SC)
and several other decisions of Tribunals, it was held that it is not mandatory
that the agreement must be registered or possession must be obtained. If it is
substantiated that the transaction is genuine, then benefit of deduction u/s
54F should be given to the assessee.

 

Accordingly, the
assessee was granted the benefit of deduction u/s 54F.

 

Explanation 1 to section 37(1): Deduction made by the buyers from the price, on account of damage / variance in the product quality does not attract Explanation 1 to section 37 (1) and same is an allowable deduction even when the assessee classified it as ‘penalty on account of non-fulfilment of contractual requirements’

5. [2020] 77 ITR
(Trib.) 165 (Del.)(Trib.) DCIT vs. Mahavir
Multitrade (P) Ltd. ITA No.:
1139/Del/2017 A.Y.: 2012-13 Date of order: 27th
November, 2019

 

Explanation 1 to
section 37(1): Deduction made by the buyers from the price, on account of
damage / variance in the product quality does not attract Explanation 1 to
section 37 (1) and same is an allowable deduction even when the assessee
classified it as ‘penalty on account of non-fulfilment of contractual
requirements’

 

FACTS

The assessee was
engaged in trading of imported coal. It sold coal as per the specifications and
requirements of the buyer and in the event of failure to comply with the
requirements, the buyer used to make deduction while releasing the payment on
account of variation in quantity and quality; the amount of deduction for A.Y.
2012-13 was Rs. 3,66,68,504 which was claimed as a deduction while computing
the business income. During the course of assessment proceedings, the assessee
categorised such deduction as penalty levied for not complying with the terms
of the contract. But the A.O. made an addition on the ground that such penalty
cannot be regarded as a deductible expenditure as per the Explanation to
section 37(1). It was explained to the A.O. that the nature of the product was
such that there was high possibility of degradation or variance and the
deduction made by the buyers represented compensatory levy for not meeting the
specifications / agreed parameters of coal.

 

On an appeal before
the CIT(A), considering various judicial precedents it was held that
exigibility of an item to tax or tax deduction cannot be based merely on the
label (nomenclature) given to it by the assessee. It was held that deduction by
buyers represented the expenditure for the damages caused, which is
compensatory payment made by the assessee and it entitled him to claim the
deduction from the income. It could not be equated with infraction of law as
provided in the Explanation to section 37(1). Accordingly, the additions made
by the A.O. were directed to be deleted.

 

Thereafter, the
Department filed an appeal before the ITAT against the order of the CIT(A).

 

HELD

1.  It was accepted by the A.O. that the assessee
received less payment from the buyers because of the variance in the quality of
coal. The allegation of the A.O. only revealed that there was failure on the
part of the assessee to meet the contractual obligation but it was nowhere
specified as to which provision of law was violated so as to invite the penal
consequences.

 

2. The A.O. had failed to consider the explanation
given by the assessee wherein it was clearly stated that the contract with the
buyers stipulated the consequence of price reduction / adjustment when there
was variation in the quality or quantity of the coal.

 

3. The inability to meet the contractual
obligation by the assessee could not be termed as an offence or infraction of
law so as to deny the claim of the assessee by invoking Explanation 1 to
section 37(1) and exigibility of an item to tax or tax deduction cannot be made
merely on the label given to it by the parties. The penalty was levied on the
assessee for not complying with the terms of the contract, which is a civil
consequence for not complying with certain terms of the contract, and has
nothing to do with any offence.

 

4. The CIT(A) had rightly relied upon the
decisions in Prakash Cotton Mills (P) Ltd. vs. CIT [1993] 201 ITR 684
(SC), Swadeshi Cotton Mills Co. Ltd. vs. CIT [1980] 125 ITR 33 (All.),
Continental Constructions Ltd. vs. CIT [1992] 195 ITR 81 (SC) and also
the decisions of the Kerala and the Andhra Pradesh High Courts in CIT vs.
Catholic Syrian Bank Ltd. [2004] 265 ITR 177 (Ker.) and CIT vs.
Bharat Television (P) Ltd. [1996] 218 ITR 173 (AP).

 

Accordingly, the
order of the CIT(A) was upheld.

Section 244A – Interest is payable on refund arising out of payment of self-assessment tax even though refund is less than ten per cent of tax determined

4. [2020] 119 taxmann.com 40 (Del.)(Trib.) Maruti Suzuki India Ltd. vs. CIT ITA Nos. 2553, 2641 (Delhi) of 2013 &
others A.Ys.: 1999-00 to 1994-95 Date of order: 31st August, 2020

 

Section 244A – Interest is payable on
refund arising out of payment of self-assessment tax even though refund is less
than ten per cent of tax determined

 

FACTS


The assessee
claimed refund of Rs. 201,37,93,163 comprising of advance tax, TDS and
self-assessment tax of Rs. 14,59,79,228 and Rs. 186,78,13,935, the tax paid on
different dates. The A.O. did not allow interest u/s 244A(1)(a) on the amount
of Rs. 14.59 crores as the refund was less than 10% of the tax determined u/s
254 r/w/s 143(3).

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the order on the
ground that to give effect to the provisions of section 244A(3), the assessee
had to mandatorily cross the limitations imposed u/s 244A(1)(a).

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD


The Tribunal observed that the CIT(A) treated the entire amount of Rs.
14.60 crores as prepaid taxes for the purpose of section 244A(1)(a). This, according to the Tribunal, was where the
CIT(A) considered / read the provisions wrong. The Tribunal held that the
prepaid taxes consist of TDS and advance tax. The provisions of self-assessment
tax are governed by section 140A which is not covered by the provisions of
section 244A(1)(a). Self-assessment tax which is payable on the basis of return
does not constitute part of advance tax. For the purpose of embargo of 10% of
tax determined in accordance with the provisions of section 244A(1)(a), it is
clear from the provisions of the section that self-assessment tax does not form
part of the embargo as self-assessment tax falls under clause (b) of section
244A(1). The proviso to clause (a) of sub-section (1) of section 244A is
applicable and has to be considered for the computational purpose of interest
computable for the refund payable u/s 244A(1)(a).

 

As regards the
question whether or not interest is payable on self-assessment tax paid, the
Tribunal observed that it is trite law that whenever the assessee is entitled
to refund, there is a statutory liability on the Revenue to pay the interest on
such refund on general principles to pay interest on sums wrongfully retained.

 

Section 244A does
not deny payment of interest in case of refund of amount paid u/s 140A. On the
contrary, clause (b) being a residuary clause, necessarily includes payment
made u/s 140A. Since there is no proviso attached to sub-clause (b), the
embargo of 10% is not applicable for calculation of interest for the refund
arising out of payment of self-assessment tax.

 

The Tribunal held
that with regard to the self-assessment tax paid, the assessee is eligible for
interest on the total amount of refund in accordance with the provisions of
section 244A(1)(b). This ground of appeal was allowed.

 

Sections 250 and 271AAA – Ex parte dismissal of appeal by CIT(A), without considering the material on record on the ground that the written submissions were not signed by the assessee, is contrary to the provisions of sub-section (6) of section 250

3. 118 taxmann.com 223 (Raj.)(Trib.) Keshavlal Devkaranbhai Patel vs. ACIT ITA No. 124 /Rajkot/2017 A.Y.: 2012-13 Date of order: 28th July, 2020

 

Sections 250 and 271AAA – Ex parte
dismissal of appeal by CIT(A), without considering the material on record on
the ground that the written submissions were not signed by the assessee, is
contrary to the provisions of sub-section (6) of section 250

 

FACTS


Aggrieved by the
order levying penalty u/s 271AAA, the assessee preferred an appeal to the
CIT(A). The assessee had filed his explanation before the A.O. and also before
the CIT(A). However, the submissions filed before the CIT(A) were not signed by
the assessee.

 

In view of this,
the CIT(A) dismissed the appeal by recording that the assessee was not
interested in pursuing the appeal.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD


The Tribunal found
the order of the CIT(A) to be very cryptic and not having any discussion on the
material already available on record before him. The Tribunal observed that:

(i)   there is no valid and justifiable reason
given by the appellate authority in his order while dismissing the claim of the
assessee;

(ii)  the CIT(A) has recorded in his order that the
assessee has filed written submissions in the office on 29th August,
2017 but without signature, hence the same were not considered by the CIT(A);
and

(iii) the CIT(A) dismissed the appeal for want of
prosecution even when the written submission was on record which did not bear
the signature of the assessee.

 

The Tribunal held
that the CIT(A) ought to have adjourned the matter and passed a further
direction to file fresh written submissions, duly signed. It is a basic
principle that justice should not only be done, but it must also be seen to be
done. In the absence of that, the Tribunal held, the order impugned is not in
consonance with the spirit and object of sub-section (6) of section 250.

 

The Tribunal set
aside the issue to the file of the CIT(A) with a direction to adjudicate it
afresh after giving the assessee an opportunity of being heard and to pass a
speaking order thereon keeping in mind, inter alia, the mandate of the
provisions of section 250(6) in order to render true and effective justice.

Section 50C – Provisions of section 50C are not applicable to introduction of development rights as capital contribution in an AOP of which assessee is a member

2. 119 taxmann.com 186 (Mum.)(Trib.) Network Construction Company vs. ACIT ITA No. 2279/Mum./2017 A.Y.: 2012-13 Date of order: 11th August, 2020

 

Section 50C – Provisions of section 50C are
not applicable to introduction of development rights as capital contribution in
an AOP of which assessee is a member

 

FACTS


The assessee firm
acquired development rights in respect of seven buildings of which the assessee
firm developed and sold four on its own and disclosed the profit earned as
business profit in its return of income. The development rights in respect of
the remaining three buildings were shown as investments in the balance sheet as
at 31st March, 2010.

 

As per the joint
venture agreement dated 1st July, 2010, the assessee contributed
development rights in respect of three buildings as ‘capital contribution’ in
an AOP for an agreed consideration of Rs. 5 crores. The assessee contended that
the capital gains were to be computed in accordance with the provisions of
section 45(3).

 

The A.O. treated
the introduction of the development rights as a transfer and computed capital
gains by applying the provisions of section 50C by adopting Rs. 10,10,47,000,
being stamp duty value of these rights, as the full value of consideration.

 

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

 

The assessee
preferred an appeal to the Tribunal.

 

HELD


The Tribunal
observed that section 45(3) is a charging provision having two limbs joined by
the conjunction ‘AND’. The first limb is a charging provision which levies
capital gains tax on gains arising from the contribution of a capital asset in the
AOP by a member, and the second limb is an essential deeming fiction for
determining the value of consideration without which the charging provision
would fail. The Tribunal also observed that the provisions of section 50C are
also a deeming fiction which deems only the value of consideration for the
purpose of calculating capital gains in the transfer of a capital asset from
one person to another. It held that the provisions of section 50C are not
applicable in the present case and that the provisions of section 45(3) will be
applied.

 

The Tribunal
reversed the orders of the A.O. and the CIT(A) and allowed this ground of
appeal filed by the assessee.

 

Section 44AD r/w sections 44AB and 144 – Assessing Officer can resort to estimation of income under the provisions of section 44AD only after rejecting the books of accounts of the assessee, by best judgment assessment u/s 144

1. [118 taxmann.com
347] Saykul Islam vs.
ITO ITA No.
64/Ahd./2018 A.Y.: 2014-15 Date of order: 31st
July, 2020

 

Section 44AD r/w sections
44AB and 144 – Assessing Officer can resort to estimation of income under the
provisions of section 44AD only after rejecting the books of accounts of the
assessee, by best judgment assessment u/s 144

 

FACTS


The assessee is an
individual trading in hardware goods. His business turnover was in excess of
Rs. 1 crore, but he had declared profit at 0.99% of the turnover in his tax
return. The information was provided by the assessee in his return of income
reflecting maintenance of books of accounts, but not audited as required under
the provisions of section 44AB. The A.O. was of the view that as per the
provisions of section 44AD, an assessee may claim lower profits and gains than
the profits and gains specified in sub-section (1) of section 44AD provided
that the assessee keeps and maintains such books of accounts and other
documents as required under sub-section (2) of section 44AA and gets his
accounts audited and furnishes a report of such audit as required u/s 44AB. The
assessee submitted that the net profit percentage was very low in his business
and requested the officer to take the net profit percentage @3% of the
turnover.

 

The A.O. rejected
this contention and estimated the net profit at 8% of the turnover. On appeal
to the CIT(A), he reduced the estimated profit on turnover from 8% to 5%.
Aggrieved by the order of the CIT(A), the assessee filed an appeal with the
Tribunal.

 

HELD


The assessee had
produced all books of accounts, bills, vouchers and other documents; however, without
pointing out any mistake or error in the books of accounts, the A.O. made an
addition at 8%. Moreover, the books of accounts were not rejected. The Tribunal
observed that the A.O. could resort to estimation of net profits only after
rejecting the books of accounts u/s 145(3) and thereafter making best judgment
assessment u/s 144. Instead, he estimated net profits only on the basis of
suspicion that the assessee might be inflating expenses and showing a lower net
profit ratio. On the factual position of the case, the Tribunal directed the
A.O. to estimate the income at 2.5% of the turnover.

 

The appeal of the
assessee was partly allowed.

Sections 2(47), 28(i), 45 – Gains arising on transfer of development rights held as a business asset are chargeable to tax as ‘business income’ – Only that part of the consideration which accrued, as per terms of the agreement, would be taxable in the year of receipt

22. [117 taxmann.com 637 (Del.)(Trib.)] ITO vs. Abdul Kayum Ahmed Mohd. Tamboli ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 6th July, 2020

 

Sections 2(47), 28(i), 45 – Gains arising
on transfer of development rights held as a business asset are chargeable to
tax as ‘business income’ – Only that part of the consideration which accrued,
as per terms of the agreement, would be taxable in the year of receipt

 

FACTS

The assessment of the assessee was re-opened because the consideration
received for transfer of development rights was not offered for taxation. Since
the assessee had handed over possession of the land and also transferred the
development rights, the A.O. in the course of reassessment proceedings taxed
the amount received by the assessee on transfer of development rights as
business income. The assessee submitted that under the contract with the
developer, he was to perform work on the basis of receipt of funds from the
developer. Accordingly, the assessee had offered only a part of the receipts as
income to the extent that receipts had accrued. The balance, according to him,
were conditional receipts. The developer, in response to a notice sent u/s
133(6), confirmed the position as stated by the assessee.

 

But the A.O. opined that the said accounting treatment was not in
consonance with the mercantile system of accounting followed by the assessee. Besides, since the transfer had been
completed, the consideration would be taxable in the year of receipt as
business income.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended
that the balance amount be considered as capital receipts. The CIT(A)
adjudicated in the assessee’s favour and held that only the part of the amount
accrued as per the agreement would be taxable in the year of receipt. He
estimated an amount of 10% of the gross receipts to be taxable in the year of
receipt. The provisions pertaining to capital gains were also held to be
inapplicable as the development rights were business assets.

 

Aggrieved, the Revenue filed an appeal to the Tribunal.

 

HELD

It was evident from
the terms of the joint venture agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was a
conditional receipt and was to accrue only in the event of the assessee
performing certain obligations under the agreement. Since the development
rights constituted the business assets of the assessee, the provisions of
capital gains would not be applicable. The order of the CIT(A) taxing 10% of
the gross receipts was justified. The Tribunal upheld the decision of the
CIT(A) and held that only part of the receipts as estimated accrued to the
assessee were taxable.

 

Sections 28, 36(1)(iii) – In a case where since the date of incorporation the assessee has carried on substantial business activities such as raising loans, purchase of land, which was reflected as stock-in-trade in the books of accounts, and entering into development agreement, the assessee can be said to have not only set up but also commenced the business. Consequently, interest on loan taken from bank for purchase of land which was held as stock-in-trade is allowable as a deduction

21. [117 taxmann.com 419 (Del.)(Trib.)] Jindal Realty (P) Ltd. vs. ACIT ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 22nd June, 2020

 

Sections 28, 36(1)(iii) – In a case where
since the date of incorporation the assessee has carried on substantial
business activities such as raising loans, purchase of land, which was
reflected as stock-in-trade in the books of accounts, and entering into
development agreement, the assessee can be said to have not only set up but
also commenced the business. Consequently, interest on loan taken from bank for
purchase of land which was held as stock-in-trade is allowable as a deduction

 

FACTS

During the previous
year relevant to the assessment year under consideration, the assessee, engaged
in real estate business, borrowed monies from banks and utilised the same to
purchase land for township projects and also for giving as advance to other
associate parties for purchase of land by them. The interest on such monies
borrowed was claimed by the assessee as deduction u/s 36(1)(iii), and the
return of income was filed for the previous year declaring a loss.

 

The A.O. disallowed
the claim of deduction of interest on the ground that the assessee had not
commenced any business activity and held the same to be pre-operative in
nature.

 

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

 

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

 

HELD

The Tribunal held
that since the date of incorporation, the assessee carried on substantial
business activities such as raising loans, purchase of land which was reflected
as stock-in-trade in the books of accounts and entering into development
agreements. The Tribunal relied on the decision of the Delhi High Court in the
case of CIT vs. Arcane Developers (P) Ltd. 368 ITR 627 (Del.)
wherein it is held that in case of real estate business, the setting up of
business was complete when the first steps were taken by the
respondent-assessee to look around and negotiate with parties.

 

Thus, the assessee
had not only set up the business but also commenced the business in the
previous year and therefore was eligible to claim deduction of interest
expenditure u/s 36(1)(iii).

 

The appeal filed by
the assessee was allowed.

 

Section 50B read with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the business of aqua culture, export of frozen shrimp, sale of hatchery seed and wind-power generation, along with all the assets and liabilities, constitute an ‘undertaking’ for the purpose of slump sale

20. [117
taxmann.com 440 (Vish.)(Trib.)] ACIT vs. Devi Sea
Foods Ltd. ITA No.
497/Vish./2019 A.Y.: 2013-2014 Date of order: 19th
June, 2020

 

Section 50B read
with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the
business of aqua culture, export of frozen shrimp, sale of hatchery seed and
wind-power generation, along with all the assets and liabilities, constitute an
‘undertaking’ for the purpose of slump sale

 

FACTS

The assessee sold
three windmills, declared the gains arising on such sale as a slump sale and
computed the long-term capital gains as per section 50B. The assessee had not
furnished separate financial statements for the windmill business activity;
however, it was claiming deduction u/s 80-IA on the income from the windmill as
a separate business which was allowed by the A.O. from A.Y. 2009-10 onwards.
But at the time of the sale, the A.O. denied the applicability of the
provisions related to slump sale by stating that the windmills did not
constitute an ‘undertaking’ and charged the income as short-term capital gains.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that each windmill is a
unit of the undertaking and is covered by the definition of slump sale. He also
noted that though the assessee had shown windmills as part of the block of
assets, depreciation claim could not be a factor to deny benefit of slump sale.
He directed the A.O. to compute long-term capital gains u/s 50B.

 

Aggrieved, the
Revenue filed an appeal to the Tribunal.

 

HELD

The Tribunal observed that the windmills were part of the assessee’s
business, for which the assessee was claiming deduction since A.Y. 2009-10. The
A.O. had not made any adverse remarks in respect of deduction claimed u/s
80-IA. Though separate books of accounts had not been maintained, the assessee
had demonstrated separate ledger account belonging to the windmill operation,
and income from such activity was independently ascertainable. Further, there
is no requirement in the Act that all assets sold under slump sale should be
together. The Tribunal held that the real test for considering any sale of an asset
as non-slump sale would be any independent asset or liability not forming part
of the business operations. It held that the windmills satisfied all conditions
for being considered as an ‘undertaking’ and the provisions of slump sale would
be applicable.

 

Section 2(22)(e) – No addition can be made u/s 2(22)(e) since as per annual return filed by the assessee, he had transferred his shareholding in borrower company before the advancement of loan by the lender company to the borrowing company

19. [(2020) 117 taxmann.com 451
(Chd.)(Trib.) ACIT vs. Gurdeep Singh ITA No. 170 (Chd.) of 2018 A.Y.: 2013-2014 Date of order: 26th June, 2020

 

Section 2(22)(e) – No addition can be made
u/s 2(22)(e) since as per annual return filed by the assessee, he had
transferred his shareholding in borrower company before the advancement of loan
by the lender company to the borrowing company

 

FACTS

The assessee was a shareholder in two companies, namely, C Ltd. and J
Ltd. During the previous year relevant to the assessment year under
consideration, C Ltd. gave loans and advances to J Ltd. out of its surplus
funds. The A.O. took a view that since the assessee was holding shares in both
companies in excess of ten percent of total shareholding, the amount of loan is
to be taxed as dividend u/s 2(22)(e) of the Act.

 

The annual return
filed with the Registrar of Companies (ROC) revealed that the assessee held
only one share of C Ltd., whereas the other shares were transferred to J Ltd.
The annual return was belatedly filed with the ROC, along with payment of late
fee, which was accepted by the ROC. Based on the belatedly filed annual return,
the assessee contended that the shares were transferred prior to the
advancement of loan and, therefore, the provisions of section 2(22)(e) were not
applicable. The A.O. did not agree with the submissions made by the assessee
and held the plea of share transfer to be an afterthought since the return with
the Registrar was filed late.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal since the transfer of shares was accepted by the A.O. while framing assessments
of subsequent years, and also held that the transfer of shares had to be
considered. He also held that the transaction was commercially expedient with
no personal benefit involved.

 

Aggrieved, the Revenue preferred an appeal to the Tribunal.

 

HELD

The Revenue could
not establish beyond doubt that the assessee was having substantial interest in
C Ltd. on the date of advancement of loan by C Ltd. to J Ltd. Even though the
annual return was filed belatedly, once accepted by the ROC, it was a legal and
valid document as per law and the effective date for transfer of shares should
be considered as that mentioned in the return filed. To apply a deeming
fiction, the first set of facts is to be proved beyond doubt and the deeming
fiction cannot be applied on the basis of assumption, presumption or suspicion
about the first set of facts. The Tribunal observed that it was the A.O.’s
suspicion that the assessee was holding substantial shares in C Ltd. on the
date of advancement of loan. The Revenue could not rebut the facts beyond
reasonable doubt. The Tribunal upheld the order passed by the CIT(A) and
confirmed the deletion of the addition made u/s 2(22)(e).

 

The appeal filed by
the Revenue was dismissed.

 

 

Section 115BBE, read with sections 69, 143 and 154 – Amount surrendered, in the course of survey, as undisclosed investment in stock and assessed as business income cannot be subsequently brought to tax u/s 115BBE by passing an order u/s 154

18. [(2020) 117 taxmann.com 178
(Jai.)(Trib.) ACIT vs. Sudesh Kumar Gupta ITA No. 976 (Jp) of 2019 A.Y.: 2014-2015 Date of order: 9th June, 2020

 

Section 115BBE, read with sections 69, 143
and 154 – Amount surrendered, in the course of survey, as undisclosed
investment in stock and assessed as business income cannot be subsequently
brought to tax u/s 115BBE by passing an order u/s 154

 

FACTS

During the course of survey, the assessee surrendered an amount of Rs. 21
lakhs as undisclosed investment in stock. This amount was offered to tax in the
return of income as business income. In the assessment completed u/s 143(3) of
the Act, the returned income was accepted.

 

Subsequently, the A.O. issued a notice u/s 154 proposing to tax the
undisclosed investment of Rs. 21,00,000 in stock u/s 69 and tax thereon levied
u/s 115BBE at 30%. The assessee submitted that the amount admitted as
undisclosed excess stock was on an estimated basis and it had been accepted by
the A.O. in an assessment made u/s 143(3). The A.O. rejected the submission
made by the assessee and passed an order u/s 154 and levied tax on the amount
of undisclosed investment at 30% in accordance with section 115BBE.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal holding that the A.O. was not justified in invoking the provisions of
section 69 once he had charged it to tax under the head business income while
passing the assessment order u/s 143(3).

 

Aggrieved, the Revenue preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted
that the amount of undisclosed investment in stock surrendered by the assessee
was offered as ‘business income’ in the return of income and was accepted by
the A.O. In the course of assessment, there was no adjustment / variation
either in the quantum, nature or classification of income offered by the
assessee. The A.O. had not called for any explanation regarding the nature and
source of such investment during the course of assessment proceedings. Further,
he had neither formed any opinion, nor recorded any satisfaction for invoking
the provisions of section 69. The Tribunal held that since the provisions of
section 69 had not been invoked at the first instance while passing the
assessment order u/s 143(3), they cannot be independently applied by invoking
the provisions of section 154.

 

The Tribunal
dismissed the appeal filed by the Revenue.

Sections 2(47), 45: When the terms of the sale deed and the intention of the parties at the time of entering into the sale deed have not been adhered to whereby full sale consideration has not been discharged, there is no transfer of land, even though the sale deed has been registered, and no income accrues and consequently no liability towards capital gains arises in the hands of the assessee

17. [2020] 117 taxmann.com 424 (Jai.)(Trib.) CIT vs. Ijyaraj Singh ITA Nos. 91 and 152/Jp/2019 A.Y.: 2013-14 Date of order: 18th June, 2020

 

Sections 2(47), 45: When the terms of the
sale deed and the intention of the parties at the time of entering into the
sale deed have not been adhered to whereby full sale consideration has not been
discharged, there is no transfer of land, even though the sale deed has been
registered, and no income accrues and consequently no liability towards capital
gains arises in the hands of the assessee

 

FACTS

The assessee in his
return of income filed u/s 139(1) declared long-term capital gains of Rs.
2,51,85,149 in respect of sale of agricultural land situate in Kota. In the
course of assessment proceedings, the assessee revised his return of income
wherein the income under the head long-term capital gains was revised to Rs.
1,10,18,918 as against Rs. 2,51,85,149 shown in the original return. The reason
for revising the return was that out of three sale deeds, two sale deeds of
land executed with Mr. Rajeev Singh were invalid sale deeds and consequently no
transfer took place and hence no capital gain arises in respect of the two
invalid sale deeds. In respect of these two sale deeds, the assessee had
received only Rs. 63 lakhs towards consideration out of Rs. 803 lakhs. The
cheques received from the buyer were dishonoured and even possession was not
handed over to the buyer. The Rajasthan High Court has also granted stay on the
sale deeds executed by the assessee.

 

But the A.O. was of
the view that the contract entered into by the assessee was a legal and valid
contract entered into in accordance with the procedure laid down by law. The
assessee voluntarily agreed to register the sale deed before the Registrar and
on the date of execution and also on the date of registration there was no
dispute between the parties. The A.O. computed long-term capital gains by
considering the full value of consideration, including the two sale deeds which
were contended to be invalid, and computed the full value of consideration u/s
50C of the Act.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that the transaction in
respect of the two invalid sale deeds is not chargeable to capital gains tax.

 

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted
that the question for its consideration is that where the full value of
consideration has not been discharged by the purchaser of the impugned land as
per the sale deed, and there is violation of the terms of the sale deed,
whether the impugned transaction would still qualify as transfer and be liable
for capital gains tax, given that the same is evidenced by a registered sale
deed. Having considered the provisions of sections 2(24), 2(47), 45 and 48 of
the Act, and also the decision of the Punjab & Haryana High Court in the
case of Hira Lal Ram Dayal vs. CIT [122 ITR 461 (Punj. & Har. HC)]
where the question before the Court was ‘whether it is open to the assessee to
prove that the sale transaction evidenced by the registered sale deed was a
sham transaction and no sale in fact took place’, and also the decision of the
Patna High Court in the case of Smt. Raj Rani Devi Ramna vs. CIT [(1992)
201 ITR 1032 (Patna)], the Tribunal held that the legal proposition
which emerges is that a registered sale deed does carry an evidentiary value.

 

At the same time,
where the assessee is able to prove by cogent evidence brought on record that
no sale has in fact taken place, then in such a scenario the taxing and
appellate authorities should consider these evidences brought on record by the
assessee and on the basis of an examination thereof, decide as to whether a
sale has taken place in a given case or not. The title in the property does not
necessarily pass as soon as the instrument of transfer is registered and the
answer to the question regarding passing of title lies in the intention of the
parties executing such an instrument. The registration is no proof of an
operative transfer and where the parties had intended that despite execution
and registration of sale deed, transfer by way of sale will become effective
only on payment and receipt of full sale consideration and not at the time of
execution and registration of sale deed.

 

The Tribunal noted
that no payment was received before execution of the sale deed but only
post-dated cheques were received by the assessee. It held that mere handing
over of the post-dated cheques which have been subsequently dishonoured and
returned unpaid to the assessee, cannot be held to be discharge of full sale
consideration as intended and agreed upon between the parties and there is
clearly a violation of the terms of the sale deed by the buyer.

 

Although the sale
deed has been registered, given that the terms of the sale deed and the
intention of the parties at the time of entering into the said sale deed have
not been adhered to whereby full sale consideration has not been discharged,
there is no transfer of the impugned land and no income accrues and
consequently, no liability towards capital gains arises in the hands of the
assessee. The Tribunal also held that it is only the real income which can be
brought to tax and there cannot be any levy of tax on hypothetical income which
has neither accrued / nor arisen or been received by the assessee. Since the
transaction fell through in view of non-fulfilment of the terms of the sale
deed whereby cheques issued by the buyer have been dishonoured, there is no
transfer and no income which has accrued or arisen to the assessee. There is no
real income in the hands of the assessee and in the absence thereof, the
assessee is not liable to capital gains. It observed that a similar view has
been taken by the Pune Bench of the Tribunal in the case of Appasaheb
Baburao Lonkar vs. ITO [(2019) 176 ITD 115 (Pune-Trib.)].

 

This ground of
appeal filed by the Revenue was dismissed.

Section 194C r/w/s 40(a)(ia) – Even an oral contract is good enough to invoke section 194C – Payment of hire charges made by assessee to cab owners for hiring cabs for the purpose of providing transportation services to its customers would attract section 194C – Since payment is made by the assessee, the presumption would be that there was a contract for hiring of vehicles

12.
[2020] 116 taxmann.com 230 (Bang.) Singonahalli
Chikkarevanna Gangadharaiah vs. ACIT ITA No.
785/Bang/2018 A.Y.: 2014-15 Date of
order: 24th February, 2018

 

Section 194C r/w/s 40(a)(ia) – Even an oral
contract is good enough to invoke section 194C – Payment of hire charges made
by assessee to cab owners for hiring cabs for the purpose of providing
transportation services to its customers would attract section 194C – Since
payment is made by the assessee, the presumption would be that there was a
contract for hiring of vehicles

 

FACTS

The A.O. noticed
from the Profit & Loss account of the assessee that the assessee has debited
a sum of Rs. 6,18,73,785 for vehicle hire charges paid and Rs. 2,48,39,356 for
petrol and diesel expenses paid. The assessee was asked to produce details of
TDS on expenses. However, the assessee failed to do so.

 

Subsequently, the
assessee submitted the PAN cards from cab drivers and owners to whom hire
charges were paid and said that the cab drivers and owners were all regular
income tax payers and hence, as per section 194C, no TDS was made where PAN was
provided.

 

According to the
A.O., section 194C will only apply to a contractor engaged in the  business of plying, hiring or leasing goods
carriages – and not to a contractor engaged in the business of plying passenger
vehicles. Accordingly, the A.O. held that the assessee is liable to deduct
TDS and disallowed a sum of Rs. 6,18,73,785 for vehicle hire charges u/s
40(a)(ia) of the Act.

 

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

 

HELD

Upon going through
the provisions of section 194C, the Tribunal held that there is no doubt that
the assessee in this case has made the payments of hire charges to cab owners.
As regards the contention of the assessee that the payments have not been made
in pursuance of any contract, the Tribunal held that a contract need not be in
writing; even an oral contract is good enough to invoke the provisions of
section 194C. The cab owners have received the payments from the assessee
towards the hiring charges, therefore, the presumption normally would be that
there was a contract for hiring of vehicles. Hence, if the assessee has made
the payment for hiring the vehicles, the provisions of section 194C are clearly
applicable.

 

The contract has to
be looked into party-wise, not on the basis of the individual. The Tribunal
held that all the payments made to a cab owner throughout the year are to be
aggregated to ascertain the applicability of the TDS provision as all the
payments pertain to a contract. A contract need not be in writing. It may infer
from the conduct of the parties. It may even be oral. The Tribunal also noted
that u/s 194C, sub-section (5) proviso thereto, if the aggregate amount
paid or credited to a person  exceeds Rs.
75,000, then the assessee shall be liable to deduct income tax at source.

 

The Tribunal then
discussed the amendment brought in by the Finance (No. 2) Act, 2014 with effect
from 1st April, 2015 by virtue of which only 30% of any sum payable
to a resident is to be disallowed. It noted that in the present case the
authorities below have added the entire sum of Rs. 6,18,73,785 by disallowing
the whole amount. Though the substitution in section 40 has been made effective
from 1st April, 2015, in its view the benefit of the amendment
should be given to the assessee either by directing the A.O. to confirm from
the cab owners as to whether the said parties have deposited the tax or not,
and further restrict the addition to 30% of the disallowance. The Tribunal held
that it will be tied (sic) and meet the ends of justice if the
disallowance is only restricted to 30% of the amount liable for TDS u/s 194C.
Accordingly, this issue is partly allowed.

 

Following the decision of the Calcutta High Court in IT Appeal No.
302 of 2011, GA 3200/2011, CIT vs. Virgin Creations decided on 23rd
November, 2011, the Tribunal restored the issue to the file of the A.O.
with the direction that the assessee shall provide all the details to the A.O.
with regard to the recipients of the income and the taxes paid by them. The
A.O. shall carry out necessary verification in respect of the payments made to
the cab drivers and taxes paid on the same by the cab drivers and filing of
returns by the recipients. In case the A.O. finds that the recipient has duly
paid the taxes on the income, the addition made by the A.O. shall stand
deleted.

 

The appeal filed by
the assessee was partly allowed.

Section 54F – Even after amendment w.e.f. A.Y. 2015-16, investment of long-term capital gain in two bungalows located adjacent to each other and used as one residential unit qualifies for exemption u/s 54F – Benefit of exemption could not have been denied on reasoning that there were two different registries of buildings / properties as both properties purchased by assessee were a single property located in same geographical area

7. [2020] 114 taxmann.com 508 (Ahd.)(Trib.)

Mohammadanif Sultanali Pradhan vs. DCIT

ITA No. 1797/Ahd/2018

A.Y.: 2015-16

Date of order: 6th January, 2020

 

Section 54F – Even after amendment w.e.f. A.Y. 2015-16,
investment of long-term capital gain in two bungalows located adjacent to each
other and used as one residential unit qualifies for exemption u/s 54F –
Benefit of exemption could not have been denied on reasoning that there were
two different registries of buildings / properties as both properties purchased
by assessee were a single property located in same geographical area

 

FACTS

During the previous year relevant to the A.Y. 2015-16, the
assessee in his return of income declared income under the head capital gain at
Rs. 23,84,101 after claiming exemption u/s 54F for Rs. 1,08,00,000. In support
of the exemption claimed, the assessee contended that he has made investment in
two bungalows which are adjacent to each other, bearing Nos. 18 and 19 located
at survey No. 606/2, TPS No. 92, Sarkhej – Makarba – Okaf – Fatewadi of Mouje
Sarkhej, taluka Vejalpur, district Ahmedabad.

 

The A.O. was of the view that the assessee can claim
exemption u/s 54F with respect to the investment in one bungalow only.
Accordingly, he computed the exemption with respect to one bungalow only
amounting to Rs. 43,77,118 and thus disallowed the excess claim u/s 54F of Rs.
64,22,882.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) and
submitted that both the bungalows are in the same society, adjacent to each
other. As such both the bungalows are one unit for residential purposes.
Therefore, he claimed that he is entitled to deduction / exemption for both the
bungalows u/s 54F.

 

The CIT(A) rejected the claim of the assessee on the ground
that there is an amendment under the provisions of section 54F of the Act where
the expression previously used, ‘a residential house’, has been substituted
with ‘one residential house’. Such amendment is effective with effect from A.Y.
2015-16, i.e., the year under consideration.

 

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that:

(i) the
issue relates to whether the assessee is eligible for exemption u/s 54F of the
Act against the long-term capital gain for the investment made in the two
properties which are adjacent to each other and used as one residential unit.
It noted that indeed, the provision of the law requires that the exemption will
be available to the assessee u/s 54F for the investment in one residential
unit;

 

(ii) under
the provisions of section 54F, there is no definition / clarification provided
about the area of the residential property. It means that one assessee can buy
a huge bungalow / property of, say, one thousand square metres and can claim
the deduction subject to conditions. Similarly, another assessee acquired two
different residential properties adjacent to each other but both the properties
put together were only two hundred square metres – but he will be extended the
benefit of the exemption with respect to one unit only because there are two
different properties based on registry documents;

 

(iii) there can be a situation that the family of the assessee is quite
large, comprising of several members, and therefore he needs two properties
adjacent to each other to accommodate them. So from the point of view of the
assessee it is a single property but he got two different properties registered
as per the requirement of the builder;

 

(iv) the
assessee cannot be deprived of the benefit conferred under the statute merely
on the reasoning that there were two different registries of the buildings /
properties;

 

(v) it
is also not a case of the Revenue / assessee that both the properties purchased
by the assessee were located in different geographical areas. In such a
situation the law amended u/s 54F appears to be applicable where the assessee
buys two properties in two different areas;

 

(vi) the
principles laid down by the courts cannot be just brushed aside on the aspect
of defining one residential unit. It noted the observations of the Hon’ble High
Court of Karnataka in the case of CIT vs. D. Ananda Basappa [(2009) 309
ITR 329].

 

The Tribunal held that the assessee
is entitled to claim exemption u/s 54F in respect of investment made in two
adjacent bungalows used as one residential unit. The Tribunal deleted the
addition made by the A.O. and confirmed by the CIT(A).

 

This ground of appeal filed by the assessee was
allowed.

Section 80P(4): Provisions of section 80P(4) exclude only co-operative banks and the same cannot be extended to co-operative credit societies

20. [2019] 107 taxmann.com 53
(Trib.)(Ahd.)(SB) ACIT vs. People’s Co-op. Credit Society Ltd. ITA Nos. 1311, 2668 to 2670, 2865, 2866,
2871 & 2905 (Ahd.) of 2012 A.Ys.: 2007-08 to 2009-10 Date of order: 18th April, 2019

 

Section 80P(4):
Provisions of section 80P(4) exclude only co-operative banks and the same
cannot be extended to co-operative credit societies

FACTS

The assessee, a
co-operative credit society, providing credit facilities to its members and
carrying on banking business, claimed deduction u/s 80P(2)(a)(i). The AO
disallowed the same holding that provisions of section 80P(4) are applicable to
the assessee.

 

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

 

The Revenue then
preferred an appeal to the Tribunal.

 

HELD

In view of the
contrary decisions by various benches of the Tribunal, a Special Bench (SB) was
constituted by the President to consider the question whether a co-operative
credit society is to be considered as a co-operative bank and whether by virtue
of the provisions of section 80P(4), a co-operative credit society shall be
disentitled to claim deduction u/s 80P(2)(a)(i).

 

At the time of
hearing before the Tribunal, the learned representatives agreed that the issues
before the SB of the Tribunal are now covered in favour of the assessee by
various decisions of the Hon’ble Jurisdictional High Court – including in the
cases of Pr. CIT vs. Ekta Co-operative Credit Society Ltd. [2018] 91
taxmann.com 42/254, Taxman 33/402 ITR 85 
and CIT vs. Jafari Momin Vikas Co-operative Credit Society
Ltd. [2014] 49 taxmann.com 571/227, Taxman 59 (Mag.) 362 ITR 331 (Guj.).

 

The Tribunal, having considered the ratio of the decisions of the
Jurisdictional High Court in the cases of Pr. CIT vs. Ekta Co-operative
Credit Society Ltd. (Supra) and CIT vs. Jafari Momin Vikas
Co-operative Credit Society Ltd. (Supra), held that the legal position
is quite clear and unambiguous. As held by the Jurisdictional High Court, the
benefit of section 80P(2)(a)(i) cannot be denied in the case of co-operative
credit societies in view of their function of providing credit facilities to
the members and the same are not hit by the provisions of section 80P(4).

 

The appeals filed
by the Revenue were dismissed.

Rule 37BA(3) r/w/s 199: Credit for Tax Deducted at Source has to be allowed in the year in which the corresponding income is assessed even though the tax is deposited by the deductor in the subsequent assessment year

19. [2019] 112 taxmann.com 354 (Trib.)(Pune) Mahesh Software Systems (P) Ltd. vs. ACIT ITA No. 1288/Pune/2017 A.Y.: 2011-12 Date of order: 20th September, 2019

Rule 37BA(3) r/w/s 199: Credit for Tax Deducted at Source has to be allowed in the year in which the corresponding income is assessed even though the tax is deposited by the deductor in the subsequent assessment year

FACTS
The assessee raised an invoice and offered to tax income arising therefrom in March, 2011. The assessee claimed credit for tax deducted thereon. However, the deductor deposited TDS only in April, 2011, i.e., in the succeeding financial year. Consequently, the TDS claimed by the assessee did not appear in Form 26AS for the year in which the income was booked. The AO, relying on sub-rule (1) of Rule 37BA, did not allow the credit in A.Y. 2011-12.

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

The assessee then filed an appeal to the Tribunal.

HELD
The Tribunal observed that the AO had relied on sub-rule (1) of Rule 37BA for denying the benefit of TDS during the year under consideration. It provides that credit for TDS shall be given to the person to whom payment has been made or credit has been given on the basis of information furnished by the deductor. Thus, what is material for sub-rule (1) is the beneficiary of credit and not the time when credit ought to be allowed. The CIT(A), in addition, had relied on sub-rule (4) of Rule 37BA which again provides that credit for TDS shall be granted on the basis of information relating to TDS furnished by the deductor.

The Tribunal observed that the point of time at which the benefit of TDS is to be given is governed by  sub-rule (3) of Rule 37BA which very clearly provides that – ‘credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.’

In view of the above, the Tribunal held that the credit of TDS had to be allowed in the year under consideration even though the TDS was deposited by the deductor in the subsequent assessment year.

The Tribunal allowed the appeal filed by the assessee.

Section 142A(6): It is mandatory for the Valuation Officer to submit the Valuation Report within six months from the date of receipt of the reference – Delay in filing the report cannot be condoned

18. [2019] 75 ITR (Trib.) 219 (Hyd.) Shri Zulfi Revdjee vs. ACIT ITA No. 2415/Hyd/2018 A.Y.: 2013-14 Date of order: 5th September,
2019

 

Section 142A(6): It is mandatory for the
Valuation Officer to submit the Valuation Report within six months from the date
of receipt of the reference – Delay in filing the report cannot be condoned

 

FACTS

The assessee sold a
property during F.Y. 2012-13. He filed the return of income disclosing capital
gains arising from the sale of the said property. The AO sought to make an
addition u/s 50C of the Act. However, since the assessee objected to it, he
referred the file to the Departmental Valuation Officer (DVO) for valuation of
the property. The DVO submitted the report after the expiry of the period
stipulated u/s 142A(6). Further, he also considered the value of the house as
on the date of registration of agreement. The assessee, inter alia,
raised an objection that the report submitted by the DVO is beyond the
stipulated time limit of six months, as specified u/s 142A(6), and consequently
the assessment is barred by limitation.

 

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

 

HELD

The Tribunal
observed that u/s 142A the valuation report by the DVO has to be submitted
within six months from the date of receipt of the reference. However, the DVO
submitted his report after 15 months from the end of the month in which
reference was made to him. The Tribunal considered whether the time limit for
submission of report could be enlarged or condoned. It noted that the word used
in sub-section (6) of section 142A is ‘shall’, while in other sub-sections it
is ‘may’. In B.K. Khanna & Co. vs. Union of India and others, the
Delhi High Court [156 ITR 796 (Del.)] has held that where the words
‘may’ and ‘shall’ are used in various provisions of the same section, then both
of them contain different meanings and the word ‘shall’ shall mean ‘mandatory’.
In sub-section (6), since the word ‘shall’ is used, the time limit specified
therein is mandatory and, thus, delay cannot be condoned. The Tribunal held
that the report of the DVO had to be filed within the time limit prescribed
under section 142A(6) and, thus, the Assessment Order passed on the basis of
the DVO’s report is not sustainable.

 

The Tribunal
allowed this ground of appeal filed by the assessee.

 

Section 143(2) – The statutory notice u/s 143(2) of the Act issued by the non-jurisdictional A.O. is void ab initio – If there are discrepancies in the details as per notice issued and details as per postal tracking report, then that cannot be considered as valid service of notice

5.       [2019]
76 ITR (Trib.) 107 (Del.)

Rajeev Goel vs. ACIT

ITA No. 1184/Del/2019

A.Y.: 2014-15

Date of order: 26th September, 2019

 

Section 143(2) – The statutory notice u/s 143(2) of the Act
issued by the non-jurisdictional A.O. is void ab initio – If there are
discrepancies in the details as per notice issued and details as per postal
tracking report, then that cannot be considered as valid service of notice

 

FACTS

The assessee’s case was selected for scrutiny by issuing
statutory notice u/s 143(2). The notice was issued by the non-jurisdictional
A.O., i.e., A.O. Circle 34(1), and without any order u/s 127 for transfer of
the case from one A.O. to another. Without prejudice to the assessee’s
contention that the notice was issued by non-jurisdictional A.O., notice u/s
143(2) was not served upon the assessee. While serving notice u/s 143(2), there
were discrepancies in the address stated in the notice and the address
mentioned in the tracking report of the post. The address mentioned in the
notice was with Pin Code 110034 and the Pin Code as per the tracking report was
110006.

 

The assessee had filed an affidavit before the A.O. claiming
that no notice u/s 143(2) was served upon him. He had produced all possible
evidences to prove that there were discrepancies while serving the said notice
and also that the assessment was initiated by non-jurisdictional A.O. These
contentions were not accepted by the A.O.

 

Aggrieved, the assessee preferred an appeal to the CIT(A)
claiming that the statutory notice u/s 143(2) was issued by the
non-jurisdictional A.O. and, thus, the assessment was void ab initio.
Without prejudice to this, the statutory notice u/s 143(2) was not validly
served upon the assessee. The CIT(A) held that the notice was served upon the
assessee and the assessee had failed to raise objections within the stipulated
period prescribed u/s 124(3) of the Act and hence dismissed the assessee’s
appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that there was a difference between the
address mentioned in the PAN database and the address mentioned in the return
of income filed by the assessee. The jurisdiction of the assessee as per his
address in the PAN database was with the A.O. Ward 39(1), whereas the
jurisdiction of the assessee as per his address in his return of income was
with A.O. Circle 47(1). However, the notice was issued by the A.O. Circle 34(1)
who had no jurisdiction over the assessee either on the basis of his
residential address or on the basis of his business address. Further, no order
u/s 127 of the Act was passed either by the Commissioner of Circle 34(1), or
the Commissioner of Circle 47(1) for transfer of the case from one A.O. to
another A.O. Thus, the notice issued by the A.O. Circle 34(1) was held to be void
ab initio as it was issued by the non-jurisdictional A.O.

 

Further, the Tribunal observed that even if the notice u/s
143(2) issued by the A.O. Circle 34(1) was considered to be valid, the notice
was not duly served upon the assessee. The address mentioned in the notice was
one of Delhi with Pin Code 110034, whereas the notice had been delivered to a
Delhi address with Pin Code 110006. As regards service of notice, the assessee
had filed an affidavit before the A.O. Circle 47(1) claiming that no notice u/s
143(2) was served upon him. The assessee had produced all possible evidences to
prove that there were discrepancies while serving notice u/s 143(2). Besides,
there was also a difference in the name mentioned in the notice which was
Rajeev Goel, whereas that mentioned in the tracking report was Ranjeev Goel.
Hence, on the basis of the aforementioned discrepancies, the notice was held to
be not validly served upon the assessee.

 

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

Section 153(1) r/w clause (iv) of Explanation 1 – Extension of time is provided to complete the assessment in a case where A.O. makes reference to the Valuation Officer only u/s 142A(1) – Where a reference is made to the Valuation Officer u/s 55A or 50C, there is no extension of time to complete the assessment

4.       [2019]
76 ITR (Trib.) 135 (Luck.)

Naina Saluja vs. DCIT

ITA No. 393/LKW/2018

A.Y.: 2013-14

Date of order: 25th October, 2019

 

Section 153(1) r/w clause (iv) of Explanation 1 – Extension
of time is provided to complete the assessment in a case where A.O. makes
reference to the Valuation Officer only u/s 142A(1) – Where a reference is made
to the Valuation Officer u/s 55A or 50C, there is no extension of time to
complete the assessment

 

FACTS

The assessee had sold her
two properties and derived income under the head ‘Capital Gains’ during the
relevant A.Y. 2013-14. While computing long-term capital gain, the assessee had
worked out the cost of acquisition on the basis of the circle rates as on 1st
April, 1981. For this purpose, the A.O. had referred the matter to the
Valuation Officer for estimating the correct fair market value of the properties
as on that date. In the meanwhile, the assessee had challenged the Stamp Duty
Value adopted and requested to refer the matter to the Valuation Cell for
valuation of the property as on the date of transfer. As the transaction was
falling under ‘capital gains’, the reference made by the A.O. to the Valuation
Officer was u/s 55A and the reference made by the assessee for valuation was
u/s 50C. The A.O. had received the second valuation report on 21st
March, 2016 and had thereafter called for objections from the assessee on the
second valuation report. The A.O. concluded the assessment and passed an
assessment order on 19th May, 2019 making an addition to the capital
gains on the basis of the said valuation report.

 

Aggrieved, the assessee preferred an appeal to the CIT(A)
claiming that the assessment completed was beyond the time period prescribed in
section 153 of the Act and, thus, the assessment order was barred by
limitation. However, the CIT(A) held that both the references were made u/s
142A of the Act and thereby concluded that the assessment order was not barred
by limitation. The CIT(A) upheld the assessment order and dismissed the
assessee’s appeal.

 

The assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that the reference to the Valuation
Officer u/s 142A can be made for the purpose of assessment or reassessment
where the valuation is required for the purpose of section 69, 69A, 69B or
section 56(2), whereas the references u/s 55A or u/s 50C are specific for the
purpose of computation of capital gains. The provisions of section 142A do not
govern the provisions of computation of capital gains.

 

The first reference to the Valuation Officer was made for
ascertaining the value of the asset as on 1st April, 1981 when it
was sold, and the second reference was made for valuation of property as on the
date of transfer which can only be made under the provisions of section 50C(2)
of the Act. Thus, neither of the references was made u/s 142A of the Act.

 

Further, as per the provision of section 153(1) r/w
Explanation 1, the provision for extension of time for completing the
assessment is available only if the reference is made to the Valuation Officer
u/s 142A. There is no provision for extension of time for completing the
assessment in case the reference is made u/s 55A or u/s 50C. Hence, the
assessment order was to be passed by 31st March, 2016 for the
relevant assessment year. The assessment order was, however, passed on 19th
May, 2016 which was beyond the period of limitation, hence the Tribunal quashed
the assessment order.

 

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

I.Section 194H – Benefit extended by assessee to the distributor under an agreement for supply of mobile phones cannot be treated as commission liable for deduction of tax at source u/s 194H as the relationship between the assessee and the distributor was not of a principal and agent II.Section 37 – Expenditure incurred on Trade Price Protection to counter changes in price of handsets by competitors, life of model, etc. was incurred wholly and exclusively for the purpose of business and was an allowable expenditure u/s 37(1)

11.
[2020] 114 taxmann.com 442 (Delhi) Nokia
India (P) Ltd. vs. DCIT ITA Nos.:
5791 & 5845(Del)2015 A.Y.:
2010-11 Date of
order: 20th February, 2020

 

I.   Section 194H – Benefit extended by assessee
to the distributor under an agreement for supply of mobile phones cannot be
treated as commission liable for deduction of tax at source u/s 194H as the
relationship between the assessee and the distributor was not of a principal
and agent

 

II.  Section 37 – Expenditure
incurred on Trade Price Protection to counter changes in price of handsets by
competitors, life of model, etc. was incurred wholly and exclusively for the
purpose of business and was an allowable expenditure u/s 37(1)

 

FACTS I

The assessee
company had extended certain benefits / post-sale discounts to the
distributors. These discounts / trade offers did not form part of the agreement
between the assessee and the distributors. The A.O. disallowed the expenditure
u/s 40(a)(ia) considering the fact that no TDS u/s 194H was deducted from these
amounts.

 

HELD I

Upon perusal of the
agreement, the Tribunal observed that the relationship between the assessee and
HCL is that of principal to principal and not that of principal and agent. The
Tribunal held that the discount which was offered to distributors is given for
promotion of sales. This element cannot be treated as commission. There is
absence of  principal-agent relationship
and the benefit extended to distributors cannot be treated as commission u/s
194H of the Act.

 

As regards the applicability of section 194J, the A.O. has not given any
reasoning or finding that there is payment for technical service liable for withholding
u/s 194J. Marketing activities had been undertaken by HCL on its own. Merely
making an addition u/s 194J without the actual basis for the same on the part
of the A.O. is not just and proper.

 

As regards the
contention of the Revenue that discounts were given by way of debit notes and
the same were not adjusted or mentioned in the invoice generated upon original
sales made by the assessee, the Tribunal observed that this contention does not
seem tenable after going through the invoice and the debit notes. In fact,
there is clear mention of the discount for sales promotion.

 

The Tribunal
allowed this ground of appeal and deleted the addition made.

 

FACTS II

The assessee
company had incurred certain expenditure on Trade Price Protection which was
extended to distributors to counter changes in the price of handsets by
competitors, protect them against probable loss, etc. The A.O. had disallowed
the expenditure questioning the commercial expediency involved in incurring the
same.

 

HELD II

The Tribunal held
that the expenditure can be treated as being incurred on account of commercial
expediency considering the modern-day technological changes which are very
fast. It observed that as per the submission made before the A.O., this
expenditure had been covered in a special clause in the Trade Schemes filed.
The Tribunal further held that expenditure incurred for Trade Price Protection
was allowed as deduction since the same was considered as being incurred wholly
and exclusively for the purpose of business.

This ground of
appeal filed by the assessee was allowed.

Section 10(13A), Rule 2(h) of Fourth Schedule – For the purpose of computing qualifying amount u/s 10(13A) of the Act, the amount received as performance bonus does not assume character of salary

17. [2020] 113
taxmann.com 295 (Trib.)(Kol.) Sudip Rungta vs.
DCIT ITA No.
2370/Kol/2017 A.Y.: 2011-12 Date of order: 10th
January, 2020

 

Section 10(13A), Rule 2(h) of Fourth Schedule – For the purpose of
computing qualifying amount u/s 10(13A) of the Act, the amount received as
performance bonus does not assume character of salary

 

FACTS

The assessee was a salaried employee who, for the year under
consideration, filed his return of income declaring total income of Rs.  2,61,97,296. During the year under
consideration, he had received a basic salary of Rs. 30,00,000 and performance
bonus of Rs. 1,50,00,000. In the return he had claimed exemption of HRA of Rs.
8,47,742. The AO called for details of the rent paid and calculation of the
amount of exemption. In response, the assessee submitted that the total rent
paid during the year was Rs. 8,20,000 and for the purposes of computing
exemption, only the basic salary had been regarded as ‘salary’.

 

The AO held that
‘performance bonus’ is covered under the term ‘salary’ as per the meaning
assigned to the definition of ‘salary’ for the purpose of calculating exemption
u/s 10(13A). ‘Performance bonus’ cannot be comprehended as an allowance or
perquisite as defined in Rule 2(h) of the Fourth Schedule to be excluded from
the purview of ‘salary’. Thus, the assessee’s total salary for computation of
exemption u/s 10(13A) for the year under assessment comes to Rs. 30,00,000 plus
Rs. 1,50,00,000, which totals Rs. 1,80,00,000; and 10% of this comes to Rs.
18,00,000. Since the assessee has paid rent of Rs. 8,20,000 which is much less
than the amount of Rs. 18,00,000, the assessee is not entitled to any benefit u/s
10(13A) of the Act. Thus, the AO denied the benefit u/s 10(13A) of the Act.

 

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

 

The assessee then
preferred an appeal to the Tribunal where it was submitted that clause (h) of
Rule 2A  specifically provides that
‘salary’ includes dearness allowance if the terms of employment so provide, but
excludes all other allowances and perquisites. Accordingly, the performance bonus
received by the appellant did not form part of ‘salary’ for the purposes of
computing exemption u/s 10(13A) of the Act.

 

HELD

The Tribunal noted
that the decision of the Hon’ble Kerala High Court in the case of CIT vs.
B. Ghosal (125 ITR 444) is on identical facts wherein on the same set
of facts, the Court had held that ‘performance bonus’ does not form part of
‘salary’ as defined in clause (h) of Rule 2A for the purposes of section
10(13A) of the Income tax Act, 1961.

 

Considering the facts narrated above, the Tribunal noted that total rent
paid by the assessee during the year is Rs. 8,20,000. The basic salary for the
purpose of computation of house rent disallowance is Rs. 3,00,000 (10% of Rs.
30,00,000 being basic salary). Therefore, excess of rent paid over 10% of
salary is Rs. 5,20,000 (Rs. 8,20,000 minus Rs. 3,00,000). Therefore, the
assessee is entitled for house rent allowance at Rs. 5,20,000 u/s 10(13A) of
the Act. The AO is directed to allow the exemption of HRA at Rs. 5,20,000.

 

The Tribunal
allowed the appeal filed by the assessee.

 

Sections 2(47), 45 – Amount received by assessee, owner of a flat in a co-operative housing society, from a developer under a scheme of re-development was integrally connected with transfer of old flat to developer for purpose of re-development, in lieu of which assessee received the said amount and a new residential flat – To be treated as income under head ‘capital gain’

3.       [2020]
115 taxmann.com 7 (Mum.)

Pradyot B. Borkar vs. ACIT

ITA No. 4070/Mum/2016

A.Y.: 2011-12

Date of order: 17th January, 2020

 

Sections 2(47), 45 – Amount received by assessee, owner of a
flat in a co-operative housing society, from a developer under a scheme of
re-development was integrally connected with transfer of old flat to developer
for purpose of re-development, in lieu of which assessee received the
said amount and a new residential flat – To be treated as income under head
‘capital gain’

 

FACTS

The assessee, an individual, filed his return of income
declaring total income of Rs. 32,30,000. The A.O., in the course of assessment
proceedings noted that the assessee has offered long-term capital gain of Rs.
31,12,638, towards sale of residential flats at C-20, 179, MIG, Bandra, Mumbai,
and has simultaneously claimed deduction u/s 54 of the Act.

 

The A.O. found that the
assessee owned a flat in the housing society which was given for development
under a scheme of re-development. As per the terms of the development agreement
between the housing society and its members, in addition to receiving a new
residential flat after re-development, each member was also entitled to receive
an amount of Rs. 53,80,500, comprising of the following:

 

Rs. 25,00,000

Compensation for
non-adherence by the re-developer to the earlier agreed terms and that the
member should be required to vacate the old flat.

 

 

Rs. 28,50,500

Beneficial right and interest
in corpus and income of the society and nuisance annoyance and hardship that
will be suffered by the members during the re-development.

 

 

Rs. 30,000

Moving or shifting cost.

 

 

The A.O. held that the amount received is not in any way related
to transfer of capital asset giving rise to capital gain. He assessed the
amount of Rs. 53,30,500 under the head ‘Income from Other Sources’.

 

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

 

HELD

The Tribunal noted that in the return of income the assessee
has offered the amount of Rs. 53,50,500 as income from long-term capital gain.
But the A.O. has held that the amount is in the nature of compensation received
due to some specific factors and not related to transfer of capital asset. He
also observed that as per the terms of the development agreement, any capital
gain arising due to re-development would accrue to the housing society.
Therefore, the compensation received, Rs. 53,50,500, cannot be treated as
capital gain.

 

The Tribunal held that the amount of Rs. 53,50,500 was
received by the assessee only because of handing over the old flat for the
purpose of re-development. Therefore, the said amount is integrally connected
with the transfer of his old flat to the developer for re-development in
lieu of which he received the said amount and a new residential flat.
Therefore, the amount of Rs. 53,50,500 has to be treated as income under the
head ‘Capital Gain’. The Tribunal observed that the decision of the Co-ordinate
Bench in Rajnikant D. Shroff [ITA No. 4424/Mum/2014, dated 23rd September,
2016] supports this view. It held that the amount of Rs. 53,50,500 has
to be assessed under the head ‘Capital Gain’.

 

This ground of appeal filed by the assessee was allowed.

Section 56 read with sections 22 and 23 – Compensation received under an agreement entered into with a tenant granting him an option to take on lease other units which belonged to the assessee is taxable under the head Income from Other Sources

10.
[2020] 116 taxmann.com 223 Redwood
IT Services (P) Ltd. vs. ITO(10)(2)(2), (Mum.) ITA No.
1309(Mum) 2018 A.Y.:
2011-12 Date of
order: 28th February, 2020

 

Section 56 read with sections 22 and 23 –
Compensation received under an agreement entered into with a tenant granting
him an option to take on lease other units which belonged to the assessee is
taxable under the head Income from Other Sources

 

FACTS

The assessee acquired an immovable property which was divided into four
units of which two units, viz. Unit Nos. 3 and 4, were let out. In terms of the
agreement entered into by the assessee with the tenant, the assessee had
granted an option to the tenant to take the other two units, viz. Units 1 and 2,
on lease. Under the option agreement, the assessee agreed to lease the property
in future and restrained itself from leasing it to any other person during the
period for which the option was granted. In consideration of such a covenant,
the assessee received from the tenant a compensation of Rs. 33,75,000 which was
offered by him under the head Income from Other Sources.

 

The A.O. considered
the two units in respect of which option was granted to be deemed let-out units
and charged tax on their market rent, and after allowing the standard deduction
taxed a sum of Rs. 76,64,328 under the head ‘Income from House Property’.

 

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

 

HELD

The Tribunal held that for income to be assessable under the head Income
from House Property, it should be out of the property let out or deemed to be
let out for the relevant period. In this case the property is neither let out
nor vacant. The compensation cannot, therefore, be assessed under the head
Income from House Property.

 

The amount received
by the assessee is in the nature of compensation for not letting out property
to any third party for a specified period. The meaning thereof is that by
entering into an option agreement, the assessee had renounced its right to let
out Unit Nos. 1 and 2 for a period of nine months from the date of the option
agreement and any amount received in pursuance of the said agreement is in the
nature of compensation which is assessable under the head Income from Other
Sources.

 

The Tribunal held
that the A.O. as well as the CIT(A) were incorrect in coming to the conclusion
that the property is deemed to be let out and income from the said property
needs to be computed u/s 22 of the Act.

 

The Tribunal directed
the A.O. to delete the additions made towards Income from House Property.

 

This ground of appeal filed by the assessee was
allowed.

Sections 32, 37, 45, 50 – Where the business of the assessee came to a halt, expenses incurred by the assessee for maintaining its legal status and disposing of the assets are allowable u/s 37(1) of the Act Assessee owned leasehold rights in the land and a building was constructed thereon; on transfer of the same, capital gains were to be bifurcated as long-term capital gains on transfer of land u/s 45 and short-term capital gains on transfer of building u/s 50 Unabsorbed depreciation is deemed to be current year’s depreciation and it can therefore be set off against capital gains

25. [2019] 202 TTJ (Bang.) 893 Hirsh Bracelet India (P) Ltd. vs. ACIT ITA No. 3392/Bang/2018 A.Y.: 2015-16 Date of order: 3rd July, 2019

 

Sections 32,
37, 45, 50 – Where the business of the assessee came to a halt, expenses
incurred by the assessee for maintaining its legal status and disposing of the
assets are allowable u/s 37(1) of the Act

 

Assessee owned
leasehold rights in the land and a building was constructed thereon; on
transfer of the same, capital gains were to be bifurcated as long-term capital
gains on transfer of land u/s 45 and short-term capital gains on transfer of
building u/s 50

Unabsorbed
depreciation is deemed to be current year’s depreciation and it can therefore
be set off against capital gains

 

FACTS

The assessee company was engaged in the
business of manufacturing wrist watch straps. The assessee had taken land on
lease for a period of 99 years and set up a unit for designing, importing,
exporting, dealing in and manufacturing wrist watch straps. In view of
continued losses and several operational difficulties, the business of the
assessee had to be closed down. The assessee had declared capital gains on the
sale of leasehold rights in land and building as short-term capital gain in the
return of income and, after adjusting current year’s expense and depreciation,
returned a total income.

 

During the course of the assessment
proceedings, the assessee claimed that sale of leasehold rights in land would
result in long-term capital gains. But the A.O. taxed the capital gains as short-term
and did not allow set-off of brought forward business losses. Further, the A.O.
had disallowed the expenditure u/s 37(1), contending that the same could not be
allowed as there was no business in existence.

 

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

 

HELD

The various expenses incurred by the
assessee were to maintain its legal status as a company until the assets were
disposed of and the liabilities paid. The Tribunal held that it was essential
for the assessee to incur these expenses and neither the A.O. nor the CIT(A)
has doubted the incurring of the expenditure. The assessee held leasehold
rights in land and it required permission from the Government for transfer of
such rights. This permission was received by the assessee only in the previous
year, 2013-2014. Therefore, even though the business of the assessee had come
to a halt in 2010, it was necessary to maintain the legal status until all the
assets were liquidated. Thus, the expenses incurred by the assessee were to be
allowed as a deduction in computation of income.

 

The assessee had made a claim for the
bifurcation of capital gains into long-term capital gains on transfer of
leasehold rights in land and short-term capital gains on transfer of building,
being a depreciable asset, in accordance with the provisions of section 50. The
assessee was entitled to bifurcate the capital gains and the provisions of
section 50 would be made applicable in computation of capital gains arising
from transfer of building.

 

Unabsorbed depreciation is deemed to be
current year’s depreciation and the same can be set off against capital gains
under the provisions of section 71.

 

These grounds of appeal filed by the
assessee were allowed.

 

Section 147, Explanation 3 & Section 154 – The powers conferred on the A.O. by Explanation 3 to section 147 cannot be extended to section 154 – Any discrepancy that was not a subject matter of reassessment proceedings cannot, subsequently, upon conclusion of reassessment proceedings, be brought up by the A.O. by recourse to section 154

24 [2019] 202 TTJ (Del.) 1014 JDC Traders (P) Ltd. vs. DCIT ITA No. 5886/Del/2015 A.Y.: 2007-2008 Date of order: 11th October, 2019

 

Section 147,
Explanation 3 & Section 154 – The powers conferred on the A.O. by
Explanation 3 to section 147 cannot be extended to section 154 – Any
discrepancy that was not a subject matter of reassessment proceedings cannot,
subsequently, upon conclusion of reassessment proceedings, be brought up by the
A.O. by recourse to section 154

 

FACTS

The assessee was a company engaged in the
business of trading, export and printing. For A.Y. 2007-2008 it submitted its
return of income and the same was processed u/s 143(1) of the Act. Reassessment
proceedings were initiated against the assessee for the assessment year in
question after recording reasons for the same. Certain travel expenditure
claimed by the assessee was disallowed and addition was made for the same. On
conclusion of the reassessment proceedings and perusal of the assessment
records by the A.O., he noticed a discrepancy in the amount of stock appearing
in the statement of profit and loss and in the notes to financial accounts. The
A.O. issued a notice u/s 154 to the assessee as regards the difference. The
assessee submitted that the amount stated as closing stock at the time of
preparation of accounts had been inadvertently missed out to be corrected
post-finalisation of accounts and stock reconciliation. The assessee also
submitted that after reconciliation the mistake was detected and corrected. The
A.O. made an addition for the amount of difference in the amounts of closing
stock stated at different values.

The assessee preferred an appeal with the CIT(A).
However, the CIT(A) did not agree with its contention and stated that under the
provisions of Explanation 3 to section 147, the A.O. was justified in assessing
/ reassessing the income which had escaped assessment. Further, there was
nothing wrong in the A.O. rectifying the mistake in the order under sections
147 / 143(3). The assessee then filed an appeal with the ITAT.

 

HELD

The issue relating to the discrepancy in the
value of closing stock was not taken up by the A.O. at the time of reassessment
proceedings u/s 147. A reading of section 147 shows that it empowers the A.O.
to assess or reassess income in respect of any issue which had escaped
assessment, irrespective of the fact whether such aspect was adverted in the
reasons recorded u/s 147. The A.O. had resorted to section 154 to make addition
in respect of the issue of discrepancy in closing stock on conclusion of the
reassessment proceedings. The powers under Explanation 3 to section 147, if
extended to section 154, would empower the A.O. to make one addition after the
other by taking shelter of Explanation 3 to section 147. It was also not the
case that the A.O. had invoked section 154 with respect to the original
assessment finalised u/s 143(3).

 

Thus, the powers of Explanation 3 to section
147 cannot be extended to section 154, and the addition made by the A.O. for
discrepancy of closing stock values upon conclusion of reassessment proceedings
was beyond his jurisdiction.

 

The appeal filed by the assessee was
allowed.

 

Section 64 – Entire loss arising to wife of assessee in the business of Futures and Options (F&O) which business was started by her during the previous year with contribution from assessee in shape of gifts, was liable to be clubbed in hands of assessee in terms of Explanation 3 read in conjunction with section 64(1)(iv) – Assessee was entitled to club full loss from business of F&O in his personal income

8. [2020] 113 taxmann.com 378 (Pune)(Trib.)

Uday Gopal Bhaskarwar vs. ACIT

ITA No. 502/Pune/2019

A.Y.: 2014-15

Date of order: 20th January, 2020

 

Section 64 – Entire loss arising to wife of assessee in the
business of Futures and Options (F&O) which business was started by her
during the previous year with contribution from assessee in shape of gifts, was
liable to be clubbed in hands of assessee in terms of Explanation 3 read in
conjunction with section 64(1)(iv) – Assessee was entitled to club full loss
from business of F&O in his personal income

 

FACTS

The assessee, in the return of
income filed by him, clubbed the loss from the business of his spouse amounting
to Rs. 31,56,429 in view of the provisions of section 64. In the course of
assessment proceedings, on being called upon to justify such a claim, the
assessee submitted that during the year under consideration he gifted a sum of
Rs. 94.50 lakhs to Mrs. Priti Bhaskarwar, his wife, who started a business of
Futures and Options (F&O) on 18th September, 2013. The assessee
claimed that she incurred a loss of Rs. 31,56,429 in the business which was
clubbed in his hands.

 

The A.O. accepted the primary claim
of the assessee of his wife having incurred a loss of Rs. 31.56 lakhs in the
business of F&O, which was set up on 18th September, 2013, and further that
the loss from such business was eligible for set-off against the income of the
assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. He,
however, did not accept the assessee’s contention that the entire loss of Rs.
31.56 lakhs be set off against his (the assessee’s) income. Considering the
mandate of Explanation 3 to section 64(1), the A.O. held that only that part of
the business loss incurred by the assessee’s wife could be set off against the
assessee’s income which bears the proportion of amount of investment out of the
gift on the first day of the previous year to the total investment in the
business as on the first day of the previous year.

 

He, therefore, computed the amount
of loss eligible for set-off against the assessee’s income at Rs. 9,72,563 by
multiplying Rs. 31,56,429 (loss incurred by wife in the business) with Rs.
25.00 lakhs (gifts made by the assessee to his wife up to 18th
September, 2013) as divided by Rs. 81,13,648 (opening capital as on 1st April,
2013 as increased by the gift of Rs. 25.00 lakhs given by the assessee up to 18th
September, 2013).

 

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

 

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

 

HELD

The Tribunal noted that the core of
controversy is the computation of eligible amount of loss incurred by the
assessee’s wife which is eligible for set-off against the assessee’s income.

 

On going through the mandate of
section 64(1)(vi) of the Act in juxtaposition with Explanation 3 to the
sub-section, it transpires that there can be two possible situations of
utilisation of the assets transferred by husband to wife triggering the
clubbing provision. The first situation can be where the amount of assets
received by the wife is exclusively invested in an asset and further there is
no investment by the wife in such a new asset. The full income resulting from
such an exclusive investment is liable to be clubbed with the total income of
the husband. An example of such a situation can be a wife making a fixed
deposit with a bank, etc. out of the gift of money received from her husband.
The full amount of interest income arising on such FDR is liable to be clubbed
with the income of the husband.

 

The second situation can be where
the amount of assets received by the wife as a gift from her husband is not the
exclusive investment in the business carried on by her. Rather, she has also
made separate investment in the said business. In such a situation of a common
pool of unidentifiable investments in the business, there arises difficulty in
precisely attributing the income of such a business to the investments made out
of the gift received from the husband attracting clubbing and to investments
made out of funds other than the gift received from the husband not attracting
the clubbing provision. It is in such a scenario that the prescription of
Explanation 3 comes into play by providing that the amount of income from the
combined business as relatable to the assets transferred by the husband should
be computed by taking the income from such business earned during the year as
multiplied with the amount of assets received by the wife from her husband as
invested in the business and divided by her total investment in the business,
including the amount of assets received from the husband.

 

In a nutshell, there are three
components in this formula. The first component is the income of the business,
which is to be considered for the year. The second is the amount of assets
received by the wife from her husband as invested in the business, and the
third is the total investment in the business including the amount of assets
received from the husband. The latter two figures are required to be taken as
on the first day of the previous year. Section 3 defines ‘Previous year’ to
mean ‘the financial year immediately preceding the assessment year.’ The proviso
to section 3 states that, in the case of a business newly set up in a financial
year, the previous year shall be the period beginning with the date of the
setting up of the business and ending with the said financial year. Since the
wife of the assessee started the new business of F&O on 18th
September, 2013, the extant case is, ergo, covered by the proviso
to section 3.

 

Having examined the factual position
in detail, the Tribunal held that the entire amount of loss resulting from the
business of F&O started by Mrs. Priti Bhaskarwar with the gifts received
from the assessee is liable to be clubbed in the hands of the assessee.

 

This ground of appeal filed by the assessee was
decided in favour of the assessee.

I.Section 43(6), Explanation 2 – In Explanation 2 to section 43(6), deprecation actually allowed shall not include any unabsorbed depreciation – The WDV in the hands of the amalgamated company is to be calculated without considering the unabsorbed depreciation of the amalgamating companies, for which set-off was never allowed II.When a receipt is held to be capital in nature and not chargeable to tax under the normal provisions of the Act, the same cannot be taxed u/s 115JB of the Act as well III.Section 234B r/w/s 115JB – Interest u/s 234B cannot be levied where liability arises on account of retrospective amendment in the Act

16. [2019] 112
taxmann.com 55 (Trib.)(Mum.) ACIT vs. JSW Steel
Ltd. ITA No.
156/Bang/2011; CO No. 59/Mum/2012 A.Y.: 2006-07 Date of order: 29th
November, 2019

 

I.  Section 43(6), Explanation 2 – In Explanation
2 to section 43(6), deprecation actually allowed shall not include any
unabsorbed depreciation – The WDV in the hands of the amalgamated company is to
be calculated without considering the unabsorbed depreciation of the
amalgamating companies, for which set-off was never allowed

 

II. When a receipt is held to be capital in nature
and not chargeable to tax under the normal provisions of the Act, the same
cannot be taxed u/s 115JB of the Act as well

 

III.        Section 234B r/w/s 115JB – Interest u/s
234B cannot be levied where liability arises on account of retrospective
amendment in the Act

 

FACTS I

In the return of
income filed by the assessee for the year of amalgamation, i.e., A.Y. 2006-07,
the assessee computed WDV in respect of the assets transferred by the
amalgamating companies by reducing the amount of deprecation (‘actually
allowed’) in A.Y. 2005-06 in accordance with the provisions of Explanation (2)
to section 43(6) of the Act.

 

The AO observed
that the closing WDV of the amalgamating company becomes the WDV in the hands
of the amalgamated company and accordingly determined the WDV of the assets
acquired on amalgamation after considering normal depreciation allowed on
assets of the two amalgamating companies; consequently, he disallowed excess
depreciation of Rs. 6,81,27,607 (being 15% of the difference in the WDV of Rs.
45,41,84,048).

 

However, the AO was
of the view that Explanation (3) has to be read into Explanation (2) and
accordingly the WDV of the assets transferred on amalgamation has to be
computed after reducing the total depreciation in the hands of the amalgamated
companies.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who allowed the appeal and directed
the AO to allow depreciation on the increased written down value of the assets.

 

Being aggrieved,
the Revenue preferred an appeal to the Tribunal.

 

HELD I

The Tribunal
observed that

(i)   the only dispute under consideration is
whether the WDV of the assets transferred on amalgamation was to be computed in
the hands of the amalgamated company considering the unabsorbed depreciation,
i.e., depreciation not given effect to, in the assessment of the amalgamating
companies;

(ii)   the provisions of Explanations (2) and (3) to
section 43(6) explains what will be the WDV of assets in the hands of the
amalgamated company in cases of amalgamation. Similarly, section 32(2) provides
for carry forward of unabsorbed depreciation and section 72A provides for carry
forward of business loss and unabsorbed depreciation in the hands of the
amalgamated company in cases of amalgamation;

(iii) on going through Explanation (2) to section
43(6), it is very clear that it speaks about depreciation ‘actually allowed’ in
relation to the said preceding year in case of the amalgamated company.

 

The Tribunal held
that in view of Explanation (2) to section 43(6) of the Act, the WDV in the
hands of the assessee as on 1st April, 2005 (the appointed date)
would be the WDV of block of assets as on 31st March, 2004 as
reduced by the depreciation ‘actually allowed’ during the said preceding year,
i.e., F.Y. 2004-05, in the hands of the amalgamating companies. Accordingly,
the WDV of assets transferred on amalgamation in the hands of the amalgamating
company has to be necessarily computed in terms of Explanation (2) to section
43(6) of the Act. In terms of this Explanation, while computing the WDV on
amalgamation, the depreciation actually allowed has to be reduced.

 

Since the case of
the AO was that Explanation (3) has to be read into Explanation (2) and,
accordingly, the WDV of assets transferred on amalgamation has to be computed
after reducing the total depreciation in the hands of the amalgamated
companies, the Tribunal found it necessary to read and comprehend as to why the
provision of section (3) to section 43(6) of the Act cannot be applied in the
facts of the present case. It held that Explanation (3) to section 43(6) states
that any depreciation which is carried forward u/s 32(2) shall be deemed to be
depreciation actually allowed. Further, it observed that Explanations (2) and
(3) to section 43(6) of the Act both used the term depreciation actually
allowed. However, as against Explanation (2), Explanation (3) to section 43(6)
of the Act operates as a deeming fiction, wherein depreciation which is carried
forward u/s 32(2) of the Act is deemed to have been actually allowed.

 

The Tribunal held
that in its view Explanation (3) being a deeming fiction, operates only in
particular conditions and in order to remove an anomaly which otherwise would
have been created under the other provisions of the Act. It held that while
interpreting Explanation (3) one needs to be aware of the intention of the
statute. These provisions, along with their intent, have been explained
elaborately by the Hon’ble Bombay High Court in the case of Hindustan
Petroleum Corporation Limited where it was held that Explanation (3) to
section 43(6) seeks to find certain anomalies which would have otherwise
existed under the Act. The intention of Explanation (3) is not simply to
nullify the provision of Explanation (2) to section 43(6), as has been read by
the AO. This is also evident from the fact that Explanation (2) has been
introduced from 1st April, 1988, whereas Explanation (3) was always
on the statute, which clearly implies that Explanation (3), which is a legal /
deeming fiction, was not introduced to nullify the impact of Explanation (2) of
the Act.

 

Accordingly, in
terms of Explanation (3) to section 43(6), in the present case, unless the
unabsorbed depreciation of the amalgamating companies is carried forward in the
hands of the amalgamated company u/s 32(2), Explanation (3) cannot be read into
Explanation (2) to simply conclude that depreciation ‘actually allowed’ also
includes unabsorbed depreciation.

 

It observed that in
view of the ratio of the decision of the Supreme Court in the case of CIT
vs. Doom Dooma India Ltd. [2009] 310 ITR 392, the words actually
allowed under Explanation (2) only mean depreciation, which has been given
effect to in the computation of income of the amalgamating companies and will
not include unabsorbed depreciation. This legal proposition, it observed, is
also supported by the decision in the case of Silical Metallurgic Ltd.
where the Hon’ble Court held that the statutory provision makes it clear that
the WDV of the asset would be the actual cost of the assets of the assessee
less depreciation allowed to the company. Any unabsorbed depreciation, which
was not set off for carry forward could not be taken into account.

 

A similar view was
taken by the Bombay High Court in the case of Hindustan Petroleum Corpn.
Ltd. and a Special Leave Petition filed against the aforesaid High
Court decision has been dismissed by the Hon’ble Supreme Court on merits in SLP
(C) No. 19054 of 2008 (SC). A similar proposition has been laid down by
the Hon’ble Madras High Court in the case of EID Parry India’s vs. CIT
[2012] 209 Taxmann 214. The Courts have, considering the applicability
of provisions of section 72A, held that deprecation actually allowed shall not
include any unabsorbed depreciation.

 

The Tribunal held
that the WDV in the hands of the amalgamated company was to be calculated
without considering the unabsorbed depreciation of the amalgamating companies,
for which set-off was never allowed. The Tribunal upheld the findings of the
CIT(A) and dismissed this ground of the appeal of the Revenue.

 

FACTS II

The assessee
received a sales tax subsidy of Rs. 36,15,49,828 from the Karnataka Government
for setting up a new industrial unit in the backward area of the state. The
refund of sales tax subsidy was routed through the profit and loss account and
hence the same was considered as part of the book profits u/s 115JB of the I.T.
Act, 1961. Subsequently, the assessee realised that sales tax subsidy being
capital receipt as held by the CIT(A), the same is not taxable under the MAT
provisions; accordingly, the issue was raised before the Tribunal and this
ground was taken by the assessee in the cross-objections filed by it.

 

HELD II

The Tribunal noted
that

(i)   the Coordinate Bench of the ITAT, Mumbai
Tribunal, in the assessee’s own case for A.Y. 2004-05 in ITA No. 923/Bang/2009,
had considered an identical issue and held that where a receipt is held to be
capital in nature not chargeable to tax under the normal provisions of the Act,
the same cannot be taxed u/s 115JB of the I.T. Act, 1961;

(ii)   the Hon’ble Kolkata High Court, in the case of
Pr. CIT vs. Ankit Metal & Power Ltd. [2019] 109 taxmann.com
93 had considered an identical issue and after considering the decision
of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (Supra)
held that when a receipt is not in the character of income as defined u/s 2(24)
of the I.T. Act, 1961, then it cannot form part of the book profit u/s 115JB.
The Court further observed that the facts of case before the Hon’ble Supreme
Court in the case of Apollo Tyres Ltd. were altogether different,
where the income in question was taxable but was exempt under a specific
provision of the Act, and as such it was to be included as a part of book
profit; but where the receipt is not in the nature of income at all, it cannot
be included in book profit for the purpose of computation u/s 115JB.

 

The Tribunal
further noted that to a similar effect was the ratio of the following
decisions:

(a)   Sutlej Cotton Mills
Ltd. vs. Asstt. CIT [1993] 45 ITD 22 (Cal. Trib.) (SB);

(b)   Shree Cement Ltd. vs.
Addl. CIT (2015) 152 ITD 561 (Jai. Trib.);

(c)   Sipca India (P) Ltd.
vs. Dy. CIT [2017] 80 taxmann.com 87 (Kol. Trib.).

 

As regards the case
laws relied upon, on behalf of the Revenue, the Tribunal held that the Tribunal
or High Court in those cases came to the conclusion that the capital receipt is
in the nature of income, but by a specific provision the same has been exempted
and hence came to the conclusion that once a particular receipt is routed
through the profit and loss account, then it should be part of book profit and
cannot be excluded while arriving at book profit u/s 115JB of the Act, 1961.

 

The Tribunal held
that when a particular receipt is exempt from tax under the Income tax Law,
then the same cannot be considered for the purpose of computation of book
profit u/s 115JB. It directed the AO to exclude the sales tax subsidy received
by the assessee amounting to Rs. 36,15,49,828 from the book profits computed
u/s 115JB.

 

The cross-objection
filed by the assessee was allowed.

 

FACTS III

Section 234B
r/w/s 115JB – Interest u/s 234B cannot be levied where liability arises on
account of retrospective amendment in Act

 

While completing
the assessment, interest of Rs. 9,84,94,367 was levied on total income computed
u/s 115JB on account of retrospective amendment to section 115JB. In the profit
and loss account for the year ended 31st March, 2006, the assessee
had debited provision for deferred tax of Rs. 433.61 crores. In the return of
income filed for A.Y. 2006-07, the aforesaid provision was not added back while
computing book profit u/s 115JB. However, subsequently the Finance Act, 2008
made a retrospective amendment to section 115JB by inserting clause (h) in
Explanation 1 to section 115JB according to which book profits are required to
be increased by an amount of deferred tax and provision thereof; the said
amendment was made with retrospective effect from A.Y. 2001-02. Accordingly,
during the course of assessment proceedings while computing book profits u/s
115JB, the AO, in view of the insertion of clause (h) in Explanation 1 to
section 115JB by the Finance Act, 2008 with retrospective effect, added the
provision for deferred tax liability and consequently interest u/s 234B was
levied which interest arose on account of the retrospective amendment to
section 115JB.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who allowed the appeal on the ground
that no liability can be fastened onto the assessee on the basis of
retrospective amendment to the Act.

 

HELD III

The Tribunal noted
that whether interest us/ 234B can be charged on the basis of a retrospective
amendment on recomputed book profit is no longer res integra. The
Coordinate Bench of the ITAT Bangalore Tribunal, in the assessee’s own case for
A.Y. 2005-06 in ITAT No. 924/Bang/2009, had considered an identical issue and
held that no interest can be levied u/s 234 B where liability arises on account
of retrospective amendment in the Act.

 

It observed that in the current year as well, the liability for interest
u/s 234B has arisen only on account of a retrospective amendment to the
provision of section 115JB. Accordingly, the assessee would not have
anticipated the retrospective amendment at the time of making the payments for
advance tax, but would have estimated the liability to pay advance tax on the
basis of the then existing provisions. The Tribunal found no error in the
findings recorded by the CIT(A), while deleting the interest liability u/s 234B
of the Act. The Tribunal upheld the findings of CIT(A) and rejected the ground
taken by the Revenue. This ground of appeal of the Revenue was dismissed.

I – Section 115JB – Provision for leave encashment is not to be added back to the book profit for computation u/s 115JB as it is an ascertained liability determined on actuarial basis II – Provision for wealth tax was not to be reduced from book profit to be computed u/s 115JB

6. [2020] 114 taxmann.com 538 (Mum.)(Trib.)

Caprihans India Ltd. vs. DCIT

ITA No. 4252/Mum/2011

A.Y.: 2005-06

Date of order: 23rd December, 2019

 

I – Section 115JB – Provision for leave encashment is not to
be added back to the book profit for computation u/s 115JB as it is an
ascertained liability determined on actuarial basis

 

II – Provision for wealth tax was not to be reduced from
book profit to be computed u/s 115JB

 

FACTS I

While assessing the total income of the assessee u/s 153C
r.w.s. 143(3) of the Act, the A.O. for the purpose of computing book profits
added the amount of provision for leave encashment of Rs. 15,30,070 on the
ground that it was an unascertained liability. He held that the liabilities
pertaining to leave encashment were not ascertained by the end of the financial
year, therefore the assessee had made a provision for the same.

 

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

 

The assessee then preferred an appeal to the Tribunal where,
relying on the ratio of the decision of the Punjab & Haryana High
Court in the case of CIT vs. National Hydro Electric Power Corporation
Ltd. [2010] 45 DTR 117 (P&H) it was contended that the provision
for leave encashment was made in the books on actuarial basis, therefore the
same could not be held to be in the nature of a provision for an unascertained
liability.

 

HELD I

The Tribunal held that if a business liability had definitely
arisen in the accounting year, the deduction should be allowed although the
liability may have to be quantified and discharged at a future date.

 

It observed that this view is fortified by the judgment of
the Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT
[2000] 245 ITR 428 (SC). In the said case, it was observed by the
Hon’ble Apex Court that what should be certain is the incurring of the
liability and the fact that the same is capable of being estimated with
reasonable certainty, although the actual quantification may not be possible.
The Apex Court had observed that the provision for meeting the liability for
encashment of earned leave by the employees is not a contingent liability and
is admissible as a deduction.

 

In view of the above, the Tribunal held that as the provision
for leave encashment had been made by the assessee on actuarial basis,
therefore the same being in the nature of an ascertained liability could not
have been added by the A.O. for the purpose of determining the ‘book profit’
u/s 115JB. This ground of appeal of the assessee was allowed.

 

FACTS II

The assessee, while computing the ‘book profit’ u/s 115JB had
added back the amount of the wealth tax provision. On appeal, the assessee by
way of a specific ground had assailed the addition of the provision for wealth
tax while computing the ‘book profit’ u/s 115JB. However, the CIT(A) declined
to accept the aforesaid claim. Observing that the said provision was covered
u/s 115JB, the CIT(A) had upheld the view taken by the A.O.

 

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that as the provision for wealth tax does not fall
within any of the items of the ‘Explanation’ to section 115JB, the same could
not be added back while computing the ‘book profit’ under the said statutory
provision. In support of the aforesaid contention, reliance was placed on the
order of the ITAT, Kolkata, Special Bench in the case of JCIT vs. Usha
Martin Industries Ltd. [2007] 104 ITD 249 (SB).

 

HELD II

The Tribunal observed that an addition to the
‘book profit’ which during the period relevant to the year under consideration
was computed as per Part II of Schedule VI of the Companies Act, 1956 could be
made only if the same was permissible as per Item No. (a) to (k)
of the Explanation to section 115JB. As contemplated in clause (a) of
the ‘Explanation’ to this section, ‘the amount of Income-tax paid or payable,
and the provision therefor’ was liable to be added for computing the ‘book
profit’ u/s 115JB. However, as there was no such provision for making the
addition with regard to wealth tax, the A.O. could not have added the same for
computing the ‘book profit’ of the assessee company u/s 115JB. It observed that
its view is fortified by the order of the ITAT, Kolkata, Special Bench in the
case of JCIT vs. Usha Martin Industries Ltd. [2007] 104 ITD 249 (SB).
The Tribunal directed the A.O. to rework the ‘book profit’ u/s 115JB after
deleting the provision for wealth tax. This ground of appeal of the assessee
was allowed.

Sections 144C(1), 143(3) – For the period prior to 1st April, 2020 in case of an eligible assessee, draft assessment order u/s 143(3) r.w.s. 144C(1) is not required to be passed in cases in which no variation in returned income or loss is proposed Mere issuance of draft assessment order, when it was legally not required to be issued, cannot end up enhancing the time limit for completing the assessment u/s 143(3)

2.       [2020]
115 taxmann.com 78 (Mum.)

IPF India Property Cyprus (No. 1) Ltd. vs. DCIT

ITA No. 6077/Mum/2018

A.Y.: 2014-15

Date of order: 25th February, 2020

 

Sections 144C(1), 143(3) – For the period prior to 1st April,
2020 in case of an eligible assessee, draft assessment order u/s 143(3) r.w.s.
144C(1) is not required to be passed in cases in which no variation in returned
income or loss is proposed

 

Mere issuance of draft assessment order, when it was legally
not required to be issued, cannot end up enhancing the time limit for
completing the assessment u/s 143(3)

 

FACTS

The A.O., for A.Y. 2014-15, passed a draft assessment order
u/s 143(3) r.w.s. 144C(1) even when no variation was proposed therein to the
income or loss returned by the assessee.

 

The assessee challenged the correctness of the DRP’s order
dated 26th July, 2018 in the matter of assessment u/s 144(C)(1)
r.w.s. 143(3) of the Act. It contended that the A.O. had erred in passing a
draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act, even when no
variation has been proposed therein to the income or loss returned by the
assessee and in passing the final assessment order u/s 143(3) of the Act, after
the due date provided u/s 153 of the Act, thus making the final assessment
order illegal, bad in law and non-est.

 

HELD

The Tribunal observed that the short question for
adjudication is whether or not the A.O. was justified in passing a draft
assessment order on the facts of the case, and whether the fact that the A.O.
chose to issue the draft assessment order even though he was not required to do
so, would result in affecting the normal time limit within which the normal
assessment order u/s 143(3) is to be issued. It also observed that there are no
variations in the returned income and the assessee income.

 

The controversy is thus confined to the question as to what
will be the rate on which income returned by the assessee is to be taxed. While
the assessee has claimed taxation @ 10% under article 11(2) of the India-Cyprus
DTAA, the A.O. has declined the said treaty protection on the ground that the
assessee was not beneficial owner of the said interest and, accordingly,
brought the income to tax @ 40% thereof. The Tribunal observed that there is,
quite clearly, no variation in the quantum of income.

 

The Tribunal observed that the assessee before it is a
non-resident company incorporated, and fiscally domiciled, in Cyprus.
Accordingly, in terms of section 144C(15)(b)(ii), the assessee is an eligible
assessee but then there is no change in the figure of income returned by the
assessee vis-a-vis the income assessed by the A.O. It held that there
is, therefore, no question of a draft assessment order being issued in this
case. It noted that the Finance Bill, 2020 proposes to make the issuance of
draft assessment orders in the case of eligible assessees mandatory even when
there is no variation in the income or loss returned by the assessee, but then
this amendment seeks to amend the law with effect from 1st April,
2020. Since the amendment is being introduced with effect from that date, the
Tribunal held that it is beyond any doubt that so far as the period prior to 1st
April, 2020 is concerned, in the cases in which no variations in the returned
income or loss were proposed, the draft assessment orders were not required to
be issued. The Tribunal upheld the plea of the assessee on this point.

 

The Tribunal noted that if no draft assessment order was to
be issued in this case, the assessment would have been time-barred on 31st
December, 2017 but the present assessment order was passed on 17th
August, 2018. It held that since no draft assessment order could have been
issued in this case, as the provisions of section 144C(1) could not have been
invoked, the time limit for completion of assessment was available only up to
31st December, 2017. The mere issuance of a draft assessment order,
when it was legally not required to be issued, cannot end up enhancing the time
limit for completing the assessment u/s 143(3). The Tribunal held the
assessment order to be time-barred.

 

The Tribunal allowed these grounds of appeal filed by the
assessee.

Sections 23, 24(b) – Where assessee is receiving rent from his own son and daughter who are financially independent, property is both a self-occupied and a let-out property – Consequently, interest claim cannot be allowed in full and shall have to be suitably proportioned, restricting the interest claim relatable to the self-occupied part thereof to Rs. 1.50 lakhs

1.       [2020]
115 taxmann.com 179 (Mum.)

Md. Hussain Habib Pathan vs. ACIT

ITA No. 4058/Mum/2013

A.Y.: 2009-10

Date of order: 5th March, 2020

 

Sections 23, 24(b) – Where assessee is receiving rent from
his own son and daughter who are financially independent, property is both a
self-occupied and a let-out property – Consequently, interest claim cannot be
allowed in full and shall have to be suitably proportioned, restricting the
interest claim relatable to the self-occupied part thereof to Rs. 1.50 lakhs

 

The children of the assessee were financially independent;
so instead of just transferring some money to their father, they wanted it to
be regarded (by mutual agreement) as rent – They believed that thus he would
receive funds in the shape of rent and that would also help meet their father’s
(the assessee’s) interest burden and help him with some tax savings – It was to
be regarded as a genuine arrangement in order to minimise assessee’s tax
liability

 

FACTS

The assessee claimed a loss of Rs. 15,32,120 qua his
residential house property in Mumbai. He claimed that he had incurred interest
on borrowed capital of Rs. 21,62,120 which was adjusted against rental income
of Rs. 9,00,000; this (rent), on a field inquiry, was found by the A.O. to be
from the assessee’s major son and major daughter residing in the said property
along with other family members of the assessee.

 

The A.O. was of the view that nobody would charge rent (for
residence) from his own son and daughter, particularly considering that both
are unmarried and living together with their family at its self-owned abode.
The arrangement was therefore regarded as merely a tax-reducing device adopted
by the assessee and liable to be ignored. Treating the house property as a
self-occupied property, the A.O. restricted the claim of interest u/s 24(b) to
Rs. 1,50,000.

 

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

 

Aggrieved, the assessee preferred an appeal to the Tribunal
where he contended that there is nothing to show that the arrangement, which is
duly supported by written agreements furnished in the assessment proceedings,
is fake or make-believe. Rental income cannot be overlooked or disregarded
merely because it arises from close family members. However, on a query from
the Bench, the counsel for the assessee was not able to state the status, i.e.,
self-occupied or rented, of the said premises for the earlier or subsequent
years, though he submitted that this is the first year of the claim of loss. He
was also unable to tell the Bench about the area let out, i.e., out of the
total area available, inasmuch as other family members, including the assessee,
were also residing in the same premises.

 

The Revenue’s case, on the other hand, was of no cognisance
being accorded to an arrangement which is against human probabilities and
clearly a device to avoid tax.

 

HELD

The Tribunal observed that the arrangement is highly unusual,
particularly considering that the rent is in respect of a self-owned property
(i.e., for which no rent is being paid), which constituted the family’s
residence, and with the assessee’s son and daughter both being unmarried.
However, the Bench felt that that may not be conclusive in the matter. Being a
private arrangement not involving any third party, not informing the
co-operative housing society was also found to be of not much consequence. It also
observed that the Revenue has rested on merely doubting the genuineness of the
arrangement without probing the facts further. What was the total area, as well
as its composition / profile? How many family members, besides the assessee
(the owner) and the two ‘tenants’, were resided thereat? Has the area let out
been specified, allowing private space (a separate bedroom each) to the son and
the daughter who would in any case be also provided access to or use of the
common area – specified or not so in the agreement/s, viz. kitchen, balcony,
living area, bathrooms, etc.? How had the rent been received, in cash or
through a bank and, further, how had it been sourced, whether from the assessee
(or any other family member), or from the capital / income of the ‘tenants’?
Why was there no attempt even to inquire whether the arrangement was a
subsisting / continuing one, or confined to a year or two, strongly suggestive
in the latter case of a solely tax-motivated exercise?

 

The Tribunal held that it could, however, well be that the
assessee’s major son and daughter are financially independent (or substantially
so), with independent incomes, sharing the interest burden of their common
residence with their father. As such, instead of transferring funds to him have
decided by mutual agreement to give the amounts as rent as that would, apart
from meeting the interest burden to that extent, also allow tax saving to the
assessee-father. A genuine arrangement cannot be disregarded just because it
results in or operates to minimise the assessee’s tax liability. The Tribunal
found itself in agreement with the assessee’s claim inasmuch as there was
nothing on record to further the Revenue’s case of the arrangement not being a
genuine one, but just that it was an unusual one.

 

However, on quantum the Tribunal found the stand of the
assessee infirm. It held that the house property, that is, the family residence
of the Pathan family, was both a self-occupied and a let-out property in view
of the rent agreements. It observed that the interest claimed (Rs. 21.62 lakhs)
is qua the entire property, which therefore cannot be allowed in full
against the rental income, which is qua only a part of the house
property. The assessee’s interest claim therefore cannot be allowed in full and
shall have to be suitably proportioned, restricting the interest claim
relatable to the self-occupied part thereof to Rs. 1.50 lakhs as allowed. The
assessee shall provide a reasonable basis for such allocation as well as the
working of the area let out. It observed that it may well be that in view of
the joint residence, no area (portion) is specified in the rent agreements. The
number of family members living jointly; their living requirements – which may
not be uniform; fair rental value of the property; etc. are some of the
parameters which could be considered for the purpose. The Tribunal directed the
A.O. to adjudicate thereon per a speaking order, giving definite reasons for
being in disagreement, whether in whole or in part, with the assessee’s claim
within a reasonable time.

 

The Tribunal allowed this ground of appeal filed by the
assessee.

Section 56 r/w Rule 11UA – Fair Market Value of shares on the basis of the valuation of various assets cannot be rejected where it has been demonstrated with evidence that the Fair Market Value of the assets is much more than the value shown in the balance sheet

22. [2019] 75 ITR (Trib.) 538 (Del.) India Convention & Culture Centre (P)
Ltd. vs. ITO ITA No. 7262/Del/2017 A.Y.: 2014-15 Date of order: 27th September,
2019

 

Section 56 r/w Rule 11UA – Fair Market
Value of shares on the basis of the valuation of various assets cannot be
rejected where it has been demonstrated with evidence that the Fair Market
Value of the assets is much more than the value shown in the balance sheet

 

FACTS

The assessee company issued 70,00,000 equity
shares of Rs. 10 each at a premium of Rs. 5 per share. The assessee company had
changed land use from agricultural to institutional purposes owing to which the
value of the land increased substantially. It contended before the ITO to
consider the Fair Market Value (FMV) of the land instead of the book value for
the purpose of Rule 11UA. However, the ITO added the entire share premium by
invoking section 56(2)(viib). He computed the FMV of shares on the basis of
book value instead of FMV of land held by the assessee company while making an
addition u/s 56(2)(viib) r/w Rule 11UA.

 

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

 

HELD

The Tribunal observed that the assessee took
refuge of clause (ii) of Explanation (a) to section 56(2)(viib). The counsel
for the assessee argued that the lower authorities have wrongly computed the fair
market value of the shares on the basis of the book value ignoring the fair
market value of the land held by the company; since the assessee had obtained
permission of the competent authority for change of land use from
‘agricultural’ to ‘institutional’ for art, culture and convention centre, its
market value increased substantially. The Tribunal, convinced by the fact of
increase in market value of land, held that valuation of the shares should be
made on the basis of various factors and not merely on the basis of financials,
and the substantiation of the fair market value on the basis of the valuation
done by the assessee simply cannot be rejected where the assessee has
demonstrated with evidence that the fair market value of the asset is much more
than the value shown in the balance sheet.

 

The Tribunal allowed the appeal filed by the
assessee.

 

Section 68 r/w/s 194J – Merely because an amount is reflected in Form 26AS, it cannot be brought to tax in the hands of the assessee where an error was made by a third person

21 [2019] 75 ITR (Trib.) 364 (Mum.) TUV India (P) Ltd. vs. DCIT ITA No. 6628/Mum/2017 A.Y.: 2011-12 Date of order: 20th August, 2019

 

Section 68 r/w/s 194J – Merely because an
amount is reflected in Form 26AS, it cannot be brought to tax in the hands of
the assessee where an error was made by a third person

 

FACTS

The assessee filed return of income,
claiming Tax Deducted at Source (TDS) of Rs. 6.02 crores whereas TDS appearing
in the AIR information was Rs. 6.33 crores. During the course of scrutiny
assessment, the ITO concluded that the assessee had not disclosed income
represented by the differential TDS of Rs. 30.88 lakhs. The income was
calculated by extrapolating the differential TDS amount (ten per cent of TDS
u/s 194J) and was taxed as undisclosed income in the hands of the assessee.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A), claiming that the difference was mainly due to the error made by
one of the clients by wrongly furnishing Permanent Account Number (PAN) of the
assessee instead of that of one of their (other) clients. The assessee produced
all possible evidence to prove that the same was on account of a genuine error
made by its client. The CIT(A) deleted the addition partially and confirmed the
rest of the difference, on the ground that the same was irreconcilable.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal observed that the assessee’s
client had erroneously quoted the assessee’s PAN in its TDS return owing to
which higher TDS was reflected in the assessee’s Form 26AS. However, the
assessee duly filed all the details to explain the difference between the TDS
amounts before the ITO during remand proceedings as well as before the CIT(A).

 

It produced evidence by way of emails
exchanged with its client to prove that the error took place while filing TDS
returns by the client. It also filed a revised TDS return as well as ledger
account of the client in the assessee’s books, as well as reconciliation
statements, and offered party-wise explanations. Thus, the assessee discharged
its primary onus as cast under the Income Tax laws.

 

Neither the ITO nor the CIT(A) conducted
necessary inquiries despite having all information in their possession
submitted by the assessee during appellate / remand proceedings.

 

It further observed that the assessee has no
control over the database of the Income-tax Department as is reflected in Form
No. 26AS and the best that the assessee could do is to offer bona fide
explanations for the differential which the assessee did in this case during
appellate / remand proceedings. The CIT(A) / ITO ought to have conducted
necessary inquiries to unravel the truth, but asking the assessee to do the
impossible is not warranted. No defects in the books of accounts are pointed
out by the authorities below nor were the books of accounts rejected by them.
No cogent incriminating material was brought on record by the authorities below
as evidence / to prove that the assessee has received / earned any income
outside its books of accounts.

 

Another important aspect which the Tribunal
considered was that though the principle of res judicata was not applicable
to assessment proceedings under Income tax law, from the assessment orders for
other assessment years indications can be drawn as to the behaviour pattern of
the taxpayer and modus operandi of the taxpayer adopted to defraud
Revenue / conceal income, if any. No such incriminating information is brought
on record by Revenue. Therefore, considering the totality of facts as well as
on the touchstone of preponderance of probabilities, the Tribunal held that no
additions to the income are warranted in the hands of the assessee on account
of the above difference.

 

The ground of appeal filed by the assessee
was allowed.

 

Section 45 – Amount received by assessee in its capacity as a partner of a firm from the other partners on account of reduction in profit-sharing ratio of the assessee, is a capital receipt not chargeable to tax

9. [2019] 116 taxmann.com 385 (Mum.) Anik Industries Ltd. vs. DCIT ITA No. 7189/Mum/2014 A.Y.: 2010-11 Date of order: 19th March, 2020

 

Section 45 – Amount received by assessee in
its capacity as a partner of a firm from the other partners on account of
reduction in profit-sharing ratio of the assessee, is a capital receipt not
chargeable to tax

 

FACTS

The assessee was a partner in a partnership firm, namely
M/s Mahakosh Property Developers (the ‘firm’). The assessee was entitled to a
30% share in the profits of the firm. During the year, the assessee received a
sum of Rs. 400 lakhs on account of surrender of 5% share of profit (from 30% to
25%.) This sum was not included in the computation of total income on the
ground that the firm was reconstituted and a right was created in favour of the
existing partners. The existing partners whose share was increased, paid
compensation of Rs. 400 lakhs to the assessee.

The assessee relied
upon the decision of the Hon’ble Madras High Court in A.K. Sharfuddin vs.
CIT (1960 39 ITR 333) for the proposition that compensation received by
a partner from another partner for relinquishing rights in the partnership firm
would be capital receipt and there would be no transfer of asset within the
meaning of section 45(4) of the Act. Reliance was placed on other decisions
also to submit that the provisions of sections 28(iv) and 41(2) shall have no application
to such receipts.

 

The A.O. held that
the said payment was nothing but consideration for intangible asset, i.e., the
loss of share of partner in the goodwill of the firm. Therefore, this amount
was to be charged as capital gains in terms of the decision of the Ahmedabad
Tribunal in Samir Suryakant Sheth vs. ACIT (ITA No. 2919 &
3092/Ahd/2002) and the decision of the Mumbai Tribunal in Shri
Sudhakar Shetty (2011 130 ITD 197). Finally, the said amount was
brought to tax as capital gains u/s 45(1).

 

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

 

Aggrieved, the
assessee preferred an appeal to the Tribunal,

 

HELD

The Tribunal
observed that the only issue that fell for its consideration was whether or not
the compensation received by an existing partner from other partners for
reduction in profit-sharing ratio would be chargeable to tax as capital gains
u/s 45(1).

 

As per the
provisions of section 45(1), any profits or gains arising from the transfer of
a capital asset effected in the previous year shall be chargeable to capital
gains tax. The Tribunal noted that the answer to the aforesaid question lies in
the decision of the Hon’ble Karnataka High Court in CIT vs. P.N.
Panjawani (356 ITR 676) wherein this question was elaborately examined
in the light of various judicial precedents.

 

The Tribunal noted
that the decision of the Karnataka High Court in P.N. Panjawani (Supra) also
takes note of the fact that the firm is not recognised as a legal entity but
the Income-tax Act recognises the firm as a distinct legally assessable entity
apart from its partners. A clear distinction has been made between the income
of the firm and the income of the partner. It is further noted that there is no
provision for levying capital gains on consideration received by the partner
for reduction in the share in the partnership firm. Upon perusal of paragraph
22 of the decision, it is quite discernible that the factual matrix is
identical in the present case. The aforesaid decision has been rendered after
considering the various case laws on the subject as rendered by the Hon’ble
Apex Court. The Tribunal found the decision to be applicable to the given
factual matrix.

 

The Tribunal held
that the compensation received by the assessee from the existing partners for
reduction in the profit-sharing ratio would not tantamount to capital gains
chargeable to tax u/s 45(1). It deleted the addition made and allowed the
appeal filed by the assessee.

Sections 2(14), 2(47), 45, 56 – Giving up of a right to claim specific performance by conveyance in respect of an immovable property amounts to relinquishment of capital asset. It is not necessary that in all such cases there should have been a lis pending between the parties and in such lis the right to specific performance has to be given up. The payment of consideration under the agreement of sale, for transfer of a capital asset, is the cost of acquisition of capital gains. Amount received in lieu of giving up the said right constitutes capital gains and is exigible to tax

16. [2020] 117
taxmann.com 520 (Bang.)(Trib.) Chandrashekar
Naganagouda Patil vs. DCIT ITA No.
1984/Bang/2017 A.Y.: 2012-13 Date of order: 29th
June, 2020

 

Sections 2(14),
2(47), 45, 56 – Giving up of a right to claim specific performance by
conveyance in respect of an immovable property amounts to relinquishment of
capital asset. It is not necessary that in all such cases there should have
been a lis pending between the parties and in such lis the right
to specific performance has to be given up. The payment of consideration under
the agreement of sale, for transfer of a capital asset, is the cost of
acquisition of capital gains. Amount received in lieu of giving up the
said right constitutes capital gains and is exigible to tax

 

FACTS

The assessee, an
individual, entered into an agreement dated 9th February, 2005 to
purchase a vacant site in Amanikere village, Bangalore for a consideration of
Rs. 27,60,000. He paid an advance of Rs. 2,75,000 and agreed to pay the balance
at the time of registration of sale deed. The vendor of the property was
required to make out a marketable title to the property. Under clause 8 of the
agreement, the assessee had a right to enforce the terms by way of specific
performance.

 

On 8th
February, 2011, Mr. Channakeshava as vendor, along with the assessee as a
confirming party, sold the property to a third party for a consideration of Rs.
82,80,000. The preamble to the sale deed stated that the assessee has been
added as a confirming party as he was the agreement holder who had a right to
obtain conveyance of the property from the owner. Out of the consideration of
Rs. 1,200 per sq. feet, a sum of Rs. 500 per sq. feet was to be paid to the
vendor, Mr. Channakeshava, and Rs. 700 per sq. feet was to be paid to the
assessee.

 

The assessee
considered the sale consideration of Rs. 48,30,000 so received under the head
capital gains. The A.O. was of the view that under the agreement dated 9th
February, 2005, the assessee did not have any right over the property except a
right to get refund of advance paid. Accordingly, he taxed Rs. 45,55,000 under
the head income from other sources.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O.
by observing that the assessee did not file any suit for specific performance
and did not have any right over the capital asset.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted that
the Karnataka High Court has in the case of CIT vs. H. Anil Kumar [(2011)
242 CTR 537 (Kar.)] held that the right to obtain a conveyance of
immovable property falls within the expression `property of any kind’ used in
section 2(14) and consequently it is a capital asset. The Tribunal held that
the right acquired under the agreement by the assessee has to be regarded as
‘capital asset’. Giving up of the right to claim specific performance by
conveyance in respect of an immovable property amounts to relinquishment of the
capital asset. Therefore, there was a transfer of capital asset within the
meaning of the Act. The payment of consideration under the agreement of sale,
for transfer of a capital asset, is the cost of acquisition of the capital
asset. Therefore, in lieu of giving up the said right, any amount
received constitutes capital gain and it is exigible to tax. It is not
necessary that in all such cases there should have been a lis between
the parties and in such lis the right to specific performance has to be
given up. The Tribunal held that the CIT(A) erred in holding that the assessee
did not file a suit for specific performance and therefore cannot claim the
benefit of the ratio laid down by the Hon’ble Karnataka High Court in
the case of H. Anil Kumar (Supra).

 

The Tribunal
allowed the appeal filed by the assessee.

 

Sections 11, 12, 139, 148 – A failure on the part of the Trust to file its return of income u/s 139(4A) cannot lead to withdrawal of exemption under sections 11 and 12 – Having filed a return of income u/s 139, subsequently, where a return is furnished in response to notice u/s 148, it replaces the return filed u/s 139, including section 139(4A), and all the other provisions of the Act including sections 11 and 12 are applicable – There was no time limit prescribed for submission of return of income and audit report in respect of a Trust whose income before claiming the exemption exceeded the basic exemption limit Clause (ba) to Section 12A, which prescribes time limit for submission of return of income and audit report to be time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in its application

23. [2019] 202 TTJ (Del.) 928 United Educational Society vs. JCIT ITA Nos.
3674 & 3675/Del/2017 and 2733 & 2734/Del/2018 A.Ys.: 2006-2007 to 2009-2010 Date of order: 28th June, 2019

 

Sections 11, 12, 139, 148 – A failure on
the part of the Trust to file its return of income u/s 139(4A) cannot lead to
withdrawal of exemption under sections 11 and 12 – Having filed a return of
income u/s 139, subsequently, where a return is furnished in response to notice
u/s 148, it replaces the return filed u/s 139, including section 139(4A), and
all the other provisions of the Act including sections 11 and 12 are applicable
– There was no time limit prescribed for submission of return of income and
audit report in respect of a Trust whose income before claiming the exemption
exceeded the basic exemption limit

 

Clause (ba) to Section 12A, which
prescribes time limit for submission of return of income and audit report to be
time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in
its application

 

FACTS

The assessee was an educational society. The
A.O. had received information about huge investments made by the society in
land and building; however, no return of income had been filed. The A.O. issued
notice u/s 148, in response to which the assessee filed return of income
showing ‘nil’ income after application of section 11. There were two sets of
financial statements prepared, one for the purpose of obtaining loan and
another filed along with the return. In view of this, the A.O. ordered a
special audit to be carried out u/s 142(2A). Based on the report of the special
auditor, the A.O. made a computation of the total income of the society by
disallowing the benefit of exemption u/s 11. The income was assessed under the
head ‘Profits & Gains of Business or Profession’ and the assessee was
assessed in the status of an AOP.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A) who gave partial relief to the assessee.

 

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

 

HELD

The A.O. had denied the benefit of exemption
of section 11 to the assessee on account of the fact that the assessee had not
filed its return of income pursuant to section 139(4A). The assessee was a
society which had been granted registration u/s 12A; it engaged in activities
which were within the meaning of charitable purpose, and once so registered,
the computation of income had to be made in accordance with the provisions of
sections 11 and 12.

 

The fact that the assessee had filed its
return in response to notice issued u/s 148 and not under the provisions of
section 139(4A) cannot be a reason for not granting the benefit of exemption.
Once a return of income is submitted under the provisions of section 148, it
replaces the return filed u/s 139 and all other provisions of the Act,
including sections 11 and 12, become applicable as if it was a return filed
under the provisions of section 139. For a return filed under the provisions of
section 148, the relevant provisions of section 139 have to be applied along
with the procedure for assessment and computation of income, without
restricting it to exclude any procedure. Therefore, the trust was entitled to
claim the exemption u/s 11 in computation of income.

 

Clause (b) of section 12A mandates that
provisions of sections 11 and 12 shall not apply unless the accounts are
audited and a return is filed along with the audited accounts. Thus, as and
when computation was done these conditions had to be complied with. The issue
of whether or not the return was filed in time is not relevant for clause (b)
of section 12A.

 

The Finance Act, 2017 has amended section
12A and a new clause has been inserted specifying the time limit in case of such
trusts to furnish their return of income and audit report within the time
specified in section 139(4A). These provisions are prospectively applicable
from A.Y. 2018-19 onwards and cannot be treated as clarificatory amendments.

 

Note: Clause (ba) to section 12A as inserted
by the Finance Act, 2017 prescribes that the return of income and tax audit
report has to be submitted by a trust within the time provided by section
139(1). Consequently, the ratio of this decision will not apply post
insertion of clause (ba), i.e. for assessment years 2017-18 and thereafter.

 

The grounds of appeal filed by the assessee
were allowed.

 

Rule 34 of the Income-tax Appellate Tribunal Rules – The period of 90 days prescribed in Rule 34(5) needs to be computed by excluding the period during which lockdown was in force

15. [2020] 116 taxmann.com 565 (Mum.)(Trib.) DCIT vs. JSW Ltd. ITA Nos. 6103 & 6264/Mum/2018 A.Y.: 2013-14 Date of order: 14th May, 2020

 

Rule 34 of the Income-tax Appellate
Tribunal Rules – The period of 90 days prescribed in Rule 34(5) needs to be
computed by excluding the period during which lockdown was in force

 

FACTS

In this case, the hearing of the appeal was concluded on 7th
January, 2020 whereas the order was pronounced on 14th May, 2020,
i.e. much after the expiry of 90 days from the date of conclusion of hearing.
The Tribunal, in the order, suo motu dealt with the procedural issue of
the order having been pronounced after the expiry of 90 days of the date of
conclusion of the hearing. The Tribunal noted the provisions of Rule 34(5) and
dealt with the same.

 

HELD

The Tribunal noted
that Rule 34(5) was inserted as a result of the directions of the Bombay High
Court in the case of Shivsagar Veg Restaurant vs. ACIT [(2009) 317 ITR
433 (Bom.)]. In the rule so framed as a result of these directions, the
expression ‘ordinarily’ has been inserted in the requirement to pronounce the
order within a period of 90 days. It observed that the question then arises
whether the passing of this order beyond 90 days was necessitated by any
‘extraordinary’ circumstances.

It also took note of the prevailing unprecedented situation and the
order dated 6th May, 2020 read with the order dated 23rd
March, 2020 passed by the Apex Court, extending the limitation to exclude not
only this lockdown period but also a few more days prior to, and after, the
lockdown by observing that ‘In case the limitation has expired after 15th
March, 2020 then the period from 15th March, 2020 till the date
on which the lockdown is lifted in the jurisdictional area where the dispute
lies or where the cause of action arises shall be extended for a period of 15
days after the lifting of lockdown’.

 

The Tribunal also
noted that the Hon’ble Bombay High Court, in an order dated 15th
April, 2020 has, besides extending the validity of all interim orders, also
observed that, ‘It is also clarified that while calculating time for
disposal of matters made time-bound by this Court, the period for which the
order dated 26th March, 2020 continues to operate shall be added and
time shall stand extended accordingly’, and also observed that the
‘arrangement continued by an order dated 26th March, 2020 till 30th
April, 2020 shall continue further till 15th June, 2020’.

 

The extraordinary
steps taken suo motu by the Hon’ble jurisdictional High Court and the
Hon’ble Supreme Court also indicate that this period of lockdown cannot be
treated as an ordinary period during which the normal time limits are to remain
in force.

 

The Tribunal held
that even without the words ‘ordinarily’, in the light of the above analysis of
the legal position, the period during which lockout was in force is to be
excluded for the purpose of time limits set out in Rule 34(5) of the Appellate
Tribunal Rules, 1963.

 

The order was
pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962,
by placing the details on the notice board.

 

Section 143(3), CBDT Instruction No. 5/2016 – Assessment order passed upon conversion of case from limited scrutiny to complete scrutiny, in violation of CBDT Instruction No. 5/2016, is a nullity

14. TS-279-ITAT-2020 (Delhi) Dev Milk Foods Pvt. Ltd. vs. Addl. CIT ITA No. 6767/Del/2019 A.Y.: 2015-16 Date of order: 12th June, 2020

 

Section 143(3), CBDT Instruction No. 5/2016
– Assessment order passed upon conversion of case from limited scrutiny to
complete scrutiny, in violation of CBDT Instruction No. 5/2016, is a nullity

 

FACTS

For assessment year
2015-16, the assessee filed its return of income declaring a total income of
Rs. 19,44,88,700. The case was selected for limited scrutiny through CASS.

 

In the assessment
order, the A.O. stated that the assessee’s case was selected for limited
scrutiny with respect to long-term capital gains but it was noticed that the
assessee had claimed a short-term capital loss of Rs. 4,20,94,764 which had
been adjusted against the long-term capital gains. The A.O. was of the view
that the loss claimed by the assessee appeared to be suspicious in nature
primarily because the loss could possibly have been created to reduce the
incidence of tax on long-term capital gains shown by the assessee. The A.O.
further stated in the assessment order that in order to verify this aspect,
approval of the Learned Principal Commissioner of Income Tax (PCIT) was taken
to convert the case from limited scrutiny to complete scrutiny and that the
assessee was also intimated about the change in status of the case.

 

The A.O. held that
the purchase of shares did not take place and the transactions were sham in
view of documentary evidence, circumstantial evidence, human conduct and
preponderance of probabilities. He observed that the entire exercise was a
device to avoid tax. The A.O. completed the assessment u/s 143(3) after making
an addition of Rs. 4,20,94,764 on account of disallowance of short-term capital
loss, Rs. 8,41,895 for alleged unexplained expenditure on commission, and Rs.
1,93,20,000 on account of difference in computation of long-term capital gains.
Thus, the total income was computed by the A.O. at Rs. 25,67,43,360.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the additions made by the
A.O. on merits.

 

The assessee
preferred an appeal to the Tribunal challenging the validity of the order
passed by the A.O. inter alia on the ground that the return was
primarily selected for limited scrutiny only on the limited issue of long-term
capital gains (LTCG) on which aspect, as per the order of the CIT(A), there
remains no existing addition, and conversion of limited scrutiny to complete
scrutiny was on mere suspicion only and for verification only, on the basis of
invalid approval of the PCIT-3; consequently, the entire addition on account of
disallowance of short-term capital loss of Rs. 4,20,94,764 and Rs. 8,41,895 as
alleged unexplained commission expense is not as per CBDT instructions (refer
Instruction Nos. 19 and 20/2015 of 29th December, 2015) on the
subject and is ultra vires of the provisions of the Act.

 

HELD

The Tribunal, on
perusal of the instructions issued by CBDT vide its letter No. DGIT
VIF/HQ SI/2017-18 dated 30th November, 2017, observed that the
objective behind the issuance of these instructions is to (i) prevent the
possibility of fishing and roving inquiries; (ii) ensure maximum objectivity;
and (iii) enforce checks and balances upon the powers of an A.O.

 

The Tribunal
observed that the proposal drafted by the A.O. on 5th October, 2017
for converting the case from limited scrutiny to complete scrutiny and the
original order sheet entries, do not have an iota of any cogent material
mentioned by the A.O. which enabled him to reach the conclusion that this was a
fit case for conversion from limited scrutiny to complete scrutiny.

 

Examining the
proposal of the A.O. of 5th October, 2017 and the approval of the
PCIT dated 10th October, 2017 on the anvil of paragraph 3 of CBDT
Instruction No. 5/2016, the Tribunal held that no reasonable view is formed as
mandated in the said Instruction in an objective manner, and secondly, merely
suspicion and inference is the foundation of the view of the A.O. The Tribunal
also noted that no direct nexus has been brought on record by the A.O. in the
said proposal and, therefore, it was very much apparent that the proposal of
converting the limited scrutiny to complete scrutiny was merely aimed at making
fishing inquiries. It also noted that the PCIT accorded the approval in a
mechanical manner which is in clear violation of the CBDT Instruction No.
20/2015.

The Tribunal noted
that the co-ordinate bench of the ITAT at Chandigarh in the case of Payal
Kumari in ITA No. 23/Chd/2011, vide order dated 24th
February, 2011 has held that even section 292BB of the Act cannot save
the infirmity arising from infraction of CBDT Instructions dealing with the
subject of scrutiny assessments where an assessment has been framed in direct
conflict with the guidelines issued by the CBDT.

 

In this case, the
Tribunal held that the instant conversion of the case from limited scrutiny to
complete scrutiny cannot be upheld as the same is found to be in total violation
of CBDT Instruction No. 5/2016. Accordingly, the entire assessment proceedings
do not have any leg to stand on. The Tribunal held the assessment order to be
null and quashed the same.

 

The appeal filed by
the assessee was allowed.

 

Section 5 – When an assessee had an obligation to perform something and the assessee had not performed those obligations, nor does he even seem to be in a position to perform those obligations, a partial payment for fulfilling those obligations cannot be treated as income in the hands of the assessee

13. [2020] 116
taxmann.com 898 (Mum.) ITO vs. Newtech
(India) Developers ITA No.
3251/Mum/2018 A.Y.: 2009-10 Date of order: 27th
May, 2020

 

Section 5 – When
an assessee had an obligation to perform something and the assessee had not
performed those obligations, nor does he even seem to be in a position to
perform those obligations, a partial payment for fulfilling those obligations
cannot be treated as income in the hands of the assessee

 

FACTS

The assessee, under
the joint venture agreement entered into by it with Shivalik Ventures Pvt.
Ltd., was to receive Rs. 5.40 crores on account of development rights from the
joint venture and this payment was to be entirely funded by Shivalik Ventures
Pvt. Ltd., the other participant in the joint venture. Out of this amount, the
assessee was paid Rs. 86.40 lakhs at the time of entering into the joint
venture agreement, Rs. 226.80 lakhs was to be paid on ‘obtaining IOA and
commencement certificate’ by the joint venture, and Rs. 226.80 lakhs was to be
paid upon ‘all the slum-dwellers vacating said property and shifting to
alternate temporary transit accommodation.’

 

In terms of the
arrangement the amount of Rs. 86.40 lakhs was to be treated as an advance until
the point of time when at least 25% of the slum-dwellers occupying the said
property vacated the premises. The agreement also provided that in case the
assessee was unable to get at least 25% of the slum-dwellers occupying the said
property to vacate the occupied property in five years, the entire money will
have to be refunded to Shivalik Ventures Pvt. Ltd., though without any
interest, within 60 days of the completion of the five years’ time limit.
However, even till the time the re-assessment proceedings were going on, the
assessee had not been able to get the occupants of the property to vacate it.
In the financial statements, the amount of Rs. 86,40,000 received was reflected
as advance received.

 

The assessee was of
the view that no income has arisen in the hands of the assessee in respect of
the above-mentioned transaction. However, the A.O. was of the view that under
the mercantile method of accounting followed by the assessee, the transactions
are recognised as and when they take place and under this method, the revenue
is recorded when it is earned and the expenses are reported when they are
incurred. He held that the assessee has already received an amount of Rs.
86,40,000 during the year and the balance amount will be received by him in
instalments after the fulfilment of the conditions as mentioned in the
agreement. As regards the agreement terms, the A.O. was of the view that since
the stipulation about the payment being treated as an advance till at least 25%
occupants have vacated the property was by way of a modification agreement, it
was nothing but a colourable device to evade taxes.

 

The A.O., in an
order passed u/s 147 r/w/s 143(3) of the Act, taxed the entire amount of Rs. 5,40,00,000
in the year under consideration.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that the crux of the issue
was whether income had accrued to the assessee. The basic concept is that the
assessee should have acquired a right to receive the income. Drawing support
from the decisions of the Tribunal in R & A Corporate Consultants
India vs. ACIT (ITA No. 222/Hyd/2012) and K.K. Khullar vs. Deputy
Commissioner of Income Tax – 2008 (1) TMI 447 – ITAT Delhi-I, the
CIT(A) held that income can be considered to accrue or arise only when the
assessee is able to evacuate 25% slum-dwellers as per the agreement / deed. If
the assessee is unable to comply with this, the assessee will have to return
the sum to Shivalik.

 

The Revenue was
aggrieved by this and preferred an appeal to the Tribunal,

 

HELD

The Tribunal
observed that –

i)   the payment to be received by the assessee
was for performance of its obligations under the joint venture agreement;

ii)   when an assessee had an obligation to perform
something and the assessee had not performed those obligations, nor did he even
seem to be in a position to perform those obligations, it cannot be said that a
partial payment for fulfilling the obligations can be treated as income in the
hands of the assessee;

iii)  it was a composite agreement and, irrespective
of whether the modifications are looked at or not, all the terms of the
agreement are to be read in conjunction with each other;

iv)  what essentially flows from the decision of
the Apex Court in E.D. Sassoon & Co. Ltd. vs. CT [(1954) 36 ITR 27
(SC)] is that a receipt cannot have an income character in the hands of
the person who is still to perform the obligations, if the amount to be
received is for performance of such obligations;

v)  since the obligations of the assessee under
the joint venture agreement are not yet performed, there cannot be any occasion
to bring the consideration for performance of such obligations to tax;

vi)  the very foundation of the impugned taxability
is thus devoid of any legally sustainable basis.

 

As regards the
supplementary agreement, it observed that even if the same were to be
disregarded, income could accrue only on performance of obligations under the
joint venture agreement. In any case, it cannot be open to the A.O. to
disregard the supplementary, or modification whichever way one terms it, only
because its result is clear and unambiguous negation of tax liability in the
hands of the assessee. It also observed that whether the amount is actually
refunded or not, nothing turns on that aspect either.

 

Under the terms of
the joint venture agreement, the assessee was to receive the payment for
performance of its obligations under the agreement and in view of the
uncontroverted stand of the assessee that the obligations have not been
performed till date, the Tribunal held that the income in question never
accrued to the assessee.

The Tribunal held
that the taxability of Rs. 5.40 crores, on account of what is alleged to be
transfer of development rights, is wholly devoid of merits.

 

The appeal filed by
the Revenue was dismissed.

 

Sections 200A, 234E – Prior to amendment of section 200A, with effect from 1st June, 2015, late fee leviable u/s 234E for default in furnishing TDS statement could not be effected in course of intimation while processing TDS statement u/s 200A

12 [2019] 111 taxmann.com 493 (Trib.)(Del.) D.D. Motors vs. DCIT (CPC – TDS) ITA No. 956/Del/2017 A.Y.: 2013-14 Date of order: 18th October, 2019

 

Sections 200A, 234E – Prior to amendment of
section 200A, with effect from 1st June, 2015, late fee leviable u/s
234E for default in furnishing TDS statement could not be effected in course of
intimation while processing TDS statement u/s 200A

 

FACTS

The assessee firm, formed in July, 2012, for
the first time deducted tax at source amounting to Rs. 34,486 in the fourth
quarter of the financial year 2012-13. The amount of tax so deducted was paid
before the due date. However, TDS return was filed on 12th
September, 2013 instead of before the due date of 15th May, 2013.
Vide intimation dated 11th February, 2014, u/s 200A of the Act, a
fee of Rs. 24,000 u/s 234E @ Rs. 200 for the delay of 120 days was charged.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A) against the levy of the late fee but the appeal was dismissed. It was contended that prior to 1st June, 2015, late
fee u/s 234E could not be levied while processing u/s 200A.

The assessee filed an appeal to the
Tribunal.

 

HELD

The Tribunal noted that section 200A has
been inserted w.e.f. 1st April, 2010 and section 234E w.e.f. 1st
July, 2012. It also noted that it is only w.e.f. 1st June, 2015 that
there is an amendment to section 200A permitting making of an adjustment of
fee, if any, u/s 234E. It observed that at the relevant time when the impugned
intimation u/s 200A was made there was no enabling provision therein for
raising a demand in respect of levy of fees u/s 234E.

 

The Tribunal held that while examining the
correctness of the intimation u/s 200A, it has to be guided by the limited
mandate of section 200A. Except for what has been stated in section 200A, no
other adjustments in the amount refundable to, or recoverable from, the tax
deductor were permissible in accordance with the law as it existed at that
point of time. The adjustment in respect of levy of fees u/s 234E was indeed
beyond the scope of permissible adjustments contemplated u/s 200A.

 

Further, the Tribunal observed that this
intimation is an appealable order u/s 246A (a) and, therefore, the learned
CIT(A) ought to have examined the legality of the adjustment made under this
intimation in the light of the scope of section 200A. The CIT(A) has not done
so. He has justified the levy of fees on the basis of the provisions of section
234E. But that is not the issue here. The issue is whether such a levy could be
effected in the course of intimation u/s 200A. The answer is clearly in the
negative. No other provision enabling a demand in respect of this levy has been
pointed out to us and it is, thus, an admitted position that in the absence of
the enabling provision u/s 200A, no such levy could be effected.

 

The Tribunal observed that a similar view
has been taken by the Coordinate Benches of Chennai, Ahmedabad and Amritsar.

 

The appeal filed by the assessee was
allowed. The Tribunal deleted the fee levied u/s 234E.

Section 54 – Investment, for purchase of new residential house, made up to date of filing of revised return of income qualifies for exemption u/s. 54

15

[2019] 104 taxmann.com 303 (Mum.)

Rajendra Pal Verma vs. ACIT

ITA No. 6814/Mum/2016

A.Y.: 2013-14

Dated: 12th March, 2019

 

Section 54 – Investment, for
purchase of new residential house, made up to date of filing of revised return
of income qualifies for exemption u/s. 54

 

FACTS

The
assessee e-filed his return of income for A.Y. 2013-14 on 31.03.2013.
Thereafter, he revised his return on 15.11.2014. In the course of assessment
proceedings, the A.O. observed that the assessee had sold a residential flat
and had claimed the entire long term capital gain of Rs. 1.75 crores as exempt
us. 54 of the Act.

 

The A.O.
observed that the assessee entered into an agreement dated 29.12.2014 with the
builder for the purchase of a new residential house. The agreement provided
that the construction of the house would be completed by September, 2017. The
A.O. also observed that the assessee had 
neither invested the capital gains in the purchase of a new house, nor
had he deposited the amount in a capital gains account as required by section
54(2). Accordingly, the A.O. disallowed the claim for exemption u/s. 54 of the
Act.

 

Aggrieved,
the assessee preferred an appeal before the CIT(A) who allowed the exemption to
the extent of investment made for purchase of new residential house up to the
due date of filing of the return of income as envisaged u/s. 139(1). He
restricted the claim of exemption to Rs. 83.72 lakhs. Still aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The
Tribunal, on examining the provisions of section 54, observed that on a plain
and literal interpretation of section 54(2), it can be gathered that the
conscious, purposive and intentional wording provided by the legislature of
“date of furnishing the return of income u/s. 139” cannot be
substituted and narrowed down to section 139(1) of the Act. It held that the
date of furnishing the return of income u/s. 139 would safely encompass within
its sweep the time limit provided for filing the “return of income” by the
assessee u/s. 139(4) as well as the revised return filed by him u/s. 139(5).

 

The
Tribunal noted that the question as to whether an assessee would be eligible to
claim exemption u/s. 54 to the extent he had invested in the new residential
property up to the date on which he had filed the revised return of income had
been looked into by a co-ordinate bench of the Tribunal in the case of ITO
vs. Pamela Pritam Ghosh [ITA No. 5644(Mum.) of 2016, dated 27.06.2018].
The Tribunal in that case had observed that the due date for furnishing the
return of income according to section 139(1) was subject to the extended period
provided under sub-section (4) of section 139.

 

The Tribunal held that the assessee was entitled to claim exemption u/s.
54 to the extent he had invested towards purchase of new residential property
up to the date of filing revised return u/s. 139(5) [on 15.11.201]. As the
assessee had invested Rs. 2.49 crores towards purchase of the new residential
house up to that date (date of filing of revised return u/s. 139(5)) which is
in excess of long term capital gain, the entire long term capital gain was held
to be exempt u/s. 54. The appeal filed by the assessee was allowed.

Corrigendum:  In
the March 2019 issue of BCAJ, in the feature Tribunal News – Part A, the line “The
appeal filed by the Revenue was dismissed by the Tribunal” appearing on
page 56 in the decision at Serial No. 31 – should correctly read as “This
ground of appeal filed by the revenue was allowed by the Tribunal.”

Section 263 – If a matter is examined by the Assessing Officer during the course of assessment and consciously accepts the plea of the assessee, the order can still be subjected to revision u/s. 263 of the Act if the view adopted by the A.O. is unsustainable in law

14

[2019] 104 taxmann.com 155 (Ahmedabad)

Babulal S. Solanki vs. ITO

ITA No. 3943/Mum/2016

A.Y.: 2012-13

Dated: 4th March, 2019

 

Section 263 – If a matter is
examined by the Assessing Officer during the course of assessment and
consciously accepts the plea of the assessee, the order can still be subjected
to revision u/s. 263 of the Act if the view adopted by the A.O. is
unsustainable in law

 

FACTS

The
Commissioner, on verification of assessment records of the assessee, observed
that while computing capital gains from transfer of land by the assessee, sale
consideration was taken instead of the jantri value, which was higher,
and therefore the difference between the jantri value and sale
consideration remained untaxed. He opined that the assessment order passed by
the A.O. was erroneous and prejudicial to the interest of the Revenue.

 

The
assessee, however, submitted that this aspect was specifically examined by the
A.O. and his claim was allowed after due verification of the records and
details pertaining to the sale of land.

 

The Commissioner
did not accept the contention of the assessee and held that since there was no
mention by the A.O. as to why the stamp duty value was not adopted as full
value of consideration, the matter was not examined and thus he directed the
revision of the assessment order u/s. 263 of the Act. Aggrieved, the assessee
preferred an appeal to the Tribunal.

 

HELD

The
Tribunal noted the decision of the Supreme Court in the case of Malabar
Industrial Co. Ltd. vs. CIT (243 ITR 83) wherein it was held that where
two views are possible and the ITO has taken one view with which the
Commissioner does not agree, it cannot be treated as an erroneous order
prejudicial to the interests of the Revenue unless the view taken by the ITO is
unsustainable in law.

 

The
Tribunal held that even if the matter was examined by the A.O. and it was his
conscious call to accept the plea of the assessee, such a situation would not
take the matter outside the purview of section 263 as the view adopted by the
A.O. in the present case was clearly unsustainable in law.

 

Further,
the Tribunal observed that the Commissioner had directed examination of the
claim on merits and therefore the revision order of the Commissioner did not
call for any interference.

 

The appeal filed by the assessee was dismissed.

Section 54 r.w.s. 139 – Assessee would be entitled to claim exemption u/s 54 to extent of having invested capital gain on sale of old residential flat towards purchase of new residential property up to date of filing of his revised return of income u/s 139(5)

24.  [2019] 199 TTJ
(Mum.) 873

Rajendra Pal Verma vs. ACIT

ITA No.: 6814/Mum/2016

A.Y.: 2013-14

Date of order: 12th March, 2019

 

Section 54 r.w.s. 139 – Assessee would be entitled to claim
exemption u/s 54 to extent of having invested capital gain on sale of old
residential flat towards purchase of new residential property up to date of
filing of his revised return of income u/s 139(5)

 

FACTS

The assessee had e-filed
his return of income on 31st July, 2013. Thereafter, the assessee
filed a revised return of income on 15th November, 2014. The AO
observed that the assessee had during the year under consideration sold an old
residential flat and the entire long-term capital gain (LTCG) on the sale of
the old flat was claimed as exempt u/s 54. The assessee had purchased a new
residential flat as per an agreement dated 29th December, 2014 with
the builder / developer, as per which the construction of the property was
expected to be completed by September, 2017. However, the AO observed that the
assessee had failed to substantiate his claim of exemption u/s 54 amounting to
Rs. 1.75 crores; hence he declined to allow the same.

 

Aggrieved by the order, the assessee preferred an appeal to
the CIT(A). The CIT(A) was of the view that the assessee was entitled for claim
of exemption u/s 54 only to the extent he had invested the LTCG up to the due
date of filing of his return of income for the year under consideration, i.e.,
assessment year 2013-14 as envisaged u/s 139(1), therefore, he had restricted
his claim for exemption up to the amount of Rs. 83.72 lakhs.

 

HELD

The Tribunal held that on a perusal of section 54(2), it
emerges that the assessee in order to claim exemption u/s 54 remains under an
obligation to appropriate the amount of the capital gain towards purchase of
the new asset as per the stipulated conditions of section 54.Where the capital
gain was not appropriated by the assessee towards purchase or construction of
the residential property up to the date of filing of the return of income u/s
139, then in such a case the entitlement of the assessee to claim the exemption
by making an investment towards purchase or construction of the new asset would
be available, though subject to the condition that the assessee had deposited
the amount of such capital gain in the CGAS account with the specified bank by
the due date contemplated u/s 139(1). Further, in case any part of the capital
gain had already been utilised by the assessee for the purchase or construction
of the new asset, the amount of such utilisation along with the amount so
deposited would be deemed to be the cost of the new asset.

 

On the basis of the
aforesaid deliberations, it was viewed that the outer limit for the purchase or
construction of the new asset as per sub-section (2) of section 54 was the date
of furnishing of the return of income by the assessee u/s 139. It was viewed
that the date of furnishing of the return of income u/s 139 would safely
encompass within its sweep the time limit provided for filing of the return of
income by the assessee u/s 139(4) as well as the revised return filed by him
u/s 139(5). It was found that the instant case clearly fell within the sweep of
the aforementioned first limb, i.e., sub-section (1) of section 54. As the
assessee in the instant case had utilised an amount of Rs. 2.49 crores (i.e.,
much in excess of the amount of LTCG on sale of the residential property) up
till the date of filing of his revised return of income u/s 139(5) on 15th
November, 2014, therefore, his claim of exemption u/s 54 in respect of the
investment made towards the purchase of the new residential property up to the
date of filing of the revised return of income u/s 139(5) was found to be in
order.

 

Therefore, the assessee in the instant case was entitled to
claim exemption u/s 54 to the extent he had invested towards the purchase of
the new residential property under consideration up to the date of filing of
his revised return of income u/s 139(5), i.e., on 15th
November,  2014.

Section 48 – Legal and professional expenditure incurred by assessee, a foreign company, for sale of shares of its Indian subsidiary is an expenditure incurred wholly and exclusively in connection with transfer and is allowable as deduction while computing capital gains

5. [2019] 103
taxmann.com 297 (Mum) AIG Offshore
Systems Services Inc. vs. ACIT ITA No.:
6715/Mum/2014 A.Y.: 2010-11 Dated:  18th January, 2019

 

Section 48 – Legal
and professional expenditure incurred by assessee, a foreign company, for sale
of shares of its Indian subsidiary is an expenditure incurred wholly and
exclusively in connection with transfer and is allowable as deduction while
computing capital gains

 

FACTS


During the previous
year relevant to the assessment year in dispute, the assessee, a foreign
company, carrying on activities as a Foreign Institutional Investor, sold
shares held by it in its Indian subsidiary and offered long-term capital gains
arising from sale of shares of the Indian subsidiary.

 

During the course
of assessment proceedings, the Assessing Officer (AO) observed that the
assessee had claimed deduction of expenditure incurred towards transfer of
shares. The assessee submitted that the said expenditure represented legal /
professional fees paid to lawyers / accounting firms for assisting in transfer
of shares. The AO, however, held that:

 

(i)   the expenditure claimed by the assessee was
not of such nature that without incurring those expenses sale of shares could
not have been done;

(ii)   the objective behind incurring the expenses
was to optimise the economic value of the business and not for the purpose of
transfer of shares; and

(iii)  the documentary evidences relied upon by the
assessee also did not mention the name of the buyer.

 

The AO disallowed
the assessee’s claim for deduction of expenditure while computing capital
gains.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the disallowance by
holding that the expenditure incurred is in the nature of business expenditure.

 

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

 

HELD


The Tribunal,
relying on various decisions, held that expenditure which is intrinsically
connected to the transfer of a capital asset is allowable as deduction u/s.
48(i) of the Act. On a perusal of the documents filed by the assessee, the
Tribunal observed that the expenses were towards advice on sale of entire
shareholding, preparation of share / sale / purchase agreement, preparation of
closing documents including board resolution, share transfer forms, etc., and
were therefore for the transfer of shares. The Tribunal held that it was clear
from the scope of the work that the services rendered by the legal /
professional firm was intrinsically related to transfer of shares of the Indian
subsidiary and therefore the expenditure qualified for deduction u/s. 48(i).
The Tribunal also held that non-mentioning of the name of the buyer did not, in
any way, militate against the fact that the expenditure incurred by the
assessee on account of legal and professional fees was in connection with the
transfer of shares.

 

The appeal of the
assessee was allowed by the Tribunal.

Section 251 – Power of enhancement conferred on CIT(A) can be exercised only on the issue which is the subject matter of the assessment. The CIT (Appeals), even while exercising its power for enhancement u/s. 251, cannot bring a new source of income which was not subject matter of assessment

12. (2019) 69 ITR (Trib) 261 (Jaipur) Zuberi Engineering Company vs. DCIT ITA Nos.: 977-979/JPR/2018 A.Y.s: 2012-13 to 2014-15 Dated: 21st December, 2018

 

Section 251 – Power of enhancement
conferred on CIT(A) can be exercised only on the issue which is the subject
matter of the assessment. The CIT (Appeals), even while exercising its power
for enhancement u/s. 251, cannot bring a new source of income which was not
subject matter of assessment

 

FACTS


The assessee was a
partnership firm and a contractor engaged in erection and fabrication work. The
assessment was completed making disallowances of various expenses claimed by
the assessee. On appeal, the Commissioner (Appeals) enhanced the assessment by
rejecting books of accounts and estimating higher net profit. On further appeal
to the Tribunal, the Tribunal allowed the assessee’s appeal and held as under.

 

HELD


The power of
Commissioner (Appeals) to enhance an assessment exists in section 251. However,
this power can be exercised only on the issue which is a subject matter of the
assessment. In the instant case, the issue of not accepting the books of
accounts was never taken up by the Assessing Officer in the scrutiny
proceedings. Therefore, the same did not constitute the subject matter of the
assessment. Consequently, it is beyond the scope of the power of enhancement
available with Commissioner (Appeals).

 

It is a settled proposition of law that the
Commissioner (Appeals), even while exercising the power for enhancement u/s.
251, cannot bring a new source of income which was not a subject matter of the
assessment. An issue or claim discussed / taken up in the course of assessment
proceedings becomes the subject matter of assessment but all the probable
issues that are capable of being taken up for scrutiny but are not so taken up
can at most collectively constitute scope of assessment, for which Commissioner
(Appeals) cannot exercise power of enhancement.

 

However, the
Commissioner can exercise revisionary powers in respect of the same subject to
fulfilment of conditions specified u/s. 263. Thus, in the instant case, since
the issue of rejection of books of accounts was not the subject matter of
assessment, the Tribunal set aside the order of the Commissioner (Appeals) qua
the issue of the power of the Commissioner (Appeals) to reject the books of
accounts.