BCAJ | Bombay Chartered Accountant Journal

Section 69 r.w.s.5 & 6 –Where additions were made to income of assessee, who was a non-resident since 25 years, since, no material was brought on record to show that funds were diverted by assessee from India to source deposits found in foreign bank account, impugned additions were unjustified.

29. [2019] 197 TTJ 161 (Mumbai – Trib.) DCIT (IT) vs.
Hemant Mansukhlal Pandya ITA No.: 4679
& 4680/Mum/2016 A.Y: 2006-07
& 2007-08 Dated: 16^th
November, 2018

Section 69
r.w.s.5 & 6 –Where additions were made to income of assessee, who was a
non-resident since 25 years, since, no material was brought on record to show
that funds were diverted by assessee from India to source deposits found in
foreign bank account, impugned additions were unjustified.

FACTS

The assessee
was a non-resident individual living in Japan on a business visa since 1990. He
had been a director in a company in Japan and had got permanent residency certificate
from Japan since 2001. The assessing officer had made addition towards amount
found credited in HSBC Bank account, Geneva on the ground that the assessee had
failed to explain and prove that deposit was not having any connection to
income derived in India and not sourced from India. The Assessing Officer had
made additions on the basis of a document called ‘base note’ received from
French Government, as per which the assessee was maintaining a bank account in
HSBC Bank, Geneva. Except this, the Assessing Officer had not conducted any
independent enquiry or applied his mind before coming to the conclusion that
whether the information contained in base note was verified or authenticated.

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) deleted the addition of income as made by the Assessing Officer. Being
aggrieved by the CIT(A) order, the Revenue filed an appeal before the Tribunal.

HELD

The Tribunal
held that the Assessing Officer was not justified in placing the onus of
proving a negative that the deposits in foreign bank account were not sourced
from India on the assessee. The onus of proving that an amount falls within the
taxing ambit was on the department and it was incorrect to place the onus of proving
negative on the assessee. No material was brought on record to show that the
funds were diverted by the assessee from India to source the deposits found in
foreign bank account. Therefore, it is viewed that when the Assessing Officer
found that the assessee was a non-resident Indian, was incorrect in making
addition towards deposits found in foreign bank account maintained with HSBC
Bank, Geneva without establishing the fact that the said deposit was sourced
out of income derived in India. Hence, the findings of the CIT(A) were upheld
and the appeal filed by the revenue was dismissed.

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Section 68 – Mere non production of Director of Shareholder Company cannot justify adverse inference u/s. 68 of the Act.

28. (2018) 66 ITR (Trib.) 226
(Delhi) Gopal Forex Pvt. Ltd. vs. ITO ITA No.: 902/Del/2018 A.Y: 2008-09 Dated:
26^th June, 2018

Section 68 – Mere non production of Director of Shareholder Company
cannot justify adverse inference u/s. 68 of the Act.

FACTS

The assessee company filed its return of income. Subsequent to the
processing of return of income, information was received from the investigation
wing of Income tax about a search operation carried out in the case of Jain
Brothers who were involved in providing accommodation entries and bogus share
capital. The name of the assessee company was found in a list as one of the
beneficiaries.

Reassessment proceedings were initiated and additions were made by the
AO only on the basis of purported documents seized from the premises of Jain
Brothers. In the assessee’s case addition was sustained merely because the
director of shareholder company did not present himself physically before the
AO.

Important question raised before CIT(A) was whether adverse inference
u/s. 68 could be drawn by AO once assessee placed all the relevant documents in
its possession before AO to establish its burden u/s. 68, without discharging
secondary burden lying on the AO to point out defect in the assessee’s
submission.

HELD

Before the Hon’ble ITAT, heavy reliance was placed by the Hon’ble bench
on Moti Adhesives P. Ltd. ITA No. 3133/Del/2018 where it was held that
once assessee places all the reliable and trustworthy documentary evidences to
support the veracity of transactions u/s. 68, it is the duty of AO to
dispassionately consider the same with objective standards and to not make
additions solely on the basis of investigation wing’s report prepared at the
time of search. This discharges the assessee’s burden u/s. 68 & shifts the
secondary burden to the AO. To discharge his burden, the AO must bring credible
incriminating material on record to displace the detailed evidence filed by the
assessee. But in the present case, it was observed that AO merely reproduced
the investigation wing’s report in the reasons recorded, the show cause notice
issued & the final order passed. If reassessment & additions are based
upon the sole ground of prima facie opinions which are used to reopen
the case, this would frustrate the entire object of law. Besides, additions
made merely on basis of non-production of directors of Share Holder Company
disregarding all the other detailed evidences on record is unjustified.

The Hon’ble ITAT also relied on the following judgements:

i) Softline Creations
Pvt. Ltd. (387 ITR 636) [Delhi HC]

ii) CIT vs. Orissa
Corporation Pvt. Ltd. (Vol. 159 ITR 78) [SC]

iii) Crystal Networks Pvt.
Ltd. vs. CIT (353 ITR 171) [Calcutta HC]

iv) Crystal Networks Pvt.
Ltd. vs. CIT (353 ITR 171) [Calcutta HC]

v) CIT vs. Dataware Pvt.
Ltd. (ITAT No. 263 of 2011) [Calcutta HC]

vi) Rakam Money Matters Pvt.
Ltd. (ITA no. 778/2015) [Delhi HC]

vii) Orchid Industries Pvt.
Ltd. (397 ITR 136) [Bombay HC]

viii) Aksar Wire Products (P)
Ltd. (ITA no. 1167/Del/2015) [Delhi ITAT]

ix) CIT vs. Stellar
Investment Ltd. (Civil No. 7868 of 1996) [SC]

Thus, relying on the views expressed in a plethora of judgements, the
Hon’ble ITAT held that mere non production of Director of share holder company
ipso facto cannot justify straight adverse inference u/s. 68 dehors detailed
documentary evidences filed.

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Section 153A, Rule 27 – Any issues other than those relating to undisclosed income which come to the AO’s knowledge while conducting enquiries relating to Search shall not be considered by AO for making assessment u/s. 153A if normal assessment for such relevant assessment years had already been completed earlier. Rule 27 gives liberty to the respondent to raise any ground which had been decided against him by the first appellate authority.

27. (2018) 66 ITR (Trib.) 306 (Delhi) ACIT vs.
Meroform India Pvt Ltd. ITA No.:
4494/Del/2014 A.Y: 2011-12 Dated: 31^st
July, 2018

Section 153A,
Rule 27 – Any issues other than those relating to undisclosed income which come
to the AO’s knowledge while conducting enquiries relating to Search shall not
be considered by AO for making assessment u/s. 153A if normal assessment for
such relevant assessment years had already been completed earlier.

Rule 27 gives
liberty to the respondent to raise any ground which had been decided against
him by the first appellate authority.

FACTS

Assessment for six years was reopened u/s.
153A. Against these, the assessee filed appeals for all the six years. Out of
these, the department preferred appeals to the Hon’ble ITAT for three
assessment years. In these three appeals, the CIT(A) had dismissed the legal
contentions of the assessee but gave relief on merits. Therefore, assessee had
not filed any cross appeal or cross objection, but it raised a legal ground by
invoking Rule 27 of ITAT Rules, challenging the validity of additions made in
the impugned assessment orders on the ground that the same were beyond the
scope of section 153A. CIT(DR) objected to the admission of the petition made
under Rule 27 and submitted that the respondent assessee cannot be permitted to
raise a ground or an issue which was decided against it which could only be
done by filing of appeal.

The second
issue raised in the appeal was whether issues already considered in the
assessments completed earlier, which had attained finality, can be re-examined
u/s. 153A by the assessing officer?

HELD

The tribunal
allowed the ground raised under Rule 27 of the Income Tax Appellate Tribunal
rules, 1963 and held
as under:

Rule 27 gives
the liberty to the respondent to support the first appellate order on any of
the ground decided against him. The issue of scope of addition in assessment
completed u/s. 153A had been decided against the assessee and therefore, as a
respondent it can very well raise the defence in the appeal filed by the
revenue. The only limitation which can be inferred is that the respondent
cannot claim any fresh relief which had been denied to him by the first
appellate authority and also which is not part of the grounds so raised by the
revenue. In the given case, it was not a claim of any fresh relief denied to
the assessee and also it was a part of the ground raised by the revenue. The
respondent assessee got the favourable judgment on merits but there was an
adverse finding on the issue of scope of addition u/s. 153A; and therefore, the
assessee can very well raise such an issue under Rule 27.

In the second
issue, the ITAT held that in the case of assessments which have attained
finality and are non-abated assessments, no additions can be made over and
above the original assessed income unless some incriminating material has been
found during the course of search. This proposition had been well discussed in
the judgment of CIT vs. Kabul Chawla (2016) 380 ITR 573 (Delhi HC).
Further, section 153A does not say that additions should be strictly made on
the basis of evidence found in the course of the search. But this does not mean
that the assessment can be arbitrary or without any relevance or nexus with the
seized material. Thus, an assessment has to be made under this Section only on
the basis of seized material as laid down in Pr.CIT vs. Meeta Gutgutia 395
ITR 526 (Delhi HC).

Thus, in the
opinion of the ITAT all the additions made by the AO in the said three
assessment years were beyond the scope of assessment u/s. 153A, because
assessments for these assessments years had attained finality before the date
of search and no incriminating material was found relating to such additions.

shailesh.kwebmaker

Section 140A(3) and 221 – AO was not justified in levying penalty u/s. 140A(3) r.w.s. 221(1) for failure to pay self-assessment tax as per the provisions of section 140A(3) as amended w.e.f. 1st April, 1989 as the amended section 140A(3) does not envisage any penalty for non-payment of self-assessment tax

10. [2018] 195 TTJ 536
(Mumbai – Trib.)

Heddle Knowledge P (Ltd) vs. ITO

ITA No.: 7509/Mum/2011

A. Y.: 2009-10.

Dated: 19^th January, 2018.

Section 140A(3) and 221 – AO was not justified in levying penalty
u/s. 140A(3) r.w.s. 221(1) for failure to pay self-assessment tax as per the
provisions of section 140A(3) as amended w.e.f. 1^st April, 1989 as
the amended section 140A(3) does not envisage any penalty for non-payment of
self-assessment tax

FACTS

The assessee filed its return for the relevant year which was not
accompanied by proof of payment of self-assessment tax. In response to
show-cause notice issued by AO, assessee raised a plea of financial stringency.
The AO did not find the reason advanced by the assessee to be satisfactory to
mitigate the levy of penalty.

He took a view that the assessee had defaulted in payment of self-assessment
tax within the stipulated period and was thus liable to be treated as
‘assessee-in-default’ as per the provisions of section 140A(3) r.w.s. 221(1) of
the Act. Accordingly, penalty order was passed for delayed payment of
self-assessment tax.

Aggrieved by the assessment order,
the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the
penalty order.

HELD

The Tribunal held that in terms of
the provisions of section 140A(3) as existing till 31-3-1989, the Assessing
Officer was empowered to levy penalty in cases where assessee had failed to pay
the self-assessment tax. The section was then amended by inserting Explanation
to it with effect from 1-4-1989. The amended section along with the explanatory
notes to the amendment conjointly made it clear that the earlier provision
prescribing for levy of penalty for default outlined in sub-section (1) of
section 140A(3) had yielded place to mandatory charging of interest for such
default. The aforesaid legislative intent also got strength by the fact that
simultaneously the legislature prescribed for mandatory charging of interest
u/s. 234B of the Act for default in payment of self-assessment tax with effect
from 01-04-1989 onwards.

However, a contrary position was
taken by the revenue to the effect that for having defaulted in payment of
self-assessment tax within the stipulated period, assessee qualified to be an
“assessee-in-default” as prescribed in the amended section 140A(3).
Section 221(1) of the Act prescribed for penalty when assessee was in default
in making the payment of tax. Once section 140A(3) had been amended with effect
from 01-04-1989, there was no amendment of section 221 and it continued to
remain the same. Furthermore, the intention of the legislature at the time of
insertion of the amended section 140A(3) made it clear that the old provisions
of section 140A(3) prescribing for levy of penalty for non-payment of
self-assessment tax was no longer found necessary because the said default
would henceforth invite mandatory charging of interest. Ostensibly, the
legislature did not envisage that consequent to the amendment, the default in
payment of self-assessment tax would hitherto be covered by the scope of
section 221(1).

The consequence of the aforesaid
two expressions contained in section 140A(3) were also not of the type sought
to be understood by the revenue, and rather the assessee was to be treated as
an “assessee-in-default” for the limited purpose of enabling the AO
to make recovery of the amount of tax and interest due and not for levy of
penalty, an aspect which had been specifically done away in the new provision.
Therefore, the Tribunal concluded that the fact that the amended section
140A(3) with effect from 01-04-1989 did not envisage any penalty for
non-payment of self-assessment tax, the AO was not justified in levying the
penalty by making recourse to section 221(1) of the Act. It may again be
emphasised that section 221 remained unchanged, both during the pre and post
amended section 140A(3) of the Act and even in the pre-amended situation,
penalty u/s. 221 of the Act was not attracted for default in payment of
self-assessment tax, which was expressly covered in pre 01-04-1989 prevailing
section 140A(3). In the result, the Tribunal directed the AO to delete the
penalty.

shailesh.kwebmaker

Section 54F – AO having accepted the returned income despite the fact that the assessee neither admitted capital gains on sale of property nor claimed exemption under any of the provisions and the CIT having given direction to the AO in his revisional order to verify the facts and to redo the assessment as per law, the claim for exemption u/s. 54F could not be denied in the fresh assessment

9. [2018] 195 TTJ 630 (Hyd
– Trib.)

Manohar Reddy Basani vs. ITO

ITA No.: 1307/Hyd/2017

A. Y.: 2010-11.

Dated: 30^th May, 2018.

Section 54F – AO having accepted the returned
income despite the fact that the assessee neither admitted capital gains on
sale of property nor claimed exemption under any of the provisions and the CIT
having given direction to the AO in his revisional order to verify the facts
and to redo the assessment as per law, the claim for exemption u/s. 54F could
not be denied in the fresh assessment

FACTS

The assessee filed its return
declaring certain taxable income. In course of scrutiny assessment, the AO
noticed that the assessee made transaction of sale of property. The assessee
had neither admitted capital gains on sale of property nor claimed exemption
under any of the provisions of the Act. In response to show-cause notice, the
assessee furnished the information called for and stated that he was entitled
to exemption u/s. 54F on the capital gains since his share of sale
consideration of the property was utilised for construction of a residential
property. Having considered the stand of the assessee, AO accepted the returned
income.

The Commissioner, however, opined
that in the absence of disclosure of capital gains in the return of income, the
assessee was not entitled to get any deduction u/s. 54F for investment in new
residential house. He thus passed a revisional order setting aside the
assessment.

Consequent to the directions of the
Revisional Authority, the AO passed an order u/s. 143(3) r.w.s. 263 holding
that the assessee neither declared the transaction of sale of property nor made
any claim of deduction u/s. 54F of the Act in the return of income and, in the
absence of any claim the assessee was not entitled to get any deduction u/s.
54F of the Act.

HELD

The Tribunal held that even if it
was assumed that the assesse could not make any new claim at later stage but
the fact remained that the assessee had not even disclosed capital gains and in
the absence of offering the capital gains to tax, the AO should have strictly
confined to the return filed and would not have made any addition and if once
he took the issue of capital gains for the first time, the claim of the
assessee regarding deduction u/s. 54F of the Act should also be considered and
in fact, the AO had fairly considered the same in the original assessment and
completed the assessment without making any addition. Presumably, because of
this the Revisional Authority did not give much stress to this aspect but
limited his direction by stating that the AO should reconsider the matter in
accordance with law. Thus, there was a categorical direction of the
Commissioner, to verify the facts and to redo the assessment as per law, and in
such an event it was a duty of the AO to consider the issue afresh. As the
assessee neither disclosed the capital gains in the return of income nor
claimed any deduction u/s. 54F, the assessee was not entitled to get any
deduction u/s. 54F, in the same way the AO should not have added the capital
gains to the income of the assessee since there was no disclosure of the same
in the return of income.

The first appellate authority ought
to have considered the issue on merits since the decision of the Supreme Court
in the case of Goetze (India) Ltd., would not debar the first appellate
authority to consider the fresh claim, if any, so as to arrive at the correct
taxable income. The High Court, in the case of CIT vs. Indian Express
(Madurai) (P.) Ltd. [1983] 13 Taxman 441/140 ITR 705, observed that unlike
a law suit in civil appeals, in tax litigation, it could not be treated as a
“lis”
between two rival parties but the job of the AO was to arrive at the correct
taxable income.

Therefore, merely on account of
fact that the assessee had not claimed exemption in return of income, the same
could not have been denied. In the result, the Tribunal directed AO to allow
the claim of deduction u/s. 54F of the Act.

shailesh.kwebmaker

Section 23 – Annual value of property of the assessee which property had remained let out for 36 months and thereafter could not be let out and had remained vacant during whole of the year under consideration, but had never remained under self-occupation of the assessee, has to be rightly computed at `nil’ by taking recourse to section 23(1)(c) of the Act

8. [2018] 97 taxmann.com
534 (Mumbai-Trib.)

Sonu Realtors (P.) Ltd. vs. DCIT

ITA No.: 2892/Mum/2016 & 66(MUM) OF 2017

A. Y.: 2011-12 and 2012-13.

Dated: 19^th September, 2018.

Section 23 – Annual value of property of the
assessee which property had remained let out for 36 months and thereafter could
not be let out and had remained vacant during whole of the year under
consideration, but had never remained under self-occupation of the assessee,
has to be rightly computed at `nil’ by taking recourse to section 23(1)(c) of
the Act

FACTS

The assessee, engaged in the
business of construction, filed its return of income for assessment year
2011-12, declaring therein a total income of Rs. Nil. In the course of
assessment proceedings, the Assessing Officer noted that immovable properties
were reflected in the balance sheet of the assessee but the deemed rental
income had not been offered for taxation. He called upon the assessee to show
cause why deemed rent of the properties owned by the assessee should not be
charged to tax under the head `Income from House Property’. The assessee, in
response to the show cause, submitted that the two flats owned by it were let
out to Sterling Construction P. Ltd. for a period of 36 months vide agreement
dated April 2007. Upon expiry of the license period, the licensee vacated the
flats. During the period when the properties were let out on leave and license,
the rental income was offered for taxation under the head `Income from House
Property’. Since during the entire year the property was vacant, the assessee
had considered the annual value to be nil. The assessee contended that its case
is covered by section 23(1)(c) of the Act. The AO, however, held that since the
properties under consideration were not let out at all during the previous
year, the provisions of section 23(1)(c) would not be applicable to its case.

Aggrieved, the assessee preferred
an appeal to the CIT(A) who upheld the order passed by the AO. Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the
assessee had vide agreement dated April, 2007 let out the Unit No. 401 &
425 of project Balaji Bhavan to Sterling Construction Pvt. Ltd. for a period of
36 months, and had offered the rental income received therefrom as its
“Income from house property” in the preceding years, but after the
expiry of the license period of 36 months the licensee had vacated the property
and conveyed its intention of not getting the license agreement renewed any
further. It observed that it is not the case of the department that after the
property was vacated, the same thereafter had remained under the self
occupation of the assessee.

In light of the aforesaid factual
position the Tribunal found itself to be in agreement with the submissions of
the Ld. A.R. that the issue raised before it is squarely covered by the orders
of the coordinate benches of the Tribunal in the case of (i) Vikas Keshav
Garud vs. ITO [(2016) 71 taxmann.com 214 (Mum.); (ii). ACIT vs. Dr. Prabha
Sanghi [(2012) 27 taxmann.com 317 (Delhi)]; (iii). Premsudha Exports (P) Ltd.
vs. ACIT [(2008) 110 ITD 158 (Mum.); and (iv) Informed Technologies India Ltd.
vs. DCIT [(2016) 75 taxmann.com 128 (Mum.)].

The Tribunal, observed that the
co-ordinate Bench in the case of Informed Technologies India Ltd. (supra)
had while analysing the scope and gamut of section 23(1)(c) of the ‘Act’,
concluded that in light of the words ‘Property is let’ used in clause (c) of
section 23(1) of the ‘Act’, unlike the term ‘house is actually let’ as stands
gathered from a conjoint reading of sub-section (2) to (4) of section 23, it
can safely and rather inescapably be gathered that the conscious, purposive and
intentional usage of the aforesaid term ‘Property is let’ in section 23(1)(c)
of the ‘Act’, cannot be substituted by the term ‘house is actually let’ as used
by the legislature in all its wisdom in sub-section (3) of section 23.

The Tribunal held that it can
safely be concluded that the requirement that the ‘house is actually let’
during the year is not to be taken as a prerequisite for bringing the case of
an assessee within the sweep of section 23(1)(c) of the ‘Act’, as long as the
property is let in the earlier period and is found vacant for the whole year
under consideration, subject to the condition that such vacancy of the property
is not for self occupation of the same by the assessee who continues to hold
the same for the purpose of letting out.

Though the
term ‘Property is let’ used in section 23(1)(c) is solely with the intent to
avoid misuse of determination of the ‘annual value’ of self occupied properties
by the assesses by taking recourse to section 23(1)(c), however, the same
cannot be stretched beyond that and the ‘annual value’ of a property which is
let, but thereafter remains vacant for the whole year under consideration,
though subject to the condition that the same is not put under self occupation
of the assessee and is held for the purpose of letting out of the same, would
continue to be determined u/s. 23(1)(c) of the ‘Act’. The Tribunal held that
the assessee had rightly determined the ‘annual value’ of the property at Nil
by taking recourse to section 23(1)(c) of the ‘Act’.

It observed that the CIT(A) had
misconceived the judgment of the Hon’ble High Court of Andhra Pradesh in the
case of Vivek Jain vs. Asstt. CIT [2011] 14 taxmann.com 146/202 Taxman
499/337 ITR 74. It observed that in
the said judgment the Hon’ble High Court in the concluding Para 14 & 15 had
observed that though the benefit of computing the ‘ALV u/s. 23(1)(c) could not
be extended to a case where the property was not let out at all, however the
same would duly encompass and take within its sweep cases where the property
had remained let out for two or more years, but had remained vacant for the
whole of the previous year.

The Tribunal was of the view that now
when in the case of the present case no infirmity emerges from the computation
of the ‘annual value’ of the said property u/s. 23(1)(c) of the ‘Act’ by the
assessee. The Tribunal allowed this ground of appeal filed by the assessee.

shailesh.kwebmaker

Section 271AAA – Penalty proceeding u/s. 271AAA can be initiated only if the person has been subjected to search u/s.132(1) If penalty proceedings u/s. 271AAA are initiated against a person who is not subjected to search action u/s. 132(1) of the Act, the provision itself becomes unworkable as no declaration u/s. 132(4) of the Act is possible from any person other than the person against whom search and seizure action u/s. 132(1) is carried out.

7. [2018] 97 taxmann.com 460 (Mumbai-Trib.)

DCIT
vs. Velji Rupshi Faria

ITA
No.: 1849/Mum/2017

A. Y.:
2008-09
Dated: 31^st August, 2018

Section 271AAA – Penalty proceeding u/s. 271AAA can be initiated
only if the person has been subjected to search u/s.132(1)

If penalty proceedings u/s. 271AAA are initiated against a person
who is not subjected to search action u/s. 132(1) of the Act, the provision
itself becomes unworkable as no declaration u/s. 132(4) of the Act is possible
from any person other than the person against whom search and seizure action
u/s. 132(1) is carried out.

FACTS

The assessee, an individual, was a
key person of certain firms and companies which were subjected to search and
seizure operation. The Assessing Officer (AO) initiated proceedings u/s. 153C
of the Act. In the course of proceedings for assessment u/s. 153C of the Act,
the AO referring to incriminating material found in the course of search and
seizure operation made a number of additions as a result of which total income
was assessed at Rs. 7,40,04,778. He also initiated proceedings for imposition
of penalty u/s. 271AAA of the Act. The AO, rejecting the explanation filed by
the assessee, levied penalty of Rs. 74,00,477 u/s. 271AAA of the Act.

Aggrieved, the assessee preferred
an appeal to the CIT(A) who having found that no search and seizure action was
carried out in the case of the assessee, followed the decision of the Ahmedabad
Bench of the Tribunal in the case of Dy. CIT vs. K. G. Developers, ITA No.
1139/Ahd./2012, dated 13^th September, 2013, and deleted the
penalty imposed.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

At the outset, the Tribunal noted
that the Department is not disputing that the penalty has been levied u/s.
271AAA of the Act. The Tribunal held that the primary condition for initiating
penalty proceeding is, a person concerned must have been subjected to a search
and seizure operation u/s. 132(1) of the Act. Undisputedly, in the facts of the
present case, no search and seizure operation u/s.132(1) of the Act was carried
out in case of the assessee. This fact is clearly evident from the initiation
and completion of proceedings u/s. 153C of the Act.

Thus, the primary condition of section 271AAA of the Act remains
unsatisfied. Even otherwise also, if penalty proceedings u/s. 271AAA of the Act
is initiated against a person who is not subjected to search action u/s. 132(1)
of the Act, the provision itself becomes unworkable as no declaration u/s.
132(4) of the Act is possible from any person other than the person against
whom the search and seizure u/s. 132(1) is carried out.

Thus, in such circumstances, sub-section (2) to section 271AAA of the Act
cannot be given effect to. The Tribunal agreed with the CIT(A) that initiation
of penalty proceedings u/s. 271AAA of the Act in the instant case is invalid.
The Tribunal observed that its decision gets support from the decision relied
upon by the Authorised Representative.

The Tribunal upheld the order
passed by the CIT(A). The appeal filed by the revenue was dismissed.

shailesh.kwebmaker

21. [2018] 194 TTJ (Mumbai) 102 Owais M Husain vs. ITO ITA No.: 4320/Mum/2016 A. Y.: 2006-07 Dated: 11th May, 2018 Section 23(1)(a)- Income from house property –– AO is directed to compute the deemed rent of the house property as per the municipal rateable value and assess the income from house property accordingly instead of estimating the letable value on the basis of the prevailing rate of rent of the building situated in the surrounding areas.

FACTS

The assesse owned 3 flats
i.e. one at Chennai which is treated as self-occupied property by the AO and
other two properties being flat at Queens Court, Worli and Dhun apartment,
Worli, Mumbai.

The AO estimated the reasonable let out value of the house
property after taking IT inspector’s report. The report was on the basis of the
local enquiry conducted in the surrounding area of the building situated and
the going rent per square feet of Rs.50.70 per square feet per month. Based on
inspector’s report, the AO estimated the rent per month for each of the flats
at Rs. 75,000 per month. Therefore, the AO worked out ALV of the flat at Dhun
cooperative society, Worli, Mumbai, at Rs. 9 lakh and for the other flat at
Queens Court, Worli, Mumbai at Rs. 9 lakh.

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
confirmed the action of the AO.

HELD

The Tribunal while
relying upon the judgement of the Hon’ble Bombay High Court, held that the
municipal rateable value could be accepted as a bona fide rental value
of the property and there could not be a blanket rejection of the same.

The market rate in the
locality was an approved method for determining the fair rental value but it
was only when the AO was convinced that the case before him was suspicious,
determination by the parties was doubtful that he could resort to enquire about
the prevailing rate in the locality.

In the result, the
Tribunal directed the AO to compute the deemed rent as per municipal rateable
value and assess the income accordingly.

shailesh.kwebmaker

20. [2018] 194 TTJ (Mumbai) 225 Fancy Wear vs. ITO ITA No.: 1596 & 1597/Mum/2016 A. Ys.: 2010-11 and 2011-12 Dated: 20th September, 2017 Section 69C – Assessee having not been allowed to cross-examine witnesses whose statements were recorded by AO and accounts of assessee having not been rejected, addition made u/s. 69C by AO was invalid for violation of the principles of natural justice as also on merits.

FACTS

The assessee filed its
return of income which was initially processed u/s. 143(1). Subsequently, the
AO received information from the Sales Tax Department as well as from DGIT
(Inv.) Mumbai that the assessee had received accommodation entries for
purchases from suspicious parties.

The AO initiated
proceedings u/s. 147, after recording reasons thereof. He observed that the
assessee had purchased goods from SE and SJE. The sales tax department had
conducted independent enquiries in each of the hawala parties and conclusively
proved that those parties were engaged in the business of providing
accommodation entries only. The AO observed that the notices issued u/s. 133
(6), had been returned with the mark ‘’not known’’ or “not claimed”.
Accordingly, the aggregate of the purchases was treated as unexplained
expenditure u/s. 69C and was added to the returned income of the assessee.

The AO further observed
that apart from the above purchases, the assessee had purchased goods from two
more entities, namely RE and VE. The names of both the entities were appearing
on the website of the Sales Tax Department in the list of the defaulters. Thus,
he made a further addition to the income of the assessee invoking section 69C.

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
reduced the addition to 25 per cent of the purchases.

HELD

The Tribunal noted that
though material for reopening was available to the AO, it was never shared with
the assessee. The assessee had made a request for cross examining the parties
who were treated as hawala-dealers by the Sales Tax Department. The AO did not
provide the copies of statements of suppliers and opportunity of cross
examination to the assessee.

In case of the other two
entities, the Tribunal held that a default under the Sales Tax Act, in itself,
could not be equated with non-genuineness of the transaction entered by an
entity with other party, unless and until some positive corroborative evidence
was brought on record. It was a fact that all the payments to the suppliers
were made through banking channels. No evidences were brought on record proving
that the suppliers had withdrawn cash immediately after deposit of cheques of the
assessee.

The assessee had
discharged the onus of proving the genuineness of the transactions by producing
copies of purchase bills, delivery challans, bank statements showing payments
made by the parties, confirmation of ledger accounts of the suppliers, sales
tax returns and sales tax challans of the suppliers, income tax returns. After
the submissions made by the assessee along with the above documents, the ball
was in the court of the AO to discharge his onus-especially when he wanted to
invoke the provisions of section 69C.

The AO had completed the assessment without marshaling the facts
properly and only on the basis of general information provided by the Sales Tax
Department. The non-filing of appeals against the orders of the CIT(A), wherein
he had deleted 75 per cent of the additions made by the AO, indicated that the
department itself was not convinced about the approach adopted by the AO in
making additions.

In the end, the Tribunal
held that the orders of the AO and CIT(A) were not valid because of violation
of principles of natural justice. Besides, the addition made u/s. 69C was also
not maintainable.

shailesh.kwebmaker

19. [2018] 193 TTJ (Jd) 751 ITO vs. Estate of Maharaja Karni Singh of Bikaner ITA NO.: 241/Jodh/2017 A. Y.: 2011-12 : 20th February, 2018 Section 50C- Capital gains – Assessee having contested the enhanced valuation of the property made by the stamp valuation authority and the AO having denied the request of the assesse to refer the matter to the DVO u/s. 50C(2), CIT(A) was justified in deleting the addition on account of capital gain on the sale of land.

FACTS

The assesse had sold two
pieces of land for Rs.45,00,000 and Rs.30,00,000 respectively, the DLC value of
which was Rs.1,12,04,236 and Rs.1,20,00,566 aggregating to Rs.2,32,04,802.
After deduction of cost of acquisition of Rs.95,07,478 the resultant taxable
long term capital gain was Rs.1,36,97,324.

The AO stated that the
reference to DVO could not be made in view of the provisions of section 50C(2)
of the Income-tax Act, 1961, as the litigation for the charging of stamp duty
was pending before KAR board, Ajmer.

Therefore, the AO
computed the Income of the assessee invoking of the provisions of section 50C,
as the assessment was getting barred by limitation on 31^st March,
2014.

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A).

The CIT(A) deleted the
additions, holding that, before adoption of valuation of property sold by the
valuation authority, the AO should have considered the objection raised by the
assessee and should have referred the matter to the DVO u/s. 50C (2).

HELD

The Tribunal held that as
per section 50C, the value taken for stamp duty by the State registration
authority would be considered as deemed sale consideration. There was solace
for assessee u/s. 50C(2), which provided that if the assessee objected to the
valuation of the property for stamp duty purposes, the AO might refer the
valuation to the DVO.

Thus, section 50C
provided two remedies at the option of the assessee, in that, he could either
file appeal against the stamp value or seek reference to the valuation cell.
Adoption of the value by the valuation cell was again subject to regular
appeals available against the order of the AO.

The Tribunal further
stated that it was well settled that the principles of natural justice would be
presumed to be necessary, unless there existed a statutory interdict, and also
when substantial justice and technical consideration were pitted against each
other, the cause of substantial justice deserved to be preferred.

Therefore, denial of
request or objections of the assessee against the value adopted by the stamp
valuation authority by the AO was against the spirit of section 50C. It was not
optional for the AO to make reference to DVO, the right of the assessee u/s.
50C was a statutory right.

In the result, the
Tribunal held that there was no infirmity in the order of CIT(A) that the AO
should have considered the objections raised by the assessee against the same
and should have referred the matter to the DVO u/s. 50C(2).

shailesh.kwebmaker

18. [2018] 193 TTJ (Jp) 898 ACIT vs. Safe Decore (P.) Ltd ITA No.: 716/Jp/2017 A. Y.: 2014-15 Dated: 12th January, 2018 Section 56(2)(viib) read with Rule 11UA – Fair market value of shares determined by assessee as per discounted cash flow method being higher than the fair market value under net asset method, CIT(A) was justified in deleting addition made by AO u/s. 56(2)(viib)

FACTS

During the year under
consideration the assessee company allotted shares to ‘J’ Ltd. The assesse
submitted valuation per equity share computed on the discounted cash flow
method as per the certificate of Chartered Accountants wherein the value per
shares was arrived at Rs.54.98 per share.

The AO did not accept
said valuation and applied Net Asset Value method as per which value of share
came to Rs.26.69 per share. Applying the said value, the AO made addition u/s.
56(2)(viib).

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A). In appellate
proceedings, the assessee contended that as per Rule 11UA of the Income-tax
Rules,1962, the Fair Market Value of unquoted equity shares would be the value
on the allotment date of such unquoted equity shares as determined as per
method provided or Net Asset Value, whichever was higher.

The CIT(A) accepted the
contention of the assessee and deleted the addition made by the AO.

HELD

The Tribunal held that
there was no dispute that the assessee had issued shares to ‘J’ Ltd., during
the year under consideration. Further, the fair market value as per the
provision of section 56(2)(viib) had to be determined in accordance with the
method prescribed under Rule 11UA of Income-tax Rules,1962 and as per Rule
11UA(2), discounted cash flow method was one of the prescribed methods. Therefore,
it was the option of the assessee to adopt any of the prescribed methods under
Rule 11UA(2).

Section 56(2)(viib) read
with the Explanation had specifically provided that the fair market value of
the unquoted shares should be determined as per the prescribed methods, and
should be taken whichever is higher fair market value, by comparing the value
based on the assets of the company.

Therefore, value as per the Net
Asset Value method as well as any of the other methods prescribed under Rule
11UA of Income-tax Rules,1962, whichever was higher, should be adopted as per
the option of the assessee.

In the case of the
assessee, the fair market value determined as per the discounted cash flow
method at Rs.54.98 per share which was higher than the valuation adopted by the
AO as per the Net Asset Value at Rs.26.69 per share.

Therefore, the Tribunal
held that as the AO had not found any serious defect in the facts and details
used in determining the fair market value under discounted cash flow method, there
was no error or illegality in the order of the CIT(A).

shailesh.kwebmaker

14 Section 56(2)(vii)(b) – The provisions of section 56(2)(vii)(b) are applicable to only those transactions which are entered into on or after 1.10.2009.

[2018] 94 taxmann.com 39 (Nagpur-Trib.)

Shailendra Kamalkishore Jaiswal vs. ACIT

ITA No.: 18/Nag/2015

A.Y.: 2010-11.

Dated: 11^thMay, 2018.

FACTS

For assessment year
2010-11, the assessee, engaged in business of trading in country liquor, filed
his return of income on 31.3.2011 declaring therein a total income of Rs.
32,70,730. The assessee is also a
director of M/s Infratech Real Estate Pvt. Ltd.
The Assessing Officer (AO) obtained information that the assessee has
purchased an immovable property for a consideration of Rs.48,57,000.

The AO asked the
assessee to furnish details in respect of this transaction and also made
inquiry with the office of the Sub-Registrar.
From the submissions and the inquiry, the AO observed that on 6^th
June, 2009, the assessee has purchased a plot of land from Infratech Real
Estate Pvt. Ltd. for a consideration of Rs. 48,57,000. The registered sale deed
stated that the consideration was paid vide cheque no. 573883 drawn on Canara
Bank, Badkas Chowk, Nagpur. However, the transaction was not recorded either in
the books of the assessee nor in the books of Infratech Real Estate Pvt. Ltd.

In the course of
assessment proceedings, the assessee submitted that Infratech Real Estate Pvt.
Ltd. needed finance and on approaching the finance company, Infratech Real
Estate Pvt. Ltd. was informed that the finance company would not be able to
sanction more than Rs. 1 crore in single name and therefore, Infratech Real
Estate Pvt. Ltd. had transferred the plot of land in the name of the assessee
for Rs. 48,57,000. Loan obtained by the
assessee from the finance company was transferred to Infratech Real Estate Pvt.
Ltd. The cheque issued to them was not
encashed by them. It was contended that
the property is not received without consideration. Not satisfied with the
explanations furnished by the assessee, the AO made an addition of Rs.
48,57,000 by invoking the provisions of section 56(2)(vii)(b) of the Act.

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

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

At the outset, the
Tribunal noted that the addition in this case has been made u/s. 56(2)(vii)(b)
of the Act. It held that the provisions of section 56(2)(vii)(b) of the Act bring
into the ambit of income from other sources, stamp duty value of an immovable
property, to the transferee, which is received without consideration. This was
brought into statute book by Finance Act, 2010, w.e.f. 1^st October
2009. Hence, prior to this date such transactions were not coming under income
u/s. 2(24) of the Act.

It observed that,
it is evident that the above said provisions of the Act are applicable to
transactions which are entered into after 1^st October 2009. It also
noted that Circular no.5/2010 issued by the CBDT clearly mentions that “these
amendments have been made applicable w.e.f. 1^stOctober 2009 and
will accordingly apply for transaction undertaken on/or after such date“.
The Tribunal held that from the above provisions of law and CBDT circular, it
is clear that transfer of immovable property without consideration will be
taxable in the hands of transferee if the transaction took place after 1^st
October 2009. There was no provision of law to tax such transaction prior to 1^stOctober 2009.

The impugned
transaction was entered into on 6^th June 2009, as per registered
sale deed. Hence, there is no dispute that the impugned transaction is not hit
by the provisions of section 52(6)(vii)(b) of the Act. It is settled law that
CBDT circulars are binding upon Revenue authorities. It observed that no
contrary decision has been brought to its notice that the said amendment is
applicable retrospectively.

The Tribunal did
not adjudicate the other limbs of argument canvassed by the assessee since it
held that the assessee succeeds on this argument itself. The Tribunal set aside
the order of the CIT(A) and decided the issue in favour of the assessee.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

13 Section 14A – Assessee having furnished details showing that its own funds were sufficient to cover the investments in shares and securities, no disallowance u/s. 14A was called for, more so when no objective satisfaction was recorded by AO before invoking the provisions of section 14A

[2018] 192 TTJ (Mumbai) 377
Bennett Coleman & Co. Ltd. vs. ACIT
ITA NO. : 3298/MUM/2012
A. Y. : 2008-09

Dated : 8th January, 2018

FACTS

– During the A.Y. 2008-09,
assessee earned an exempt dividend income of Rs.15.68 crore from investments in
shares and securities. The company had also made long term capital gain of
Rs.51.22 crore on sale of equity shares and equity oriented mutual funds. The
dividend income and long term capital gains had been claimed as exempt from
income tax u/s. 10(34) and 10(38) of the Act respectively.

– The AO held that assessee
had incurred interest expenditure and had not given exact details of the
sources of the investments in shares and mutual funds. The AO concluded that it
could not be ruled out that part of the interest incurred had a proximate
connection with the investments in tax free securities. Therefore, the AO made
the disallowance u/s. 14A.

– This disallowance was
contested in an appeal before CIT(A) who upheld the disallowance.

– Before the Tribunal, it was
contended that the assessee did not have any borrowings till 31-03-2006 as per
the audited balance sheet. The assessee had surplus own fund which could be
verified from the balance sheet. The comparative chart of assessee’s own funds
vis-à-vis investments right from 31-3-2006 to 31-3-2008 showed that the
assessee had sufficient interest free own funds to make investments in tax free
income yielding securities.

HELD

– The Tribunal noted that the
assessee had produced the chart showing the summary of source and application
of funds before the Assessing Officer. The assessee had replied to show cause
notice issued by the Assessing Officer and furnished details that its own funds
over the years were sufficient to cover the investments in the shares and
securities yielding exempt income.

– The borrowings of the
assessee-company were utilised for other business requirements and not for
making investments. The entire interest expenditure incurred on borrowing fund
had been offered to tax.

– No objective satisfaction
had been recorded by the Assessing Officer before invoking the provisions of
section 14A. It was necessary for the Assessing Officer to give opportunity to
the assessee to show cause as to why Rule 8D should not be invoked. Assessee
had placed on record all the relevant facts and it had also given the detailed
working of the disallowance voluntarily made for earning the exempt income in
the return of income.

– The assessee had claimed
that it had sufficient funds to cover investments in tax free securities, which
fact was established by the financial audited report for various assessment
years. The AO had also recorded that assessee’s own funds were far more than
the investments in shares and securities yielding tax free income.

– The Tribunal directed AO to
delete the disallowance made u/s. 14A.

shailesh.kwebmaker

12 Section 45 read with section 28(i) – Where assessee sold a property devolved on him after death of his father as a consequence of automatic dissolution of partnership firm in which his father was a partner, since there was nothing to suggest that assessee had undertaken any business activity, profit arising from sale of same was not taxable as business income.

[2018] 169 ITD 693 (Mumbai – Trib.)

Balkrishna P. Wadhwan vs. DCIT

ITA NO. : 5414 (MUM.) OF 2015

A.Y. : 2010-2011

Dated: 28^th February, 2018

FACTS

– During relevant year,
assessee had shown income under the head long-term capital gain on sale of an
immovable property. The property sold had devolved upon the assessee after the
death of his father as a consequence of automatic dissolution of the
partnership firm, in which his father was a partner.

– The AO took a view that
since the assessee could not furnish the purchase and sale agreements of the
property in question, he was unable to verify the long term capital gain
declared by the assessee. For this reason, the AO considered the consideration
as ‘income from other sources’ and not as a long term capital gain.

– Before the CIT(A), assessee
furnished the copies of the purchase and sale agreements of the property. On
that basis, the CIT (A) concluded that the consideration was received by the
assessee on sale of an immovable property, but according to him, the same was
not a ‘capital asset’. Therefore, he disagreed with the assessee that the
profit on sale of such property was assessable under the head ‘capital gain’.
Instead, CIT (A) concluded that the profit on sale of property was assessable
as ‘business income’.

– The other three plots were
sold by the assessee in A.Y. 2008-09 and the gain arising therefrom was
declared as capital gain, and the same had also been accepted by the AO.

HELD

– The material on record
showed that during the year under consideration, the assessee had sold a plot
of land admeasuring 966.40 sq. mtrs. for a consideration of Rs. 3.75 crore. The
material led by the assessee also revealed that the plot of land sold during
the year was a part of the four plots, which admeasured in total 4648.70 sq.
mtrs.

– The Tribunal noted that the
share of assessee’s father devolved on his wife, two sons and four daughters,
and it was only by way of deed of release, that the assessee obtained complete
ownership of the plot of land from the other co-inheritors.

– It was found that neither
the assessee had declared income from any business and nor any income under the
head ‘business’ had been determined by the AO. The assessee was engaged in the
business of dealing in lands, and the sources of income detailed in the return
of income were on account of salaries, capital gain and income from other
sources.

– The basis for the CIT(A) to
treat the impugned plot of land as ‘stock-in-trade’ is the fact that the
property devolved on the assessee from the erstwhile partnership firm, where
assessee’s father was a partner. The property was acquired by the partnership
firm in 1972 and assessee’s father died in February, 1987. As per the CIT(A),
the final accounts of the erstwhile partnership firm were not available for
examination, therefore, the manner in which the impugned plot of land was
accounted for i.e. whether as capital asset or not, could not be verified.

– The CIT(A) proceeded to
presume that the land was held by the erstwhile partnership firm as a ‘business
asset for the purpose of its business’. Apparently, it is nobody’s case that
upon dissolution of the erstwhile partnership firm, its business devolved on to
the assesse.

The fact is that
only the land devolved on the assessee. So far as the assessee was concerned,
there was nothing to establish that the same had been held by him for the
purpose of his business so as to be construed as stock-in-trade. In A.Y.
2008-09, the land devolved on the assessee from his father had already been
accepted as a ‘capital asset’. Therefore, there was no justification to treat
the plot of land in question as ‘stock-in-trade’ and the assessee was justified
in treating the gain on sale of the plot to be assessable under the head
‘capital gain’.

shailesh.kwebmaker

11 Section 32 read with section 43(3) – Depreciation – Assessee being in the business of manufacture and sale of soft drinks and required to supply the product to far off places in chilled condition. Visicoolers purchased by it and installed at the site of distributors to keep the product in cold saleable condition was entitled for additional depreciation.

[2017] 192 TTJ (Kol) 361

DCIT vs. Bengal Beverages (P) Ltd.

ITA NO : 1218/Kol/2015

A.Y. : 2010-11

Dated: 6^th October, 2017

FACTS

– The assessee company was
engaged in the business of manufacture of soft drinks, generation of
electricity through wind mill and manufacture of PET bottles for packing of
beverages. The assessee had installed visicoolers at distributors premises so
as to deliver product to ultimate consumer in its consumable form, i.e.,
chilled form. The assessee claimed additional depreciation on Visicooler.

– The AO disallowed the claim
of additional depreciation on the ground that these Visicoolers were kept at
distributors premises and not at the factory premises of the assessee company.
The assessee submitted before the AO that Visicoolers were required to be
installed at the delivery point to deliver the product to the ultimate consumer
in chilled form, therefore these were part of assessee’s plant. However, the AO
rejected the assessee’s contention and held that assessee was not carrying out
manufacturing activity on the product of the retailer at retailer’s premises
and merely chilling of aerated water could not be termed as manufacturing
activity and even that chilling job was the activity of the retailer and not of
the assessee.

– Aggrieved by the AO’s order
the assessee preferred an appeal before CIT(A). The CIT(A) deleted the addition
made by AO. The assessee’s contention that usage of visicooler at the
distributor’s premises so as to ensure that the drink is served ‘cold’ to the
ultimate consumer tantamounts to usage in the course and for the purposes of
business, was upheld by CIT(A).

HELD

– The Tribunal held that the
benefit of additional depreciation is available to an assessee engaged in the
business of manufacture of article or thing. It is therefore clear that the
additional deprecation is available only to those assessees who manufacturer,
on the cost of plant & machinery. Additional depreciation allowance is not
restricted to plant & machinery used for manufacture or which has first
degree nexus with manufacture of article or thing. The condition laid down in
section 32(1)(iia) is that if the assessee is engaged in manufacture of article
or thing then it is entitled to additional depreciation on the amount of
additions to plant & machinery provided the items of addition do not fall
under any of the exceptions provided in clauses (A) to (D) of the proviso. ln
this case, the assessee was engaged in the business of manufacture of cold
drinks. This fact had not been disputed by the AO. Therefore, the assessee was
legally entitled to avail the benefit of additional depreciation u/s. 32(1)(iia).

– The “visicooler”
is a “plant & machinery”. The said item falls within the category
of “plant & machinery” as laid down in the I.T. Rules, 1962. The
“visicooler” also does not fall within the exceptions provided in
clauses (A) to (D) of the proviso to section 32(1)(iia).

– In the result, the appeal
filed by the Revenue was dismissed.

shailesh.kwebmaker

10 Section 45 – Capital gains – Settlement of accounts of partners on their retirement, and payment of cash by firm to retiring partners after revaluation of firm’s assets did not attract section 45(4) – there could be no charge of capital gains on assessee firm in such a case.

[2018] 193 TTJ (Mumbai) 8

Mahul Construction Corporation vs. ITO

ITA NO. : 2784/MUM/2017

A. Y. : 2009-10

Dated: 24^th November, 2017

FACTS

– The assessee firm was
engaged in the business of construction and was a builder and developer. This
firm vide an agreement acquired development rights over a piece of land for a
total consideration of Rs.4.67 crore. Subsequently, this partnership deed was
modified and new partners were inducted.

– Subsequently, vide deed of
retirement & reconstitution, three partners retired from the partnership
firm and took the amount credited to their accounts, including surplus on
account of revaluation of asset.

– The AO held that the
assessee firm had not carried out any development work till 1.4.2008.
Therefore, land was a capital asset and not stock-in-trade, and payment of
cash/bank balance by the firm for settlement of retiring partner’s revalued
capital balances amounted to distribution of capital asset as contemplated in
section 45(4).

– Aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the
action of the AO on both the issues by holding that the land was a capital
asset and not stock-in-trade, and
also that the amount distributed was taxable u/s. 45(4).

HELD

– The Retiring partners
merely retired from the partnership firm without any distribution of assets of
the firm amongst the original and new incoming partners. Since, the
reconstituted firm consisted of 3 old partners and 1 new partner, it was not a
case where firm with erstwhile partners was taken over by new partners only. It
was not a case of distributing capital assets amongst the partners at the time
of retirement and therefore provisions of section 45(4) were not applicable.

– It could not be inferred
that by crediting the surplus on revaluation to Capital account of 4 Continuing
Partners and allowing the 3 Retiring Partners to take equivalent cash
subsequently, amounted to distribution of rights by the Continuing Partners to the
Retiring Partners. Till the accounts are settled and the residue/surplus is not
distributed amongst the partners, no partner can claim any share in such assets
of the partnership firm. The entitlement of right in the assets/ property of
the partnership firm arises only on dissolution. While the firm is subsisting,
there cannot be any transfer of rights in the assets of the firm by any or all
partners amongst themselves because during subsistence of partnership, the firm
and partners do not exist separately. Therefore, it was not a case of
distributing capital assets amongst the partners at the time of retirement and,
therefore, provisions of section 45(4) were not applicable.

– The AO wanted to tax the
amount credited in capital account of retiring as well as continuing partners u/s. 45(4). So far as amount credited to capital account of retiring partners
is concerned, notwithstanding the fact that there is no distribution by firm to
retiring partners, the transferor and transferee are like two sides of the same
coin. The capital gain is chargeable only on the transferor, and not on the
transferee.

– In this case, the
transferor is the partners who on their retirement assign their rights in the
assets of the firm, and in lieu the firm pays the retiring partners the money
lying in their capital account. Hence, it is the firm and its continuing
partners who have acquired the rights of the retiring partners in the assets of
the firm by paying them lump sum amount on their retirement. So it cannot be
said that the firm is transferring any right in capital asset to the retiring
partner, rather it is the retiring partner who is transferring the rights in
capital assets in favour of continuing partners.

– Accordingly, the assessee
firm was not liable to capital gains on the above transaction.

shailesh.kwebmaker

Sections 50, 54F – Deemed short term capital gains, calculated u/s. 50, arising on transfer of a depreciable asset, which asset was held for more than 36 months before the date of transfer qualify for exemption u/s. 54F, subject to satisfaction of other conditions mentioned in section 54F. Assessee having utilised the net consideration by the due date as specified u/s. 139(4), is entitled to exemption u/s. 54F though he failed to deposit the net consideration in the capital gain account scheme within the time specified u/s. 139(1).

18. [2018] 99 taxmann.com 88 (Ahmedabad-Trib.) Shrawankumar G. Jain vs. ITO ITA No. 695/Ahd./2016 A.Y.: 2011-12.Dated: 3^rd October, 2018.

Sections 50, 54F – Deemed short term
capital gains, calculated u/s. 50, arising on transfer of a depreciable asset,
which asset was held for more than 36 months before the date of transfer
qualify for exemption u/s. 54F, subject to satisfaction of other conditions
mentioned in section 54F.

Assessee having utilised the net
consideration by the due date as specified u/s. 139(4), is entitled to
exemption u/s. 54F though he failed to
deposit the net consideration in the capital gain account scheme within the
time specified u/s. 139(1).

FACTS

The assessee, an individual, carrying on his
proprietorship business under the name and style of MM sold his factory shed on
which depreciation had been claimed. Accordingly, the income earned thereon was
shown as short-term capital gain u/s. 50. However, in the return of income the
assessee had claimed exemption u/s. 54F against the short-term capital gain on
the ground that same was invested in purchase of residential property.

The Assessing Officer (AO) held that the
exemption is available u/s. 54F, only on transfer of a long-term capital asset.
The impugned factory shed was subject to depreciation u/s. 32 therefore, the
gain earned on the sale of such factory shed was liable to be taxed u/s. 50
being short-term capital gain. Once, the gain was held as short-term by virtue
of the provision of section 50, same could not be subjected to exemption under
section 54F. The Assessing Officer also
observed that the object for enacting the provision of section 50 was to avoid
the multiple benefits claimed by the assessee. He held that the assessee was
not eligible for exemption u/s. 54F.
Besides above, he also observed that the assessee had violated the
provision of section 54F(4) as he failed to deposit the amount of net sale
consideration in the capital gain account scheme. Therefore, the assessee could
not be allowed exemption u/s. 54F.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that It is undisputed
fact that the period of holding of factory shed, on which depreciation was
claimed and which has been sold, was exceeding 36 months. Thus, the gain
arising on sale was held as short term by virtue of the provision of section
50.

The Tribunal on a combined reading of the
sections 50 and 54F noted that all the provisions of the two sections are
mutually exclusive to each other. There is no mention under section 50
referring to the provision of section 54F and vice versa. Therefore, the Tribunal
held that the provision of one section does not exclude the provision of other
section. It held that both the provisions should be applied independently in
the instant case. The Tribunal held that the capital gain earned by the
assessee on the sale of depreciable assets being factory shed is eligible for
exemption u/s. 54F as it is long-term capital assets as per the provision of
section 2(42A). The Tribunal observed
that it has no hesitation in deleting the addition made by the AO by
disallowing the exemption available to the assessee.

The Tribunal also held that there is no
dispute the net consideration was utilised by the assessee before filing the
income tax return within the due date as specified u/s. 139(4). Therefore, the
assessee is eligible for exemption u/s. 54F, though he failed to deposit the
net consideration in the capital gain account scheme within the time specified
u/s. 139(1). The appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 22, 24 – Income earned by assessee, society, by letting out space on terrace for installation of mobile tower / antenna is taxable as “Income from House Property” and consequently, deduction u/s. 24(a) is allowable in respect of such income.

17. [2018] 98 taxmann.com 365 (Mumbai-Trib.) Kohinoor Industrial Premises Co-op Society
Ltd. vs. ITO ITA No. 670/Mum/2018 A.Y.: 2013-14.
Dated: 5^th October, 2018.

Sections 22,
24 – Income earned by assessee, society, by letting out space on terrace for
installation of mobile tower / antenna is taxable as “Income from House
Property” and consequently, deduction u/s. 24(a) is allowable in respect of
such income.

FACTS

The assessee, a co-operative society,
derived income by letting out space on terrace for installation of mobile
tower/antenna. This income was declared
in the return of income, filed by the society, under the head `Income from
House Property’ and deduction u/s. 24(a) was claimed.

The Assessing Officer (AO) observed that the
terrace cannot be regarded as house property as it was a common amenity for
members. He also observed that since the
conveyance was not executed, the society is not the owner of the premises. The AO taxed the income under the head
“Income from Other Sources”.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the issue before
it is, what is the nature of income received by the assessee for letting out
such space to the cellular operator/mobile company for installing and operating
mobile towers/antenna? It held that the terrace of the building cannot be
considered as distinct and separate but certainly is a part of the
house property.

Therefore, letting-out space on the terrace
of the house property for installation and operation of mobile tower/antenna
certainly amounts to letting-out a part of the house property itself. It held
that the observation of the AO that the terrace cannot be considered as house
property is unacceptable.

As regards the
observation of the Commissioner (Appeals) that the rental income received by
the assessee is in the nature of compensation for providing services and
facility to cellular operators, the Tribunal observed that the revenue has
failed to bring on record any material to demonstrate that in addition to
letting-out space on the terrace for installation and operation of antenna the
assessee has provided any other service or facilities to the cellular operators.

The Tribunal
directed the AO to treat the rental income received by the assessee from
cellular operator as income from house property and allow deduction u/s. 24(a).

Appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 145(3) – Books of Accounts cannot be rejected u/s. 145(3) merely because Gross profit from a particular segment was lower and assessee was not in possession of proper documentary evidences in respect of expenses where the genuineness of expenses was not doubted.

16.
(2018) 65 ITR (Trib.) 532 (Jaipur)

Dreamax
Infrastructure Developers vs. ITO ITA No. :
364/JP/2017 A.Y.:
2012-13Dated: 25^th May, 2018

Section 145(3) – Books of Accounts cannot
be rejected u/s. 145(3) merely because Gross profit from a particular segment
was lower and assessee was not in possession of proper documentary evidences in
respect of expenses where the genuineness of expenses was not doubted.

FACTS

The appellant, a partnership firm, engaged
in the business of Infrastructure and industrial project of Construction of
Road, Industrial Township, Security Barracks etc., was awarded two different
projects. One of road work and industrial township (Chittorgarh project) and
another of a highway road project (Pune Project). Appellant had maintained
single set of books for whole of its business covering both the projects. No
work was carried in respect of Pune project and no revenue was generated,
whereas, there was contractual revenue from the Chittorgarh project. Appellant was asked to submit separate
trading account for each project by the Assessing Officer (AO). Appellant had
not maintained separate books for each project, however books were audited and
the same were produced along with other required details. AO further pointed
out that assessee had not supported the expenditure with proper vouchers. AO
also noted that appellant had shown very less Gross Profit (GP) for the
relevant Assessment year from the work executed. Accordingly, the AO doubted
the correctness of the books of accounts of the assessee and rejected the same
by invoking the provisions of section 145(3) of the Income Tax Act and adopted
8% Net Profit rate on Contract receipts. The rejection of Books was challenged
before the Hon’ble ITAT.

HELD

When AO does
not dispute the fact that appellant maintains Books, which are also audited,
then he is not justified in segregating the activities in different category
and then observing that appellant had reported low GP in some category ,
whereas overall 7.44% GP rate was declared which was not objected by the
revenue. Further, AO had only pointed out that expenses were not supported with
proper evidences and he had not doubted the genuineness of expenditure. When
appellant had produced relevant documentary evidences, insignificant defects in
supporting evidence cannot be a reason for rejection of books of account. It
was further held that if the expenditure claimed by the appellant was not found
to be bogus/ excessive then the low profit cannot be reason for rejection of
Books. As the work was carried under a composite work contract and appellant
was working as one enterprise there was no need for production of separate
books for each activity. Further, Hon’ble ITAT followed the decision of the
Hon’ble jurisdictional High Court in case of Malani Ramjivan Jagannath vs.
ACIT 316 ITR 120, wherein it was held that mere deviation of GP rate cannot
be a ground for rejecting books of accounts and income cannot be determined on
the basis of estimate and guesswork. Accordingly it was held that appellant’s
case did not warrant rejection of Books of Accounts u/s. 145(3).

shailesh.kwebmaker

Section 10(1) – Cultivation of Mushroom, although in controlled condition using trays placed above land, is an agricultural activity and income derived there from is exempt u/s. 10(1).

15.
(2018) 65 ITR (Trib.) 625 (Hyderabad – SB)

DCIT vs.
Inventaa Industries (P.) Ltd. ITA No.:
1015 to 1018(Hyd.) of 2015 C.O. No.:
53 to 56 (Hyd.) of 2015 A.Ys.:
2008-09 to 2012-13 Dated: 9^th July, 2018

Section 10(1) – Cultivation of Mushroom,
although in controlled condition using trays placed above land, is an
agricultural activity and income derived there from is exempt u/s. 10(1).

FACTS

The assessee company was engaged in growing
Edible White Button Mushrooms and the income from the said activity was treated
as Agricultural Income claiming exemption u/s. 10(1). Assessing Officer (AO) contended that as
Mushrooms were grown in ‘growing rooms’ under ‘controlled conditions’ in racks
placed above land and using compost manure which is not land and hence the said
activity was not an agricultural activity. CIT(A) ruled in assessee’s favor by
concluding that production of mushroom was a process of agricultural production
and income derived from such a process was agricultural income eligible for
exemption u/s. 10(1). The question before the Special Bench of the Hon’ble ITAT
(Hyderabad Bench) was, whether income from production and sale of Mushrooms can
be termed as ‘agricultural income’ under the Income Tax Act, 1961?

HELD

The Special Bench of the Hon’ble ITAT
supported the view of assessee that ‘soil’ is a part of the land, which is part
of earth. Mushrooms are grown on ‘soil’. Certain basic operations are performed
on it, which require ‘expenditure of human skill and labour’ resulting in
raising the mushrooms. When soil is placed on trays, it does not cease to be
land and when operations are carried

out on soil, it would be agricultural activity carried upon land itself.

In order to
claim exemption u/s. 10(1), use of land and performing activity on it, so as to
raise a natural product, is sufficient. If the strict interpretation is adopted
for the word ‘Land’ appearing in definition of “agricultural Income” u/s. 2(1A)
of the Act, then, when ‘soil’ attached to earth is cultivated, it would be
agricultural activity and when ‘soil’ is cultivated after detaching the same
from earth, it would not be agricultural activity. Such an interpretation is
unintended and unfair. It was concluded that ‘soil’, even when separated from
land and placed in trays, pots, containers, terraces, compound walls etc.,
continues to be a specie of land.

Further, on the question whether mushroom is
‘plant’ or a ‘fungus’ it was observed that one cannot restrict the word
‘product’ to ‘plants’, ‘fruits’, ‘vegetables’ or such botanical life only. The
only condition was that the “product” in question should be raised on
the land by performing some basic operations. Mushrooms produced by the
assessee are a product.

This product is raised on land/soil, by
performing certain basic operations. The product draws nourishment from the
soil and is naturally grown, by such operation on soil which require expenditure
of ‘human skill and labour’. The product so raised has utility for consumption,
trade and commerce and hence would qualify as an ‘agricultural product’ the
sale of which gives rise to agricultural income which is exempt u/s. 10(1) of
the Act.

Just because mushrooms are grown in
controlled conditions it does not negate the claim of the assessee that the
income arising from the sale of such mushrooms is agricultural income.
Accordingly, exemption u/s. 10(1)was allowed to the assessee.

shailesh.kwebmaker

Section 68 – No addition u/s. 68 can be made when assessee is not liable to maintain books of accounts, further bank passbook cannot be regarded as books maintained by assessee.

14. (2018) 65 ITR (Trib.) 500 (Delhi)

Babbal
Bhatia vs. ITO ITA Nos.
5430 & 5432/DEL/2011 A.Ys.: 2010-11 to 2012-13 Dated: 8^th June, 2018

Section 68 – No addition u/s. 68 can be made when assessee is not liable to
maintain books of accounts, further bank passbook cannot be regarded as books
maintained by assessee.

FACTS

Assessment was reopened u/s. 147 based on
information that Assessee had earned Rental income and had made huge cash
deposit in her bank account. In response to notice u/s. 148, she filed her
Return of Income (ROI) wherein she clearly stated that she did not maintain
books of accounts. Further, assessee had declared her income under the
presumptive taxation provisions of section44AF, however as per the contentions
of revenue, the turnover and profit shown by assessee did not entitle assessee
to be governed by section 44AF. During the assessment proceeding, she submitted
Cash Flow Statement and stated that cash deposited was received from cash sales
and withdrawals from other banks. However, the Assessing Officer (AO) rejected
the explanation and made addition of cash deposit u/s. 68.

CIT(A) upheld the order of AO and assessee
filed appeal before the Hon’ble ITAT.

HELD

The Tribunal allowed the assessee’s appeal
and held as under:

1. If returned income did not match the
presumptive tax rates u/s. 44AF revenue authorities should have treated the ROI
as invalid. Further in such circumstances, AO cannot proceed by making addition
u/s. 68 in respect of cash deposited in Bank account knowing fully that
assessee was not maintaining books of accounts.

2. The Hon’ble ITAT relied on the following
decisions:

(a) ITO vs. Om Prakash Sharma (ITA
2556/Del/2009) wherein it was accepted that bank passbook does not
constitute Books of Accounts, further when no Books are maintained by assessee
addition u/s. 68 cannot be made. Reliance was placed on CIT vs. Bhaichand H.
Gandhi [141 ITR 67 (Bom.)], Sampat Automobile vs. ITO [96 TTJ(D)368], Mayawati
vs. DCIT [113 TTJ 178(Del.)], Sheraton Apparels vs. ACIT [256 I.T.R. 20 (Bom.)].

(b) Baladin Ram v. CIT [1969] 7 ITR 427[SC]
wherein the apex court held that passbook could not be regarded as books of
account of assessee as relationship between banker and customer is that of
debtor-creditor and not of trustee-beneficiary.

(c) CIT vs. Ms. Mayawati [338 ITR 563 (Del
HC)] wherein it was held that Bank neither act as agent of customer nor
maintains pass book under the instructions of customer (assessee). Thus, cash
credit in the Pass Book of the assessee does not attract provisions of section
68.

(d) Anandram Ratiani vs. CIT [1997] 223 ITR
544 (Gauhati) wherein it was observed that perusal of section 68 of the
Act, shows that in relation to the expression “books”, the emphasis
is on the word “assessee” meaning thereby that such books have to be
the books of the assessee himself and not of any other person.

3. The very sine qua non for making
addition u/s. 68 presupposes a credit of the amount in the Books of the
assessee. A credit in the Bank account of assessee cannot be construed as
credit in the books of the assessee.

4. The Hon’ble ITAT stated that it is settled
position that statutory provision has to be given plain literal interpretation
no word howsoever meaningful it may appear can be allowed to be read into a
statutory provision in garb of giving effect to the underlying intent of
legislature. Thus, credit in bank of assessee cannot be construed as credit in
Books of assessee. Accordingly no addition u/s. 68 can be made in the given
case.

shailesh.kwebmaker

Section 54 r.w. section139 and 143 – There is no bar/restriction in provisions of section 139(5) that assessee cannot file a revised return after issuance of notice u/s. 143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised in revised return on ground that said return was filed after issuance of notice u/s. 143(2)

13. [2018] 195 TTJ 1068 (Mumbai – Trib.)

Mahesh H. Hinduja vs. ITO ITA No.
176/Mum/2017 A.Y.:
2011-12. Dated: 20^th June, 2018.

Section 54
r.w. section139 and 143 – There is no bar/restriction in provisions of section
139(5) that assessee cannot file a revised return after issuance of notice u/s.
143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised
in revised return on ground that said return was filed after issuance of notice
u/s. 143(2)

FACTS

The assessee filed his return declaring
certain taxable income. Subsequently, the assessee filed a revised return of
income in which while offering long-term capital gain, he claimed deduction of
the said amount u/s. 54 towards investment of an amount in a new residential
house. The AO taking a view that revised return of income was filed after
issuance of notice u/s. 143(2), held that the said revised return being
invalid, assessee’s claim for deduction u/s. 54 could not be allowed. Aggrieved
by the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) confirmed the said disallowance.

HELD

The Tribunal held that in the original
return of income the assessee had neither declared the long-term capital gain
nor has claimed deduction u/s. 54. Therefore, the assessee filed a revised
return of income within the time prescribed u/s. 139(5) declaring net long-term
capital gain of Rs.49,96,681, though, it was claimed as deduction u/s. 54
towards investment in a new residential house.

A careful
reading of the provisions contained u/s. 139(5) would make it clear that if an
assessee discovered any omission or wrong statement in the original return of
income, he could file a revised return of income within the time limit as per
section 139(5). There was no bar/restriction in the provisions of section
139(5) that the assessee could not file a revised return of income after
issuance of notice u/s. 143(2) of the Act. The assessee could file a revised
return of income even in course of the assessment proceedings, provided, the
time limit prescribed u/s. 139(5) was available. That being the case, the
revised return of income filed by the assessee u/s. 139(5) could not be held as
invalid.

When the
assessee had made a claim of deduction u/s. 54 of the Act, it was incumbent on
the part of the Departmental Authorities to examine whether assessee was
eligible to avail the deduction claimed under the said provision. The
Departmental Authorities were not expected to deny assessee’s legitimate claim
by raising technical objection. In view of the aforesaid, the impugned order of
the CIT(A) was set aside and the issue was restored to the file of the AO for
examining and allowing assessee’s claim of deduction u/s. 54 subject to
fulfilment of conditions of section 54.

shailesh.kwebmaker

Section 2(24) r.w. section 12AA – Corpus specific voluntary contributions being in nature of ‘capital receipt’, are outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to tax even in case of trust not registered u/s.12A/12AA

12. [2018] 195 TTJ 820 (Pune – Trib.)

TO(E) vs. Serum Institute of India Research
Foundation ITA No.
621/Pune/2016 A.Y.:
2005-06. Dated: 29^th January, 2018.

Section 2(24) r.w. section 12AA – Corpus
specific voluntary contributions being in nature of ‘capital receipt’, are
outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to
tax even in case of trust not registered u/s.12A/12AA

FACTS

The assessee was registered trust under the
Bombay Public Trust Act, 1950, however, it was unapproved by the CBDT as
required u/s. 35(1)(ii) of the Act. Further, it was also not registered u/s.
12A/12AA. This is the second round of the proceedings before Tribunal. During
the relevant year, the AO brought to tax the corpus donation of Rs. 3 crore on
the ground that approval u/s.35(1)(ii) had not been granted to the assessee and
the assessee had also not been registered u/s. 12A. During the first round of
the proceedings, the assessee submitted before Tribunal that even if approval
u/s. 35(1)(ii) was not granted then also the amount could not be brought to tax
since it was in nature of a gift and said aspect had not been considered by the
lower authorities. The Tribunal restored the issue to the file of the AO with a
direction to examine the contention of the assessee that the amount of Rs.3
crore received as corpus donation was in the nature of gift and, therefore, same
was not taxable.

In remand
proceedings, the AO held that “corpus donation” did not tantamount to
exempt income as laid down u/s. 2(24)(iia) of the Act. The AO referred the provisions of section 12A/11(1)(d) and
reasoned that the voluntary contribution to the corpus of the trust were
taxable as the income of the trust but for the provisions of clause (d) of
section 11(1) of the Act. In the absence of any such specific exclusions
provided in the provisions of section 10(21), the said donation became taxable
in the hands of the assessee.

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) held that section 2(24)(iia) was required to be read in the context of
introduction of the section 12 considering the simultaneous amendments to both
the provisions with effect from 01-04-1973 and that the said amount of corpus
donation was not taxable under the Act being in the nature of capital receipt.

HELD

The Tribunal held that it was necessary to
examine the non-taxability of the corpus donations in assessee’s case despite
inapplicability of the provisions of section 12(1)/11(1)(d)/section 35/10(21).
On the face of it, the provisions of section 2(24)(iia) applied to the case of
the assessee. It had been held in various cases decided earlier that the corpus
donation received by the trust, which was not registered u/s. 12A/12AA, was not
taxable as it assumed the nature of ‘capital receipt’ the moment the donation
was given to the “Corpus of the Trust”. The provisions of sections
2(24)(iia)/12(1)/11(1)(d)/35/56(2) were relevant for deciding the current
issue. It was a settled legal proposition that in case of a registered trust,
the corpus specific voluntary contributions were outside the scope of income as
defined in section 2(24)(iia) due to their “capital nature”. But
assessee was an un-registered trust. Despite the detailed deliberations made by
revenue, the principles relating to judicial discipline assume significance and
the priority. It was also well settled that there was need for upholding the
favourable view if there existed divergent views on the issue. As mentioned
above, there were multiple decisions in favour of the assessee. Accordingly,
the corpus-specific-voluntary contributions were outside the taxations in case
of an unregistered trust u/s. 12/12A/12AAA too.

shailesh.kwebmaker

Section 40A(2) – Where AO made disallowance u/s. 40A(2)(a) without placing on record any material which could prove that payments made by assessee were excessive or unreasonable, having regard to fair market value of services for which same were made or keeping in view legitimate needs of business of assesee or benefit derived by or accruing to assessee therefrom, said disallowance could not be sustained.

11. [2018] 195 TTJ 796 (Mumbai – Trib.) Nat Steel Equipment (P.) Ltd. v. DCIT ITA Nos.: 4011 & 5070/Mum/2013 A.Y.s: 2009-10 & 2010-11
Dated: 13^th June, 2018.

Section 40A(2) – Where AO made disallowance
u/s. 40A(2)(a) without placing on record any material which could prove that
payments made by assessee were excessive or unreasonable, having regard to fair
market value of services for which same were made or keeping in view legitimate
needs of business of assesee or benefit derived by or accruing to assessee
therefrom, said disallowance could not be sustained.

FACTS

The assessee
had made an aggregate payment to its related parties by way of commission/legal
and professional charges. However, the assessee had failed to place on record
any documentary evidence in support thereof. The AO was of the view that the
assessee had paid commission to its related parties at an exorbitant rate of 10
per cent of the sale value. It was further observed by the AO that not only the
payments made by the assessee to its related parties appeared to be
unreasonable, but rather 90 per cent of the total payments were found to have
been made to such related parties. After characterising the payments made by
the assessee to its related parties as unreasonable and excessive, the AO had
disallowed 30 per cent of such payments and made a consequential addition in
its hands.

Aggrieved, the assessee preferred an appeal
to the CIT(A). The CIT(A) confirmed the disallowance of 30 per cent of total
commission.

HELD

The Tribunal held that once the AO formed an
opinion that the expenditure incurred by the assessee in respect of the goods,
services or facilities for which the payment was made or was to be made to the
related party was found to be excessive or unreasonable, then the onus was cast
upon the assessee to rebut the same and prove the reasonableness of such
related party expenses. However, the Legislature had in all its wisdom in order
to avoid any arbitrary exercise of powers by the AO in the garb of the
aforesaid statutory provision, specifically provided that such formation of
opinion on the part of the AO had to be arrived at having regard to the fair
market value of the goods, services or facilities for which the payment was
made by the assessee.

In the case of the assessee, the CIT(A) had upheld the ad hoc disallowance of 30 per
cent of the payments made by the assessee to its related parties, without
uttering a word as to on what basis the respective expenditure incurred by the
assessee in context of the related party services was found to be excessive or
unreasonable, having regard to either the fair market value of the services for
which the payment was made by the assessee or the legitimate needs of its
business or the benefit derived by or accruing to the assessee therefrom. The
lower authorities had carried out the disallowance u/s. 40A(2)(a) on an ad hoc
basis viz. 30 per cent of the payments made to the related parties and made a
disallowance without placing on record any material which could prove to the
hilt that the payments were excessive or unreasonable, having regard to the
fair market value of the services for which the same were made or keeping in
view the legitimate needs of the business of the assessee or the benefit
derived by or accruing to the assessee therefrom.

In the absence
of satisfaction of the basic condition for invoking of section 40A(2)(a), the
Tribunal held that the disallowance of 30 per cent of the related party
expenses i.e.Rs.38,87,705 made u/s. 40A(2)(a) could not be sustained.

shailesh.kwebmaker

6 Section 37(1) – In the absence of any evidence brought on record by the AO to substantiate that the payment of insurance premium of employees’ family members in terms of employment rules framed by the assessee company had no nexus with business of the assessee, it could hardly be said that the impugned expenditure was not incurred wholly and exclusively for the purposes of business, which is the real intent of section 37(1).

[2018] 96 taxmann.com 483
(Delhi)

Loesche
India (P.) Ltd. vs. ACIT

ITA No. :
295/Delhi/2016

A. Y:
2010-11
Dated: 13^th August, 2018

Section 37(1)
– In the absence of any evidence brought on record by the AO to substantiate
that the payment of insurance premium of employees’ family members in terms of
employment rules framed by the assessee company had no nexus with business of
the assessee, it could hardly be said that the impugned expenditure was not
incurred wholly and exclusively for the purposes of business, which is the real
intent of section 37(1).

FACTS

The assessee company engaged in business of
Design & Engineering, manufacturing and trading of vertical roller grinding
mill systems & components thereof for cement, steel, power plants and other
mineral based industries filed its return of income declaring total income of
Rs. 19,12,54,863. In the course of
assessment proceedings, the Assessing Officer (AO) noticed that amount of Rs.
15,48,654 has been claimed on account of medical insurance. He called upon the assessee to furnish
details of relations of employees in respect of whom insurance premium has been
paid and also to show cause why it should not be disallowed on the ground that
it is gratuitious and not on commercial lines since obligation of the employee
has been met by the employer. Upon
perusal of the list of relatives who had been insured, the AO noticed that
medical insurance premium has been paid to insure health of mother-in-law of
the Managing Director apart from his independent children and also towards
married sisters of other directors of the assessee company. He held that the
assessee had adopted an inequitable and unreasonable system by bearing the
medical insurance expenses of only the relatives of key managerial persons and
their distant family members. Relying on
the decisions of Madras High Court in the case of CIT vs. Indian Express
Newspapers (Madurai) (P.) Ltd. [1999] 104 Taxman 578 and Calcutta High
Court in M D Jindal vs. CIT [1986] 28 Taxman 509 (Delhi), he held that
he was entitled to lift the veil of corporate entity in order to ascertain the
actual intention. He distinguished the case law of Bombay High Court in the
case of Mahindra & Mahindra on which reliance was placed by the
assessee since the instant benefit was not for achieving the purpose of
corporate social responsibility but in the instant case it was to benefit a few
selected employees. Even otherwise,
since the employees had not offered what amounted to be perquisites in their
hands u/s. 17(2)(iv), he was of the view that these were not business expenses
qualifying for deduction u/s. 37(1).

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the record
reveals that the assessee had paid the insurance premiums of the employees’
family members in terms of employment rules framed by the assessee-company
therefor. Therefore, it can hardly be
said that the impugned expenditure were not incurred wholly and exclusively for
the purpose of business, which is the real intent of section 37(1). The Tribunal further observed that the
authorities below have not brought any evidence on record to substantiate that
the payments so made by the assessee-company had no nexus with the business of
the assessee. Even otherwise, it is not
necessary that all the payments/expenditure incurred by the assessee should
have a direct bearing on earning of income, but some payments are also made
under certain business expediency. It
noted that the payments claimed to have been made for insurance premium of such
members who have attained the age of 21 years or more or who are the remote
relations of the assesse have already been offered by the assessee to tax
before the CIT(A). It observed that the
authorities below appear to have rejected the claim of the assessee that these
payments were in the nature of perquisites to the employees as contemplated
u/s. 17(2)(iv), according to which any obligation which, but for such payment,
would have been payable by the assessee, shall be included in perquisites.
However, in view of proviso (iii) & (iv) appended to this section clearly
prohibit application of section 17(2) in certain eventualities contained in
these provisos. The Tribunal held that in view of the attending facts and
circumstances of the case and the provisions of law, noted above, there is no
justification in the findings reached by the authorities below for rejecting
the deduction of impugned expenditure claimed by the assessee. Therefore, there
is no justification to discard the impugned claim of the assessee u/s.
37(1).

The Tribunal allowed the appeal filed by
the assessee.

shailesh.kwebmaker

5 Section 23 – In case of a property construction whereof is not fully in accordance with the sanctioned plan and some alteration is required to bring it under proper plan, benefit of vacancy allowance u/s. 23(1)(c) of the Act needs to be allowed in respect of the period taken for carrying out necessary alterations.

[2018] 96 taxmann.com 476
(Mumbai)

Saif Ali
Khan Pataudi vs. ACIT

ITA No.:
5811/Mum/2016

A. Y:
2012-13
Dated: 21^st August, 2018

Section 23 – In case of a property
construction whereof is not fully in accordance with the sanctioned plan and
some alteration is required to bring it under proper plan, benefit of vacancy
allowance u/s. 23(1)(c) of the Act needs to be allowed in respect of the period
taken for carrying out necessary alterations.

Facts

The assessee owned a residential flat in a
society. The assessee considered the annual value of this flat to be Rs.
4,00,000. The Assessing Officer (AO) while assessing the total income of the
assessee held that considering the size of the flat and its location, the
amount of rent estimated by the assessee to be its annual value was low. The AO
adopted 7% of the value of the investment in the flat to be its annual value.
Accordingly, he computed Rs. 81,08,802 to be the annual value of the flat under
consideration.

Aggrieved, the assessee preferred an appeal
to the CIT(A) where the assessee argued that the building in which the house
was situated has been constructed unauthorisedly as per letter dated 9.2.2012
of Executive Engineer, Building Proposal (WS), `H’ Ward, Municipal Corporation
of Central Mumbai. It contended that the annual value shown by the assessee be
accepted and addition made by the AO deleted. He noted that as per the
valuation report filed by the assessee, the annual value of the property has
been estimated to be Rs. 11,86,723. The CIT(A) held that the alteration
required to be done to remove the unauthorised construction was minor.
Referring to the rent of another flat in the same building, the CIT(A) computed
the annual value to be Rs. 50,40,000.

Aggrieved, the assessee preferred an appeal
to the Tribunal where on behalf of the assessee it was contended that the
assessee was not able to let out the property and hence vacancy allowance be
granted. It was also submitted that there were some inherent defects in
construction of the property. The deficiency was pointed out by the authorities
and it was necessary to remove the deficiencies in order to bring the property
in accordance with the approved plan. Since defects were subsisting there was
reasonable cause why the flat would not be let out. It was also pointed out
that subsequently substantial expenditure was incurred by the assessee in order
to bifurcate the property into 3 flats in order to rent the same. In order to
avoid litigation the assessee was agreeable to offer Rs. 11,83,723 as annual
value, as computed by the assessee’s valuer.

HELD

The Tribunal noted that the CIT(A) has
partly rejected the assessee’s plea that the assessee was under an obligation
to remove certain unauthorised construction / defects done by the builder in
order to bring the construction under appropriate permission and sanction. It observed that the CIT(A) has admitted that
certain defects were there but he has found the same to be minor. No details whatsoever has been brought by the
CIT(A) in considering the defects to be dissected between major and minor. Once when it is accepted that the construction
was not fully in accordance with the plan and some alteration was required to
bring it under proper plan, it has to be accepted that the flat was not in a
position to be let out dehors the removal of the defects.

The Tribunal held that there were certain
defects in the construction of the flat under the sanctioned plan, the removal
of which was necessary. Letting out a house which is not constructed as per an
approved plan cannot be forced upon an assessee. Furthermore, subsequently the assessee has incurred
over Rs. 50 lakh for alteration of the flat which resulted in the bifurcation
of the flat into three parts. This oxygenates the assessee’s claim that the
premises required alteration in order to be properly let out. It held that the plea made on behalf of the
assessee cannot be said to be spurious, vexatious, mere bluster or frivolous.
It held that the assessee deserves vacancy allowance u/s. 23(1)(c).

Considering the ratio of the decision of the
Mumbai Bench of ITAT in the case of Premsudha Exports (P.) Ltd. vs. ACIT
[2008] 110 ITD 158 (Mum.), the Tribunal held that the assessee should be
granted vacancy allowance. However,
since the assessee had in its grounds of appeal agreed to offer Rs. 11,83,723
to be the annual value of the property, the proposal of the assessee was
accepted and the order of CIT(A) was held to be modified accordingly.

The Tribunal allowed the appeal filed by the
assessee.

shailesh.kwebmaker

4 Section 23(1)(a) – Provisions of section 23(1)(a) cannot be applied to a property constructed by the assessee, construction whereof was completed in the month of February and property remained unsold and vacant, as it is not possible to let out property just after its completion i.e. only after one month.

[2018] 97 taxmann.com 214 (Jaipur)

Raj
Landmark (P.) Ltd. v. ITO

ITA No.:
242/Jp/2018

A. Y:
2013-14
Dated: 24^th August, 2018

Section 23(1)(a) – Provisions of section
23(1)(a) cannot be applied to a property constructed by the assessee,
construction whereof was completed in the month of February and property
remained unsold and vacant, as it is not possible to let out property just
after its completion i.e. only after one month.

FACTS

The assessee, a private limited company,
engaged in the business of real estate development constructed a commercial
complex, construction whereof was completed in February 2013 and which remained
unsold and vacant for one month during the previous year 2012-13. The Assessing
Officer (AO) computed the annual value of this property to be Rs. 9 lakh for
the month of March 2013. Since the construction of the property was completed
only in February 2013, the AO determined estimated rental income only for a
period of one month.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the commercial
complex under consideration was held by the assessee as its stock-in-trade. It
noted that it was not the allegation of the AO that the assessee has
deliberately not let out the property in question under consideration. The
Tribunal, observed that without going into the controversy as to applicability
of section 23 in respect of a property held as stock-in-trade, it came to the
conclusion that it is not a case of keeping the property vacant from year after
year but the project was completed in Feb 2013. It observed that reasonably
expected rent envisaged by section 23(1)(a) itself signifies the possibility of
letting out of the property and also that there is a time lag between the
completion of construction of the property and letting out the property
thereafter. It is not practically possible to let out the property on the next
day of completion of construction or acquisition of the property. It held that
in a case when there is no possibility of any deliberate or unreasonable delay
in letting out the property then it is not expected to fetch a reasonable rent
just after completion of the project in question. Moreover, the present case
was not one of letting out a small space of the house but the entire project
was completed by assessee in the month of Feb 2013 and therefore the provisions
of section 23(1)(a) itself would not be workable in such a case for want of
immediate letting out the property just after its completion.

The Tribunal noted that the Legislature has
also recognised this aspect while inserting section 23(5) by Finance Act, 2017
w.e.f. 1.4.2018 allowing vacancy allowance of one year from the end of the
financial year in which certificate of completion of construction of the
property is obtained from the competent authority.

Though s/s. (5) is not applicable for
assessment year under consideration, however, it is not a case of allowing the
vacancy allowance in respect of the property held as stock-in-trade but it is
the fundamental issue of determination of notional annual letting value just
after completion of construction of the property held as stock-in-trade. The
Tribunal noted that without allowing a reasonable period or time gap from the
completion of construction of property held as stock-in-trade to let out the
same, the property cannot reasonably be expected to be let from year to year
and fetch fair market rent just after completion of construction.

The Tribunal held that in the facts and
circumstances of the case, section 23(1)(a) cannot be applied to the property
in question due to the peculiar reason that the completion certificate was
obtained only in Feb 2013 and it is not expected to let out the property just
after completion of the project and, therefore reasonable expected rent to be
fetched by the property in question is not possible immediately after the
completion without allowing a reasonable period, which is also recognised by
the Legislature.

The Tribunal deleted the addition made by
the AO on this account.

The appeal filed by the assessee were
allowed.

shailesh.kwebmaker

3 Section 271(1)(c) –Where satisfaction of AO while initiating penalty proceedings u/s. 271(1)(c) is with regard to alleged concealment of income by assessee, whereas imposition of penalty is for ‘concealment/furnishing inaccurate particulars of income’, levy of penalty is not sustainable

[2018] 195 TTJ (Asr)(TM) 1

HPCL Mittal Energy Ltd. vs. ACIT

ITA No.:
554 & 555/Asr/2014

A. Ys.:
2008-09 & 2009-10 Dated: 20^th
June, 2018

Section 271(1)(c) –Where satisfaction of AO
while initiating penalty proceedings u/s. 271(1)(c) is with regard to alleged
concealment of income by assessee, whereas imposition of penalty is for
‘concealment/furnishing inaccurate particulars of income’, levy of penalty is
not sustainable

FACTS

During the year under consideration, the AO
made disallowance of business loss; non-declaration of interest income from
deposits with banks and non-declaration of interest income on Fixed Deposit
Receipts (FDRs) as security given to the trial court. The additions were
confirmed by the CIT(A) and the Tribunal.

The penalty notice u/s. 274 was issued by
stating that the assessee ‘concealed the particulars of income’ with respect to
the above three disallowance/additions. However, the penalty order was passed
holding that ‘the assessee concealed the particulars of income/furnished
inaccurate particulars of such income’.

On appeal to CIT(A), the penalty order was
affirmed.

On further
appeal to the Tribunal, the assessee contended the penalty was not sustainable,
on the ground that the Assessing Officer levelled charge of ‘concealment of
income’ and also issued penalty notices on the same charge, but found the
assessee guilty in the penalty orders on a different and vague default of ‘concealment
of the particulars of income/furnishing of inaccurate particulars of income’.

The Judicial
Member concurred with the submissions advanced on behalf of the assessee on
this preliminary legal ground and ordered deletion of penalty in his proposed common
order. On the other hand, Accountant Member passed order sustaining the penalty
on merits. On difference of opinion, matter was referred to the Third Member.

HELD

The Third Member held that the penalty
proceedings were separate from assessment proceedings, which got started with
the issue of notice u/s. 274 and concluded in the penalty order u/s. 271(1)(c).
Many a times, penalty initiated in the assessment order on one or more counts
by means of notice u/s. 274, was not eventually imposed by the AO on getting
satisfied with the explanation tendered by the assessee in the penalty
proceedings.

In any case,
confronting the assessee with the charge against him is sine qua non for
any valid penalty proceedings. It is only when the assessee was made aware of
such a charge against him that he could present his side.

It was evident that when the AO was
satisfied at the stage of initiation of penalty proceedings of a clear-cut
charge against the assessee in any of the three situations (say, concealment of
particulars of income), but imposed penalty by holding the assessee as guilty
of the other charge (say, furnishing of inaccurate particulars of income) or an
uncertain charge (concealment of particulars of income/furnishing of inaccurate
particulars of income), the penalty could not be sustained.

In the present
case, the Third Member held that the penalty was wrongly imposed and confirmed
and Judicial Member was justified in striking down all the penalty orders.

shailesh.kwebmaker

2 Section 11 & 13(1)(d) – It is only the income from such investment or deposit which has been made in violation of section 11(5), that is liable to be taxed; violation of section 13(1)(d) does not result in the denial of exemption u/s. 11 to the total income of the assessee.

[2018] 194 TTJ (Del) 715

ITO vs. The Times Centre for Media and
Management Studies

ITA No.:
1389/Del/2015

A. Y.:
2010-11 Dated: 31^st
May, 2018

Section 11 & 13(1)(d) – It is only the
income from such investment or deposit which has been made in violation of
section 11(5), that is liable to be taxed; violation of section 13(1)(d) does
not result in the denial of exemption u/s. 11 to the total income of the
assessee.

FACTS

The assessee was a charitable institution in
terms of section 25 of the Companies Act, 1956 and also registered u/s. 12AA(1)
of the Income-tax Act, 1961. During the year under consideration the assessee
had received a donation of 50,000 shares worth Rs.2,00,000 from Angelo Rhodes
Ltd. (United Kingdom) way back in 1996 and had received dividend income of
Rs.2,36,000.

The AO proceeded to deny the exemption u/s. 11(1) of the Income-tax Act, 1961
for violation of provision of section 13(1)(d) r.w s. 11(5) of the Income-tax
Act, 1961 pertaining to mode of investment.

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) granted the assessee the
benefit of exemption on all income except the impugned amount of Rs.2,36,000.

HELD

The Tribunal held that it was well settled
that where investments or deposits had been made by a charitable trust which
were in violation of section 11(5), the benefit of exemption u/s. 11 would not
be denied on the entire income of the assessee and only the
investments/deposits made in violation of provisions of section 11(5) would
attract maximum marginal rate of tax.

The Tribunal followed the ratio of the
Hon’ble High Court decision in the case of CIT vs. Fr. Mullers Charitable
Institutions (2014) 102 DTR (Kal) 386 wherein while dealing with an
identical issue it was held that a reading of section 13(1)(d) made it clear
that it was only the income from such investment or deposit which had been made
in violation of section 11(5) that was liable to be taxed and that the
violation u/s. 13(1)(d) did not tantamount to denial of exemption u/s. 11 on
the total income of the assessee.

The Tribunal relying upon the judgement of
the Hon’ble High Court, held that in the present case the maximum marginal rate
of tax would apply only to the dividend income from shares held in
contravention of section 13(1)(d) and not to the entire income.

shailesh.kwebmaker

1 Section 56(2)(viia) – Provisions of section 56(2)(viia) are attracted only in case of “shares of any other company”

[2018] 194 TTJ (Mumbai) 746

Vora Financial Services (P.) Ltd. vs. ACIT

ITA No.: 532/Mum/2018

A. Y.: 2014-15 Dated: 29^th June, 2018

Section 56(2)(viia) – Provisions of section
56(2)(viia) are attracted only in case of “shares of any other company” and
could not be its own shares as own shares cannot become property of the
recipient company; buy-back of own shares by a company cannot attract the
provisions of section 56(2)(viia) as the same does not satisfy the tests of
“becoming property” and “shares of any other company”

FACTS

During the year under consideration the
assessee made an offer to existing shareholders for buy-back of 25% of its
existing share capital at a price of Rs.26 per share. One of the directors of
the company offered 12,19,075 shares under the buy-back scheme for a
consideration of Rs.3,16,95,950 on 24.05.2013. The AO noticed that the book
value of shares as on 31.03.2013 was Rs.32.80 per share, whereas the
assessee-company had bought back the shares at Rs.26 per share.

The AO observed
that consideration of Rs. 3,16,95,950 had been reinvested in the company in the
form of loan. Hence, the AO took the view that the entire exercise was carried
out to reduce the liability of the company by purchasing shares below the fair
market value. Accordingly, the AO assessed the difference between the book
value of shares and purchase price of shares amounting to Rs.82,89,710 lakhs as
income of the assessee company u/s. 56(2)(viia) of the Income-tax Act, 1961.

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the action of
the AO.

HELD

The Tribunal held that a combined reading of
section 56(2)(viia) and the memorandum explaining the provision of it would
show that the section 56(2)(viia) would be attracted when “a firm or
company (not being a company in which public are substantially
interested)” receives a “property, being shares in a company (not
being a company in which public are substantially interested)”.

Therefore, the shares should become
“property” of recipient company and in that case, it should be shares
of any other company and could not be its own shares. Own shares could not
become the property of the recipient company.

Accordingly, section 56(2)(viia) would be
applicable only in cases where the receipt of shares became property in the
hands of recipient and the shares would become property of the recipient only
if they were “shares of any other company”.

In the instant case, the assessee had
purchased its own shares under buyback scheme and the same had been
extinguished by reducing the capital and hence the tests of “becoming
property” and also “shares of any other company” failed in this
case. Accordingly, the Tribunal took a view that the tax authorities were not
justified in invoking the section 56(2)(viia) for buyback of own shares.

In the result, the Tribunal set aside the
order passed by CIT(A) on this issue and directed the AO to delete the addition
made u/s. 56(2)(viia) of the Income-tax Act, 1961.

shailesh.kwebmaker

17. [2018] 193 TTJ (Mumbai) 214 Asia Investments (P.) Ltd. vs. ACIT ITA NO. : 7539/MUM/2013 & 4779/Mum/2014 A. Y.: 2003-04 Dated: 23rd February, 2018

Section 271(1)(c) read with section 275
– Where once addition on which penalty
has been levied is set aside to Assessing Officer for fresh consideration, it
is as good as there is no addition for levy of penalty u/s. 271(1)(c)

FACTS

The assessee company filed return of income and the
assessment was completed u/s. 143(3) making certain additions. The assessee
carried the matter in appeal before the CIT(A) wherein the partial relief was
allowed by the CIT(A). The assessee filed appeal before Tribunal for the
additions sustained by the CIT(A). The Tribunal set aside the issue to the file
of the AO with a direction to examine the entire facts of the case.

The AO had initiated penalty proceedings u/s. 271(1)(c) and
after considering the submissions of the assesse, he passed order levying penalty
u/s. 271(1)(c).

Aggrieved by the penalty order, the assessee preferred an
appeal before the Ld. CIT(A) wherein the penalty was confirmed by the CIT(A).

HELD

The Tribunal stated that once the addition on which penalty
had been levied was set aside to the AO for fresh consideration, it was as good
as there was no addition for levy of penalty u/s. 271(1)(c) of the Act.

In present case, the AO had finalised penalty proceedings
before the Tribunal had set aside the issue of additions in the quantum appeal
to the file of the AO. The case was covered under the provisions of sub section
(1A) to section 275 of the Act where it is categorically stated that in a case
where the relevant assessment or the order is the subject matter of an appeal
before the appellate authorities or High Court and an order imposing or
enhancing or reducing or cancelling penalty or dropping the proceedings for the
imposition of penalty is passed before the order of the appellate authority is
received by the Commissioner then the order imposing or enhancing or reducing
or cancelling penalty or dropping the proceedings for the imposition of penalty
may be passed on the basis of assessment as revised by giving effect to such
order of the appellate authorities.

Therefore, the Tribunal set aside the issue to the file of
the AO directing him to reconsider the issue as per the provisions of section
275(1A) of the Act.

shailesh.kwebmaker

16. [2018] 193 TTJ (Mumbai)(UO) 36 ACIT vs. Zee Media Corporation Ltd ITA NO. : 2166/MUM/2016 A. Y. : 2011-12 Dated: 16th April, 2018

Section 4 read with section 133(6) – In the
absence of any material on record to show that the assessee has received amount
more than the income which had been declared by it in the P&L a/c, addition
cannot be made solely based on AIR information, especially when the assessee
requested the AO to examine the parties by issuing notice u/s. 133(6) but AO
failed to make any enquiry.

FACTS

The AO in the course of the assessment proceedings, on
perusal of the AIR data found that there was a discrepancy in income to the
extent of Rs.14,13,908 in Form 26AS and the books of account.

The assessee submitted that the transactions in respect of
the discrepancy did not happen and were not related to the assessee. The
assesse also filed before the AO a rectification application under section- 154
requesting for withdrawal of corresponding TDS credit.

It was submitted before the AO that these transactions did
not appear in the books of account of the assessee and the bank account also
did not reflect any receipts from these parties. The assessee requested the AO
to verify the books of account and also to examine the parties by issuing the
notices under section 133(6).

However, the AO treated the said amount as income of the
assessee for the reason that assessee claimed TDS on such transactions but
denied owning up of the said transactions.

Aggrieved by the assessment order, the assessee filed appeal
before CIT(A) but the addition was sustained by the CIT(A).

HELD

The Tribunal stated that in the absence of any material
brought by the revenue authorities that the assessee had received amount more
than the professional fees which had been declared by him in the P&L
account and when the professional income declared by the assessee far exceeded
the professional fees shown in the AIR information, the additions solely based
on the AIR information were not sustainable.

The AO also failed to make any enquiries with the parties as
requested by the assesse when the assessee had denied any transactions with
them. When the assessee had denied any transactions with the parties, the onus
was on the AO to verify the transactions with the parties and to establish that
the assesse indeed entered into any transactions with the said parties and had
received income from them. No such enquiries or effort was made by the AO.

The addition was made solely based on the AIR information
without bringing any cogent evidence on record to suggest that the assessee
received income from the said parties.

In the result, the Tribunal reversed the order of the CIT(A)
and directed the AO to delete the addition made on account of alleged
difference in income.

shailesh.kwebmaker

15. [2018] 194 TTJ (Mumbai) 122 All India Federation of Tax Practitioners vs. ITO ITA NO. : 7134/MUM/2017 A. Y.: 2013-14 Dated: 04th May, 2018

Section 249(1) read with rule 45 – Assessee
having filed the appeal in paper form, CIT(A) ought not to have dismissed the
same solely on the ground that the assessee has not filed the appeal
electronically as per the mandate of rule 45.

FACTS

The assessee was a trust and had filed its return of income
for A.Y.2013-14. Thereafter, assessment for the said year was completed by
order u/s. 143(3) on 17-2-2016.

Aggrieved by the order of the AO, the assessee preferred
appeal before CIT(A). The assessee filed appeal before CIT(A) in paper form as
prescribed under the provisions of IT Act, 1961 within the prescribed period of
limitation.

But the same was dismissed by CIT(A) by holding that the
assessee had not filed appeal through electronic form, which was mandatory as
per IT Rules, 1962. The CIT(A) passed the order without allowing hearing to
assessee merely on the basis of alleged default of not having appeal filed
electronically .

HELD

The Tribunal observed that the assessee had already filed the
appeal in paper form, however, only the e-filing of appeal had not been done by
the assessee which was only a technical consideration.

The Tribunal followed the ratio of the Hon’ble Supreme Court
decision in the case of State of Punjab vs. Shyamalal Murari & Ors. AIR
1976 SC 1177 wherein it was held that courts should not go strictly by the
rulebook to deny justice to the deserving litigant as it would lead to
miscarriage of justice and no party should ordinarily be denied the opportunity
of participating in the process of justice dispensation.

The Tribunal relying upon the judgement of Hon’ble Supreme
Court, held that the alleged compliances defaults were of a technical nature
and the same could not be a reason to deny an opportunity of appeal and
opportunity of justice in the deserving case.

In the result, the Tribunal set aside the CIT(A) order and
allowed the appeal. The Tribunal directed the assessee to file the appeal
electronically within 10 days from the date of receipt of ITAT order and
further directed the CIT(A) to consider the appeal filed by the assessee on
merits by passing a speaking order.

shailesh.kwebmaker

Sections 28, 40A(2)(b) – If the assessee derives income from developing properties and leasing them out, income is chargeable to tax as ‘business income’ following the concept of consistency. No disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically bring the actual fair market value on record on basis of corroborative evidences.

25. (2018) 66 ITR (Trib.) 116 (Mumbai) ACIT vs. Grew
Industries Pvt. Ltd. ITA No.:
5427/Mum/2016 A.Y.: 2011-12 Dated: 9^th May, 2018

Sections
28, 40A(2)(b) – If the assessee derives income from developing properties and
leasing them out, income is chargeable to tax as ‘business income’ following
the concept of consistency.

No
disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically
bring the actual fair market value on record on basis of corroborative
evidences.

FACTS

Briefly,
facts were that the assessee – a company, was engaged in the business of
development of commercial properties including I.T. Parks, offices etc., and
given them on lease. The Assessing Officer (AO) intended to treat the lease
rent as ‘Income from house property’ as against ‘Business income’ as offered by
the assessee. Upon this, the assessee explained that the I.T. Park was
developed by Salarpuria Properties Pvt Ltd (SPPL) on the land belonging to the
assessee. That the assessee developed the property to be used as I.T. Park in
Bangalore keeping the need of I.T Sector in Bangalore and office premises of
several I.T Companies were located in the I.T. Park. Also, the development and
maintenance of I.T. Park was a very complex commercial activity, which required
continuous and considerable efforts so as to provide services round the clock.
It was submitted, as per section 80 IA of the Act, development and maintenance
of I.T. Park was regarded as a business activity. It was submitted by the
assessee that in A.Y. 2006-07 to A.Y.2010-11, the income received from I.T.
Park was offered as ‘Business income’ and the department had also accepted it.
Therefore, it was submitted that the income offered by the assessee should not
be assessed as ‘Income from House Property’. Disregarding the assessee’s
submissions, the AO held the income to be ‘Income from house property’. This
was later reversed by the first appellate authority.

During
the course of assessment proceedings, the Assessing Officer noticed that the
assessee had claimed deduction on account of payment of salaries of Rs.
1,11,000/- and Directors remuneration of Rs. 2,20,00,000/. The AO found that no
such remuneration was paid in the earlier assessment years. He, therefore,
called upon the assessee to justify the reasonableness of payment made to them.
The assessee justified the payment made to the Directors, however, the
Assessing Officer was of the view that there was no justification of payment to
the Directors and also observed that the assessee failed to establish the
reasonableness of commission paid to the Directors. Accordingly, he disallowed
the payment made u/s. 40A(2)(b) of the Act. The CIT(A) after considering the
submissions of the assessee, allowed assessee’s claim. The CIT(A) appealed to
the ITAT.

HELD

The
learned DR relying on the observations of the Assessing Officer submitted that
the lease rentals were received by the assessee merely as an owner of the property.
Therefore, the income derived from lease rental had to be assessed as ‘Income
from House Property’. The learned AR submitted that the assessee had also
demonstrated with documentary evidence that it was operating and maintaining
the I.T. Park. The learned AR submitted that the assessee was in the business
of developing and leasing out commercial properties, I.T. Parks etc. Therefore,
the income derived from such activities had to be treated as ‘Business income’.

The
Tribunal pointed out that the Assessing Officer himself had accepted the fact
that the assessee owns number of properties and had leased them out. Though
principle of res judicata is not strictly applicable to income tax
proceedings, each assessment year being an independent unit, rule of
consistency cannot also be ignored. Considering all the facts on record, the
ITAT held that the object of the assessee was to derive income from developing
properties and leasing them out. Further following the principle of
consistency, as per earlier years the income of the concerned year should also
be considered to be ‘business income’.

As
regards the payment made to the Directors, the Assessing Officer had disallowed
them primarily for two reasons – firstly, the assessee had not carried out any
business activities and secondly, the payment made was unreasonable. The first
reasoning of the Assessing Officer had lost its force considering the fact that
the income derived by the assessee had been held to be business income. Even
otherwise also, besides leasing out of properties, the assessee had other
business activities also. That being the case, the disallowance of expenditure
on the ground of no business activity was totally wrong. As regards the
applicability of section 40A(2)(b) of the Act is concerned, the ITAT observed
that the Assessing Officer had not established on record what was the fair
market value of the services rendered by the assessee. The Assessing Officer
merely made a vague statement that the remuneration paid by the assessee to the
Directors was unreasonable, without bringing any corroborative evidence on
record. Neither did he establish the actual fair market value of the services
rendered. Hence, the ITAT held that the disallowance was merely on the basis of
conjectures and surmises and could not be sustained.

shailesh.kwebmaker

Section 234E – Assessing Officer cannot make any adjustment by levying fee u/s. 234E prior to 01.06.2015

24. [2018] 66 ITR (Trib.) 69 (Chennai) A.R.R. Charitable
Trust vs. ACIT ITA No.:
1307/Chny/2017 & 238, 239, 240 & 241/Chny/2018 A.Y.s: 2013-14 to
2015-16 Dated: 24^th July, 2018

Section
234E – Assessing Officer cannot make any adjustment by levying fee u/s. 234E
prior to 01.06.2015

FACTS

Prior
to 01.06.2015, there was no enabling provision in section 200A of the Act for
making adjustment in respect of the statement filed by the assessee with regard
to tax deducted at source by levying fee u/s. 234E of the Act. The Parliament
for the first time enabled the Assessing Officer to make adjustment by levying
fee u/s.234E of the Act with effect from 01.06.2015. Therefore while processing
statement u/s. 200A of the Act, the Assessing Officer cannot make any
adjustment by levying fee u/s. 234E prior to 01.06.2015.

Thus
the legal position prior to 01.06.2015, as per various precedents was that, the
Assessing Officer had no authority to levy fee while issuing intimation u/s.
200A of the Act. In the present case, the Ld. CIT(A) in his order, stated that
intimation u/s. 200A of the Act was issued on 31.07.2015. However the Ld. AR
pointed out referring to the intimations issued u/s. 200A of the Act, that all
the intimations u/s. 200A of the Act were issued before 01.06.2015, therefore,
the CIT(Appeals) was not justified in confirming the levy of fee.

HELD

The Tribunal on careful examination of facts held that the
intimations were issued for all the years before 01.06.2015. Therefore, the
CIT(Appeals) was not correct in saying that the intimations were issued on
31.07.2015. When the intimations were issued before 01.06.2015, this Tribunal
was of the considered opinion that the Assessing Officer had no jurisdiction to
levy fee u/s. 234E of the Act. The amendment to section 200(3) of the Act was
made only with effect from 01.06.2015.

Relying
on its own decision in Smt. G. Indhirani the Tribunal in I.T.A. Nos.238 to
241/Chny/18, held that while processing statement u/s. 200A of the Act, the
Assessing Officer cannot make any adjustment by levying fee u/s. 234E prior to
01.06.2015. Thus the fee levied u/s. 234E of the Act was deleted.

shailesh.kwebmaker

Sections 11, 12 – Tax exemption u/s. 11/12 cannot be denied merely for receiving sponsorship from a corporate business entity.

23. (2018) 66 ITR (Trib.) 82 (Delhi) D.C.I.T. vs. India
Olympic Association ITA No.:
1130/DEL/2016 A.Y.: 2011-12 Dated: 19^th July, 2018

Sections
11, 12 – Tax exemption u/s. 11/12 cannot be denied merely for receiving
sponsorship from a corporate business entity.

FACTS

The
assessee-society was an Apex sports body for selecting athletes to represent
India at Olympic Games, Asian Games and other international athlete meets at
these events. It was registered u/s. 12A of the Act. The assessee received an
income from sponsorship amounting to Rs. 86 lakh received from Samsung India
Electronics Pvt. Ltd for 2010 Asian Games and 2010 Youth Olympic Games.
Therefore, the Assessing Officer (AO) formed an opinion that the assessee had carried
out the activities for the purposes of general public utility in the nature of
trade, commerce or business. The AO further formed a belief that this
transaction of the assessee was in the nature of rendering services in relation
to business of Samsung in lieu of consideration from Samsung India Electronics
Pvt. Ltd. The AO was convinced that
proviso to section 2(15) of the Act squarely applies and hence the assessee
does not fall within the category of ‘charitable organisation’. Accordingly,
benefit u/s. 11/12 of the Act was denied to the assessee. Being aggrieved, the
assessee carried the matter before the first appellate authority and reiterated
that the proviso to section 2(15) of the Act does not apply in the case of the
assessee and the AO had wrongly denied claim of exemption u/s. 11/12 of the
Act.

HELD

The
Tribunal allowed the assessee’s appeal and held as under:

1. On drawing support from the speech of the Finance Minister and
subsequent clarification issued by the CBDT within the framework of amended
provisions of section 2(15) of the Act, the Tribunal was of the view that an
object of public utility need not be an object in which the whole of the public
is interested. It is sufficient if well defined section of the public benefits
by the objects which means that the expression “object of general public
utility” is not restricted to objects beneficial to the whole mankind.

2. Receiving sponsorship is not a part of any business carried out by
the appellant. Merely receiving sponsorship from a business entity cannot
tantamount to a conclusion that the assessee has entered into a business
activity with such sponsorer.

3. The Hon’ble ITAT relied on the following decisions:

(a) CIT vs. Swastik Trading Co. Ltd. (113 ITR 852) wherein it was
held that establishing and maintaining Gaushalas and Panjrapole constitutes
charitable purpose.

(b) ICAI vs. Director General of Income Tax (Exem) (347 ITR 99)
where ICAI which was denied exemption u/s. 10(23C)(iv) of the Act because in
the opinion of the DGIT (Exem.) the institute was holding coaching classes and
therefore was not an educational institution. The Hon’ble Delhi High Court held
that the order denying the exemption was not valid.

Thus, in the Tribunal’s opinion, there was no material
which may suggest that the assessee association was conducting its affairs
solely on commercial lines with the motive to earn profit. There was also no
material which could suggest that the assessee association had deviated from
its objects which it had been pursuing since past many decades. The proviso to
section 2(15) of the Act was not applicable to the facts of the case and the
assessee-association deserved benefit u/s. 11/12 of the Act.

shailesh.kwebmaker

Section 234A – When the taxes have been deposited before the original due date of filing of return of income even though the return has been filed within the extended due date so notified by the CBDT, there would not be any levy of interest u/s. 234A where the returned income has been accepted or where the taxes deposited are higher than the taxes finally determined by the AO.

22. [2018] 196 TTJ 768 (JP – Trib.) Rajasthan State
Mines & Minerals Ltd vs. ACIT ITA No.: 47/Jp/2018
A.Y.: 2014-15.Dated: 24^th October, 2018

Section
234A – When the taxes have been deposited before the original due date of
filing of return of income even though the return has been filed within the
extended due date so notified by the CBDT, there would not be any levy of
interest u/s. 234A where the returned income has been accepted or where the
taxes deposited are higher than the taxes finally determined by the AO.

FACTS

The
due date of filing of return of income for A.Y.2014-15 was extended by the CBDT
vide its order u/s. 119 from 30.9.2014 to 30.11.2014. The assessee filed the
return on 28.11.2014. The assessee had paid self-assessment tax well before the
original due date of filing return of income. The AO while working out the
interest u/s. 234A had not given credit of self-assessment tax paid by the assessee.
Aggrieved by the assessment order, the assessee preferred an appeal to the
CIT(A). The CIT(A) confirmed the same.

HELD

The
Tribunal followed the ratio of the Hon’ble Supreme Court decision in the case
of CIT vs. Pranoy Roy & Anr. (2009) 222 CTR (SC) 6 wherein it was
held that the interest u/s. 234A of the Act on default in furnishing return of
income shall be payable only on the amount of tax that has not been deposited
before the due date of filing of the IT return for the relevant assessment
year. The Tribunal relying upon the judgement of Hon’ble Supreme Court, held
that where the taxes deposited before filing the return of income were more
than the taxes finally determined on regular assessment, the interest u/s. 234A
was held not leviable.

shailesh.kwebmaker

Section 271AAA r.w.s 132 and 153C – Where no search and seizure operation u/s. 132(1) was carried out in assessee’s case, initiation of penalty proceeding u/s. 271AAA by Assessing Officer was invalid.

21. [2018] 196 TTJ 812 (Mumbai – Trib.) DCIT vs. Velji
Rupshi Faria ITA No.:
1849/Mum/2017 A.Y.: 2008-09 Dated: 31^st August, 2018

Section
271AAA r.w.s 132 and 153C – Where no search and seizure operation u/s. 132(1)
was carried out in assessee’s case, initiation of penalty proceeding u/s.
271AAA by Assessing Officer was invalid.

FACTS

The assessee was
an individual and stated to be the key person pursuant to a search and seizure
operation u/s. 132(1) of the Act in certain business concerns. The Assessing
Officer (AO) initiated proceedings u/s. 153C of the Act against the assessee.
Pursuant to the notice issued u/s. 153C of the Act, the assessee filed its
return of income. During the assessment proceedings, the AO referring to the
incriminating material found in course of search and seizure operation made a
number of additions. While completing the assessment, the AO also initiated
proceedings for imposition of penalty u/s. 271AAA of the Act. And then passed
an order on 13^th March 2014.

Aggrieved
by the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) after considering the submissions of the assessee and having found that
search and seizure operation u/s. 132(1) of the Act was not carried out in case
of the assessee, followed the decision of the Tribunal, Ahmedabad Bench, in
case of Dy. CIT vs. K.G. Developers, ITA No.1139/Ahd./ 2012, dated 13^th
September 2013, and deleted the penalty imposed.

Being
aggrieved by the CIT(A) order, the Revenue filed an appeal before the Tribunal.

HELD

The
Tribunal held that only in case of a person in whose case search and seizure
operation u/s. 132(1) of the Act was carried out on or after 1^st Day
of 2007 but before the 1^st Day of July 2010, penalty proceedings
u/s. 271AAA of the Act could be initiated. The primary condition for initiating
penalty proceeding was, a person concerned must have been subjected to a search
and seizure operation u/s. 132(1) of the Act. In present case, no search and
seizure operation u/s. 132(1) of the Act was carried out. Thus, the primary
condition of section 271AAA of the Act remained unsatisfied. Even otherwise
also, if penalty proceedings u/s. 271AAA of the Act was initiated against a
person who was not subjected to search action u/s. 132(1) of the Act, the
provision itself became unworkable as no declaration u/s. 132(4) of the Act was
possible from any person other than the person against whom the search and
seizure u/s. 132(1) was carried out. In the end, the Tribunal upheld CIT(A)
order.

NOTE:
Section 271AAA was applicable for searches u/s. 132(1) initiated prior to the 1^st
day of July, 2012. For searches initiated on or after the 1^st day of
July, 2012, section 271AAB shall be applicable.

shailesh.kwebmaker

Section 115JB – For computing book profits u/s. 115JB, no adjustment can be made in respect of depreciation provided at a rate higher than that prescribed under Schedule XIV of Companies Act provided the assessee shows how and on what basis the specified period and the higher rate of depreciation was arrived at.

9. [2018] 93 taxmann.com 215
(Chennai)

Indus Finance Corporation Ltd
vs. DCIT

ITA No. : 1348/Chennai/2017

A.Y.: 2012-13

Dated: 03^rd May,
2018

Section 115JB – For computing book profits u/s. 115JB, no
adjustment can be made in respect of depreciation provided at a rate higher
than that prescribed under Schedule XIV of Companies Act provided the assessee
shows how and on what basis the specified period and the higher rate of
depreciation was arrived at.

FACTS

The
assessee, engaged in the business of providing non-banking financial services,
charged depreciation on wind mills at 80% as against 5.28% prescribed under
Schedule XIV of the Companies Act, 1956. The notes to the accounts mentioned
that depreciation on wind mill has been provided at the rates prescribed by the
Income-tax Act. For the purposes of computing book profits u/s. 115JB of the Act, the Assessing Officer (AO) sought to disallow the amount
of depreciation in excess of the amount computed by applying the rate
prescribed by Schedule XIV of the Companies Act, 1956. In the course of
assessment proceedings, it was submitted by the assessee that the rate of
depreciation given in Schedule XIV of the Companies Act was only the minimum
rate that had to be charged and the assessee was at a liberty to claim excess
depreciation when situation warranted. The AO, not being satisfied with the
contention of the assessee computed book profits by allowing depreciation on windmills
at the rate prescribed in Schedule XIV of the Companies Act, 1956.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal where on behalf of the assessee
it was contended that the wind mills had not performed to the level expected
and therefore assessee was constrained to charge depreciation, above the rate
prescribed under Companies Act and reliance was placed on the decision of
co-ordinate bench in the case of DCIT vs. Indowind Energy Ltd, (ITA
No.1854/2015, dated 25.10.2016).

HELD

The
Tribunal noted that the assessee can, at its option, choose to provide
depreciation at a rate higher than that prescribed under Schedule of the
Companies Act. However, in doing so, the
assessee must justify that the depreciation so computed, is in accordance with
section 205(2)(b) of the Companies Act which provides that depreciation can be
provided by dividing ninety-five per cent of the original cost thereof to the
company by the specified period in respect of such asset. It observed that
except for the note in the annual accounts, nothing was brought on record to
show how and on what basis the specified period and the higher rate of
depreciation was arrived by the assessee. In absence of justification by the
assessee on the basis of depreciation arrived by it, the Tribunal held that,
for the purposes of computing book profits u/s. 115JB, lower authorities were
justified in allowing depreciation based on the rates prescribed in the
Schedule. The Tribunal distinguished the decision relied upon by the assessee
by holding that the said decision was based on realistic facts.

shailesh.kwebmaker

Section 37(1) – Premium paid on keyman insurance policy, under which in the event of death of the directors assured sum had to be received by the assessee, is allowable expenditure u/s. 37(1) of the Act.

8. [2018] 93 taxmann.com 188
(Mumbai)

Arcadia Share & Stock
Brokers (P.) Ltd. vs. ACIT

ITA Nos. : 5854 &
5855/Mum/2016

A.Ys.: 2011-12 &
2012-13

Dated: 25^thApril,
2018

Section
37(1) – Premium paid on keyman insurance policy, under which in the event of
death of the directors assured sum had to be received by the assessee, is
allowable expenditure u/s. 37(1) of the Act.

FACTS

The
assessee, a private limited company, engaged in the business of share and stock
broking, claimed deduction on account of premium paid towards keyman insurance
policy taken in the name of two of its directors. In course of assessment
proceedings, the Assessing Officer (AO) called upon the assessee to furnish
necessary details. After verifying the details furnished by the assessee and
referring to the characteristic of keyman insurance, the AO called upon the
assessee to justify the deduction claimed. The assessment order stated that the
assessee submitted some literatures of keyman insurance policy, but did not
furnish any document to prove that the policies taken are keyman insurance
policy. The AO held the premium paid to be on life insurance policy and not on
keyman insurance policy. Accordingly, he held that the premium paid by the
assessee cannot be allowed as business expenditure and disallowed the amount of
premia paid.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD

The
Tribunal noted that the assessee had claimed deduction of the premium paid in
respect of such Insurance policy in assessment years 2005-06, 2006-07 and
2007-08. While completing assessments for these years
u/s. 143(3) of the Act, the AO after examining assessee’s claim, allowed
deduction in respect of premium paid. The Tribunal held that when it is a fact
on record that the Insurance policies are continuing from the year 2004 and in
the preceding assessment years assessee’s claim of deduction in respect of
premium paid have been allowed by the AO in scrutiny assessments, in the
absence of any material change in facts the deduction claimed in respect of
premium paid cannot be disallowed in the impugned assessment year, as the rule
of consistency must be applied.

It
observed that except stating that in the preceding assessment years the AO has
not properly examined the issue no material change was pointed which could have
influenced the AO to take a different view in the impugned assessment year
departing from the view taken in the preceding assessment years.

The
Tribunal noted that the keyman insurance policies were taken in the name of
directors in pursuance to resolution dated 24^th February 2004 of
board of directors and the sum assured under the insurance policy as per the
terms and conditions will come back to the assessee on the death of policy
holders. Accordingly, the Tribunal allowed assessee’s claim of deduction of
premium paid in both the assessment years.

The appeals filed by
the assessee were allowed.

shailesh.kwebmaker

Section 194IA – The limit of Rs. 50 lakh in section 194-IA(2) is qua the transferee and not qua the amount as per sale deed. Each transferee is a separate income-tax entity and the law has to be applied with reference to each transferee as an individual transferee/person.

26. [2018] 101 taxmann.com 190 (Delhi-Trib.) Pradeep Kumar
Soni vs. ITO (TDS) (Delhi) ITA No.:
2739/Del./2015 A.Y.:
2014-15.Dated: 10^th
December, 2018

Section 194IA
– The limit of Rs. 50 lakh in section
194-IA(2) is qua the transferee and not qua the amount as per
sale deed. Each transferee is a separate
income-tax entity and the law has to be applied with reference to each transferee
as an individual transferee/person.

FACTS

The Assessing
Officer (AO) received information from the Sub-registrar that vide an agreement
registered on 3^rd July, 2013, the assessee along with 3 other
persons has purchased an immovable property for a consideration of Rs. 1.50
crore.

The AO observed
that the assessee was required to deduct tax u/s. 194-IA @ 1% and deposit the
same to the credit of the Central Government. He, accordingly, called for
information u/s. 133(6) of the Act. In response, the assessee submitted that
each of the four transferees have jointly purchased the property and the share
of every co-owner is Rs. 37.50 lakh which is less than Rs. 50 lakh and
therefore, the provisions of section 194-IA are not applicable. The AO held
that since the consideration for the transfer of immovable property is Rs. 1.50
crore, i.e. more than Rs. 50 lakh, and the same is executed through a single
deed and registered the provisions of section 194-IA are applicable. He passed
an order u/s. 201(1) and 201(1A) of the Act holding the assessee and three
other transferees to be jointly and severally responsible for payment of
taxes.

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

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal
noted that the sale deed inter alia provided that “the Vendees have
become the absolute and undisputed owner of the above said plot in equal
share.” It also noted that section 194-IA(2) provides that section 194-IA(1)
will not apply where the consideration for transfer of immovable property is
less than Rs. 50 lakh. It observed that section 194-IA(1) is application to any
person being a transferee, so section 194-IA(2) is also, obviously, applicable
only with respect to the amount related to each transferee and not with
reference to the amount as per sale deed. It noted that in the instant case,
there are four separate transferees and the sale consideration w.r.t. each
transferee is Rs. 37.50 lakh, hence, less than Rs. 50 lakh each.

It held that
each transferee is a separate income-tax entity therefore, the law has to be
applied with reference to each transferee as an individual transferee/person.
The law cannot be interpreted and applied differently for the same transaction,
if carried out in different ways. The point to be made is that, the law cannot be
read as that in case of four separate purchase deed for four persons
separately, section 194-IA was not applicable, and in case of a single purchase
deed for four persons section 194-IA will be applicable.

The Tribunal
noted that AO has passed a common order for all four transferees u/s. 201(1).
The Tribunal stated that this was to justify his action since in case of
separate orders for each transferee separately, apparently, provisions of
section 194-IA could not have been made applicable since in each case purchase
consideration is only Rs. 37.50 lakh. This action of the AO shows that he was
clear in his mind that with reference to each transferee, section 194-IA was
not applicable.

The Tribunal
held that the addition made by the AO and confirmed by CIT(A) to be not
sustainable in the eyes of law and deleted the same.

The appeal
filed by the assessee was allowed.

shailesh.kwebmaker

Section 68 – Additions made to income of assessee, who was a non-resident since 25 years, were unjustified since no material was brought on record to show that funds were diverted by assessee from India to source deposits found in foreign bank account.

20. [2018] 100 taxmann.com 280 (Mumbai-Trib) DCIT(IT) vs. Hemant
Mansukhlal Pandya ITA Nos.: 4679
& 4680 (Mum) of 2016 and C.O. 58
& 159 of 2018 A.Y.s: 2006-07
& 2007-08 Dated: 16^th November, 2018

Section
68 – Additions made to income of assessee, who was a non-resident since 25
years, were unjustified since no material was brought on record to show that
funds were diverted by assessee from India to source deposits found in foreign
bank account.

FACTS

The
assessee, a non-resident since financial year 1995-96, is a director in a
company in Japan and living in Japan on business visa since 1990. He got permanent residency certificate from
Japan in 2001. The assessee has filed
his return of income for AY 2006-07 declaring total income of Rs.
5,51,667. Subsequent to processing of
the return, the assessment was reopened u/s. 147 of the Act for the reasons
recorded as per which information was received by Government of India from the
French Government under DTAA that some Indian nationals and residents have
foreign bank accounts in HSBC Private Bank (Swisse SA, Geneva) which were
undisclosed to the Indian Income-tax department. This information was received
in the form of a document (hereinafter referred to as ‘base note’) was processed
with that of the assessee’s Indian income-tax return and found that the details
contained in base note were matching with the information provided by the
assessee in his income-tax return. Accordingly, the DDIT(Inv), Unit VII(4),
Mumbai sent information to the concerned AO for further action. The AO, after
recording reasons, issued notice u/s. 148 of the Act for reopening of the
assessment.

In
the course of assessment proceedings the AO called for various details
including details of bank accounts maintained in HSBC, Geneva in original CD
and other details. In response to notice, the assessee, stated that he is a
non-resident for more than 25 years and being a non-resident, he is not under
obligation to declare his foreign assets and foreign income to the Indian
Income-tax Authorities; hence, the question of submitting the CD of the HSBC
Bank account or the consent waiver form does not arise. The AO, issued notice and asked the assessee
to file necessary details in support of HSBC Bank account maintained in Geneva
and also show cause as to why assessment shall not be framed u/s. 144 of the
Act, based on material available on record.

In
response, the assessee filed an affidavit and stated that his foreign bank
accounts and foreign assets have no connection with India or any Indian
business. No amounts from India have been transferred to any of his foreign
accounts directly or indirectly. The assessee
challenged the authenticity and correctness of the base note and contended that
no addition can be made merely on assumptions or presumptions. The assessee
further submitted that the bank account maintained in HSBC, Geneva is having no
connection with India and accordingly question of furnishing details of bank
accounts and foreign assets does not arise. He further stated that he has filed
his income-tax return regularly in India in the status of Non-resident
declaring whatever income accrued or deemed to accrue in India and such returns
have been accepted by the department. In the absence of any provisions to
declare foreign bank accounts and assets by non-residents to Indian Income-tax
department, the question of disclosing those accounts to Indian Income-tax
department does not arise and consequently, the amount lying in HSBC Geneva
account cannot be taxed in India.

The
AO added the peak balance in HSBC account, amounting to Rs. 48,95,304 (Rs.
45.52 per USD) by holding that since the assessee had not produced any
evidences to prove that the money deposited in his foreign bank account does
not have any source from India. He held
that since the assessee did not produce any documentary evidence to prove that
prior to 2001 he was permitted to have business/profession or work in Japan or
any other country the only conclusion that can be drawn is that prior to this
date, the assessee cannot be engaged in any business, profession or employment
in Japan. He also held that there is a prima
facie presumption of amounts in the said account being undisclosed and
sourced from India. The circumstances of the case point to only one thing with
regard to source of deposits in HSBC, Geneva accounts; that the deposits were
made by the assessee in his HSBC, Geneva account from sources in India which
have not been disclosed in his return of income.

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

Aggrieved,
the revenue preferred an appeal to the Tribunal.

HELD

The
Tribunal noted that the assessee had only one bank account in India of which
the bank statements from 1998 to 2008 were furnished by the assessee. On
perusal of the said bank statements it could be seen that no amounts have been
transferred by the assessee from this bank account in India to any of the other
bank accounts including HSBC Geneva. It
also noted that the balance maintained in this Indian Bank Account is so less
that it cannot fund an amount of Rs. 4.28 crore which has been added by the AO
to assessee’s income. The Tribunal
observed that the AO sought to put the onus of proving a negative that the
deposits in foreign bank accounts are not sourced from India, on the
assessee. It held that the AO is not
justified in placing the onus of proving a negative on the assessee. In fact, only a positive assertion can be
proved and not a negative one. The onus
of proving that an amount false within the taxing ambit is on the department
and it is incorrect to place the onus of proving negative on the assessee. The
Tribunal held that when the AO found that the assessee is a non-resident
Indian, he was incorrect in making addition towards deposits found in foreign
bank account maintained with HSBC Bank, Geneva without establishing the fact
that the said deposit is sourced out of income derived in India, when the
assessee has filed necessary evidence to prove that he is a non-resident since
25 years and his foreign bank account and assets did not have any connection
with India and that the same have been acquired/sourced out of foreign income
which has not accrued/arisen in India.

The Tribunal then proceeded to examine whether the government/
legislature intended to tax foreign accounts of non-residents. Having noted the clarifications of Minister
of State for Finance on the floor of the Loksabha and also the provisions of
the Black Money Act and the FAQs issued to the Black Money Act it held that the
AO, without understanding these facts and also without answering the
jurisdictional issue of whether the non-resident assessee was liable to tax in
India in respect of deposits in his foreign bank account, when he had proved
that the source of deposit was not from India, went on to make addition on
wrong footing only on the basis of information in the form of base note which
is unverified and unauthenticated. It
held that no material was brought on record to show that the funds were
diverted by the assessee from India to source the deposits found in foreign
bank account. The suspicion, however
strong, cannot take place of proof and no addition could be made on presumption
and assumption. The Tribunal held that
the AO had not proved that impugned addition could be made within the ambit of
section 5(2) r.w.s. 68/69 of the Act.

The
Tribunal also noted that the co-ordinate Bench of ITAT has in the case of Dy.
CIT vs. Dipendu Bapalal Shah [(2018) 171 ITD 602 (Mum.-Trib.)] decided an
identical issue in respect of foreign bank accounts and held that when the AO
failed to prove the nexus between deposits found in foreign bank accounts and
source of income derived from India, erred in making addition towards deposit
u/s. 68/69 of the Act.

As
regards reliance of the revenue on the decision of the Mumbai Bench of ITAT in
the case of Rahul Rajnikant Parikh [IT Appeal No. 5889 (Mum) 2016] the
Tribunal held that the said case has no application to the facts of the case as
in the said case, the Tribunal has not laid down any ratio. The matter was set aside to the file of the
AO. It is settled law that a
judgment/order delivered by consent has no precedential value.

The
Tribunal held that the AO erred in making addition towards deposit found in
HSBC Bank Account, Geneva u/s. 69 of the Act.
It held that the CIT(A) has rightly deleted the addition made by the AO.
The appeal filed by the revenue was dismissed.

shailesh.kwebmaker

[2016] 73 taxmann.com 91 (Kol – Trib.) Bombay Plaza (P.) Ltd. v. ACIT ITA Nos. 1641 & 1203 (Kol) of 2014 A.Ys.: 2006-07 and 2007-08, Dated: 02.09.2016

S. 22 r.w.s.
27(iiib) – The provisions of section 22
read with section 27(iiib) are not attracted in the case of an assessee who is
a licensee and not a lessee.

FACTS:

The assessee company, formed with the
main object of acquiring on license or by purchase, etc premises in India and
also to license or sub-license or lease or sub-lease such lands, or property or
premises, had entered into an agreement
dated 16.4.1991 with East India Hotels Ltd. under which it got on leave
and license basis 9000 sq. feet in Hotel Oberoi Towers, Bombay for the purpose
of using it as a shopping centre. The
tenure of the leave and license was for a period of 50 years at a fixed monthly
license fee agreed between the parties.
After acquiring the said shopping space the assessee utilized it in
granting different portions of the shopping space to various parties who were
interested in setting up shops there with the condition that shopkeepers had to
subscribe to a specific number of shares of the assessee apart from payment of
monthly charges. The assessee also
provided various services to the licensees like air-conditioning, telephone
services, maintenance, electricity, water, sanitary, security, etc. The assessee was basically involved in the
business of providing the said shopping space on license along with various
services. The consideration from this
activity was shown as business income.
The assessee claimed license fee paid to East India Hotels as a
deduction.

While assessing the total income of the
assessee under section 143(3) of the Act, the Assessing Officer (AO), in view
of the provisions of section 22 r.w.s. 27(iiib) of the Act, charged the said
income under the head `Income from House Property’.

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

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

The Tribunal noted that the license was
not only for use of the shop area but also for the use of facilities like
air-conditioners, use of elevators, etc.
It noted various clauses of the leave and license agreement with a view
to ascertain whether the subject matter of agreement was a lease or a
license. It noted the definition of
`lease’ under Transfer of Property Act and the definition of `license’ under
the Indian Easements Act and keeping in mind these definitions it laid down the
distinction between the lease and the license.
Applying the tests so laid down it came to the conclusion that the
parties intended it to be a license and the agreement did not create any
interest in the property owned by the licensor and that the licensee did not
have exclusive possession of the property.
The assessee, as a licensee, had granted sub-license to various parties
and derived income therefrom. It held
that once it is concluded that the assessee is only a licensee, then it can
safely be said that the provisions of section 22 read with section 27(iiib) of
the Act are not attracted. Accordingly,
it held that the income in question cannot be assessed under the head `Income
from House Property’.

The Tribunal also observed that keeping
in mind the objects of the assessee and the facts and circumstances of the
assessee’s case, it can be safely concluded that the assessee carried on a
systematic and regular activity in the nature of business and therefore the
income from granting the premises on sub-license was to be assessed under the
head `Income from Business’. It observed
that the latest decision of the Apex Court in the case of Chennai Properties
and Investments Ltd. (373 ITR 673)(SC) was not available to the Tribunal when
it passed the order in case of another group company based on which decision of
the Tribunal the CIT(A) confirmed the action of the AO.

The Tribunal held that in view of the
decision of the Apex Court in the case of Chennai Properties and Investments
Ltd. (supra) the question whether the assessee is a deemed owner under section
22 r.w.s. 27(iiib) of the Act, no longer assumes importance.

The Tribunal allowed the appeal filed by
the assessee.

shailesh.kwebmaker

[2016] 73 taxmann.com 36 (Mum – Trib.) Kamlesh M. Kanungo HUF v. DCIT- TDS ITA Nos.: 4045 & 4046 (Mum) of 2015 A.Ys.: 2011-12 and 2012-13, Dated: 19.09.2016

S. 221 r.w.s.
201 – For the purposes of Explanation
below section 221(1) which prescribes that an assessee shall not cease to be
liable to penalty under sub-section (1) of section 221 merely by reason of the
fact that before levy of such penalty, he has paid tax a distinction has to be
made between a case where the TDS is
deposited suo motu before any proceedings are initiated by the AO and a case
where the deposit of the TDS is made after initiation of proceedings by the AO
but before levy of penalty.

FACTS:

The assessee HUF deducted income-tax
amounting to Rs. 1,71,88,352 under section 194A of the Act but did not deposit
it by due date which was 31.5.2011 but deposited it only on 30.6.2011 along
with interest.

The Assessing Officer (AO) levied
penalty of Rs. 5,10,000 which was equivalent to 3% of the defaulted amount of
TDS.

Aggrieved, the assessee preferred an
appeal to CIT(A) who upheld the action of the AO by noticing that non-deposit
of requisite TDS to the Government Treasury was an admitted position.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

The Tribunal observed that the proviso
to section 221(1) clearly suggests that the levy of penalty under section
221(1) is not automatic and that the AO is empowered to use his discretion not
to levy penalty if the default is for good and sufficient reasons. It noted
that the bonafides of the assessee in complying with the requirements of
depositing the tax into the Government Treasury stood established in as much as
the tax had been deposited even before the corresponding interest amounts were
paid to the respective creditors and also before any proceedings were initiated
by the AO.

The Tribunal held that the Explanation
below section 221(1) refers to a situation where the tax has been paid “before
the levy of such penalty”, whereas in the facts of the present case the
assessee had deposited the requisite TDS along with applicable interest into
the Government Treasury even before any proceedings under section 201(1) of the
Act were initiated by the AO.
Considering the penal nature of section 221 it would be in the fitness
of things to make a distinction between a case where the TDS is deposited suo
motu before any proceedings are initiated by the AO and a case where the
deposit of TDS is made after initiation of proceedings by the AO but before
levy of penalty. It held that the
Explanation will not militate against the assessee because of this
distinction. The Tribunal held that
there existed ‘good and sufficient reasons’ to mitigate the default in
question, and thus, the proviso to section 221(1) of the Act clearly comes to
the rescue of the assessee.

The Tribunal deleted the penalty levied
under section 221(1) r.w.s. 201(1) of the Act by the AO.

The Tribunal allowed the appeal filed by
the assessee.

shailesh.kwebmaker

[2016] 72 taxmann.com 91 (Kol – Trib.) Union Bank of India v. ACIT ITA Nos. 7589 (Mum) of 2014 A.Y.: 2008-09, Dated: 11.08.2016

S. 244A – While granting refund in pursuance to the
appeal effect order, the amount of refund granted earlier should be adjusted
first against the interest component of the earlier refund and thereafter the
balance amount should be adjusted against the principal component of tax in the
refund order granted earlier.

FACTS:

The Assessing Officer (AO) while
computing the amount of refund arising as a result of passing an order giving
effect to the order of CIT(A) granted interest of Rs. 64,53,58,824 as against
the amount of Rs. 65,73,42,440 claimed by the assessee. The discrepancy, according to the assessee,
arose because the AO adjusted the refund granted to the assessee first against
principal amount of tax due instead of adjusting it first against the amount of
interest and thereafter against the principal amount of tax.

Aggrieved, the assessee filed an appeal
to the CIT(A) who distinguished the order of the Tribunal, in the assessee’s
own case, for earlier year on the ground that the said order of the Tribunal
has not considered the decision of the Apex Court in the case of Gujarat Fluoro
Ltd. (358 ITR 291).

Aggrieved, the assesse preferred an
appeal to the Tribunal.

HELD:

The Tribunal noted that the issue under
consideration was decided by the Tribunal, for AY1998-99, 2001-02 &
2005-06, in favour of the assessee. It
noted that the earlier orders of the Tribunal were based on decision of the
Delhi High Court in the case of India Trade Promotion Organisation wherein it was
inter alia held that in a situation where only part amount is refunded by the
Department, then payment of interest on the balance amount due from the
Department to the assessee, on a particular date, does not amount to payment of
interest on interest. The Delhi High
Court, while arriving at this decision, had taken support from the judgment of
the Supreme Court in the case of CIT v. HEG Ltd. (2010) 324 ITR 331 (SC).

The Tribunal observed that the facts
before it were similar to the facts of the case before the Delhi High Court in
the case of India Trade Promotion Organisation (supra) since in the present
case also only part amount was refunded in the first phase by the department
and when the balance amount was paid by the department in the second phase, the
assessee was entitled for interest on the balance amount of refund due. It held that, in view of the observations of
the Delhi High Court, it can be said that it is not a case of payment of
interest on interest. It also noted that
the Delhi High Court has held that the department ought to follow the same
procedure and rules while collecting tax and while issuing refunds.

The Tribunal held that since the statute
itself has already prescribed a particular method of adjustment in Explanation
to section 140A(1), then justice, fairness, equity and good conscience demands
that same method should be followed while making adjustment for refund of
taxes, especially when no contrary provision has been provided.

Following the order of the Tribunal of earlier
years, the Tribunal directed the AO to re-compute the amount of interest under
section 244A by first adjusting the amount of refund already granted towards
interest component and balance left, if any, shall be adjusted towards the tax
component.

The Tribunal allowed the appeal filed by
the assessee.

shailesh.kwebmaker

[2016] 73 taxmann.com 68 (Mum-Trib)(SMC) Smt. Manasi Mahendra Pitkar v. ACIT ITA No. 4223 & 4224/Mum/2015 A.Y.: 2011-12, Dated: 12.08.2016

S. 68 – The
bank pass book or bank statement cannot be construed to be a book maintained by
the assessee for any previous year as understood for the purposes of section
68.

FACTS:

These were two appeals preferred by
husband and wife. In both the appeals,
the common dispute was that the cash deposits made in the joint bank account to
the extent of Rs. 27,36,500 were treated as unexplained cash credits within the
meaning of section 68 of the Act. Substantive addition was made in the case of
Mahindra Chintaman Pitkar, the husband, and protective addition was made in the
case of Manasi Mahendra Pitkar, wife. The Tribunal in its order dealt with the
appeal in the case of husband as the lead appeal.

The assessee, an individual was employed
with Municipal Corporation of Greater Mumbai. The Assessing Officer (AO)
noticed that during the year under consideration cash aggregating to Rs.
29,53,500 was deposited in the joint bank account of the assessee and his wife
with Thane Janata Sahakari Bank.

On being asked the assessee explained
that the amounts were received from his father, father-in-law, son and various
other relatives & friends and that these amounts were used by him for
treatment of his wife who was bedridden and was suffering from the disease of
multiple sclerosis which required costly medical treatment. It was explained that expenditure of Rs. 30
lakh a year was required to be incurred for medical treatment of his wife and
since the assessee was a salaried employee with limited resources he had
received amounts from family members, relatives and friends for the medical
treatment of his wife.

The AO added the sum of Rs. 29,53,500 to
the total income of the assessee on a substantive basis and also made similar
addition on protective basis in the case of his wife.

Aggrieved, the assessee preferred an
appeal to CIT(A) who gave relief to the extent of Rs. 2,70,000 with respect to
withdrawals found in the bank account of assessee’s father and confirmed the
addition of Rs 27,36,500 as unexplained cash credit under section 68 of the
Act.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

In the course of hearing
before the Tribunal, affidavit of the assessee narrating the factual position
about the disease of his wife and the utilization of funds for the medial
treatment was filed and the documents in support of the facts narrated in the
affidavit were also filed. The Tribunal considered the ratio of the judgment of
Bombay High Court in the case of Bhaichand N. Gandhi (1983) 141 ITR 67
(Bom). It noted that the assessee did
not maintain any books of account and section 68 of the Act had to fail because
as per the judgment of the Hon’ Bombay High Court in the case of Shri Bhaichand
N. Gandhi (supra), the bank pass book or bank statement cannot be construed to
be a book maintained by the assessee for any previous year as understood for
the purposes of section 68 of the Act.
It held that on this account itself the addition deserves to be deleted.

The Tribunal also observed
that the circumstances in which the cash deposits were made and the purpose for
which such monies were utilized was emerging from record and no material was
found by the AO to disprove the same. It
noted that the assessee could not produce any formal corroborative evidence of
having received respective amounts from friends, relatives, however, it
observed that section 68 is a rule of evidence, and, the AO is expected to
consider the explanation rendered in the context of the circumstances of each
case.

The Tribunal held that the
addition is unsustainable in view of the ratio of the Bombay High Court in the
case of Shri Bhaichand N. Gandhi (supra).

The order of CIT(A) was set
aside and the AO was directed to delete the addition of Rs. 27,36,500 made
under section 68 of the Act.

Since the substantive
addition in the case of the husband was deleted, the Tribunal held that the
protective addition in the hands of the wife was also unsustainable.

The appeals filed by the
assessee were allowed.

shailesh.kwebmaker

[2016] 159 ITD 743 (Mumbai Trib.) ITO (TDS) (OSD) vs. Fino Fintech Foundation A.Y.: 2011-12 – Dated: 22.06.2016.

Section
194J read with Section 194C of the Income-tax Act, 1961- An assessee is
required to deduct tax under section 194J if it acquires or uses technical
knowhow which is provided by a human element. Mere use of technology by
contractors who provide services to the assessee would not make those services
technical services and hence when assessee makes payments to such contractors,
tax is required to be deducted under section 194C and not under section 194J.

FACTS:

The assessee Company was
involved in providing banking services through its network of agents in
extremely rural areas by use of a device called “Point of Transaction Machine
(POT)”.

The transactions of the
beneficiary/customers were settled at the end of the day by connecting the POT
to the Bank Server and the transactions of the beneficiary got reflected in the
beneficiary’s bank account.

In the relevant
assessment year, the assessee company had deducted tax u/s 194C on the payments
made to contractor towards the major expenses incurred under the heads – enrollment
charges, AMC charges, POT usage charges and rent for POT machines.

The AO observed that the
assessee was providing services for opening bank accounts to different banking
institutions in rural areas and that for opening bank accounts it was taking
help of other service-providers who would mobilise technical manpower for
opening the bank accounts. The service providers would prepare bio-metric and
demographic particulars of the customers and put the same in bank network for
the assessee.

The AO held that the
services of capturing photos and finger-prints by web camera and scanner
required highly technical skill and specified software and that the procedure
could not be performed by non-technical person. Hence, for such services,
payments made by the assessee under the heads enrollment expenses and AMC
charges would attract tax deduction under section 194J of the Act. Hence the AO
held that the assessee was in default under section 201(1) for the shortfall of
tax deduction and under section 201A for interest on the shorfall.

Aggrieved by the order of
the AO the assessee preferred an appeal before the First Appellate Authority
(FAA). The assessee argued that it had hired services of service provider as a
contractor and that mere use of technology and/or technical equipments by
service providers while doing the said composite work for assessee would not
make it as a technical service and hence the tax was rightly deducted u/s. 194C
of the Act.

The FAA held that
provisions of 194C were applicable as there was no acquisition / use of
technical know-how by the assessee.

On revenue’s appeal –

HELD:

In case of CIT v.
Delhi Transco Ltd. [2015] 380 ITR 398 the Hon’ble Delhi High Court has defined
the word technical services while dealing with the section 194 J of the Act, in
the following manner-

Section 194J of the Income-tax Act, 1961, provides
for deduction of tax at source from fees for technical services. Technical
services consist of services of technical nature when special skills or
knowledge relating to technical field are required for their provision,
managerial services are rendered for performing management functions and
consultancy services relate to provision of advice by someone having special
qualification that allow him to do so. What constitutes technical services
cannot be understood in a rigid formulaic manner. It will vary from industry to
industry. There will have to be a specific line of enquiry for determining what
in a particular industry would constitute rendering of a technical service.

In the case under
consideration, the FAA has rightly held that the provisions of section 194J
would not be applicable based on the following observation –

The services provided to the assessee were manual in
nature and no specific skills were required to provide the said services. The
services rendered by the parties to the assessee were neither in the nature of
fee for professional services, nor in the nature of managerial, technical or
consultancy services. Mere use of technology would not make it technical
services. For provisions of section 194J to be applicable, it is necessary that
there must either be acquisition or use of technical knowhow which is provided
by a human element. There was no acquisition of technical expertise/knowhow by
the assessee and the service providers were contractors executing contracts for
projects undertaken and hence the provisions of section 194C were applicable.

In the case under
consideration there is a use of technology, but, it does not mean that it is
not a contract. There is no legal or factual infirmity in the order of the FAA
and the assessee has rightly deducted tax as per the provisions of section 194C
of the Act.

Note – Relying on
the decision in case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 it was
also held that, the expression “fees for technical services” in
section 194J of the Income-tax Act, 1961 has the same meaning as given to the
expression in Explanation 2 to section 9(1)(vii) of the Act. In the said explanation
the expression “fees for technical services” means any consideration
for rendering of any “managerial, technical or consultancy services”.
Applying the rule of noscitur a sociis, the word “technical” would
take colour from the words “managerial” and “consultancy”,
between which it is sandwiched. Since both the words “managerial” and
“consultancy” involve a human element, the word “technical”
would also have to be construed as involving a human element.

shailesh.kwebmaker

[2016] 159 ITD 255 (Pune Trib.) S.R.Thorat Milk Products (P.) Ltd. vs. Asst. CIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10, Date of Order: 20.05.2016

Section
37(1) read with Section 36(1)(iii) – The share application money
pending allotment per se cannot be characterized and equated with share capital
as the obligation to return the share application money is always implicit in
the event of non-allotment of shares and consequently if the assessee incurs
interest expense on the share application money pending allotment, the said
interest expense can be claimed as revenue expenditure by the assessee.

FACTS:

During the various years
under appeal, the assessee had claimed deduction of interest paid, at the rate
of 12% per annum, on share application money pending allotment, while computing
business income.

The AO was of the opinion
that conditions laid down under section 36(1)(iii) are not fulfilled because ingredients
of borrowing as a positive act of lending by one and expense thereof by the
other, coupled with an obligation of refund or repayment thereof are not
present when the interest is paid on receipts in the nature of share
application money. Further the AO held that expenditure on account of interest
paid on share application money is not revenue but capital expenditure in
nature and therefore is not allowable under section 37(1) of the Act. He
accordingly disallowed the interest claimed by the assessee.

The CIT-(A) concurred
with the view of the AO and disallowed the claim of the said interest expense by
stating that when the money had been received with the intention of allotment
of shares, it could not subsequently acquire the colour of borrowed funds even
though it might have been utilized for business purposes.

Aggrieved by the order of
the CIT-(A), the assessee filed appeal before the Tribunal.

HELD:

Even though the share
application money has been pending allotment for a substantial period of time,
the revenue has not disputed the contention of the assessee that the share
application money was utilized for business purposes.

In our opinion, the share
application money per se cannot be characterized and equated with share
capital. The obligation to return the money is always implicit in the event of
non-allotment of shares in lieu of the share application money received.
Allotment of shares is subject to certain regulations and restrictions as provided
under the Companies Act and receipt by way of share application money is not
receipt held towards share capital before its conversion. Therefore, payment of
interest on share application money cannot be treated differently in the
Income-tax Act.

Relevant extract of the
observation made in case of ACIT v. Rohit Exhaust Systems (P.) Ltd. in IT Appeal
No.686 / 687 of 2011-

The
Hon’ble ITAT, Pune in the case of Western India Forging Ltd. ITA No.
419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52)
has held that following the principle of commercial expediency, interest paid on
share application money pending allotment utilized for business purpose is an allowable
expense.

On
perusal of the said case of Western India Forging Ltd (supra), it has also been
noticed that as per provisions of section 69(5) of the Companies Act, 1956 a
company has to pay interest @6% per annum and as per provisions of section
73(2) of the Companies Act, 1956 the maximum interest rate prescribed is 15% on
return of share application money.

Accordingly, the claim of
interest expenditure on share application money pending allotment was allowed
as revenue expenditure.

shailesh.kwebmaker

[2016] 72 taxmann.com 147 (Delhi – Trib.) Sanjeev Puri vs. DCIT A.Y.: 2010-11 Date of order: 11th July, 2016

Section 54F – For the purposes of section 54F, the question whether the assessee owns more than one residential house other than the new asset is to be determined based on the actual user of the property and not on the basis of what is shown in municipal record and therefore, ownership of a flat which is shown as a residential house in municipal records but is actually used as an office is not to be regarded as ownership of a “residential house”.

FACTS
During the previous year relevant to the assessment year 2010-11, the assessee, a senior advocate, sold his rights in his Gurgaon Flat and earned long term capital gain of Rs. 1,48,23,645. This long term capital gain was invested in a residential property within the specified time and exemption claimed u/s. 54F of the Act. This claim for exemption u/s. 54F was denied by the Assessing Officer (AO) on the ground that the assessee was owner of more than one residential house.

The contention of the assessee that the property belonging to the assessee being property at E-575A, Ground floor, Gr. Kailash-II, New Delhi was used by the assessee as his office and therefore the same is not regarded as a residential house owned by the assessee for the purposes of section 54F of the Act was not accepted by the AO on the ground that as per the municipal records and the sale deed this property was a residential property.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that there was no dispute about the fact that the property E-575A, GK-II, New Delhi, owned by the assessee was being used by him as his office during the relevant period but the only dispute between the assessee and the Revenue remained on the entitlement of the deduction u/s. 54F of the Act on the basis of actual user of the property i.e. office use and not merely on the basis of the municipal record showing the property meant for residential use or in the sale deed shown as residential type.

The Tribunal noted that the ratio of the following decisions

(i) CIT vs. Geeta Duggal (357 ITR 153)(Del);

(ii) ITO vs. Ouseph Chacko (271 ITR 29 (Ker);

(iii) Smt. P. K. Vasanthi Rangarajan vs. CIT (23 taxmann. com 229)(Mad);

(iv) ITO vs.. Rasiklal & Satra (98 ITD 335)(Mum Trib); and

(v) ITO vs.. Smt. Rohini Reddy (122 TTJ 423)(Hyd.)

support the stand of the assessee that for availing the deduction u/s. 54F of the Act, the property though shown as residential on the record of the municipality but the test will be actual user of the premises by the assessee during the relevant period. It held that the actual user thereof by the assessee will be considered while adjudicating upon the eligibility of deduction u/s. 54F of the Act and the fact that the property has been shown as residential house on the record of the government authority does not make a difference.

The Tribunal held that the AO should not have considered the property E-575A, GK-II, New Delhi to be residential property on the basis of municipal record by ignoring the actual use thereof as office of the assessee. The authorities below were held to be not justified in denying the claim of deduction u/s. 54F on the basis that the assessee was owning more than one residential house by including the said house used as office to be a residential house.

The Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

[2016] 159 ITD 165 (Pune Trib.) Cooper Corporation (P.) Ltd. vs. Deputy CIT A.Y.: 2008-09. Date of order: 29th April, 2016.

Section 37(1) – When the assessee converts Indian rupee loan borrowed for purchasing assets from India into foreign currency loan for taking benefit of lower interest rates and thereafter as per AS – 11 translates foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and such translation results in business loss, then the resultant loss is allowed as deduction u/s 37(1) as such loss is dictated by revenue considerations of saving interest costs.

FACTS
The assessee had initially availed various term loans in Indian rupees from banks for acquisition of assets and for expansion of project, etc. Subsequently, said loans were converted into foreign currency loans to take benefit of lower rate of interest on such foreign currency loans visa- vis loans in Indian rupee.

The assessee, following Accounting Standard – 11 (AS- 11) issued by Institute of Chartered Accountants of India (ICAI), translated foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and the same resulted in exchange loss. The said translation loss resulted in business loss which was disallowed by the AO.

The assessee argued before the AO that there is no provision in the Income-tax Act to reject the loss incurred on fluctuation in exchange as revenue expense except section 43A which provides for capitalization of such loss where the loan was taken on acquisition of any capital asset outside India. Since the assessee had not acquired assets from a country outside India section 43A was not applicable.

However, the AO held that the so-called loss was merely a notional loss and not an actual loss incurred by the company. The Assessing Officer further observed that even presuming that increased liability for repayment of foreign currency loans had been saddled on the assessee, still the same would be a payment of capital nature since impugned loans were obtained for acquiring the capital asset. The AO, thus, held that the loss claimed on account of fluctuation in the foreign exchange rate could not be allowed as revenue expenditure.

On appeal, the CIT-(A) granted partial relief to assessee on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items such as bill discounting, debtors, etc. However, in respect of other loans, the CIT-(A) observed that such loans were taken for capital purposes such as acquisition of assets and expansion of the projects and, therefore, the assessee was not entitled to losses from fluctuation in currency as revenue expenditure.

On second appeal:

HELD
It may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to section 43(1). Section 43(1) defines the expression ‘actual cost’. As per section 43(1), actual cost means actual cost of the assets of the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to section 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets.

The issue is also tested in the light of provision of section 36(1)(iii) governing deduction of interest costs on borrowings. Section 36(1)(iii) states that utilization of loan for capital account or revenue account purpose has nothing to do with allowing deduction of corresponding interest expenditure. A proviso inserted thereto by Finance Act, 2003, also prohibits claim of interest expenditure in revenue account only upto the date on which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure.

Thus, viewed from the perspective of section 43(1) and section 36(1)(iii), such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms of overriding provisions of section 43A.

CBDT notification S.O. 892(E) dated 31-3-2015 also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in section 43A or rule 115 of the Income Tax Rules, 1962 as the case may be.

A bare reading of section 43A, which opens with a non obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that section 43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It, therefore, deals with realised exchange gain/loss. The treatment of unrealised exchange gain/loss is not covered under the scope of section 43A. It is, thus, apparent that special provision of section 43A has no application to the facts of the case. Therefore, the issue whether the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines, etc.

The Supreme Court in the case of CIT vs. Tata Iron and Steel Co. Ltd. [1998] 231 ITR 285 held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Therefore, fluctuations in foreign exchange rate while repaying instalments of foreign loan raised to acquire asset cannot alter actual cost of assets. The assessee may have raised funds to purchase the asset by borrowing but what the assessee has paid to acquire asset is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset.

The assessee has inter alia applied AS-11 dealing with effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting period.

As per section 209 of the Companies Act, 1956, the assessee being a company is required to compulsorily follow mercantile system of accounting. Section 211 of the Companies Act, 1956 also mandates that accounting standards as applicable are required to be followed while drawing statement of affairs. Section 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. The Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 has observed that AS-11 is mandatory in nature. Thus, in view of the various provisions of the Companies Act and the Income-tax Act, it was mandatory for the assessee to draw accounts as per AS-11. Thus, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising there from. Actual payment of expense is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent.

Besides AS-11, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and, consequently, to augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore, has a direct nexus to the saving in interest costs without bringing any new capital assets into existence. Thus, the business exigencies are implicit as well explicit in the action of the assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, the plea of the assessee that claim of expenditure is attributable to revenue account has considerable merits.

For the aforesaid reasons and in the light of the fact that the conversion in foreign currency loans which led to impugned loss were dictated by revenue considerations towards saving interest costs, etc., the said loss is considered as being on revenue account and is an allowable expenditure u/s. 37(1). The order of the CIT-(A) sustaining the disallowance is thus reversed.

shailesh.kwebmaker

[2016] 71 taxmann.com 136 (Delhi-Trib)(SMC) Sushil Kumar Jain vs. ACIT A.Y.: 2006-07 Date of order: 24th June, 2016

Section 147 r.w.s. 154 – Initiation of two parallel proceedings on a similar subject matter, cannot sustain. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be initiated.

FACTS
The assessee, a senior advocate by profession, filed his return of income for assessment year 2006-07 declaring total income of Rs. 8,39,253. The Assessing Officer (AO) vide order dated 26.3.2008, assessed the total income of the assessee to be Rs. 8,56,753.

The AO issued notice u/s. 154 of the Act dated 23.2.2011 intimating the assessee that he proposes to rectify the order passed u/s. 143(3) of the Act to include in his total income receipts of Rs. 4,47,600 which were received by the assessee, as per TDS certificates, but which were not included in total income.

Subsequently, the AO reopened the assessment on the ground that assessee has claimed credit for TDS against current years income on receipts of Rs. 4,47,600 but the same have not been offered for taxation. The assessment was completed u/s. 147 r.w.s. 143(3) of the Act by making a total addition of Rs. 2,37,500.

Aggrieved, the assessee preferred an appeal to CIT(A) and interalia argued that since the AO had issued notice u/s. 154 of the Act initiation of reassessment proceedings was not valid.The CIT(A) upheld the initiation of reassessment proceedings and the additions made.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal on perusal of copy of notice u/s. 154 along with the reasons recorded for reopening observed that the subject matter of both the notices was the same viz. receipts of Rs. 4,47,600 which in the opinion of the AO had escaped taxation. The Tribunal observed that during the continuation of the proceedings u/s. 154, the AO embarked upon the same issue by means of a separate reassessment proceedings without concluding the earlier proceedings initiated u/s. 154. It goes without saying that initiation of two parallel proceedings on a similar subject matter, cannot be sustained. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be sustained. The Tribunal held that since the rectification proceedings u/s. 154 were initiated in 2011 and these were still on in the year 2013, when the proceedings u/s. 147 were initiated on the same subject matter, the proceedings u/s. 147 cannot stand during the continuation of proceedings u/s. 154. The Tribunal set aside the initiation of reassessment proceedings by means of a notice u/s. 148 and the proceedings flowing therefrom.

The appeal filed by the assessee was allowed.

shailesh.kwebmaker

[2016] 159 ITD 199 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO A.Y.: 2012-13. Date of order: 31st May, 2016.

Sections. 2 and 4, read with sections 45, 56(2) (viii) and 145A – If the assessee receives interest, to compensate for the time value of money, on account of delay in payment of the motor accident compensation, then such interest takes the same character as that of the accident compensation and since the said accident compensation, being capital receipt, is not taxable, consequently receipt of interest on such compensation is also not taxable.

FACTS
The assessee had met with a serious motor car accident which had left her permanently disabled. The competent authority termed the disability at ninety per cent level.

She had claimed compensation of Rs.15,00,000/- for this tragic loss of her physical abilities. She was, finally after 21 years, awarded the said compensation along with the interest of Rs.14,94,286/- by Hon’ble Supreme Court. The said interest was computed using 8% interest rate, on the enhanced compensation, from the date of filing the claim petition before MACT (Motor Accidents Claims Tribunal) till the date of realization.

The assessee had not offered the said interest income to tax. The main contention of the assessee was that the interest which is received by any person under any statute is taxable under the Act, however, if the interest is awarded by courts of higher authorities as part of fair and equitable compensation, the same is capital receipt and hence not taxable in the hands of the assessee.

The AO was of the opinion that the interest received on the said compensation came within the purview of section 145A(b) read with section 56(2)(viii) and hence, after allowing deduction of Rs.7,47,143/- as per provisions of section 57(iv) of the Act, taxed the balance Rs.7,47,143/- as income from other source.

The CIT-(A) upheld order of the AO.

On second appeal before the Tribunal.

HELD
Section 145A provides that interest received on compensation or enhanced compensation shall be deemed to be income of the year in which it is received. This provision was enacted with a view to mitigate hardship to taxpayers, where interested was awarded by judicial forums but on account of the decision being challenged the same was not received.Clause (viii) in sub-section (2) of section 56 provides that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as ‘income from other sources’ in the year in which it is received.’

Section 145A deals with the method of accounting i.e. cash or mercantile and has its focus on the point of time when an income is taxable rather than taxability of income itself. Thus, when an income is not taxable, section 145A has no relevance. Nothing else needs to be read in this provision.

Section 56(2)(viii), is only an enabling provision, to bring interest income to tax in the year of receipt rather than in the year of accrual.

Thus only when interest received by the assessee is in the nature of income, such interest can be taxed u/s. 56(2)(viii). Section 56(1) makes this aspect even more clear when it states that income of every kind, which is not to be excluded from the total income under the Incometax Act, shall be chargeable to income tax under the head income from other sources, if it is not chargeable to income tax under any of the heads, and then, in the subsequent provision, i.e., section 56(2), proceeds to set out an illustrative, rather than exhaustive list of, such ‘incomes’. Clearly, section 56 does not decide what constitutes income. What section 56 holds is that if there is an income, which is not taxable under any of the other heads u/s. 14, then it is taxable under the head ‘income from other sources’.

To suggest that since an item is listed u/s. 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse.

The payment made to the assessee is in the nature of compensation for the loss of her mobility and physical damages. Clearly, such a receipt, in principle, is a capital receipt and beyond the ambit of taxability of income, since only such capital receipts can be brought to tax which are specifically taxable u/s. 45. As it is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of income by way of specific provisions. The accident compensation is thus not taxable as income of the assessee.

What is termed as interest takes the same character as that of the accident compensation and it seeks to compensate the time value of money on account of delay in payment of the compensation. Such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate of interest. In this case, the interest is awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-a-vis the point of time when it was actually paid, or, for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the Motor Accident Claims Tribunal, it would have been principal sum but since there is an inordinate, though partial, delay in payment of this amount, interest payment is to factor for fall in value of money in the meantime. The transaction thus remains the same, i.e., compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in a somewhat distant past.

If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. Essentially, this conclusion supports the school of thought that when principal transaction itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction as well.

The authorities below were thus completely in error in bringing the interest awarded by the Supreme Court to tax. The question of deduction u/s. 57(iii), given the above conclusion, is wholly irrelevant. The order of the AO taxing the interest on accident compensation and the order of the

CIT-(A) confirming AO’s order is disapproved.

In result, the appeal of the assessee is allowed.

shailesh.kwebmaker

[2016] 158 ITD 480 (Mumbai Trib.) Siemens Nixdorf Informationssysteme GmbH vs. DDIT (International Taxation) A.Y.: 2002-03 Date of order: 31 March, 2016

Section 2(14) – a non-resident company, gavea loan to its wholly owned subsidiary which constituted property – in sense it is was an assetwhich a person could hold and enjoyand not covered by exclusion clauses set out in section 2(14), it was required to be treated as a ‘capital asset’ and consequently any loss arising on sale of said asset, would be treated as short term capital loss.

FACTS
The assessee, a non-resident company, had given loan to its wholly owned subsidiary in India as its subsidiary had run into serious financial troubles and there was also a proposal to wind up the said subsidiary. The assessee sold the debt, that it had given to its subsidiary, Siemens AG, for a less consideration and claimed the short term capital loss on this transaction of sale of book debt.

The AO disallowed the deduction of capital loss on the basis of the reasoning that

a. the assessee’s right to recover the loan of Euro 90,00,000 from its subsidiary was not a capital asset u/s. 2(14);

b. the assignment of this debt, or the right to recover the money from subsidiary, was not a transfer u/s. 2(47);

c. even going by the valuation report, what was recoverable was part of said sum i.e. Euro 7,31,000 only and what was not recoverable could not be transferred either; and

d. it was a sham transaction only with the tax motives since the advance to the subsidiary was in the capital field and a capital loss was not allowed as deduction.

The CIT-(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The advance given by the assessee to its subsidiary was a property, in the sense it was an interest which a person could hold and enjoy. Section 2(14) defines a ‘capital asset’ as ‘property of any kind held by an assessee, whether or not connected with his business or profession’ except as specifically excluded in the said section. So far as business assets are concerned, the exclusion is only for ‘(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession’.

Thus the said advance was required to be treated as a ‘capital asset’.

Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so, that the debt was not a capital asset. As regards CIT-(A)’s observation to the effect that ‘a loan is a current asset and not a capital asset’, it was pointed out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression u/s. 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains.

As regards the CIT-(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, there is no relevance or basis in these observations. The capital asset was the money recoverable from an Indian entity which was thus essentially required to be treated as in India, and, as was mandate of section 9(1)(i) any income, inter alia, ‘through the capital asset situated in India’ is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset u/s. (14), swayed by the considerations which were not germane in this context

Section 2(47)(i) provides that ‘transfer, in relation to a capital asset, includes: sale, exchange or relinquishment of the asset’. Therewas no dispute that all the rights to recover the money from the Indian entity, which was what the capital asset was in this case, was sold to Siemens AG for a consideration of Euro 7,31,000. The sale of trade debts, or even loans, is a part of day to day trade and commerce. The CIT-(A) has not even raised any issues on this aspect of the matter.

As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bona fides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored.

There is also no dispute that if the capital loss was to be allowed, the loss had to be short-term capital loss.

In view of the above discussions, as also bearing in mind entirety of the case, the AO was directed to allow the shortterm capital loss.

shailesh.kwebmaker

[2016] 70 taxmann.com 265 (Chandigarh – Trib.) Sanjeev Aggarwal vs. DCIT A.Y.: 2011-12 Date of order: 25 May, 2016

Sub-section 143(2), 147, 292BB – Failure to
issue notice u/s. 143(2) could not be cured by resorting to deeming
fiction under section 292BB.

FACTS
The assessee had
filed its return of income on 14.8.2011 declaring total income of Rs.
30,10,400 which was processed u/s. 143(1) on 12.10.2011 and subsequently
the case was reopened after recording reasons on 18.3.2014 and notice
u/s. 148 was issued and duly served on the assessee on 25.3.2014. In
response, the assessee vide his letter dated 25.6.2014 submitted that
the original return of income filed by him may be treated as a return
filed in response to notice issued u/s. 148 and requested for reasons
recorded for reopening the assessment which were provided to the
assessee vide letter dated 27.6.2014. Notice dated 25.9.2014 was issued
u/s. 142(1) of the Act along with detailed questionnaire. After a
detailed discussion the Assessing Officer (AO) passed an order dated
31.12.2014 u/s. 147 r.w.s. 143(3) of the Act assessing the total income
to be Rs. 1,42,64,299.

Aggrieved, the assessee preferred an
appeal to the CIT(A) where it took a legal ground that assessment
completed by the AO needs to be quashed and declared to be null and void
since no notice u/s. 143(2) of the Act was issued. The CIT(A) held that
since the assessee had appeared in the assessment proceedings, by
virtue of provisions of section 292BB it is deemed that the notice
required to be served on the assessee was duly served on him in time.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The
Tribunal noted that it is undisputed that the notice under section
143(2) of the Act was not issued by the AO. Therefore, the only issue
before it was whether in the absence of issue of notice under section
143(2) of the Act, the assessment framed u/s.147 r.w.s. 143(2) of the
Act is valid in the background of provisions of section 292BB of the
Act.

The Tribunal on perusal of section 292BB concluded that
section 292BB talks about only the situation where the assessee raises
the issue of non-service of a notice and still co-operates with the
Department. Otherwise also, it stated that the issuance of statutory
notice cannot be dispensed with by the co-operation of the assessee. It
concurred with the assessee that the judgment of Punjab & Haryana
High Court has in the case of CIT vs. Cebon India Ltd. (2012) 347 ITR
583 (Punj. & Har.) has held that the absence of a statutory notice
cannot be cured u/s. 292BB of the Act.

As regards the contention
of the revenue that the provisions of section 148 constitute a complete
code by itself, the Tribunal held that the provisions of section 148 of
the Act itself negate the view taken by the revenue. It observed that
once the assessee files return in pursuance of notice u/s. 148 of the
Act, which is deemed to be filed u/s. 139 of the Act and in case the AO
wants to proceed with the return filed by the assessee, he has to issue a
notice u/s. 143(2) of the Act. Any assessment framed without issue of
notice u/s. 143(2) of the Act, suffers from jurisdictional error. This
position of law has also been clarified by the Delhi High Court in the
case of Alpine Electronics Asia Pte Ltd. vs. DGIT (2012) 341 ITR 247
(Delhi).

In view of the above, the Tribunal quashed the order of
the AO since it was made without issue of notice u/s. 143(2) of the
Act.

This ground of appeal filed by the assessee was allowed.

shailesh.kwebmaker

[2016] 70 taxmann.com 261 (Pune- Trib.) S. R. Thorat Milk Products (P.) Ltd. vs. ACIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10 Date of order: 20 May, 2016

Sub-section 36(1)(iii), 37 – Interest paid on share application money pending allotment would be allowable as a revenue expenditure. Share application money per se cannot be characterized and equated with share capital. Obligation to return the money is always implicit in the event of non-allotment of shares in lieu of share application money received.

FACTS
The assessee, a closely held company, engaged in the business of processing of milk and manufacturing of milk products, had in its return of income for assessment year 2004-05 claimed interest expense of Rs. 23,04,273 on account of interest paid on share application money received from existing shareholders pending allotment. Similar expense was claimed in other assessment years.

The Assessing Officer (AO) was of the view that the expenditure cannot be allowed under section 37 since it is a capital expenditure and it cannot be allowed u/s. 36(1) (iii) since the ingredients of borrowing by the assessee as also a positive act of lending by one and expense thereof by the other, coupled with an obligation of refund or repayment thereof were not present when the interest is paid on receipts in the nature of share application money. The AO disallowed the interest claimed to have been paid at the rate of 12% per annum.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Rohit Exhaust Systems (P.) Ltd. in ITA No. 686/PN/2011 and others, order dated 5.10.2012. In view of the decision of the co-ordinate bench, the Tribunal held that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of a share is subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion (sic allotment). Therefore, payment of interest on share application money cannot be treated differently in the Income-tax Act. Once the contention of the assessee that the money has been utilized for the purpose of business remains uncontroverted, there is no justification to hold the issue against the assessee. The Tribunal directed the AO to delete the addition on merits.

The Tribunal allowed the appeals filed by the assessee.

shailesh.kwebmaker

[2016] 70 taxmann.com 389 (Raipur) ACIT vs. Jindal Power Ltd. A.Y.: 2008-09 Date of order: 23 June, 2016

Section 37, Explanation 2 to section 37 – Voluntary expenses incurred, prior to 1.4.2015, on corporate social responsibility are deductible. Explanation 2 to section 37(1) inserted with effect from 1.4.2015 providing that expenditure incurred on corporate social responsibility referred to in Companies Act, 2013 shall not be deemed to be an expenditure incurred for purpose of business or profession does not have retrospective effect.

FACTS
The assessee had in its return of income claimed a sum of Rs. 24,45,435 on account of expenses incurred on discharging corporate social responsibility. This expenditure mainly related to expenses incurred on construction of school building, devasthan / temple, drainage, barbed wire fencing, educational schemes and distribution of clothes, etc voluntarily. The Assessing Officer (AO) disallowed this expenditure on the ground that it was incurred voluntarily, and was not for business purpose.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
As regards the contention of the AO that the expenditure is voluntary and not mandatory, the Tribunal held that as long as the expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature.

As regards the contention on behalf of the revenue that the provisions of Explanation 2 to Section 37(1) be regarded as clarificatary in nature, the Tribunal held that the Explanation refers only to such corporate social responsibility expenses which fall under section 135 of the Companies Act, 2013, and as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in 2013. Explanation 2 to section 37(1) was held to be inherently incapable of retrospective application any further. The Tribunal also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1.4.2015 and in this view of the matter also, there is no reason to hold this provision to be retrospective in application.

The Tribunal observed that the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed as deduction in computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. The Tribunal observed that there is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April, 2015, the Tribunal held that the disabling provision of Explanation 2 to section 37(1) does not apply to the facts of the case.

This ground of appeal of the revenue was dismissed.

shailesh.kwebmaker

[2016] 73 taxmann.com 363 (Pune – Trib.) Quality Industries vs. ACIT A.Y.: 2010-11 Date of Order: 9th September, 2016

Section 14A – interest paid on
partners’ capital does not qualify as `expenditure’ for the purpose of section
14A.

Facts

The assessee firm, engaged in the
business of manufacturing of chemicals etc., filed return of income for assessment
year 2010-11 declaring
total income of Rs.95,65,090/-.
in the course of assessment proceedings,
the Assessing Officer (AO)
noticed that the assessee has,
inter-alia, earned tax free dividend income amounting to Rs.24,63,700/- from
investment in mutual funds which was claimed as exempt income under section
10(35) of the Act. The AO also noted
that the assessee’s investments in mutual funds as on 31.3.2010 was Rs.4,41,88,955/- and the corresponding amount
as on 31.03.2009 was Rs.3,18,39,548/-. He observed that the partners of the
assessee firm were charging interest on capital introduced by them into the
firm. Total interest claimed as deduction against taxable income was Rs. 75,63,615
which comprised of interest on bank loans Rs.75,615/- and interest on partner’s
capital to the tune of Rs.74,88,000/-.

The assessee contended that interest on partners
capital is not an `expenditure’ per se, as specified u/s.14A of the act and
that even income-tax law understands it this way as such interest in partners’
hand is taxable as “profits from business” and not as “income from other
sources”. It was also contended that expenditure needs presence of two parties
i.e. spender and earner. The firm has no separate existence from its partners.
The assessee firm is a separate entity under income-tax act only for taxation
purposes. This is the very reason that deduction of interest and salary to partners is allowed
as a separate deduction and not as an expenditure under separate section from
sections 30 to 43 of the act. These interest and salaries
to partners are
for this very reason
not liable to TDS provisions under the act. The AO, however, Held that assessee has incurred
expenditure including interest expenses which are attributable to earning
dividend income from investment in mutual funds which is exempt and not
includible in total income. he invoked
the provisions of section 14a of the act read with rule 8D of the income-tax
rules, 1962 (“rules”) and disallowed the a sum Rs. 29,25,362 being estimated
expenditure incurred in relation to dividend income so earned in terms of the
formula provided under rule 8D of the rules.

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

Aggrieved, the assessee preferred
an appeal to the tribunal.

Held

The tribunal noted that interest
and salary received by the partners are treated on a different footing by the
act and not in its ordinary sense of term. Section 28(v) treats the passive
income accrued by way of interest as also salary received by a partner of the
firm as a ‘business receipt’ unlike different treatments given to similar
receipts in the hands of entities other than partners. The tribunal observed that under proviso to section 28(v),
the disallowance of such interest is only in reference to section 40(b) and not
section 36 or section 37. This also gives a clue that deduction towards
interest is regulated only under section 40(b) and the deduction of such interest
to partners is out of the purview of section 36 or 37 of the act.

Firm and partners of the firm are
not separate person under Partnership act although separate unit of assessment
for tax purposes. There cannot therefore be a relationship inferred between
partner and firm as that of lender of funds (capital) and borrower, hence,
section 36(1)(iii) is not applicable at all.
Section 40(b) is the only section governing deduction towards interest
to partners. In view of section 40(b) of the Act, the Assessing Officer
purportedly has no jurisdiction to apply the test laid down u/s. 36 of the Act
to find out whether the capital was borrowed for the purposes of business or
not. Thus, the question of allowability
or otherwise of deduction does not arise except for section 40(b) of the act.

The interest paid to partners and
simultaneously getting subjected to tax in the hands of its partners is merely
in the nature of contra items in the hands of the firms and partners.
Consequently interest paid to its partners cannot be treated at par with the
other interest payable to outside parties. Thus, in substance, the revenue is
not adversely affected at all by the claim of interest on capital employed with
the firm by the partnership firm and partners put together. Thus, capital
diverted in the mutual funds to generate alleged tax free income does not lead
to any loss in revenue by this action of the assessee. In view of the inherent
mutuality, when the partnership firm and its partners are seen holistically and
in a combined manner with costs towards interest eliminated in contra, the
investment in mutual funds generating tax free income bears the characteristic
of and attributable to its own capital where no disallowance u/s.14A read with
rule 8D is warranted. The tribunal Held
that it found merit in the plea of the assessee in so far as interest
attributable to partners.

The Tribunal allowed the ground
of appeal filed by the assessee to the extent of interest on partners capital.

shailesh.kwebmaker

[2016] 74 taxmann.com 90 (Kolkata – Trib.) Soma Rani Ghosh vs. DCIT A.Y.: 2012-13 Date of Order: 9th September,2016

Sections 40(a)(ia), 194C – Since the assessee had, in the
course of assessment proceedings, submitted to the AO PAN and addresses of the transporters,
in respect of whose payments tax was not deducted at source, disallowance u/s.
40(a)(ia) is not called for.

Facts

The assessee,
an individual, carried
on proprietary export business in
export of Chemical, Surgical and Clinical
Goods. During the previous
year relevant to the assessment year under consideration
the assessee incurred transport charges by way of lorry hire Charges, both in relation to Purchases,
referred to as Carriage inward, and exports to Bangladesh referred to as
Carriage outward.

The
Assessing Officer (AO) on the premise that the assessee was required to deduct
tax at source under the provisions of section 194C of the act disallowed the
expenses of rs.1,63,78,648/- claimed towards Carriage inward and rs.1,13,00,980/- claimed as Carriage
outward by invoking the provisions of
section 40(a)(ia) of the act, since the
assessee had not deducted tax at source.

Aggrieved, the
assessee preferred an
appeal to the CIT(A) and contended
that because of
the provision of section 194C(6),
she was not liable to deduct tax at source on payments to transporters who had
submitted their Pan, and those details
of Pan and addressees of the transporters
were filed during the course of scrutiny assessment before the AO.

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

Aggrieved, the
assessee preferred an
appeal to the Tribunal.

Held

The
Tribunal noted that the CIT(A) had
dismissed the appeal of the assessee on the ground that the assessee is a
contractor making payments to the transporter for carrying of goods and was
thus liable to deduct TDS on such payment. According to the CIT(A), section
194C(6) will not apply to payments made by a person who himself is not a transporter,
to another sub-contractor for plying, hiring or leasing goods carriage.
Further, the CIT(A) Held that provisions
of section 194C(6) and 194C(7) have to be read together and the benefit u/s.
194C (6) is available only when the assessee fulfils the conditions laid down
in s/s. 194C(7) of the act.

The
Tribunal Held that –

(a) in the context of section 194C (1), person
undertaking to do the work is the contractor and the person so engaging the
contractor is the contractee;

(b) by
virtue of the
amendment introduced by the
finance (no.2) act 2009, the distinction
between a contractor and a sub-contractor has been done away with and
clause(iii) of explanation u/s. 194C(7) now clarifies that contract shall
include sub-contract;

(c) subject to compliance with the provisions of
section 194C (6), immunity from TDS u/s. 194C (1) in relation to payments to
transporters applies transporter and non-transporter contractees alike;

(d) u/s. 194C (6), as it stood prior to the
amendment in 2015, in order to get immunity from the obligation of TDS, filing
of PAN of the payee transporter alone is sufficient and no confirmation letter
is required;

(e) Section 194C (6) and section 194C (7) are
independent of each other and cannot be read together to attract disallowance
u/s. 40(a) (ia) read with section 194C; and

(f) if
the assessee complies
with the provisions
of section 194C(6), no disallowance u/s. 40(a)(ia) is permissible, even
there is violation of the provisions of section 194C(7).

Therefore,
the payments made by the assessee to the transporters for carriage inward and
carriage outward were not disallowable u/s. 40(a)(ia).

The
Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

[2016] 74 taxmann.com 99 (Mumbai – Trib.) Voltas Ltd. vs. ITO A.Y.: 2005-06 Date of Order: 16th September, 2016

Section 50C – Provisions of section 50C are not applicable
to transfer of development rights in land.

Facts

The
assessee company owned a plot of land at Panchpakdi, thane, in respect of which it entered into a
development agreement with m/s. Sheth developers Pvt. Ltd.,
on 8.6.2004. In
the return of
income filed by the assessee,
long term capital gains arising as a result of entering into the development
agreement were computed with reference to consideration mentioned in the
agreement.

During
the course of assessment proceedings, the Assessing Officer (AO) asked the
assessee to show cause why sales consideration should not be substituted with
the value adopted by the stamp valuation authority in view of section 50C of
the act. In response, the assessee objected to the value adopted by the stamp
valuation authority and also objected to the very invoking of section 50C of
the act upon the impugned transaction of sale of development rights.

The
AO referred the matter to District Valuation Officer for valuation of the sales
consideration as well as cost of acquisition of the property. But,
valuation report of the dvo was
not received by the ao till conclusion of
the   assessment   proceedings
and   therefore   the ao adopted value of stamp valuation
authority and substituted it with actual sales consideration shown by the assessee
and computed the long term capital gains on sale of development rights of the
land accordingly. Subsequently, upon receiving the valuation from the DVO, the
AO rectified the assessment order by passing an order u/s.154 of the Act.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal where it, interalia, contended
that the transaction of sale of development rights is not covered u/s 50C.

Held

The
Tribunal Held that the scope of term ‘capital asset’ mentioned in the section
50C specifically refers and confines its meaning to ‘land or building or both’.
The scope of section 50C is restricted by the legislature itself to these two
types of capital assets only.

It
noted that the capital asset transferred by the assessee was ‘development rights in the land’
and not the ‘land’
itself.

The Tribunal having noted a few other similar
provisions of the act found that in section 269a and section 269UA ‘rights’ in
`land & building’ have been specifically included as per requirement of
these sections. It concluded that term ‘land & building’ and ‘rights
therein’ have been clearly understood and treated as independent from each
other. A perusal of the definitions given in these sections when compared with
section 50C shows that legislature was conscious about the proper expression to
be used as per its intention, scope, object and purpose of the section 50C,
wherein it has been expressly mentioned that capital asset should be ‘land or
building or both’. It has not been mentioned that any type of ‘rights’ shall
also be included in the definition of capital assets to be transferred by an
assessee.

Since
the provisions of section 50C are deeming provisions, the settled law and well
accepted rule of interpretation is that deeming provisions are to be construed
strictly. While interpreting deeming provisions neither any words can be added
nor deleted from language used expressly. The Tribunal Held that the ‘rule of
Strict interpretation’ as well as ‘rule of literal Construction’ should be
applied while understanding the meaning and scope of deeming provisions. it
Held that the provisions of section 50C have been wrongly applied to the
impugned transaction since the capital asset transferred by the assessee, upon
which long term capital gain has been computed by the ao, is development rights
in the land of the assessee. The land itself has not been transferred by the
assessee. The Tribunal reversed the action of lower authorities in applying the
provisions of section 50C and in substituting any value other than the amount
of actual sales consideration received by the assessee.

This
ground of the appeal filed by the assessee was allowed.

shailesh.kwebmaker

[2016] 70 taxmann.com 33 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO ITA Nos. 630 /Ahd/2016 A.Y.: 2012-13 Date of order: 31.05.2016

Section 56 – Interest on accident compensation, which is a capital receipt, can be characterized as income only if interest is a kind of statutory interest. Otherwise it retains the same character as that of the compensation and is not liable to tax

FACTS
The assessee met with a serious accident leaving her permanently disabled. She claimed compensation of Rs. 15,00,000 which was awarded to her by the Supreme Court. The Supreme Court also granted her interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before Motor Accidents Claims Tribunal (MACT) till the date of realisation. The amount of interest worked to Rs. 7,47,143. The Assessing Officer held that this interest of Rs. 7,47,143 is taxable and is covered by section 145A(b) r.w.s. 56(viii) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the payment made to the assessee was in the nature of compensation for the loss of her mobility and physical damages and was therefore a capital receipt and beyond the ambit of taxability of income since only such capital receipts can be brought to tax which are specifically taxable under section 45. What is termed as interest also is of the same character and seeks to compensate the time value of money on account of delay in payment. On the first principles, such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate. It noted that in the present case interest was awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-à-vis the point of time when it was actually paid, or for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the MACT, it would have been Rs 15 lacs but since there was an inordinate delay, though partially, delay in payment of this amount, interest is to factor for fall in the value of money in the meantime. The transaction thus remains the same, i.e. compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in the distant past. Viewed thus, the amount of compensation received at this point of time, whichever way it is computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. The Tribunal held that the conclusion of the Allahabad High Court in the case of CIT v. Oriental Insurance Co. Ltd. 92012) 211 Taxman 369 (All) supports the school of thought that when principal transaction, i.e. accident compensation for delayed payment of which interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation as well. It also noted that the decision of the Punjab & Haryana High Court in the case of CIT v. B Rai (2004) 264 ITR 617 (P & H) which draws a line of demarcation between the interest granted under a statutory provision and interest granted under discretion of the court and holds that the latter is outside the scope of `income’ which can be brought to tax under the Act. It noted that the situation before it is covered by the observation of the Punjab & Haryana High Court viz. “where interest ….. is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to `income’ for the purposes of income-tax”.

The Tribunal held that the authorities below were completely in error in bringing the interest awarded by the Supreme Court to tax. The Tribunal vacated the action of the AO and disapproved the CIT(A)’s action of confirming the same.

The appeal filed by the assessee was allowed.

shailesh.kwebmaker

2016 – TIOL – 1063 – ITAT – VIZAG ITO vs. Mother Theresa Educational Society ITA No. 326/Vizag/2013 A. Y.: 2009-10 Date of order: 31.03.2016

Ss. 40(a)(ia) and 43B – When income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and 43B are not applicable.

FACTS
The assessee society, registered under Andhra Pradesh Societies Registration Act and also registered under section 12A of the Act, filed its return of income declaring total income to be Nil by claiming exemption under section 11 of the Act. In the course of assessment proceedings the AO noticed that assessee was deriving income from various sources such as fees from students, income from hospital, income from pharmacy, rent from premises and interest on bank deposits against which various expenses such as salaries of faculty and administrative staff, administrative expenses, college maintenance, etc were claimed. The AO observed that the receipts of the society increased from Rs. 1,58,84,406 to Rs. 22,57,55,509 over a period of four years from AY 2005-06 to 2008-09. He also noticed that the society had availed term loans from banks for construction of college buildings, etc.

The AO observed that though the objects are not under dispute, not is any case being made out for reconsidering the exemptions by virtue of registration under section 12A of the Act. However, he held that since the assessee’s activities are akin to any commercial activity income needs to be assessed under the head `income from business’. While assessing income under the head `Income from Business’, he disallowed various expenditures by invoking provisions of sections 40(a)(ia) and 43B of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the AO has neither doubted the genuineness of the activities nor pointed out any violations referred to in sections 13(1)(c) or 13(1)(d), which are preconditions for denying exemption u/s. 11. The Tribunal held that the AO was not correct in denying exemption under section 11 and having assessed income under the head `profits and gains of business or profession’.

The Tribunal noted that Chapter III of the Act deals with incomes which do not form part of total income. Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sections 40(a)(ia) and 43B fall under Chapter IVD, which deals with computation of profits and gains from business or profession. The provisions of sections 40(a)(ia) and 43B are relevant if income is computed under the head `profits and gains of business or profession’.

The Tribunal held that the concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trusts / societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption under section 11 shall apply 85% of income for objects of the trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. The Tribunal held that when income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and section 43B of the Act are not applicable. This was also the ratio of the decision of the co-ordinate Bench in the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemption) (2012) 52 SOT 26 (Mum.).

The Tribunal held that the CIT(A) had rightly deleted the additions.

The appeal filed by the revenue was dismissed.

shailesh.kwebmaker

[2016] 158 ITD 329 (Bangalore Trib.) T. Shiva Kumar vs. ITO A.Y.: 2009-10. Date of order: 19.02.2016

Section 54 – Where assessee after selling residential property; pays sale consideration to another person, within the time limit prescribed under section 54, for purchase of house property then assessee’s claim for deduction under section 54 is to be allowed even though the said purchase transaction does not eventually materialise and another person refunds the consideration paid by the assessee.

FACTS
For the relevant assessment year, the assessee had filed his return declaring income of about 3 lakhs. During the course of assessment proceedings, the AO noted that the assessee had sold a house property and the conveyance deed in relation to the said sale was executed on 15-4- 2008. However, the assessee had not shown any capital gains in his return of income.

The assessee’s case was that it had intention to invest in a residential house building from the very beginning as the entire sum realized on sale was given by him to his brother for acquiring a house property owned by his brother. However, the transaction did not go through and the amount was returned to the assessee.

Subsequently, said sum was paid to one ‘M’ for acquiring a residence owned by her on basis of agreement entered into on 10-3-2010. The said transaction also did not eventually materialise.

The AO thus denied the exemption claimed by assessee u/s. 54 as the assessee could neither show that he purchased a house within two years from the date of transfer of the original asset nor could the assessee show that he had constructed a residential house within three years of such transfer.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case was 14-4-2011. Vide sub-section (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction, has to be done before the due date for furnishing the return of income under section (1) of section 139.

The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Ms Jagriti Aggarwal [2011] 339 ITR 610 has held that sub-section (4) of section 139 can only be construed as a proviso to sub-section (1) and thus, the due date of furnishing the return mentioned in section 139(1) is subject to the extended period provided under section 139(4). The impugned assessment year is assessment year 2009-10, and the extended time period under section 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-3-2011.

The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-section (2) of section 54 in this case is 31-3-2011. Thus, it is clear that the assessee had time upto 31-3-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.

This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-3-2011. Apart from the transaction that assessee claimed to have made with his brother, the assessee had undisputedly entered into a purchase agreement with one ‘M’ on 10-3-2010. The assessee had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-3-2011 through which consideration originally agreed by the assessee with ‘M’ was reduced from Rs. 70 lakhs to Rs. 40 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 2-12-2010 to ‘M’ for Rs. 40 lakhs. The bank account of the assessee shows that the above cheque was encashed by ‘M’ on 18- 12-2010. The agreement clearly mentions the intention of the seller to sell a building. It is also mentioned therein that the reduction in the consideration was due to vendor’s inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property.

The liberal interpretation of the term purchase as it appears in section 54 has to be given also to the term ‘constructs’ appearing therein, in conjunction to the former. The Hon’ble Karnataka High Court in the case of CIT vs. Smt. B. S. Shanthakumari [2015] 233 Taxman 347 has held that the completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There is no dispute that the construction of the property for which agreement was entered by the assessee with ‘M’ had already begun. The question whether the above agreement finally fructified is a different matter altogether. Assessee had for all purposes satisfied the conditions u/s. 54 and earnestly demonstrated his intention to invest the capital gain in a residential house. Therefore, the disallowance of such claim stands deleted.

In the result, the appeal filed by the assessee is treated as allowed.

shailesh.kwebmaker

[2016] 158 ITD 179 (Hyderabad Trib.) Heritage Hospitality Ltd. vs. DCIT A.Y.: 2007-08. Date of order: 22.01.2016.

Sections 28(i) and 22 – Where assessee does not let out any property but receives occupancy charges on daily basis for accommodating employees of various companies and moreover assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc, the occupancy charges so received is assessed as income from business and not income from house property.

FACTS
The assessee owns property on which it is running the hospitality business. The assessee had entered into agreements with various companies for accommodating their employees in assessee’s guest rooms and received rental receipts charged on daily basis for the same. Such incomes had been accepted up to assessment year 2006- 07 as ‘income from business’.

For relevant assessment year, the Assessing Officer (AO) opined that the assessee had let out the property and did not have any license to run the catering part and on enquiry it was found out that the assessee was not running a kitchen but providing food by outsourcing, on cost to cost basis. He, accordingly, held that the income received by the assessee should be brought to tax as ‘income from house property’.

The AO also noted that various companies deducted tax at source u/s. 194-I and, consequently, the rentals received were to be assessed as ‘income from house property’. The AO also opined that in case assessee’s incomes were to be assessed as ‘business income’, the expenditure could not be allowed fully. Therefore, he had substantially disallowed the amounts on a protective basis.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
There is no dispute with reference to certain facts as follows; (i) assessee owns the property on which it is running the hospitality business; (ii) assessee has not let out property per se but has entered into agreement for providing accommodation to the software engineers of various companies in its property; (iii) the agreement indicates that the charges are payable on occupancy basis on per day basis without any food, except providing coffee and tea and light snacks; (iv) the receipts which are received are for occupancy only of the seven rooms assessee is owning.

There is no letting out of any property as such, but the amounts were paid by the said companies as rent for occupation of the property. It is also not in dispute that in earlier years, assessee’s receipts were accepted under the head ‘business’. Moreover, assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc.

The Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT [2015] 373 ITR 673 has held that where in terms of Memorandum of Association, main object of the assessee-company was to acquire properties and earn income by letting out the same, the said income is to be brought to tax as ‘income from business’ and not as ‘income from house property’. In assessee’s case, assessee has not let out any property but has allowed the occupancy of its properties charged on a daily rental basis and thus AO’s contention that income has to be assessed under ‘house property’ has no basis at all.

Provisions of section 194-I may be applied for any rental income paid, but as seen from the definition of ‘rent’ in section 194-I, rent includes any payment by whatever name called, for use of buildings including factory buildings, equipment, furniture or fittings. Even if machinery was leased, the consequent rent comes under the definition of section 194-I. But machinery lease cannot be considered under ‘income from house property’. Thus AO’s opinion that since TDS made under section 194-I, incomes are to be assessed under head ‘income from house property’ cannot be accepted.

Therefore, both on facts of the case and also on law, as established by the Hon’ble Supreme Court in the above said case, receipts of the assessee cannot be brought to tax under the head ‘house property’. The same is to be assessed under the head ‘Profits and gains of business or profession’ only. Thus the issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration.

shailesh.kwebmaker

7 Section 271(1)(c) – Penalty levied on account of depreciation wrongly claimed deleted.

Harish Narinder Salve vs. ACIT

Members:
H. S. Sidhu (J. M.) and L.P. Sahu (A. M.)

I.T.A. No. 100/Del/2015

A.Y.: 2010-11.
Date of Order: 21^stSeptember, 2017

Counsel for Assessee / Revenue: Sachit Jolly / Arun Kumar Yadav

Section 271(1)(c) – Penalty levied on
account of depreciation wrongly claimed deleted.

FACTS

The assessee is an Advocate by profession. During
the assessment proceedings, additions on account of, amongst others, excess
depreciation claimed in his return of income of Rs. 11.4 lakh and for claiming
as expenditure, a sum of Rs. 1.69 lakh towards loss on sale of fixed assets,
were made. According to the AO, the
assessee furnished inaccurate particulars of income which resulted into
concealment of income. Considering the same, the penalty of Rs. 4.04 lakh u/s.
271(1)(c) was levied which was confirmed by the CIT(A).

Before the Tribunal, the revenue justified
its action stating that the assessee had made illegal and unjustified claim of
expenses on account of depreciation on car and on account of loss on sale of
fixed assets. The assessee had understated his taxable income by claiming
higher depreciation of Rs. 11.4 lakh and loss on sale of fixed assets at Rs.
1.69 lakh. The assessee did not voluntarily surrender the claim of
depreciation, it was only when a show cause was issued by the AO as to the
basis of claim of depreciation for the entire year, the assessee offered to tax
additional income. Before issuing show cause, the assessee was sitting quietly.
This shows that it was not merely a bonafide mistake or error. The revenue
further stated that the assessee was unable to prove that he had filed the true
particulars of his income and expenses during the assessment proceedings. The
facts clearly showed that though the car was purchased and delivered in
November 2009, the assessee had wrongly claimed depreciation for the entire
year. According to it, the fact was very much in the knowledge of the assessee
and the claim of depreciation and loss on sale of assets was ex-facie bogus
which attracted penalty u/s. 271 (1) (c). In support of the above contention,
the revenue also relied upon the following cases:

– MAK
Data P. Ltd. vs. CIT (38 Taxmann.com 448) / (2013 358 ITR 593);

– CIT
vs. Escorts Finance Ltd. (183 Taxman 453);

– CIT
vs. Zoom Communication (P) Ltd. 191 Taxman 179 (Delhi);

– B.
A. Balasubramaniam and Bros. Co. vs. CIT (1999) 236 ITR 977 (SC);

– CIT
vs. Reliance Petroproducts (2010) 189 Taxman 322 (SC);

– Union
of India vs. Dharmendra Textile Processors (2007) 295 ITR 244.

HELD

The Tribunal noted that during the
assessment proceedings, the assessee had given his explanation supported by
documentary evidences on the additions in dispute, especially relating to the
depreciation issue, that he had forgone the benefit of 50% depreciation on
account of car and offered the amount to tax vide his letter dated 20.11.2012
to avoid litigation. According to the Tribunal, the claim for depreciation only
gets deferred to subsequent years by claiming it for half year. The Tribunal
further added that the deferral of depreciation allowance does not result into any
concealment of income or furnishing of any inaccurate particulars.

As regards wrongful claim of loss on sale of
fixed assets, the Tribunal agreed that it was a sheer accounting error in
debiting loss incurred on sale of a fixed asset to profit & loss account
instead of reducing the sale consideration from written down value of the block
under block concept of depreciation. There was a separate line item viz., loss
on fixed asset of Rs.1.69 lakh in the Income & Expenditure Account which
was omitted to be added back in the computation sheet. The error went unnoticed
by the tax auditor as well as by the tax consultant while preparing the
computation of income. According to it, there was no intention to avoid payment
of taxes. The quantum of assessee’s tax payments clearly indicated the
assessee’s intention to be tax compliant. The assessee’s returned income of Rs.
34.94 crore and tax payment of more than Rs.10.85 crore, according to the
Tribunal, did not show any mala fide intention to conceal an income of Rs.13.09
lakh (not even 0.4% of returned income) with an intention of evading tax of Rs.
4 lakh (not even 0.4% of taxes paid). Therefore, in view of the above mentioned
facts and circumstances, the allegation that the assessee was having any mala
fide intention to conceal his income or for furnishing inaccurate particulars
of income was not correct. Hence, the penalty in dispute needs to be deleted.

According to the Tribunal, the case laws
relied upon by the revenue were distinguishable on the facts of the present
case, and hence, the same were not applicable in the present case.

Further, relying on the decision of the
ITAT, Mumbai Bench in the case of CIT vs. Royal Metal Printers (P) Ltd.
passed in ITA No. 3597/Mum/1996 AY 1991-92 dated 8.10.2003 reported in (2005)
93 TTJ (Mumbai) 119, the Tribunal set aside the orders of the authorities below
and deleted the levy of penalty.

shailesh.kwebmaker

17 Section 32 read with Explanation 3 – Expenditure incurred on construction of road on Built, Operate and Transfer (“BOT”) basis gives rise to an intangible asset in the form of right to operate the road and collect toll charges, which is in the nature of licence or akin to licence as well as a business or commercial right as envisaged u/s. 32(1) read with Explanation 3 and hence assessee is eligible to claim depreciation on said intangible asset.

ACIT vs. Progressive Constructions Ltd.
(2018) 161 DTR (Hyd)(SB) 289
ITA No:1845/Hyd/2014
A.Y.:2011-12
Date of Order: 14th February, 2017

FACTS

The assessee
had entered into a Concession Agreement (“C.A.”) with the Government of India
for four laning of National Highway No. 9 on BOT basis. As per this agreement
the assessee was to complete the work at its own cost and maintain the same for
a period of 11 years and seven months. The assessee had incurred a sum of
Rs.214 crores for the said project. The only right allowed to the assessee was
to operate the highway for the concession period of 11 years and 7 months and
to collect toll charges from the vehicles using the highway.

During the
assessment proceedings, it was noticed that depreciation at the rate of 25% was
claimed by the assessee on opening written down value of built, operate and
transfer (BOT) highway of Rs 40,07,94,526. The assessee had completed the
construction in financial year 2008-09 and had claimed depreciation @ 10% on
the said asset treating it as building. However from assessment year 2010-11,
assessee had started treating the asset as an intangible asset in terms of
section 32(1)(ii) of the Act. However, the AO disallowed the claim of
depreciation on the basis that assessee is not the owner of the asset and also
assessee has not maintained consistency in its claim of depreciation.

Thus, being
aggrieved by the disallowance of depreciation, an appeal was preferred before
CIT(A). The CIT(A) noting that the claim of depreciation being allowed by the
Tribunal in case of said assessee in preceding previous year, allowed the claim
of depreciation in the impugned assessment year. Aggrieved by the CIT(A)’s
order, the Department preferred an appeal before ITAT. A Special Bench was
constituted to dispose the appeal filed by the Department against the order of
CIT(A). The only point under consideration before Special Bench was whether the
expenditure incurred for construction of road under BOT contract with
Government gives rise to an asset and if so, whether it is an intangible asset
or tangible asset.

HELD

The assessee
had incurred expenses of Rs 214 crores and Government of India was not obliged
to reimburse the cost incurred. Thus, the only way in which the assessee can
recoup the cost incurred was to operate the bridge during the concession period
of 11 years and seven months and collect toll thereon. Thus, by investing such
huge sum of Rs 214 crores, the assessee had obtained a valuable business right
to operate the project facility and collect toll charges.This right in form of operating the project and collecting the toll is an intangible asset created by
the assessee by incurring expenses of Rs 214 crores.

It is necessary
now to examine whether such intangible asset comes within the scope and ambit
of section 32(1)(ii).It is the claim of assessee that the right acquired under
C.A to operate the project facility and collect toll charges is in the nature
of licence. Since licence is not defined under the Income-tax Act 1961, the
definition of licence under the Indian Easements Act, 1882 has to be seen. If
the facts of the present case are examined vis-a-vis the definition of licence
under the Indian Easements Act, 1882, it is clear that assessee has only been
granted a limited right by virtue of C.A. to execute and operate the project
during the concession period, on expiry of which the project/ project facility
will revert back to the Government. What the Government of India has granted to
the assessee is the right to use the project site during the concession period
and in the absence of such right, it would have been unlawful on the part of
the concessionaire to do or continue to do anything on such property. However,
the right granted to the concessionaire has not created any right, title or
interest over the property. The right granted by the Government of India to the
assessee under the C.A. has a license permitting the assessee to do certain
acts and deeds which otherwise would have been unlawful or not possible to do
in the absence of the C.A. Thus, the right granted to the assessee under the
C.A. to operate the project / project facility and collect toll charges is a
license or akin to license, hence, being an intangible asset is eligible for
depreciation u/s. 32(1)(ii) of the Act.

Even assuming
that the right granted under the C.A. is not a license or akin to license, it
requires examination whether it can still be considered as an intangible asset
as described u/s. 32(1)(ii) of the Act. The Hon’ble Supreme Court in CIT vs.
Smifs Securities (2012) 348 ITR 302 after interpreting the definition of
intangible asset as provided in Explanation 3 to section 32(1), while opining
that principle of ejusdem generis would strictly apply in interpreting
the definition of intangible asset as provided by Explanation 3(b) of section
32, at the same time, held that even applying the said principle ‘goodwill’
would fall under the expression “any other business or commercial rights
of similar nature”. Thus, as could be seen, even though, ‘goodwill’ is not
one of the specifically identifiable assets preceding the expressing “any
other business or commercial rights of similar nature”, however, the
Hon’ble Supreme Court held that ‘goodwill’ will come within the expression
“any other business or commercial rights of similar nature”.
Therefore, the contention of the learned Senior Standing Counsel that to come
within the expression “any other business or commercial rights of similar
nature” the intangible asset should be akin to any one of the specifically
identifiable assets is not a correct interpretation of the statutory
provisions. It has been held by the Hon’ble Delhi High Court in case of Areva
T&D India Ltd. that the legislature did not intend to provide for
depreciation only in respect of specified intangible assets but also to other
categories of intangible assets which were neither visible nor possible to
exhaustively enumerate. It also observed that any intangible assets which are
invaluable and result in smoothly carrying on the business of the assessee
would come within the expression “any other business or commercial rights of
similar nature”. Thus, the right to operate the toll road and collect toll
charges is a business or commercial right as envisaged u/s. 32(1)(ii) read with
Explanation 3(b).

Further the
assessee neither in the preceding assessment years nor in the impugned
assessment year has claimed the expenditure (amount invested/ expenses
incurred) as deferred revenue expenditure, hence there is no scope to examine
whether the expenditure could have been amortized over the concession period in
terms of CBDT Circular No. 9 of 2014 dated 23rd April, 2014. The aforesaid CBDT
circular is for the benefit of the assessee and such benefits shall be granted
only if the assessee claims it. The benefit of the circular cannot be thrust
upon the assessee if it is not claimed.

Thus the right
granted to the assessee to operate the road and collect toll is a licence or
akin to licence as well as a business or commercial right as envisaged u/s.
32(1) read with Explanation 3 and hence, assessee is eligible to claim
depreciation on said intangible asset.

shailesh.kwebmaker

6 Section 40a(i) read with section 195 – Sales commission paid to foreign agent is neither technical service nor managerial, hence not covered under Explanation to section 9(2). No tax required to be deducted u/s. 195.

6.
Divya Creation vs. ACIT

Members:
R. K. Panda (A. M.) and Suchitra Kamble (J. M.)

ITA No.5603/Del/2014.

A.Y.: 2010-11

Date of Order: 14^thSeptember,
2017

Counsel for Assessee / Revenue: Piyush Kaushik / Arun Kumar Yadav

Section 40a(i) read with section 195 –
Sales commission paid to foreign agent is neither technical service nor
managerial, hence not covered under Explanation to section 9(2). No tax
required to be deducted u/s. 195.

FACTS

The assessee is a partnership firm engaged
in the business of manufacturing and export of plain and studded gold and
silver jewellery. During the year under
appeal, the assessee had paid commission of Rs. 62.13 lakh to two parties in
France and Switzerland for promoting the sales in Europe.The AO disallowed the
commission u/s. 40a(i) for non-deduction of tax at source u/s. 195 giving
following reasons:

– commission
has been remitted to the foreign agent only after realisation of proceeds by
the assessee from the customers solicited by the agents;

– as
per the agreement, in case of losses / interest which are not paid by the
customers on account of delay in payment, the same was to be adjusted against
commission payable to the agent;

– as
per the agreement, the agent was personally acting as agent of the assessee,
which was inferred by the AO as that the income of foreign agent had a real and
intimate connection with the income accruing to the assessee and this
relationship amounted to a business connection through or from which income can
be deemed to accrue or arise to the non-resident.

Further, relying on the decision of the AAR
in the case of SKF Boilers and Driers Pvt. Ltd. reported in 68 DTR 106 and the
decision of AAR in the case of Rajiv Malhotra reported in 284 ITR 564, the AO
disallowed the commission u/s. 40a(i). According to the CIT(A) although the
non-resident agents had rendered services and procured orders abroad, but the
right to receive the commission arose in India when the orders got executed by
the assessee. Accordingly, he upheld the order of the AO.

Before the Tribunal, the revenue relied on
the orders of the lower authorities.

HELD

The Tribunal referred to the following
decisions:

– The
Ahmedabad Tribunal in the case of DCIT (International Taxation) vs. Welspun
Corporation Ltd. reported in 77 taxmann.com 165 held that the commission
paid to agent cannot be considered as the fees for payment for technical
services. Such payments were in nature of commission earned from services
rendered outside India which had no tax implications in India. The Tribunal
while deciding the issue had also considered the two decisions of the AAR which
were relied on by the AO as well as the CIT(A);

– The
Allahabad High Court in the case of CIT vs. Model Exims reported in 363
ITR 66 held that the payments of commission to non-resident agents, who have
their own offices in foreign country, cannot be disallowed, since the agreement
for procuring orders did not involve any managerial services. It was held that
the Explanation to section 9(2) was not applicable;

– The
Delhi High Court in the case of CIT vs. EON Technology P. Ltd. reported
in 343 ITR 366, held that non-resident commission agents based outside India
rendering services of procuring orders cannot be said to have a business
connection in India and the commission payments to them cannot be said to have
been either accrued or arisen in India;

– The
Tribunal also referred to the decision of the Supreme Court in the case of CIT
vs. Toshoku Ltd. reported in 125 ITR 525, Madras High Court in the cases of
CIT vs. Kikani Exports Pvt. Ltd. reported in 369 ITR 96 and CIT vs.
Faizan Shoes Pvt. Ltd. reported in 367 ITR 155.

In view of the above, the Tribunal held that
the assessee was not liable to deduct tax under the provisions of section 195
on account of foreign agency commission paid outside India for promotion of
export sales.

shailesh.kwebmaker

3 Section 115BBE– Amendment made by the Finance Act, 2016 to section 115BBE(2), with effect from 01.04.2017, whereby set-off of loss against the income referred to in sections 68, 69, 69A, 69B, 69C or 69D is denied, is prospective and is effective from 01.04.2017.

1.
[2017] 84 taxmann.com 138
(Jaipur- Trib.)

ACIT vs. Sanjay Bairathi Gems Ltd.

ITA No. : 157 (Jp.) of 2014

A.Y.: 2013-14, Date of Order: 8^th
August, 2017

FACTS

The assessee-company was engaged in carrying
on business of export, import and manufacture of precious and semi-precious
stones and jewellery. In the course of survey action at the business premises
of the assessee-company which action was converted into search, excess stock of
Rs. 231.41 lakh was surrendered.

The AO assessed the income on account of
excess stock u/s. 69B. However, he denied set-off of business loss against
excess stock by applying the provisions of section 115BBE and relied on the
decision of the Punjab & Haryana High Court in the case of Kim Pharma
(P.) Ltd. vs. CIT [2013] 35 taxmann.com 456 and Liberty India vs. CIT
[2007] 293 ITR 520.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who relying on the ITAT, Jaipur Bench in the case of DCIT vs.
Ramnarayan Birla [IT Appeal No. 482 (JP) of 2015, dated 30.9.2016] held
that the excess stock so found is part of regular business, the same is to be
taxed as business income. He further held that the amendment to the proviso of
section 115BBE wherein the word “or set off of any loss” is introduced by the
Finance Act, 2016 w.e.f. 1.4.2017, set-off of business loss during the year
against the excess stock found in the search operation is allowable. The CIT(A)
allowed the appeal filed by
the assessee.

Aggrieved, the Revenue preferred an appeal
to the Tribunal where, on behalf of the Revenue, it was argued that the
provisions of section 115BBE come under Chapter XII providing for determination
of rate of tax in certain special cases and accordingly, it relates to
quantification of amount of tax and not to the computation of total income and
therefore, the amendment brought in by the Finance Act, 2016 would not affect
the computation of total income. It was, accordingly, contended that the
business loss in the instant case cannot be allowed to be set-off against the
amount brought to tax u/s. 69B in terms of undisclosed investment in stock of
stones, gold and jewellery.

HELD

The Tribunal having noted the amendment
brought in section 115BBE(2) by the Finance Act, 2016, observed that if the
contentions made by CIT(DR) are accepted, the question that arises is would the
interpretation render sub-section (2) otiose and what was the necessity
for bringing in such amendment. It observed that the intention of the
legislature has been provided in the memorandum explaining the amendment.

The Tribunal held that given the fact that
the AO has invoked the provisions of section 115BBE in the instant case, the provisions
of sub-section (2) to section 115BBE are equally applicable. The amendment
brought in by the FA, 2016 whereby set-off of losses against income referred to
in section 69B has been denied is stated clearly to be effective from 1.4.2017
and will accordingly, apply AY 2017-18 onwards. Accordingly, for the year under
consideration, there is no restriction to set-off of business loss against
income brought to tax u/s. 69B of the Act.

The Tribunal observed that the matter could
be looked at from another perspective. The provisions relating to set-off of
losses are contained in Chapter VI relating to aggregating of income and
set-off of losses. Whenever legislature desires to restrict set-off of loss or
allowance of loss, in a particular manner, usually, the provisions are made in
Chapter VI such as non-allowance of business loss against salary income as
provided in section 71(2A), and treatment of short-term or long-term capital
losses. There is no specific provision which restricts set-off of business losses
against income brought to tax u/s. 69B. Interestingly, both section 69B and
section 71 fall under the same Chapter VI. In the absence of any provisions in
section 71 falling under Chapter VI which restrict set-off, in the instant
case, set-off of business losses against income brought to tax u/s. 69B cannot
be denied.

The Tribunal dismissed the appeal filed by
the revenue.

shailesh.kwebmaker

Section 37– Expenses on account of provident fund contribution of employees employed through the sub-contractor of the assessee-contractor are allowable if the same are incurred as per the conditions of contract entered into by the assessee-contractor and rendering of services by labourers of sub-contractors for the purposes of business of assessee was not doubted.

1.
[2017] 82 taxmann.com 292 (Pune- Trib.)

Ratilal
Bhagwandas Construction Co. (P.)
Ltd. vs. ITO

ITA No.:
1698 (Pune) of 2014

A.Y.:
2009-10, Date of Order: 31^stMay, 2017

FACTS

The assessee-company was engaged in the
business of industrial concern. It filed its return of income declaring a total
income of Rs. 4,82,49,120. In the course of assessment proceedings, the
Assessing Officer (AO) on perusing the `Office and Administration Expenses
Account’, noticed that assessee had debited Rs. 20,78,557 on account of
provident fund for employees of the contractors of the assessee company. He
noticed that this amount of Rs. 20,78,557 comprised of Rs. 9,73,953 being
employees’ contribution to PF and Rs. 11,04,624 being employers’ contribution.

The AO asked the assessee to justify this
claim of Rs. 20,78,557. The assessee submitted that under the agreement entered
into by the assessee with its various clients, the assessee is liable for
provident fund expenditure. It also submitted that many of the sub-contractors
do not have PF registration and hence, the assessee has paid their PF
contribution and therefore the same is claimed as an expenditure. The AO
considering the fact that in respect of assessee’s own employees, assessee has
contributed only employers’ contribution and had deducted the portion of
employees’ contribution from their wages / salaries, but in respect of
employees of the sub-contractors which were engaged by the assessee, no such deduction
was made from the wages / salaries of the concerned employees. The AO
disallowed Rs. 9,73,953 (being employees contribution to PF in respect of
employees of sub-contractor).

Aggrieved, the assessee preferred an appeal
to the CIT(A) who apart from upholding the order of the AO also enhanced the
disallowance by directing the AO to disallow further Rs. 11,04,124 being
employer’s contribution pertaining to contractor’s employees.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that under the terms
of the contract entered into by the assessee with its customers, it is the
responsibility of the assessee to comply with the requirements of the Employees
Provident Fund Act. Under the contract, it was the duty of the assessee to
cover all employees (including that of sub-contractor) under the Provident Fund
Act.

The Tribunal held that a perusal of sections
of Employees Provident Fund & Miscellaneous Provisions Act, 1952 and
Employees Provident Fund Scheme 1952 together with the clauses of the agreement
that the assessee had entered into with his clients show that the assessee is
responsible for the deduction of provident fund dues of the employees,
including those employed through sub-contractor and its deposit with the
appropriate authorities. It observed that in the present case, the rendering of
services by the labourers of the sub-contractors for the purpose of business of
the assessee has not been doubted by the revenue. It observed that statutorily,
the assessee could have recovered the Provident Fund dues from the
subcontractors, but when the assessee is not in a position to recover the
amounts paid as provident fund contribution for the respective contract
labourers, or considering the business exigencies when the assessee bears the
expense on account of Provident Fund contribution, then whether in such a
situation the expense can be disallowed? It held that the same cannot be
disallowed as an expenditure, more so when the rendering of services by the
subcontractors for the business of the assessee is not in doubt and in such a
situation, the expenditure can be allowed u/s. 37(1) of the Act.

Section 37(1) does not curtail or prevent an
assessee from incurring an expenditure which he feels and wants to incur for
the purpose of business. Expenditure incurred may be direct or may even
indirectly benefit the business in the form of increased turnover, better
profit, growth, etc. The AO cannot question the reasonableness by
putting himself in the arm-chair of the businessman and assume status or
character of the assessee and that it is for the assessee to decide whether the
expenses should be incurred in the course of his business or not. Courts have
also held that if the expenditure is incurred for the purposes of the business,
incidental benefit to some other person would not take the expenditure outside
the scope of section 37(1) of the Act.

It observed that it is a settled law that
the commercial expediency of a businessman’s decision to incur a particular
expenditure cannot be tested on the touchstone of strict legal liability to
incur such expenditure.

The Tribunal held that the disallowance of
employees contribution of PF (as made by the AO) and that of employers
contribution of PF (as enhanced by CIT(A)) was uncalled for. The appeal filed
by the assessee was allowed.

The Tribunal allowed the appeal filed by the
assessee.

shailesh.kwebmaker

1 Section 153C – AO cannot assume jurisdiction u/s. 153C on the basis of loose paper, seized in the course of search on a person (other than the assessee), which loose paper neither makes any reference to the assessee company, nor of any transaction entered into by the assessee. Amendment made by the Finance Act, 2015 to section 153C is prospective and is applicable w.e.f. 1.6.2015.

1.
[2017] 85 taxmann.com 87 (Mumbai – Trib.)

DCIT vs. National Standard India Ltd.

ITA Nos. 4055 to 4060 (Mum.) of 2015

A.Ys.: 2005-06 to 2010-11, Date of Order: 28^th July, 2017

FACTS

The management of the assessee company
changed in May 2010 and consequently, the assessee company became a part of
Lodha Group of companies. At the time of search on Lodha Group of entities on
10.1.2011, premises of the assessee company at Wagle Estate, where the project
of Lodha Group viz. Lodha Excellencia was coming up, was covered u/s.
133A.

In the course of the search, minutes of SCUD
meeting giving details of projects, customers, flats booked by them, area of
the flat, consideration and deviation from the listed price were seized. These
minutes had a remarks column which explained the deviation and indicated in
many cases payment in cash euphemistically referred to as “payment in other
mode”.

Further, in the course of search, Mr.
Abhinandan Lodha, key person of Lodha Group, in his statement recorded u/s.
132(4) of the Act, came up with a disclosure of Rs. 199.80 crore and offered
the same as additional income. From the
entity wise details of unaccounted income, furnished by Mr. Lodha, it was found
that it included Rs. 110.25 lakh in respect of sale of parking space in the
hands of assessee company in AY 2011-12.

The Assessing Officer, based on these
minutes and the statement recorded u/s.132(4), assumed jurisdiction u/s.153C of
the Act and issued a notice requiring the assessee to furnish return of income.

Vide order dated 31.3.2013 passed u/s.153A
r.w.s. 153C/143(3) the Assessing Officer (AO) assessed the loss to be Rs.
6,40,575 as against the returned loss of Rs. 3,62,51,460.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who observed that the seized document on the basis of which the
AO assumed jurisdiction u/s. 153C of the Act indicated the modus operandi
of the Lodha Group of receiving money, but did not make any reference to any
project of the assessee. It also did not bear any reference to the transactions
entered into by the assessee. The CIT(A) held that the AO had wrongly assumed
jurisdiction u/s. 153C of the Act. Accordingly, he quashed the assessment
framed by the AO u/s. 153A r.w.s. 153C/143(3) of the Act.

Aggrieved, the Revenue preferred an appeal
to the Tribunal.

HELD

A reference to the provisions of section
153C of the Act reveals beyond any doubt that upto 30^th May, 2015,
the requirement, as per mandate of law, for the purpose of assumption of
jurisdiction u/s. 153C was that the AO of the person searched should be
satisfied that money, bullion, jewellery or other valuable article or thing or
books of accounts or documents seized `belonged’ to a person other than the
person referred to in section 153A. Section 153C excludes from its scope and
gamut such seized documents which though were found to pertain or relatable to
such `other person’, but however not found to be `belonging’ to the latter.

The legislature realising the fact that the
usage of the aforesaid terms seriously jeopardised the assumption of
jurisdiction by the AO in a case where any `books of account’ or `documents’
which though pertained to or any information contained therein related to such
other person, but were not found to be `belonging’ to him, amended the
provisions of section 153C, by the Finance Act, 2015, with effect from 1.6.2015
and dispensed with the terms `belongs’ or `belong to’ and instead included
within its sweep books of account or documents which pertain or pertains to or
any information contained therein, relates to such other person.

The Tribunal held that the aforesaid
amendment to section 153C is not retrospective in nature and is applicable only
w.e.f. 1.6.2015. This observation stands fortified by the judgment of the Bombay
High Court in the case of CIT vs. Arpit Land (P.) Ltd. [2017] 393 ITR 276
(Bom.). It held that the case of the assessee would be governed by the
pre-amended law as was applicable upto 30.6.2015.

It observed that a bare perusal of the
seized documents does neither make any reference of the assessee company, nor
of any transaction entered into by the assessee company, which could go to
justify the assumption of jurisdiction by the AO u/s. 153C.

The Tribunal held that in the absence of any
document belonging to the assessee having been seized during the course of
search proceedings in the case of Lodha Group, the assumption of jurisdiction
by the AO u/s. 153C by referring to the above referred seized documents is
highly misplaced.

It also observed that the statement of Shri
Abhinandan Lodha recorded u/s. 132(4) in the course of search and seizure
proceedings conducted in the case of Lodha group cannot be construed as a
`seized document’, therefore, the reliance placed by the AO on the same to
justify the validity of jurisdiction assumed u/s. 153C in the hands of the
assessee company, cannot be accepted.

The Tribunal held that the AO had clearly
traversed beyond the scope of his jurisdiction u/s. 153C and therein proceeded
with and framed assessment u/s. 153A r.w.s. 153C/143(3) in the hands of the
assessee company.

The Tribunal upheld the order of CIT(A) and
dismissed the appeal filed by the revenue.

shailesh.kwebmaker

13 Section 12A(2) – First proviso to section 12A(2) inserted by the Finance Act, 2014, with effect from 1.10.2014, being a beneficial provision intended to mitigate hardships in case of genuine charitable institutions, has to be applied retrospectively.

[2017] 87
taxmann.com 113 (Amritsar – Tribunal.)

Punjab
Educational Society vs. ITO

ITA No. :
459/Asr/2016

A.Y. : 2011-12
Date of Order: 20^thNovember, 2017

FACTS

The assessee, an educational institution,
filed its return of income for AY 2011-12 on 29.09.2011, declaring total income
at Rs. Nil. During the course of assessment proceedings the Assessing Officer
(AO) observed that the assessee society during the year under consideration had
shown excess of income over expenditure of Rs. 34,31,521 which was transferred
to its Reserves and Surplus account. Since the gross receipts of the assessee
society, which was neither registered u/s. 12A nor approved u/s. 10(23C)(vi) of
the Act had during the previous year relevant to assessment year 2011-12
exceeded Rs. One crore, the AO called upon the assessee to explain why the same
may not be brought to tax in his hands.

The assessee submitted that it was
registered u/s. 12AA(1)(b)(i) of the Act with the competent authority with
effect from AY 2012-13, therefore, it being a charitable society which was
running an educational institution, could not be denied exemption for the
reason that its gross receipts had exceeded Rs. One crore. It also submitted
that it had applied its income purely for accomplishment of its objects as per
section 11(5), therefore, its income could not be subjected to tax.

The AO taxed the sum of Rs. 34,31,521 as the
assessee society had not applied for the grant of registration u/s. 12AA with
the prescribed authority nor was approved u/s. 10(23C)(vi) or (via) for AY
2011-12.

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

HELD

The Tribunal observed that the issue
involved in the present appeal lies in a narrow compass viz. as to whether the
CIT(A) was right in concluding that the first proviso of section 12A(2) would
be applicable to the facts of the present assessee or not. It noted that the
first proviso of section 12A(2) had been made available on the statute vide
the Finance (No. 2) Act, 2014, with effect from 01.10.2014. It also observed
that a perusal of the Explanatory notes of the Memorandum to Finance (No. 2)
bill, 2014 explaining the objects and reasons for making available the first
proviso to section 12A(2) on the statute reveals that it was in order to
mitigate the hardships caused to charitable institutions, which despite having
satisfied the substantive conditions rendering them eligible for claim of
exemption, however, for technical reasons were saddled with tax liability in
the prior years, due to absence of registration u/s. 12AA.

It noted that the issue as to whether the
beneficial provisions made available on the statute by the legislature in all
its wisdom, vide the Finance (No. 2) ‘Act’, 2014 with effect from
01.10.2014 were to be given a retrospective effect, or not, had already
deliberated upon and adjudicated by this Tribunal in bunch matters of St.
Judes Convent School vs. Asstt. CIT [2017] 164 ITD 594/77 taxmann.com 173
(Asr.).

The Tribunal, having given a thoughtful
consideration to the aforesaid observations of the Tribunal, found itself to be
in agreement with the view taken therein. The Tribunal held that the first
proviso of section 12A(2) as had been made available on the statute vide
the Finance (No. 2) ‘Act’. 2014, with effect from 01.10.2014, being a
beneficial provision intended to mitigate the hardships in case of genuine
charitable institutions, would be applicable to the case of the present
assessee. It set aside the order of the CIT(A) and consequently deleted the
addition of Rs.34,31,521/- sustained by her.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

12 Sections 115JAA, 234B – For the purposes of calculating the levy of interest u/s. 234B of the Act, amount of “assessed tax” is to be determined after reducing the entire MAT credit (including surcharge and cess) u/s. 115JAA.

2017] 88 taxmann.com 28 (Kolkata – Trib.)

Bhagwati Oxygen Ltd. vs. ACIT

ITA No. : 240(Kol) of 2016

A.Y.: 2011-12
Date of Order: 15^th November,
2017

FACTS

The assessee, a private limited company,
electronically filed its return of income for the assessment year 2011-12
disclosing total income of Rs. 1,41,26,460/. The assessee computed the tax
liability at Rs. 46,92,789/- including surcharge and cess under the normal
provisions of the Act. The assessee
computed the book profit u/s. 115JB of the Act at Rs. 92,42,889/- and
determined the tax payable thereon at Rs. 17,13,632/- including surcharge and
cess. The assessee computed the MAT credit u/s. 115JAA of the Act to be
adjusted in future years at Rs. 29,79,157/- ( 46,92,789 – 17,13,632).

This return was processed u/s. 143(1) by
Centralized Processing Centre, Bangalore (in short “CPC”) wherein the
total income under normal provisions of the Act was determined at Rs.
1,41,27,460/- and tax @ 30% thereon was determined at Rs. 42,38,238/-. In the
said intimation u/s. 143(1) the book profit u/s. 115JB of the Act was
determined at Rs. 92,42,889/- and tax @ 18% was determined at Rs. 16,63,720/-.
Accordingly, the CPC in the intimation u/s. 143(1) of the Act determined the
MAT credit u/s. 115JAA of the Act at Rs. 25,74,518/- (4238238 – 1663720). While
determining the MAT credit u/s. 115JAA CPC completely ignored the surcharge
portion and cess portion computed by the assessee, both under normal provisions
of the Act as well as under computing the tax liability u/s. 115JB of the Act.
In view of this, the assessee was fastened with a demand payable.

Aggrieved, the assessee preferred an appeal
to CIT(A). In the course of appellate proceedings the assessee placing reliance
on the decision of the Hon’ble Supreme Court in the case of CIT vs. K.
Srinivasan [1972] 83 ITR 346, among other decisions, pleaded that surcharge
and cess are nothing but a component of tax. The CIT (A) however, was not
convinced with the argument of the assessee and upheld the demand raised by the
CPC in the intimation u/s. 143(1).

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that –

(i) the issue under dispute
has been addressed against the assessee by the decision of Delhi Tribunal in
the case of Richa Global Exports (P.) Ltd. vs. Asstt. CIT [2012] 25
taxmann.com 1/54 SOT 185;

(ii) the issue under dispute
is covered in favour of the assessee by the Co-ordinate Bench of Hyderabad
Tribunal in the case of Virtusa (India) (P.) Ltd. vs. Dy. CIT [2016] 67
taxmann.com 65/157 ITD 1160;

(iii) the Hyderabad Tribunal
after considering the decision of Delhi Tribunal (supra) and after
considering the decision of the Apex Court in the case of K. Srinivasan
(supra) had held that tax includes surcharge and cess and accordingly the
entire component of taxes including surcharge and cess shall have to be
reckoned for calculating the MAT credit u/s. 115JAA of the Act;

(iv) the Hon’ble Apex Court had
in the case referred to supra, had held that meaning of word ‘surcharge’
is nothing but an ‘additional tax’.

It held that this understanding of surcharge
and cess being included as part of the tax gets further sanctified by the
amendment which has been brought in section 234B of the Act in Explanation 1
Clause 5, while defining the expression ‘assessed tax’. Having considered the
language of Explanation 1 to section 234B of the Act it observed that from the
said provisions it could be inferred that the legislature wanted to treat the
payment of entire taxes (including surcharge and cess) eligible for MAT credit
u/s. 115JAA while calculating the interest on ‘assessed tax’ u/s. 234B of the
Act, meaning thereby, the assessed tax shall be determined after reducing the
entire MAT credit u/s. 115JAA of the Act for the purpose of calculating
interest u/s. 234B of the Act. It observed that this is clinching evidence of
the intention of the legislature not to deprive any credit of any payment of
surcharge and cess made by the assessee either in the MAT or under the normal
provisions of the Act. It noted that it is not in dispute that the surcharge
and cess portion was not paid by the assessee along with the tax portion. The
bifurcation of the total payment of taxes by way of tax, surcharge and cess is
only for the administrative convenience of the Union of India in order to know
the purpose for which the said portion of amounts are to be utilised for their
intended purposes. Hence, the bifurcation is only for utilisation aspect and
does not change the character of payment in the form of taxes from the angle of
the assessee. As far as assessee is concerned, it had simply discharged the
statutory dues comprising of tax, surcharge and cess to the Union of India and
hence if paid in excess, would be eligible for either refund or adjustment as
contemplated u/s. 115JAA of the Act. It observed that if the version of the
CIT(A) is to be accepted, then it would result in an situation wherein if the
assessee is entitled for refund, he would not be entitled for refund on the
surcharge and cess portion. This cannot be the intention of the legislature and
it is already well settled that the tax is to be collected only to the extent
as authorised by law in terms of Article 265 of the Constitution and the
department cannot be unjustly enriched with the surcharge and cess portion of
the amounts actually paid by the assessee. It held that the reliance placed on
behalf of the assessee on the decision of Hyderabad Tribunal is well founded
and squarely applies to resolve the dispute in the present case.

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

shailesh.kwebmaker

11 Section 201(1A) – Interest u/s. 201(1A), on delay in deposit of TDS, is to be calculated for the period from the date on which tax was deducted till the date on which the tax was deposited.

[2017] 88 taxmann.com 103 (Ahmedabad)

Bank of Baroda vs. DCIT

ITA No. : 1503/Ahd./2015

A.Y.: 2014-15
Date of Order: 30^th November,
2017

FACTS

The assessee, a branch of a nationalised
bank, deposited tax deducted at source, u/s. 194A of the Act, for the month of
September 2014 on 8^thOctober, 2014. While processing the TDS return
u/s. 200A, a sum of Rs. 2,78,607 was charged as interest for delay in
depositing the tax at source, for a period of two months, i.e. September and
October 2014. This interest amount of Rs.2,78,607/- was sought to be recovered
by the Assessing Officer.

Aggrieved, by the action of levying interest
for a period of two months, assessee carried the matter in appeal before the
CIT(A) who observed that the issue in dispute is whether the day on which tax
was deducted is to be excluded or not. Relying on the decision of the Hon’ble
Apex Court in Criminal Appeal No.1079 of 2006 in case of Econ Antri Ltd. vs.
Ron Industries Ltd. & Anr, in order dated 26-03-2013 he held that for
the purpose of calculating period of one month, the period has to be reckoned
by excluding the date on which the cause of action arose. He held that the
assessee was liable to pay interest for a period of one month.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the time limit
for depositing the tax deducted at source u/s. 194A, as set out in rule
30(2)(b) – which applies in the present context, is “on or before seven
days from the end of the month in which the deduction is made”. It noted
that since the TDS was deposited on 8^th of October 2014, admittedly
there was clearly a delay in depositing tax at source. It noted that the
contention on behalf of the assessee is that the levy of interest should be
reduced to actual period of delay in depositing the tax at source, i.e. from
the date on which tax was deducted and till the date on which tax was
deposited. It is only if such a period exceeds one month, then the question of
levy of interest will arise. It observed that what has been done in the present
case is that the interest has been charged for two calendar months, i.e.
September and October. It held that the question of levy of interest for the
second month can arise only if the period of time between the date on which tax
was deducted and the date on which tax was paid to the Government exceeds one
month. The Tribunal directed the Assessing Officer to re-compute the levy of
interest u/s. 201(1A) accordingly.

shailesh.kwebmaker

10 Section 201(1)/201(1A) r.w.s 191- Before treating the payer as an assessee in default u/s. 201(1), since the ITO(TDS) did not requisition information from the recipients of income to ascertain whether or not taxes have been paid by them, there is violation of mandate of explanation to section 191 and thus invocation of jurisdiction u/s. 201(1)/(1A) is void.

Aligarh Muslim University vs. ITO

(2017) 158 DTR (Agra) (Trib) 19

ITA No: 191/Agra/2016

A.Y.:2015-16
Date of Order: 15^th May, 2017

FACTS

The assessee/deductor university paid salary
to its employees after deducting tax u/s. 192. The ITO (TDS) noticed that the
assessee was allowing exemption u/s. 10(10AA)(i) on the payment of leave salary
at the time of retirement/superannuation to its employees, considering them as
employees of Central Government. The Assessing Officer treated the assessee as
an assessee in default u/s. 201/201(1A) for short deduction of tax due to
allowing the exemption u/s. 10(10AA)(i) beyond the maximum limit of Rs. 3 lakh.

On appeal to the CIT(A), the CIT(A) directed
the ITO(TDS) to allow the assessee to adduce evidence that the deductees had
themselves paid due tax on their leave salary and then, to recompute the
amounts in respect of which the assessee would be an assessee in default u/s. 201(1).

The assessee preferred an appeal to the
Tribunal and argued that in order to declare the assessee as assessee in default,
the condition precedent is that the payee had failed to pay tax directly and it
is only after the finding that the payee had failed to pay tax directly, that
the assessee could be deemed to be an assessee in default in respect of such
tax.

HELD

A bare perusal of the Explanation to section
191 itself makes it clear that it is only when the employer fails to deduct the
tax and the employee has also failed to pay tax directly, that the employer can
be deemed to be an assessee in default. In other words, in order to treat the
employer as an assessee in default, it is a pre-requisite that it be
ascertained that employee has also not paid the tax due.

The CIT (A) has stated that before him, no
evidence was produced to show as to which of the employees of the University
had paid due taxes in respect of leave salary income on which TDS was not made
properly and that it was therefore, that he was unable to quantify the relief
that can be allowed in respect of such employees.

The Tribunal held that it was not within the
purview of the CIT(A) to fill in the lacuna of the ITO (TDS). In fact,
it was for the ITO (TDS) to ascertain the position, as prescribed by the
Explanation to section 191, that is, as to whether the deductee had failed to
pay the due tax directly, and only thereafter to initiate proceedings to deem
the assessee as an assessee in default u/s. 201(1) of the Act. As observed by
the Allahabad High Court in the case of Jagran Prakashan Ltd vs. DCIT
reported in 345 ITR 288, this is a foundational and jurisdictional matter
and therefore, the Appellate Authorities cannot place themselves in the
position of the ITO (TDS) to ratify a jurisdiction wrongly assumed.

The only prerequisite was that the details
of the persons to whom payments were made, should be available on record. And
once that is so, i.e., the assessee has submitted the requisite details to the
ITO (TDS), it is for the ITO (TDS), to ascertain, prior to invoking section
201(1) of the Act, as to whether or not the due taxes have been paid by the
recipient of the income.

The show cause notice issued to the
University contains the names of 237 persons with full details of payments made
to them by the University. Therefore, it is amply clear that at the time of
issuance of notice dated 02.03.2015, u/s. 201/201(1A) to the University, the
ITO (TDS) was in possession of the requisite details of the recipients of the
income. As such, the legislative mandate of the Explanation to section 191 of
the Act was violated by the ITO (TDS), by not requisitioning, before issuing
the show cause notice to the University, information from the recipients of the
income, as to whether or not the taxes had been paid by them, nor seeking such
information from the concerned Income-tax Authorities.

As observed, this is a foundational
jurisdictional defect going to the root of the matter. Violation of the mandate
of the Explanation to section 191 is prejudicial to the invocation of the
jurisdiction of the ITO (TDS) under sections 201/201(1A). In absence of such
compliance, the invocation of the jurisdiction is null and void ab initio.

As a consequence, the order under appeal no
longer survives and it is cancelled.

shailesh.kwebmaker

6 Section 54B – Deduction u/s. 54B cannot be denied on the ground that entering into agreement to sell does not amount to `purchase’.

6
[2017] 86 taxmann.com 217 (Chandigarh- Trib.)

Anil Bishnoi vs. ACIT

ITA No. : 1459 (Chd.) of 2016

A.Y.: 2014-15 Date of Order: 27^thSeptember, 2017

The word `purchase’ cannot
be interpreted and detached from the definition of word `transfer’ as given
u/s. 2(47) of the Act.

FACTS

The assessee, during the
year under consideration, sold land for a consideration of Rs. 1,29,00,000 and
claimed deduction u/s. 54B claiming purchase of following agricultural lands –

(i) Agricultural land
at Kiratpur Rotwara,
Jaipur, of Rs. 28,84,500 through a registered sale deed dated 6.5.2013;

(ii) Agricultural land
at Village Dudu,
Jaipur for Rs. 1,00,00,000 through an agreement to sell dated 16.4.2014.

The Assessing Officer,
allowed deduction for purchase of land mentioned at S. No. (i) above but in
respect of land mentioned at (ii) above he asked the assessee to show cause why
deduction claimed should not be disallowed on the ground that the sale deed is
not registered, but only an agreement to sell is entered into.

The assessee submitted that
the entire payment for purchase of land was made through cheques and the
possession was handed over to the assessee by the seller with all the rights to
use the said land or to sell it further. The name of the assessee had also been
entered in Khasra Girdawari, a document showing the possession and cultivation
of the land. The assessee also submitted that at the time of execution of the
agreement to sell, the assessee was not aware of the Stay Order to the sale of
land issued by ADM and hence, the sale deed could not be registered.

The AO held that the word
used in section 54B is `purchase’ and not `transfer’ as defined in S. 2(47).
The purchase, according to the AO, could be only through a registered sale
deed. He disallowed the claim for deduction u/s. 54B with reference to the land
for which only an agreement to sell was entered into.

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

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the
assessee paid consideration through cheques and also obtained possession of the
property in question. The claim of deduction was denied on the ground that the
deed of purchase / sale had not been registered with the competent authority.

The Tribunal having noted
the ratio of the decisions of the Supreme Court in the case of Sanjeev Lal
vs. CIT (2014) 269 CTR 1 (SC); CIT vs. T. R. Arvinda Reddy (1979) 12 CTR 423
(SC) and the decision of the Bombay High Court in the case of CIT vs.
Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804 (Bom.), held as follows –

If capital gains are deemed
to have been earned by the assessee on transfer of land as per the provisions
of section 2(47) of the Act, as per which registration of the sale deed is not
necessary, the consequences are that the seller of the assessee is said to have
transferred his right in property and consequently, those rights are acquired
by the transferee; if in the case of transferor, the same is to be treated as
sale, then, we do not find any reason to give a different meaning to the word
`purchase’. If someone has sold a property, consequently the other person has
purchased the said property.

If the transfer of property
is complete as per the definition of transfer u/s. 2(47) of the Act, the
assessee is made liable to pay tax on the capital gains earned by him, on the
same analogy, the transfer is also complete in favour of the purchaser also.
The provisions cannot be interpreted in a manner to say that transfer vis-à-vis
selling is complete, but vis-à-vis purchase is not complete in respect
of same transaction. In view of this, the word `purchase’ cannot be interpreted
and detached from the definition of word `transfer’ as given u/s. 2(47) of the
Act.

When the transfer takes
effect as per the provisions of section 2(47) of the Act, if a liability to pay
tax arises in the case of the seller, the consequent right to get deduction on
the purchase of property accrues in favour of the purchaser, if he otherwise is
so eligible to claim it as per the relevant provisions of the Act. The Tribunal
directed the AO to give the benefit of deduction u/s. 54B of the Act in respect
of the purchase of property at Village Dadu.

The Tribunal allowed the
appeal filed by the assessee.

shailesh.kwebmaker

5 Section 54 – Investment made upto due date of filing return u/s. 139(4) of the Act qualifies for deduction u/s. 54 provided the investment is made upto date of filing of return of income.

5 TS-443-ITAT-2017 (Ahmedabad- Trib.)

Anita Ajay Shad vs. ITO

ITA No. 3154 (Ahd.) of 2015

A.Y.: 2011-12 Date
of Order: 18^th September, 2017

FACTS

During the previous year
relevant to assessment year 2011-12, a long term capital gain of Rs. 35,23,326
arose to the assessee, an individual, on transfer of an immovable property
jointly owned by her. The assessee claimed that a sum of Rs. 35 lakh was exempt
u/s. 54 on the ground that the assessee has deployed the consideration for
purchase of a new residential house. The assessee made the following
investments towards purchase of a new residential property –

# Rs.
15 lakh before 31.7.2011 (being due date for
filing ROI u/s. 139(1)

# Rs.
5 lakh before actual date of filing ROI (being 25.8.2011); and

# Rs.
15 lakh between Sept. 2011 to Dec. 2011 (which
is within the time limit available under section
139(4) of the Act).

While assessing the total
income of the assessee, the Assessing Officer (AO) denied the claim for
deduction u/s. 54 on the ground that the assessee has not invested capital gain
before filing return of income and the tax payer has not acquired the new
property before filing return of income.

Aggrieved, the assessee
preferred an appeal to CIT(A) who observed that the assessee has invested the
gains after furnishing the return of income. He, held that the assessee is
entitled to claim partial exemption u/s. 54 of the Act.

Aggrieved, the assessee
preferred an appeal to the Tribunal where, on behalf of the assessee, it was
contended that the investment made is within the due date stipulated u/s.
139(4) of the Act and that the property was acquired and put to use within a period
of two years from the date of transfer of original asset and therefore,
qualifies for exemption u/s. 54 of the Act.

HELD

Section 54(2) enjoins that
the capital gain is required to be appropriated by the assessee towards
purchase of a new asset before furnishing of return of income u/s. 139 of the
Act. Alternatively, in the event of non-utilisation of capital gains towards
purchase of new asset, the assessee is required to deposit the capital gains in
specified bank account before the due date of filing of return of income u/s.
139(1) of the Act. Any payment towards purchase subsequent to the furnishing of
return of income (25.8.2011 in the instant case) but before the last date
available to file the return of income u/s. 139(4) of the Act is irrelevant.
Such subsequent payments after filing of return are required to be routed out
of deposits made in capital gain account scheme. Thus, the plea of the assessee
that utilisation of capital gain can be made before the
extended date for filing of
return of income u/s. 139(4) of the Act
even after filing of return do not coincide with the plain language employed in
section 54(2) of the Act. Nonetheless, the capital gain employed towards
purchase of new asset before the actual date of furnishing return of income
either u/s. 139(1) or u/s. 139(4) of the
Act will be deemed to be sufficient compliance of section 54(2) of the Act.

The Tribunal observed that
the legislature in its wisdom has used the expression section 139 for purchase,
etc. of new asset while on the other hand, time limit u/s. 139(1) has
been specified for deposit in the capital gain account scheme. When viewed
liberally, the distinction between the two different forms of expression of
time limit can yield different results. A beneficial view may be taken to say
that section 139 being omnibus would also cover extended time limit provided
u/s. 139(4) of the Act. Thus, when an assessee furnishes return subsequent to
due date of filing return u/s.139(1), but within the extended time limit u/s.
139(4), the benefit of investment made upto the date of furnishing return of
income u/s. 139(4) cannot be denied on such beneficial construction. However,
any investment made after the
furnishing of return of income but before extended date available u/s.
139(4) would not receive beneficial construction in view of unambiguous and
express provision of section 54(2) of the Act. The suggestion on behalf of the
assessee on eligibility of payments subsequent to furnishing of return of
income is not aligned with and militates against the plain provision of law as
stated in section 54(2) of the Act.

Since there was ambiguity
on record as to whether the other joint owner of the property purchased by the
assessee has also availed exemption in respect of investment made from joint
account and if yes, to what extent, the Tribunal set aside and remanded back to
the file of AO for the limited purpose of verification of the extent of claim
made by the other joint owner.

The appeal filed by the
assessee was allowed.

shailesh.kwebmaker

4 Section 68 – Addition u/s. 68 cannot be sustained in respect of share application money received from shareholder who is a daughter of a director and is therefore, not a stranger. Also, shareholder was a resident of USA, earnings statement of her husband were on record, the payments were made through banking channels and receipts in bank account of the shareholder were also through banking channels.

4 TS-432-ITAT-2017 (Ahd.)

Namision Powertech Pvt. Ltd. vs. ACIT

ITA No. : 218/AHD/2015

A.Y.: 2010-11 Date of Order: 21^st
September, 2017

FACTS

During the financial year
2009-10, the assessee company received a sum of Rs. 19,00,000 towards share
application money from Smt. Pammi Sandesara, daughter of one of the directors
of the assessee company. The Assessing Officer (AO) held that the source of
funds in the hands of Smt. Pammi Sandesara and her creditworthiness are not
proved. He rejected the explanation
furnished by the assessee viz. that she was a resident of USA, money was
received in US dollars through her ICICI Bank account in India.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that
Smt. Pammi Sandesara was a resident of USA as was evident from her passport. It
also noted that the earnings statement of her husband issued by NetApp Inc USA
was filed. The payments were made through banking channels and receipts in her
bank account were also through banking channels.

The relationship between
the assessee-company and the shareholder is well established in the sense that
the shareholder is the daughter of one of the directors of the company. It is,
therefore, not a transaction between two strangers and her bank accounts show prima
facie evidence of the means of the shareholder. The amounts have been
received through the banking channels. The Tribunal held that bearing in mind
all these factors, the receipts from Smt. Pammi Sandesara cannot be treated as
unexplained cash credit. The Tribunal deleted the addition made by the AO.

The Tribunal allowed the
appeal filed by the assessee.

shailesh.kwebmaker

4 Section 54 – The exemption u/s. 54 cannot be denied even in a case where the assessee has utilised the entire capital gain by way of making payment to the developer of flat but could not get possession of the flat as the new flat was not completed by the developer. Section 54(2) does not say that in case assessee could not get possession of property, he was not entitled for exemption u/s. 54.

[2018] 91 taxmann.com 11 (Chennai-Trib.)
ACIT vs. M. Raghuraman
ITA No. : 1990/Mds/2017
A.Y.: 2013-14
Date of Order: 08th February, 2018

FACTS

The assessee, in his return
of income, claimed exemption u/s. 54 of the Act. The claim for exemption was made on the basis
of payments made to the developer for sale consideration. The flat, however,
was not completed even though payment was made to the promoter. The possession
was not yet given to the assessee.

The Assessing Officer (AO)
denied deduction on the ground that construction is not completed and
therefore, the assessee is not eligible to claim exemption.

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

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD

A bare reading of section
54 clearly says that in case the assessee purchased a residential house in
India or constructed a residential house in India within a period stipulated in
section 54(1), the assessee is eligible for exemption u/s. 54. Section 54(2)
clearly says that in case the capital gain, which is not appropriated by the
assessee towards purchase of new asset or which is not utilised in purchase of
residential house or construction of residential house, then it shall be
deposited in a specific account. It is not the case of the revenue that capital
gain was not appropriated or it was not utilised. The fact is that the entire
capital gain was paid to the developer of the flat. In other words, the
assessee has utilised the entire capital gain by way of making payment to the
developer of the flat.

Section
54(2) does not say that in case the assessee could not get the possession of
the property, he is not entitled for exemption u/s. 54. The requirement of
section 54 is that the capital gain shall be utilised or appropriated as
specified in section 54(2). The assessee has complied with the conditions
stipulated in section 54(2). Therefore, the Commissioner (Appeals) has rightly
allowed the appeal of the assessee. The Tribunal held that it did not find any
reason to interfere with the order of the lower authority and accordingly, it
confirmed the same.

The appeal filed by the Revenue
was dismissed.

shailesh.kwebmaker

3 Section 47(iv) – Transaction of transfer of shares by a company to its second step down 100% subsidiary cannot be regarded as ‘transfer’ in view of the provisions of section 47(iv) of the Act. A second step down subsidiary company is also regarded as subsidiary of the assessee company under Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Act.

[2018] 91 taxmann.com 62 (Kolkata-Trib.)
Emami Infrastructure Ltd. vs. ITO
ITA No. : 880/Kol/2014
A.Y.: 2010-11: Date of Order: 28th February, 2018

FACTS
The assessee filed its return of income declaring therein a total income of Rs. 88,79,544. In the return of income, the assessee also claimed that it has incurred a long term capital loss of Rs. 25,05,20,775 which it carried forward. The Assessing Officer (AO), assessed the total income of the assessee to be Rs. 29,99,30,657.

During the previous year under consideration, on 31.3.2010, the assessee sold 2,86,329 shares of Zandu Realty Ltd., at the rate of Rs. 2100 per share, to Emami Rainbow Niketan Pvt. Ltd., a 100% subsidiary of the assessee’s subsidiary viz. Emami Realty Ltd. The sale was in accordance with the decision taken by the Board of Directors on 23.3.2010 and also in accordance with the valuation report of SSKM Corporate Advisory Pvt. Ltd.

The Assessing Officer found that the assessee had sold shares of Zandu Realty Ltd. at a price ranging from Rs. 6200 per share on 23.12.2009 to Rs. 4390 per share on 11.2.2010. He asked the assessee to show cause why the sale price per share of Zandu Realty Ltd. should not be taken at Rs. 3989.80 being the average price traded at NSE as on 31.3.2010 against the sale price of Rs. 2100 per share taken by the assessee.

The AO held that he found the explanation of the assessee to be not acceptable. Considering the huge price variance between the quoted price in NSE and the off-market selling price shown by the assessee he held that when the shares are traded in stock exchange the best way to determine the selling price of a share is the price quoted in the stock exchange. Accordingly, he determined the long term capital gain to be Rs. 29,05,83,769, by considering the sale price to be Rs. 3989.80 per share as against Rs. 2100 per share taken by the assessee, as against the claim of loss of Rs. 25,05,20,775 shown by the assessee in the return of income.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the ratio of the decision of Gujarat High Court in the case of Kalindi Investments Pvt. Ltd. vs. CIT (256 ITR 713)(Guj.)

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the assessee sold equity shares of Zandu Realty Ltd. to Emami Rainbow Niketan Pvt. Ltd based on price of shares determined by Corporate Advisory Pvt. Ltd. It also noted that the buyer Emami Rainbow Niketan is a 100% subsidiary of Emami Realty Ltd. Emami Realty Ltd. is a 100% subsidiary of Emami Infrastructure Ltd, the assessee. The Tribunal observed that the two issues which arise for its adjudication are –

(i) whether there is a transfer of shares in view of the provisions of section 47(iv) of the Act; and

(ii) if the transaction in question is not covered by section 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with FMV as determined by him?

The Tribunal observed that if it comes to the conclusion that this is not a transfer then the assessee’s claim that it had incurred a long term capital loss and same has to be carried forward cannot be allowed. Similarly, capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled.

The Tribunal noted that the transfer is to a second step down 100% subsidiary of the assessee. The issue is whether provisions of section 47(iv)(a)(b) are applicable to a second step down subsidiary. It noted the following two divergent views on this issue –

(i) the Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (236 ITR 220)(Bom.) has, in the context of provisions of section 108 of the Act, held that a 100% owned sub-subsidiary of a 100% owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(a) of the Act;

(ii) the Gujarat High Court has in the case of Kalindi Investments Pvt. Ltd. (256 ITR 713)(Guj) held that there is no justification for invoking clause (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.

Applying the decision of the Bombay High Court (supra), the transaction in question cannot be regarded as a transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of a capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also a subsidiary of the assessee company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act.

Upon going through the two judgments, the Tribunal held that it prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) as in its view a second step down 100% subsidiary is also covered by the provision of section 47(iv) of the Act, as this is the letter and spirit of the enactment.

Following the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra), the Tribunal held that the transaction of sale of shares of Zandu Realty by assessee to Emami Rainbow Niketan Ltd. is not regarded as transfer in view of section 47(iv) of the Act. Hence, the question of computing either the capital loss or capital gain does not arise. The Tribunal held that the assessee is not entitled to carry forward the capital loss of Rs. 25 crore as claimed.

This ground of appeal of assessee was dismissed.

shailesh.kwebmaker

2 Sections 2(29A) r.w.s. 2(42B) and 251 – Gain arising on sale of shares of a private limited company, offered in the return of income as `short term capital gain’ can be claimed, for the first time, to be `long term capital gain’ before appellate authority even without filing a revised return of income.

. 2018] 91 taxmann.com 28 (Mumbai – Trib.)

Ashok Keshavlal Tejuja vs. ACIT

ITA No. : 3429 (MUM.) of 2016

A.Y.: 2011-12: Date of Order: 15^th
February, 2018

FACTS

During the previous year
relevant to assessment year 2011-12, the assessee had sold shares of a private
limited company. Gain arising on sale of these shares was shown in the return
of income, filed by the assessee, as short term capital gains. In the course of
assessment proceedings, the assessee, without having revised the return of
income, filed a letter and also a revised computation of income thereby making
a claim that the gain arising on sale of shares of private limited company need
to be considered as `long term capital gains’. This additional claim was denied
to the assessee.

Aggrieved by the assessment
made, the assessee preferred an appeal to the CIT(A) and in the course of
appellate proceedings the assessee raised the said claim before the CIT(A). The
CIT(A) did not entertain the claim made by the assessee on the ground that it
was made otherwise than by filing a revised return of income.

Aggrieved,
the assessee preferred an appeal to the Tribunal where the assessee brought to
the notice of the Tribunal the decision of the Apex Court in the case of Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC) and also the decision of the
Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders
[2012] 349 ITR 336 (Bom.).

HELD

The Tribunal noted that the
Supreme Court in the case of Goetze India Ltd. (supra) and also the
Bombay High Court in the case of Pruthvi Brokers & Shareholders (supra)
has clearly held that the additional claim can be filed before the appellate
authorities even if the same is not filed by way of revised return of income.
Since the assessee had filed the claim before the AO as well as before the
CIT(A) to bring to tax the capital gains as long term capital gains on sale of
share of private limited company instead of short term capital gain as declared
in the return of income, the Tribunal admitted the claim filed by the assessee.

The Tribunal remitted the
matter to the file of the AO for considering the aforesaid additional claim
raised by the assessee on merits after hearing the contention of the assessee
and evaluating the evidences filed / to be filed by the assessee on merits in
accordance with law.

This ground of appeal filed
by the assessee was allowed.

shailesh.kwebmaker

1 Section 253 – An erroneous disallowance made by the assessee in its return of income on account of non-deduction of tax at source which disallowance was not contested before CIT(A) can be challenged by the assessee, for the first time, before the Tribunal.

[2018] 90 taxmann.com 328 (Kolkata-Trib.)
Allahabad Bank vs. DCIT
ITA No. : 127/Kol/2011
A.Y.: 2007-08 and 2009-10
Date of Order: 07th February, 2018

If the stand of the
assessee is found to be correct and if it results in income being assessed
lower than returned income, that would be the true and correct income of the
assessee and it would be the duty of the revenue to assess the correct tax
liability of the assessee.

FACTS

The assessee, in his return
of income for AY 2007-08, disallowed a sum of Rs. 3,17,32,735 u/s. 40(a)(ia) of
the Act. Since this disallowance was
made voluntarily in the return of income, the assessee did not contest it in an
appeal filed before CIT(A) against the assessment order.

In Assessment Year 2008-09,
the deduction was claimed in the return of income and same was disallowed by
the Assessing Officer (AO). This disallowance was contested in an appeal before
CIT(A) who allowed the deduction to the extent of Rs. 96,38,366 after
examination of copies of challans and other documents.

Subsequent to the passing
of the order by CIT(A), the assessee bank observed that in respect of
disallowance amounting to Rs. 99,32,277 out of Rs. 3,17,32,735, the provisions
of TDS are not applicable at all and consequently the provisions of section
40(a)(ia) are not attracted.

For the first time in an
appeal before the Tribunal, the assessee took an additional ground that the AO
be directed to allow deduction of Rs. 99,32,277 after verification of all
necessary documents in support of the claim of the assessee.

Before the Tribunal, it was
contended that the assessee never had an occasion to address this issue before
the lower authorities and hence had no option but to file an additional ground
before the Tribunal. It was also submitted that since the issue has not been
examined by the lower authorities, in order to appreciate the contentions of
the assessee, it could be remanded to the file of the AO. The revenue had no
objection except that it would result in an assessment being framed at lesser
than returned income.

HELD

As regards the contention
of the revenue that the assessment would be framed at lesser than returned
income, the Tribunal noted the observations of the Calcutta High Court in the
case of Mayank Poddar (HUF) vs. WTO [2003] 262 ITR 633 (Cal.) and
observed that it is now well settled that there is no estoppel against the
statute. It observed that the assessee is only pleading for claim of deduction
which had been erroneously disallowed by it in the return of income and
considered as such by the AO in the assessment. Though there was no occasion
for the revenue to adjudicate this issue on merits, the revenue could not take
advantage of the mistake committed by the assessee. The scheme of taxation is
primarily governed by the principles laid down in the Constitution of India and
as per Article 265 of the Constitution of India, no tax shall be levied or
collected unless by an authority of law. When a particular item is not to be
taxed as per statute, then taxing the same would amount to violation of
constitutional principles and revenue would be unjustly enriched by the same.
Hence, in the process of verification by the AO, if the stand of the assessee
is found to be correct and if it results in income being assessed lower than
the returned income, that would be the true and correct income of the assessee
and it would be the duty of the revenue to assess the correct tax liability of
the assessee.

Having made the aforesaid
observations, the Tribunal, in the interest of justice and fair play, remanded
the issue to the file of the AO for adjudication of merits.

The additional ground of
appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 43(5), 271(1)(c) – Penalty cannot be levied in a case where set off of loss against normal business income was not allowed because the AO assessed the loss to be speculative loss as against normal business loss claimed by the assessee in its return of income. Such a change amounts to change in sub-head of loss and not furnishing of inaccurate particulars of income invoking penal provisions.

18. [2017] 84
taxmann.com 63 (Kolkata – Trib.)

DCIT vs. Shree Ram Electrocast (P.) Ltd.

A.Y.: 2009-10
Date of Order: 2^nd June, 2017

FACTS

The assessee in its return of income for AY 2009-10 claimed
deduction of Rs. 51,00,000. This sum represented amount paid by the assessee as
damages to Global Alloys Pvt. Ltd. with whom assessee had entered into a
contract on 9.7.2008 for purchase of 200 MT of “Silicon Magnum” and 50MT of
“Ferro Silicon” at the rate of Rs. 78,000/MT and Rs. 86,000/MT respectively.
The contract was valid till 28.2.2009. The contract interalia provided
that in case of failure on the part of the assessee to lift the material on the
date fixed for performance of the agreement, the assessee would pay damages to
seller. Similar was the provision in case the supplier failed to supply the
material. The quantification of damages was with reference to market price on
the date of failure.

The Assessing Officer (AO) held that –

(i) the agreement read as a whole showed that the
loss in question was speculative in nature;

(ii) the element of speculation was embedded in
clauses 7 and 8 of the agreement;

(iii) non-delivery of material was contemplated in
the contract itself and the payment of Rs. 51 lakh was emanating directly from
the settlement of the contract rather than on account of any arbitration award
on account of any separate suit filed by counter party for breach of the
contract;

(iv) non-delivery of material was never a breach of
the contract but was a part of the contract under clauses of the contract and
either assessee or the seller could lose or gain depending upon whether price
of the material decreases or increases in future.

The AO rejected the contention of the assessee that the
amount paid was damages and damages paid for breach of contract was not to be
regarded as speculative loss was not accepted by the AO.

As a result of the AO treating the loss to be speculative in
nature, there was a consequent addition to the total income of the assessee.
Further, the AO initiated penalty proceedings u/s. 271(1)(c) for furnishing
inaccurate particulars and concealing particulars of income. He levied penalty
u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
held that a loss declared in the income was treated as a speculative loss and
consequently not allowed to be set off against the normal business income would
only be a change of the sub-head of the loss and it could not be said that
there was furnishing of inaccurate particulars. He decided the appeal in favour
of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that in the quantum proceedings, the
Tribunal has vide order dated 22.3.2013 confirmed the action of the CIT(A) that
the loss under consideration is a speculation loss and cannot be set off
against income of a non-speculative nature. It observed that the question that
requires consideration and decision is whether the disallowance of the
assessee’s claim for set off of share trading loss against other income by
treating the same as speculation loss will attract penalty u/s. 271(1)(c). It
observed that the issue is covered in favour of the assessee by the following
judicial pronouncements –

(i) CIT vs. SPK Steels (P.) Ltd. [2004]
270 ITR 156 (MP);

(ii) CIT vs. Auric Investment & Securities
Ltd. [2009] 310 ITR 121 (Delhi)

(iii) CIT vs. Bhartesh Jain [2010] 323 ITR
358 (Delhi).

The Tribunal noted that the Delhi High Court in the case of
Auric Investment & Securities Ltd. (supra) has held that penalty
imposed by the AO u/s. 271(1)(c) was not sustainable as mere treatment of
business loss as speculation loss by the AO did not automatically warrant
inference of concealment of income and there was nothing on record to show that
in furnishing return of income, the assessee has concealed its income or had
furnished any inaccurate particulars of income.

The Tribunal upheld the action of the CIT(A) in deleting the
penalty levied by the AO.

The Tribunal dismissed the appeal filed by the
revenue.

shailesh.kwebmaker

Section 5: Where foreign employer directly credited the salary, for services rendered outside India, into the NRE bank account of the non-resident seafarer in India, same cannot be brought to tax in India u/s. 5.

17. [2017] 82
taxmann.com 209 (Kolkata – Trib.)

Shyamal Gopal Chattopadhyay
vs. DDIT

A.Y.: 2011-12
Date of Order: 2^nd June, 2017

FACTS

The assessee, a Marine Engineer, engaged with Wallem Ship
Management Ltd., in capacity as a Master was paid USD 74271.36 on different
dates, convertible into Indian Rupees of Rs. 33,47,312. The amount was received
in USD outside India and on request of the assessee, was remitted to the
Savings Bank NRE Account maintained by the assessee with HSBC in India. The
above income was not offered for taxation on the ground that it has been
received from outside India in foreign currency.

In the course of assessment proceedings, the Assessing
Officer (AO) issued asked the assessee to show cause why remuneration received
in India should not be brought to tax in terms of section 5(2)(a) of the Act.

The AO rejected the assessee’s contention that the payments
were received outside India and at the request of the assessee, were remitted
to his savings bank NRE account maintained in India. The AO charged to tax the
sum of Rs. 33,47,112 as income chargeable to tax in India. For this
proposition, he placed reliance on the Third Member decision of Mumbai Tribunal
in the case of Capt. A. L. Fernandes vs. ITO [2002] 81 ITD 203, wherein
it has been held that salary received by the assessee in India is taxable u/s.
5(2)(a) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that its case is squarely covered by the following decisions
–

(i) DIT
(Int Tax) vs. Prahlad Vijendra Rao [2011] 198 Taxman 551 (Kar.)

(ii) CIT
vs. Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom.)

It was also submitted that the issue is now squarely covered
in favour of the assessee by CBDT Circular No. 13/2017 dated 11.4.2017 wherein
it has been categorically clarified by CBDT that the subject mentioned receipt
is not taxable as income u/s. 5(2)(a) of the Act.

HELD

The Tribunal observed that the decision in the case of Tapas
Kumar Bandhopadhya vs. DDIT (Int. Tax) [2016] 159 ITD 309 (Kol.-Trib.),
relied upon by the ld. DR, was rendered by placing reliance on the Third Member
decision of Mumbai Tribunal in case of Capt. A. L. Fernandes (supra).
This decision clearly lays down that the receipt in India of salary for
services rendered on board a ship outside the territorial waters of any country
would be sufficient to give the country where it is received the right to tax
the said income on receipt basis. Such a provision is found in section 5(2)(a)
of the Act which was applied in the aforesaid decision. It is trite that
decision of a Third Member would be equivalent to a decision of a Special Bench
and thereby would become a binding precedent on the division bench. However, we
find that the impugned issue has been duly addressed by the CBDT Circular No.
13/2017 dated 11.4.2017 as rightly relied upon by the ld AR.

A perusal of the Circular referred to above, shows that
salary accrued to a non-resident seafarer for services rendered outside India
on a foreign going ship (with Indian flag or foreign flag) shall not be
included in the total income merely because the said salary has been credited
in the NRE account maintained with an Indian bank by the seafarer. Remittances
of salary into NRE Account maintained with an Indian Bank by a seafarer could
be of two types: (i) Employer directly crediting salary to the NRE Account
maintained with an Indian Bank by the seafarer;
(ii) Employer directly crediting salary to the account maintained
outside India by the seafarer and the seafarer transferring such money to NRE
account maintained by him in India. The latter remittance would be outside the
purview of provisions of section 5(2)(a) of the Act, as what is remitted is not
“salary income” but a mere transfer of assessee’s fund from one bank
account to another which does not give rise to “Income”. It is not
clear as to whether the expression “merely because” used in the
Circular refers to the former type of remittance or the latter. To this extent,
the Circular is vague.

In the instant case, the employer has directly
credited the salary, for services rendered outside India, into the NRE bank
account of the seafarer in India. In our considered opinion, the aforesaid
Circular is vague inasmuch as it does not specify as to whether the Circular
covers either of the situations or both the situations contemplated above.
Hence, we deem it fit to give the benefit of doubt to the assessee by holding
that the Circular covers both the situations referred to above. The result of
such interpretation of the Circular would be that the provisions of sec.5(2)(a)
of the Act are rendered redundant. Be that as it may, it is well settled that
the Circulars issued by CBDT are binding on the revenue authorities. This
position has been confirmed by the Hon’ble Apex Court in the case of Commissioner
of Customs vs. Indian Oil Corpn. Ltd. [2004] 267 ITR 272, wherein their Lordships
examined the earlier decisions of the Apex Court with regard to binding nature
of the Circulars and laid down that when a Circular issued by the Board remains
in operation then the revenue is bound by it and cannot be allowed to plead
that it is not valid or that it is contrary to the terms of the statute.
Accordingly, the grounds raised by the assessee are allowed.

shailesh.kwebmaker

Sections 23, 198, 199 – Credit has to be granted even in respect of TDS on the part of annual value which has been claimed as unrealised rent.

16. [2017] 82 taxmann.com 456 (Mumbai- Trib.)

Shree Ranji Realties (P.) Ltd. vs. ITO

A.Y.: 2010-11
Date of Order: 9^thJune, 2017

FACTS

The assessment of total income of the assessee company having
investment in shares, mutual funds and immovable properties, etc. was
completed u/s. 143(3) of the Act.
Subsequent to completion of assessment, the Assessing Officer (AO)
noticed that the assessee had offered income under the head `Income from House
Property’ after deducting amount of unrealised rent under Rule 4 of the
Income-tax Rules, 1962 (“Rules”) and had claimed credit of TDS on both,
realized as well as unrealised rent. The
AO, in an order passed u/s. 154 of the Act restricted the credit of TDS to the
extent of actual amount of rent received.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where relying on the decision of the Apex Court in the case of T. S.
Balaram, ITO vs. Volkart Bros. [1971] 82 ITR 50 (SC), it was contended that
the issue is highly debatable and cannot be rectified u/s. 154 of the Act.

HELD

The Tribunal observed that –

(i) the facts are not in dispute that the
assessee has disclosed rental income but claimed deduction of unrealised rent
u/s. 23(1) read with rule 4 of the Rules;

(ii) the Unrealised rent is duly offered to tax by
the assessee at the first instance, and then the same is claimed as deduction from
Rental Income u/s. 23(1) of the Act r.w. Rule 4 of the rules;

(iii) the assessee duly fulfils all the conditions
as laid down in section 198 r.ws. 199 read with Rule 37A of the Act.

(iv) TDS had been deducted and paid to the Central
Government by the deductee and Payment / Credit of Rent Income has been
included in the accounts of the assessee;

(v) the deductor had duly filed requisite TDS
returns as per Rules and also issued TDS certificate to the assessee and the
same was furnished to the AO;

(vi) amount of TDS claimed, corresponding to claim
of unrealised rent, is duly offered to tax as income of the assessee, in view
of section 198 of the Act and also assessed by the AO.

It held that the Unrealised rent is deduction which is
claimed u/s. 23(1) of the Act, read with Rule 4 of the Rules, from the total
rental income offered during the year. The unrealised rent is not an exempt
income. As the total rental income (including unrealised rent) is duly offered
to tax under the head ‘Income from House Property’, corresponding TDS credit
needs to be allowed. The Tribunal observed that there are similar instances,
where although the deduction is allowed with respect to total income offered
during the year, still the claim of TDS with respect to such deduction is duly
allowable under the Act i.e. TDS credit is allowed on deduction of Income u/s.
8OIA, 8OIB, 80IC of the Act, etc. and also TDS credit is allowed on bad
debts claimed u/s. 36(1)(vii) of the Act.

Further, the issue is covered by the decision of co-ordinate
bench of this Tribunal in the case of Chander Shekhar Aggarwal (2006) 157 ITD
626 (Delhi).

The Tribunal held that the assessee’s action is in accordance
with provisions of section 199 of the Act and the assessee is eligible for seeking credit of the TDS amount.

The Tribunal set aside the order of the authorities below and
decided the issue in favour of the assessee. It also held that this issue is
highly debatable and cannot be acted upon by the revenue.

The Tribunal allowed the appeal filed by the
assessee.

shailesh.kwebmaker

16 Section 54 – Acquisition of a flat in a building under construction is a case of `construction’ and not `purchase’. Construction of new house may commence before transfer of old house but should be completed within a period of 3 years from the date of transfer of old house.

[2017] 88 taxmann.com 275 (Mumbai-Trib.)

Mustansir I Tehsildar vs. ITO

ITA No. : 6108/Mum/2017

A.Y. : 2013-14 Date of Order: 18^th December, 2017

FACTS

During the previous year relevant to the
assessment year under consideration, on 5-12-2012, the assessee sold his 1/3^rd
share in Flat No.2902 of an apartment named Planet Godrej located at Byculla,
Mumbai, for a consideration of Rs.126.83 lakh. Long term capital of Rs. 78.36
lakh accrued to the assessee on transfer of his flat in
Planet Godrej.

The assessee had earlier, vide agreement
dated 5.2.2010, booked a flat at Elegant Tower, which was under construction.
The details of payments made to the builder are as detailed below:-

Particulars of payment

Rupees

Before the date of transfer of old house

From 12.04.2007 to 03-11-2009

86,38,225

On 21.4.2012

7,28,525

Sub-total (a)

93,66,750

Payments subsequent to the date of transfer of old house

14.06.2014

3,12,225

22.10.2014

7,28,525

Sub-total (b)

10,40,750

Total (a + b)

1,04,07,500

Thus, the aggregate payments made by the
assessee towards the new flat were Rs.104.07 lakh. Since the aggregate of
payments made was more than the amount of Capital gain, the assessee claimed
that entire amount of capital gain of Rs.78.36 lakh was deductible u/s. 54 of
the Act. The assessee treated the acquisition of new flat as a case of “Construction”. As per the provisions of section 54, the new
flat is required to be constructed within 3 years from the date of transfer of
old flat. Since the old flat was transferred on 05-12-2012, the assessee submitted
that the time limit was available up to December, 2015 and the new flat was
acquired before that date.

The Assessing Officer (AO) treated the case
of acquisition of new house by the assessee as a case of purchase and not of
construction. He, accordingly, held that the purchase should have been between
06-11-2011 to 04-12-2014. Accordingly, he held that –

(a) the payments aggregating to
Rs.86.38 lakh made between 12-04-2007 to 03-11-2009 falls outside the period
mentioned above and hence not eligible for deduction u/s. 54 of the Act;

(b) the capital gains not
utilised for purchase of new asset before the due date for filing return of
income should have been deposited in Capital gains Account Scheme as per the
provisions of section 54 of the Act. The payments of Rs.3,12,225/- and Rs.7,28,525/-made
on 14.6.2014 and 22.10.2014 respectively have violated the provisions of
section 54 of the Act, since the assessee did not deposit them in Capital gains
Account scheme. Accordingly, the AO held that the above said two payments are
not eligible for deduction u/s. 54 of the Act;

(c) The payment of
Rs.7,28,525/- made on 21-04-2012 was within the range of period mentioned by
him. Accordingly, he allowed deduction u/s. 54 of the Act only to the extent of
Rs.7,28,525.

Aggrieved, the assessee preferred an appeal
before CIT(A) who following the decision of the Bombay High Court in the case
of CIT vs. Smt. Beena K. Jain (217 ITR 363)(Bom.) held that the
acquisition of the new house by the assessee was a case of purchase and not
construction. He, confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the Hon’ble Bombay
High Court in the case of Mrs. Hilla J. B. Wadia (216 ITR 376)(Bom.) has held
that booking of flat in an apartment under construction must also be viewed as
a method of constructing residential tenements.

Accordingly, the co-ordinate bench has taken
the view in the case of Sagar Nitin Parikh (ITA No.6399/Mum/2011 dated
03-06-2015) that booking of flat in an apartment under construction is a
case of “construction”. In view of the above said decision of the
Hon’ble Bombay High Court and the Tribunal, the acquisition of new flat in an
apartment under construction should be considered as a case of “construction”
and not “purchase”. The Tribunal set aside the view taken by the tax
authorities and held that the assessee has constructed a flat and the
provisions of section 54 should be applied accordingly.

It also noted that section 54 of the Act
provides the condition that the construction of new residential house should be
completed within 3 years from the date of transfer of old residential house.

It noted that the Hon’ble Karnataka High
Court has held in the case of CIT vs. J. R. Subramanya Bhat [1987](165 ITR
571) that commencement of construction is not relevant for the purpose of
section 54 and it is only the completion of construction. The above said ratio
has been followed in the case of Asst. CIT vs. Subhash Sevaram Bhavnani
[2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the
contentions of the assessee.

The Tribunal held that, for the purpose of
section 54 of the Act, it has to be seen whether the assessee has completed the
construction within three years from the date of transfer of old asset. It noted
that there is no dispute that the assessee took possession of the new flat
within three years from the date of sale of old residential flat.

The Tribunal held that the assessee has
complied with the time limit prescribed u/s. 54 of the Act. Since the amount
invested in the new flat prior to the due date for furnishing return of income
was more than the amount of capital gain, the requirements of depositing any
money under capital gains account scheme does not arise in the instant case.
Further, the Hon’ble High Court has held in the case of K.C.Gopalan [(1999)
107 Taxman 591 (Kerala)] that there is no requirement that the sale
proceeds realised on sale of old residential house alone should be utilised.

The Tribunal held that the assessee is
entitled for deduction of full amount of capital gains u/s. 54 of the Act, as
he has complied with the conditions prescribed in that section. It set aside the order passed by Ld CIT(A)
and directed the AO to allow the deduction u/s. 54 of the Act as claimed by the
assessee.

shailesh.kwebmaker

15 Section 37, CBDT Circular No. 5 of 2012 – Expenditure incurred on AMP by a pharma company, on organising conferences and seminars of doctors, with the main object of updating the doctors of latest developments and to create awareness about new research in medical field which is beneficial to the doctors, cannot be disallowed.

[2018] 89 taxmann.com 249 (Mumbai – Trib.)

Solvay Pharma India Ltd. vs. Pr.CIT

ITA No. : 3585 (Mum) of 2016

A.Y.: 2011-12 Date of Order: 11^thJanuary, 2018

Medical Council of India Regulations do not
apply to pharma companies.

FACTS

The assessee company incurred Advertisement
expense of Rs. 25,02,929 and Publicity and Propaganda Expense of Rs.
15,94,99,360. The assessee in his letter
informed the Assessing Officer (AO) that Advertisement expenses are in
compliance with CBDT Circular No. 5/2012 dated 1.8.2012 but did not furnish any
further details. The AO neither called
for the books of accounts nor called for any evidence such as invoices,
vouchers, etc. The assessee was neither asked
to file by the AO nor did it suo moto file any corroborative details in respect
of Publicity and Propoganda Expenses.

The CIT was of the view that if any
expenditure incurred is claimed u/s. 37 especially those expenditure which the
business entity incurs on items which may broadly be classified as
`Advertisement, Marketing and Business Promotion’ (in short AMP), the
possibility of incurring expenditure on prohibited items as per Explanation
below section 37(1) of the Act exists which must be ruled out by some
examination of corroborative evidence called for and produced before the
AO. Since the AO did not make any
inquiry, the CIT held the assessment order to be erroneous and prejudicial to
the interest of the revenue. He rejected
the contentions of the assessee that the MCI regulations are not applicable to
pharma companies but only to medical practitioners. He also rejected the contention that
expenditure so incurred is not in the nature of freebies to the doctors.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal held that the MCI Regulations
are not applicable to the assessee, the question of assessee incurring
expenditure in alleged violation of the regulation does not arise.

CBDT Circular No. 5 of 2012 seeks to
disallow expenditure incurred by pharmaceutical companies interalia in providing
`freebies’ to doctors in violation of the MCI Regulations. The term “freebies” has neither been defined
in the Income-tax Act nor in the MCI Regulations. However, the expenditure so incurred by
assessee does not amount to provision of `freebies’ to medical
practitioners. The expenditure incurred
by it is in the normal course of its business for the purpose of marketing of
its products and dissemination of knowledge etc. and not with a view to giving
something free of charge to the doctors.
The act of giving something free of charge is incidental to the main
objective of product awareness.
Accordingly, it does not amount to provision of freebies. Consequently, there is no question of
contravention of the MCI Regulations and applicability of Circular No. 5 of
2012 for disallowance of the expenditure.

Explanation to section 37(1) provides an
embargo upon allowing any expenditure incurred by the assessee for any purpose
which is an offence or which is prohibited by law. This means that there should be an offence by
an assessee who is claiming the expenditure or there is any kind of prohibition
by law which is applicable to the assessee.
Here in this case, no such offence of law has been brought on record, which
prohibits the pharmaceutical company not to incur any development or sales
promotion expenses.

CBDT Circular
dated 1.8.2012 in its clarification has enlarged the scope and applicability of
`Indian Medical Council Regulation, 2002’ by making it applicable to the
pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI
regulation to the pharmaceutical companies by the CBDT is without any enabling
provisions either under the provision of the Income-tax Law or by any
provisions under the Indian Medical Council Regulations. The CBDT cannot
provide casus omissus to a statute or notification or any regulation
which has not been expressly provided therein.

The beneficial circular may apply
retrospectively but a circular imposing a burden has to be applied
prospectively only. Here, in this case the CBDT has enlarged the scope of
`Indian Medical Council Regulation, 2002’ and made it applicable for the
pharmaceutical companies. Therefore,
such a CBDT circular cannot be reckoned to have retrospective effect. The free
sample of medicine is only to prove the efficacy and to establish the trust of
the doctors on the quality of the drugs. This again cannot be reckoned as
freebies given to the doctors but for promotion of its products.

The pharmaceutical company, which is engaged
in manufacturing and marketing of pharmaceutical products can promote its sale
and brand only by arranging seminars, conferences and thereby creating
awareness among doctors about the new research in the medical field and
therapeutic areas, etc. Every day there are new developments taking
place around the world in the area of medicine and therapeutic, hence in order
to provide correct diagnosis and treatment of patients, it is imperative that
the doctors should keep themselves updated with the latest developments in the
medicine and the main object of such conferences is to update the doctors of
the latest developments, which is beneficial to the doctors in treating the
patients as well as the pharmaceutical companies.

The Tribunal did not find any merit in the
order passed u/s. 263. It allowed the appeal filed by the assessee.

shailesh.kwebmaker

14 Section 56(2)(vi) – Amount received by the assessee, at the time of her retirement, from the firm, after surrendering her right, title and interest therein, is for a consideration and therefore, not taxable u/s. 56(2)(vi).

2017] 89 taxmann.com 95 (Pune-Trib.)

Smt. Vasumati Prafullachand Sanghavi vs.
DCIT

ITA No. : 161/Pune/2015

A.Y.: 2008-09 Date of Order: 13^thDecember, 2017

FACTS

For the assessment year under consideration,
the assessee filed her return of income declaring therein a total income of Rs.
88,330. The Assessing Officer (AO) issued a notice u/s. 147 of the Act on the
ground that the amount of Rs. 21,52,73,777 received by her on relinquishing her
share in the partnership firm Deepak Foods (DF) has escaped assessment.

During the year under consideration, the
assessee retired as a partner from Deepak Foods and received an amount of Rs.
21,66,52,000. This amount was claimed in the return of income and was accepted
by the AO in the regular assessment as exempt.

The capital balance of the assessee, on the
eve of retirement from the firm, was Rs. 13,78,223. In the return of income,
the assessee furnished a note stating that the credit balance in capital
account of the assessee includes share of Goodwill received from Deepak Foods
on retirement from the firm. While
assessing the total income in reassessment proceedings, the Assessing Officer
(AO), by relying upon the decision of the Pune Tribunal in the case of Shevantibhai
C. Mehta vs. CIT [2004] 4 SOT 94 (Pune) taxed Rs. 21,52,73,777 as income
from long term capital gains. Further,
the AO, alternatively, assessed the amount of Rs. 21,52,73,777 as income from
other sources.

Aggrieved, the assessee preferred an appeal
to CIT(A) where it was contended that the similar addition was made in the
assessment of Smt. Shakuntala S. Sanghavi, the other retiring partner, who also
received identical amount. In her case,
upon completion of the assessment, the CIT in revision proceedings set aside
the order passed by the AO and taxed the amount in an order passed u/s. 263 of
the Act. The Tribunal quashed the revision order of CIT both on facts and on
merits. Consequential order passed by AO u/s. 143(3) r.w.s. 263 was also
quashed and original order restored by the Tribunal in the case of Smt.
Shakuntala S. Sanghavi. The assessee relied on the order of the Tribunal in the
case of Shakuntala S. Sanghavi vs. ACIT [ITA No. 956(Pn) of 2013) relating to
AY 2008-09, order dated 22.3.2014] regarding finality of the issue by the
Tribunal on the taxability of the said receipts.However, the CIT(A) held that
the amounts received by the assessee from Deepak Foods constitute a gift
taxable u/s. 56(2)(vi) of the Act.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the ratio of the
decision of Pune Bench of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi (supra) and order of the Tribunal in the case of ITO vs.
Rajnish M. Bhandari [IT Appeal No. 469 (PN) of 2011, dated 17.7.2012] and
the judgment of the Bombay High Court in CIT vs. Riyaz A. Sheikh [2014] 221
Taxman 118 (Bom.) suggest that the receipts of this kind are not to be
taxed under the head `Income from Capital Gains’ as well as under the head
`Income from Other Sources’ in general.
In view of the order of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi, on similar facts, the non-taxability of the said receipt under the
head `Capital Gains’ as well as under the provisions of section 56 of the Act,
i.e. under the head `Income from Other Sources’ has reached finality.

As regards taxability of the said receipt
under the specific provision of section 56(2)(vi) of the Act, the Tribunal
noted that the assessee received
compensation of Rs. 21,66,32,000 from Deepak Foods on her
retirement when she surrendered her right, title, interest in the said
firm. Therefore, the amount of
compensation cannot be said to have been received without consideration. It observed that it is not the case of the
revenue that the assessee continues to be a partner even after receipt of the
consideration and that the assessee has not surrendered the rights of every
kind in the firm.

The Tribunal decided the appeal in favour of
the assessee.

shailesh.kwebmaker

7 Sections 71, 72, 73 and Circular No. 23D dated 12.9.1960 issued by the Board – Business losses brought forward from earlier years can be adjusted against speculation profits of the current year after the speculation losses of the current year and also speculation losses brought forward from earlier years have been duly adjusted.

[2018] 92 taxmann.com 133 (Mumbai-Trib.)

Edel Commodities Ltd. vs. DCIT

ITA Nos. : 3426 AND 356 (Mum) OF 2016

A.Y.: 2011-12 Dated:
06.04.2018

FACTS

The assesse company engaged in the business
of trading in securities, physical commodities and derivative instruments filed
its return of income wherein against the speculation profit of Rs. 4,77,37,754
brought forward business loss of AY 2010-11 of Rs. 1,92,98,587 was set
off. The Assessing Officer (AO) on
examination of clause 25 of the Tax Audit Report and also the relevant schedule
of the return of income as also the assessment record of AY 2010-11 observed
that the loss of AY 2010-11 which has been set off against speculation profit
of the current year was not a speculation loss but was a business loss other
than loss from speculation business. The
AO denied the set off of non-speculation business loss brought forward from
earlier years against speculation profit of the current year.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where relying on the provisions of sections 71 and 72 of the
Act relating to carry forward of losses. it was submitted that there is no bar
in the Act for adjustment of brought forward non-speculation losses against the
speculation profit of the current year.
Reliance was placed on CBDT Circular No. 23D dated 12.9.1960 and also on
the decisions of the Calcutta High Court in the case of CIT vs. New India
Investment Corporation Ltd. 205 ITR 618 (Cal); and of Allahabad High Court
in the case of CIT vs. Ramshree Steels Pvt. Ltd. 400 ITR 61 (All.).

HELD

The Tribunal noted that the Allahabad High
Court has in the case of Ramshree Steels Pvt. Ltd. (supra) held that
loss of current year and brought forward
losses of earlier year from non-speculation income can be set off against
profit of speculation business of current year.
It also noted that the Calcutta High Court in the case of New India
Investment Corporation Ltd. (supra) referred to the Bombay High court
decision in the case of Navnitlal Ambalal vs. CIT [1976] 105 ITR 735 (Bom.)
and also to the CBDT Circular which has held that if speculation losses for
earlier years are carried forward and if in the year under consideration speculation profit is earned by the assessee
then such speculation profits for the year under consideration should be
adjusted against the brought forward speculation loss of the previous year
before allowing any other loss to be adjusted against these profits.

The Tribunal held that a reading of sections
71, 72 and 73, Circular and case laws makes it clear that there is no blanket
bar as such on adjustment of brough forward non-speculation business loss
against current years speculation profit.
These provisions provide that loss in speculation business can neither
be set off against income under the head “Business or profession” nor against
income under any other head, but it can be set off only against profits, if
any, of another speculation business. Section 73 effects complete segregation
of speculation losses, which stand distinct and separate and can be mixed for
set off purpose, only with speculation profits.
The said circular of the Board (which has been held by the Hon’ble
Bombay High Court to be still holding the field) provide that if speculation
losses for earlier years are carried forward and if in the year of account a
speculation profit is earned by the assessee, then such speculation profits for
the current accounting year should be adjusted against brought forward speculation losses of the earlier year,
before allowing any other losses to be adjusted against these profits. Hence, it is clear that there is no bar in
adjustment of unabsorbed business losses against speculation profit of current
year provided the speculation losses for the year and earlier has been first
adjusted from speculation profit.

The Tribunal noted that in the present case
no case has been made out by the revenue that the current or earlier
speculation losses have not been adjusted from the speculation profit. In view of the aforesaid decision of Hon’ble jurisdictional High Court and CBDT
Circular mentioned above, the Tribunal set aside the order of lower authorities
and decided the issue in favour of the assessee.

shailesh.kwebmaker

6 Sections 200, 201 – Since no retrospective effect was given by the legislature while amending sub-section (3) by Finance Act, 2014, it has to be construed that the legislature intended the amendment made to sub-section (3) to take effect from 1st October, 2014 only and not prior to that.

[2018] 92 taxmann.com 260 (Mumbai-Trib.)
Sodexo SVC India (P.) Ltd. vs. DCIT
ITA No. : 980 (Mum) OF 2018
A.Y.: 2012-13 Dated: 28.03.2018

FACTS

The assessee, an Indian company, is engaged
in the business of issuing meal, gift vouchers, smart cards, to its clients who
wish to make benefit in kind for their employees. The employees use these
vouchers / smart cards at affiliates of the assessee company across India and
who are engaged in different business sectors such as restaurants, eating
places, caterers, super markets. For this purpose, the assessee has entered
into an agreement with the affiliates who accept the vouchers/smart cards
towards payment for goods or services provided by them. Further, the assessee also
enters into agreement with its clients/customers for issuance of vouchers/cards
for which it charges in addition to face value certain amount towards service
and delivery charges. The entire amount
paid by client/customer is deposited in an escrow account of the assessee kept
with Reserve Bank of India as per guidelines of Payment and Settlement Systems
Act, 2007 and Revised Consolidated Guidelines 2014. The assessee, in turn, after deducting
certain amounts as service charges and applicable taxes makes payments to
affiliates as per the terms and conditions of agreement towards cost of
goods/services provided by them.

In the course of a survey, u/s. 133(2A) of
the Act, conducted in the business premises of the assessee on 21.01.2016, it
was found that assessee was deducting tax at source only in respect of payments
made to caterers whereas no tax was deducted at source on payments made to
other affiliates. Therefore, the AO issued a notice to assessee directing it to
show cause why it should not be treated as assessee in default u/s. 201(1) for
non-deduction of tax at source on such payment. The assessee responded by
stating that the provisions of section 194C are not applicable in respect of
payments made by it to other affiliates (other than caterers). The AO did not agree with the submissions made
by the assessee. He held the assessee to
be an assessee in default for not having deducted tax at source and accordingly
passed an order u/s. 201(1) and 201(1A) raising demand of Rs. 36,97,34,000
towards tax and Rs. 20,09,04,420 towards interest.

Aggrieved, the assessee preferred an appeal
to the CIT(A) interalia on the ground that the order passed u/s. 201(1)
and 201(1A) is barred by limitation as per section 201(3) as was applicable for
the relevant period. The CIT(A) held
that the amendment to section 201(3) being clarificatory in nature will apply
retrospectively.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that Finance Act, 2009
with a view to provide time limit for passing an order u/s. 201(1) introduced
sub-section (3) of section 201. The time
limit was two years for passing an order u/s. 201(1) from the end of the
financial year in which the statement of TDS is filed by the deductor and in a
case where no statement is filed the limitation was extended to before expiry
of four years from the end of financial year in which the payment was made or
credit given.

Subsequently, the Finance Act, 2012 amended
section 201(3) with retrospective effect from 1.4.2010 and the time period of
four years was extended to six years in case where no statement is filed. However, the time period of two years, in
case where statement is filed, remained unchanged.

Finance Act, 2014 once again amended
sub-section (3) with effect from 1.10.2014 to provide for a uniform limitation
of seven years from the end of the financial year in which the payment was made
or credit given. The distinction between
cases where statement has been filed or not was done away with.

The issue before the Tribunal was whether
the un-amended sub-section (3) which existed before the amendment by the
Finance Act, 2014 applies to the case of the assessee. The Tribunal noted that by the time the
amended provisions of sub-section (3) was introduced by the Finance Act, 2014,
the limitation period of two years as per clause (i) of sub-section (3) of
section 201 (the unamended provision) has already expired.

The Tribunal held that on a careful perusal
of the objects for introduction of the amended provision of sub-section (3) it
does not find any material to hold that the legislature intended to bring such
amendment with retrospective effect. If
the legislature intended to apply the amended provision of sub-section (3)
retrospectively it would definitely have provided such retrospective effect
expressing in clear terms while making such amendment. It observed that this view gets support from
the fact that while amending sub-section (3) of section 201 by the Finance Act,
2012, by extending the period of
limitation under sub-clause (ii) to six years, the legislature has given
retrospective effect from 1^stApril, 2010. Since, no such retrospective effect was given
by the legislature while amending sub-section (3) by Finance Act, 2014, it has
to be construed that the legislature intended the amendment made to sub-section
(3) to take effect from 1^stOctober, 2014, only and not prior to
that.

The Tribunal noted that the principles
concerning retrospective applicability of an amendment have been examined by
the Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. [2014]
367 ITR 466 (SC). It observed that the decision of the Gujarat High Court
in the case of Tata Teleservices Ltd. vs. Union of India [2016] 385 ITR 497
(Guj.) is directly on the issue of retrospective application of amended
sub-section (3) of section 201. The
court in this case has held that the amendment to sub-section (3) of section
201 is not retrospective. Following the
decision in the case of Tata Teleservices (supra), the Gujarat High
Court in the case of Troykaa Pharmaceuticals Ltd. vs. Union of India [2016]
68 taxmann.com 229(Guj.) once again expressed the same view.

Considering the principle laid down by the
Supreme Court as well as the ratio laid down by the Gujarat High Court in the
decisions referred to above which are directly on the issue, the Tribunal held
that the order passed u/s. 201(1) and 201(1A) having been passed after expiry
of two years from the financial year wherein TDS statements were filed by the
assessee u/s. 200 of the Act, is barred by limitation, hence, has to be
declared as null and void.

The Tribunal kept the question of
applicability of section 194C of the Act open.

This ground of appeal filed by the assessee
was allowed.

shailesh.kwebmaker

5 Section 56(2)(viia), Rule 11UA – As per Rule 11UA, for the purposes of section 56(2)(viia), fair market value of shares of a company in which public are not substantially interested, is to be computed with reference to the book value and not market value of the assets.

[2018] 92 taxmann.com 29 (Delhi-Trib.)
Minda S. M. Technocast Pvt. Ltd. vs. ACIT
ITA No.: 6964/Del/2014
A.Y.: 2014-15. Dated: 07.03.2018.

FACTS

During the previous year relevant to the
assessment year under consideration, the assessee, a private limited company,
having rental income and interest income acquired 48% of the issued and paid up
equity share capital of Tuff Engineering Private Limited from 3 private limited
companies for a consideration of Rs. 5 per share. The assessee supported the consideration paid
by contending that the purchase was at a price determined in accordance with
Rule 11UA. The assessee produced valuation report of Aggrawal Nikhil & Co.,
Chartered Accountants, valuing the share of Tuff Engineering Private Limited
(TEPL) @ Rs. 4.96 per share.

The Assessing Officer (AO) in the course of
assessment proceedings observed that while valuing the shares of TEPL the
assets were considered at book value. He was of the view that the land
reflected in the balance sheet of TEPL should have been considered at circle
rate prevailing on the date of valuation and not at book value as has been done
in arriving at the value of Rs. 4.96 per share. The AO substituted the book
value of land by the circle rate and arrived at a value of Rs. 45.72 per equity
share. He, accordingly, added a sum of Rs. 11,84,46,336 to the income of the
assessee on account of undervaluation of shares. The amount added was arrived
at Rs. 40.72 (Rs. 45.72 – Rs. 5) per share for 29,08,800 shares acquired by the
assessee.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the issue for its
consideration is as to whether the land shown by the TEPL should be taken as
per the book value or as per the market value while valuing its shares. The
Tribunal having noted the provisions of section 56(2)(viia) and the definition
of “fair market value” in Explanation to section 56(2)(viia) and Rule 11UA
observed that on the plain reading of Rule 11UA, it is revealed that while
valuing the shares the book value of the assets and liabilities declared by the
TEPL should be taken into consideration. There is no whisper under the
provision of 11UA of the Rules to refer the fair market value of the land as
taken by the Assessing Officer as applicable to the year under consideration.

The Tribunal relying on and finding support
from the decision of the Bombay High Court in the case of Shahrukh Khan vs.
DCIT reported in 90 taxmann.com 284 held that the share price calculated by
the assessee of TEPL for Rs. 5 per share has been determined in accordance with
the provision of Rule 11UA. The Tribunal reversed the orders of the lower
authorities and allowed the appeal filed by the assessee.

The Tribunal decided the appeal in favour of
the assessee.

Please note: The provision of law has
since changed.

shailesh.kwebmaker

4. [2017] 79 taxmann.com 170 (Pune – Trib.) Asara Sales & Investments (P.) Ltd. v. ITO ITA No. 1345 (Pune) of 2014 A.Y.: 2009-10 Date of Order: 8th March, 2017

Section 10(38) – Long term loss arising on sale of equity shares of a listed company, in an off market transaction, can be set off against long term capital gain arising on sale of unquoted shares since 10(38) does not apply to sale of listed shares in an off market transaction as STT is not required to be paid on such a sale.

FACTS
For the assessment year under consideration, the assessee company filed its return of income declaring therein a business loss of Rs. 13,54,362 and long term capital gain of Rs. (-) 3,85,58,664.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the year under consideration, shown long term capital gain of Rs. 4,53,98,376 on sale of shares of unlisted group companies and a long term capital loss of Rs. 8,39,57,040 on sale of shares of listed company i.e. G. G. Dandekar Machine Works Ltd. (GGDL). The assessee had set off the long term capital gains of Rs. 4.53 crore against long term capital loss of Rs. 8.39 crore. Thus, the long term capital loss in the return of income was Rs. 3.85 crore which was carried forward to subsequent assessment years.

The AO was of the view that since the shares of GGDL were acquired through a stock exchange after payment of STT, the long term capital gain arising on their sale, after holding them for a period of more than one year, would be exempt u/s. 10(38) of the Act. According to the AO, the fact that the shares were sold in off market transaction without paying any STT would not take away or change the nature of shares, because the shares were listed on Stock Exchange and were otherwise eligible for levy of STT. He also held that the sale of shares of GGDL after 12 months to a 100% subsidiary in an off market transaction without payment of STT was a colorable device to enable the assessee to set off loss on sale of listed shares against profit on sale of unlisted shares. He also noted that the sale was on 18.3.2009 at a loss of Rs. 48 per share whereas the book value on the same date was Rs. 59.60 and on the same date unlisted shares of KSL have been sold @ Rs. 225 per share whereas the book value was only Rs. 134 per share which resulted in long term capital gain. Both the transactions were made on the same date and with the same entity i.e. BVHPL which is again a 100% subsidiary of the assessee. The AO held that the long term capital loss of Rs. 8.39 crore on sale of shares of listed companies would not be set off in the current year against the long term capital gains of sale of listed shares nor it would be allowed to be carried forward to be set off in future and the long term capital gains of Rs. 4.53 crore on sale of shares of unlisted group company would be chargeable to tax in the year itself as long term capital gain @ 20%.

Further, since the shares of GGDL were sold for a price which was lower than their book value whereas the sale of shares of other unlisted companies was for a price higher than their book value, the AO held that the amount of loss to the extent of Rs. 2.75 crore (to the extent it was lower than the book value of the shares sold) would be ignored while setting it off against other income, if any, in the current year or for carry forward and set off in subsequent years.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the order of the AO and also treated the transaction to be a colorable device where the transaction was made on the same day in respect of listed shares and sale of shares of unlisted group companies. He also rejected the contention with regard to off market transaction between the group companies.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
Applying the rule of literal interpretation to the provisions of the Act i.e. section 10(38) of the Act and section 88 of the Finance (No. 2) Act, 2004, it is clear that STT is to be paid on such transaction which are entered into through recognised Stock Exchange. The section does not provide that each transaction of sale of listed shares is to be routed through Stock Exchange. Applying the said principle, to the facts of the case, where the shares of a group entity which was a listed company i.e. GGDL were sold in off market transaction, then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently, set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied.

The Tribunal noted that while selling the shares of listed company GGDL, the assessee opted to transact on off market trade since the said shares were of Kirloskar group concern and the group did not want the shares to be picked up by any stranger, if traded on Stock Exchange. Such business decision, according to the Tribunal, taken by the assessee cannot be doubted and called as colorable device to set off profits arising on sale of unquoted shares.

As regards the contention of the AO that the transaction was a colorable device since the shares were sold at Rs. 48 per share to another group concern whereas the book value of shares as on 31.3.2008 was Rs. 59.61 per share and these shares were acquired by the assessee in December 2006 @ Rs. 74.25 per share, the Tribunal held that the shares have not been sold to a subsidiary of the assessee but to a concern from whom the assessee has raised a loan to the extent of Rs. 18 crore and the decision was taken to sell the shares in an off market transaction to repay the loan and arrest the payment of interest on such loans. It also noted that the assessee had sold the shares at a market price prevailing on the date of the sale. It held that no fault can be found with such transactions undertaken by the assessee. Accordingly, the total loss arising on the said transaction can be adjusted and set off against any other gain arising in the subsequent year.

The appeal filed by the assessee was allowed.

shailesh.kwebmaker

3. [2017] 79 taxmann.com 67 (Mumbai – Trib.) Anita D. Kanjani vs. ACIT ITA No.: 2291 (Mum) of 2015 A.Y.: 2011-12Date of Order: 13th February, 2017

Section 2(42A) – Holding period of an office premises commences from the date of letter of allotment since that is the point of time from which it can be said that assessee started holding the asset on a de facto basis.

FACTS
In the return of income for AY 2011-12, the assessee included in the total income long term capital gain arising on transfer of her office unit. The chronology of relevant events, with respect to the office unit sold during the previous year, were as under –

1   Date of allotment of office unit to the assessee   11.04.2005
2   Date of signing of the agreement to sell       28.12.2007
3   Date of registration with the Registrar       24.04.2008
4   Date of sale                   11.03.2011

The Assessing Officer (AO) computed the holding period with reference to date of registration of the agreement and held that the office unit was held for a period of less than 36 months before the date of transfer and was therefore, a short term capital asset. He rejected the contention of the assessee that the holding period should be computed from the date of letter of allotment of office.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on various decision it was contended that the period of holding should be computed from the date of allotment of the property as per section 2(42A). It was alternatively contended that in case holding period is to be computed from the transfer of the property, in that case, ‘date of execution’ of the sale agreement should be taken as date of transfer of the property because the document registered on a subsequent date operates from the ‘date of execution’ and not from the ‘date of registration’ in view of clear provisions of section 47 of the Registration Act, 1908. If holding period was computed from the date of execution of the agreement, then, the impugned property shall be ‘long term capital asset’ in the hands of the assessee.

HELD
The Tribunal observed that Karnataka High Court has in the case of CIT vs. A. Suresh Rao [2014] 223 Taxman 228 (Kar.) dealt with similar issue wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length. From the said judgment it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.

It also noted that the ratio of the decisions of Punjab & Haryana High Court in the case of Madhu Kaul vs. CIT [2014] 363 ITR 54 (Punj. & Har.) and Vinod Kumar Jain vs. CIT [2014] 344 ITR 501 (Punj. & Har.) and of Delhi High Court in the case of CIT vs. K. Ramakrishnan [2014] 363 ITR 59 (Delhi) and of Madras High Court in the case of CIT vs. S. R. Jeyashankar [2015] 373 ITR 120 (Mad.).

The Tribunal, following various decisions of the High Courts, held that the holding period should be computed from the date of issue of allotment letter. Upon doing so, the property sold by the assessee would be long term capital asset and the gain on sale of the same would be taxable as long term capital gains.

This appeal filed by the assessee was allowed by the Tribunal.

shailesh.kwebmaker

2. [2017] 78 taxmann.com 242 (Delhi – Trib.) EIH Ltd. vs. ITO ITA Nos.: 2642 to 2645 (Delhi) of 2015 A.Ys.: 2004-05 to 2007-08 Date of Order: 14th February, 2017

Sections 15 r.w.s. 17, 192 – U/s. 192 there is no liability on the assessee to deduct tax at source on ‘TIPS’ recovered by the assessee from guests and paid to employees.

FACTS
The assessee company was engaged in the business of a chain of hotels (The Oberoi Group). A survey u/s. 133A was carried out at the business premises of the assessee company at Hotel – The Oberoi, New Delhi. In the course of the survey proceedings, it was noticed that the assessee company was in receipt of extra amount known as “TIPS” paid by the guests in cash or through credit cards at the time of settlement of bills in appreciation of good services provided by the service staff. On disbursal of this amount, by the assessee to the employees, no tax was deducted.

The Assessing Officer (AO) was of the view that since TIPS are paid to the employees in lieu of rendering prompt services for their employer, hence these accrued to the employees for services rendered as employees for their employer. He, accordingly, held that the assessee has failed to deduct tax and passed separate orders holding the assessee to be an assessee in default and passed orders u/s. 201(1) / 201(1A) for each of the assessment years.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the Apex Court in the case of ITC Ltd. vs. CIT (TDS) [2016] 384 ITR 14 (SC) has on analysis of section 15 has held that for the said section to apply, there should be a vested right in an employee to claim any salary from an employer or former employer. It held that since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case. The Tribunal observed that the facts as considered by the Apex Court in the case of ITC Ltd.’s case (supra) would fully apply to the present case. It also noted that the cognisance of the judicial precedence has already been taken by the co-ordinate “SMC” Bench in its order dated 12.7.2016 in the case of the assessee itself.

The Tribunal held that the assessee cannot be said to be in default of the provisions of section 192 of the Act as there was no liability of the assessee to deduct TDS under the said provision on TIPS recovered from hotel guests. Therefore, it cannot be held to be an assessee in default. Since interest u/s. 201(1A) can only be levied on a person who is declared as an assessee in default the question of interest does not arise. The Tribunal quashed the orders of the AO u/s. 201(1) / 201(1A) for the respective years.

The appeals filed by the assessee were allowed.

shailesh.kwebmaker

1. [2017] 78 taxmann.com 188 (Mumbai – Trib.) Bharat Serum & Vaccines Ltd. vs. ACIT ITA Nos.: 3091 & 3375 (Mum) of 2012 A.Y.: 2008-09 Date of Order: 15th February, 2017

Section 55 – Amount received for assignment of patent is taxable as capital gains u/s. 55(2)(a) and its cost of acquisition has to be taken as Nil.

FACTS
The assessee company was engaged in the business of research development, manufacturing, wholesale trading and licensing of bio-pharmaceuticals, bio-technology products serums and process related technology. During the year under consideration, the assessee transferred a patent for Rs. 1.50 crore. The entire receipt on assignment of patent was regarded to be not taxable on the ground that the patent was a capital asset and no expenditure was incurred for acquiring the patent.

The Assessing Officer (AO) took the view that it was not possible to develop a process / patent without input from specialised/skilled personnel in a state-of-art research facility, that process of developing a patent was a part of the business of the assessee and that it had claimed all the expenses for skilled personnel and research facility in its P & L Account.

The claim made by the assessee that it had not incurred any cost for developing a patent was not accepted by the AO. He held the amount received to be a revenue receipt.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the facts of the present case were squarely covered by the provisions of section 55 of the Act and that the receipt had to be taxed as capital gains.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal, at the outset, discussed the concept of patent and the history of patents. It mentioned that it is necessary to make a distinction between cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or copyrighted product or material. In cases where the payment is made to acquire patented or copyrighted products, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. It pointed out the distinction between a patent and a trademark. The Tribunal then discussed about the patented medicine ‘Profofal’ which was marketed by the assessee as Diprivan among others and was discovered in 1977. It observed that the medical patents require clinical tests and administering drugs to patients. Clinical tests have to be performed under controlled conditions. For understanding the effective mass and the side-effects of the medicine, large sample survey spread over a reasonable time span is a must.

The Tribunal held that before getting a patent of medicine like the item under consideration, the assessee has to carry out a lot of research analysis and experimentation. Naturally, it would require incurring of expenditure for both the activities. Such a tedious and cumbersome process was adopted by the assessee to have a right to manufacture / produce / process ‘Profofal’.

Considering the recitals of the agreement for assignment of patent, the Tribunal held that the patent was for the purpose to have right to manufacture/produce/process some article/thing. The patent was registered for commercial exploitation of the same in India as well as in the international market. It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing. Therefore, as per the amended provisions, the right to manufacture/produce/process would be taxable under the head capital gains and cost has to be taken at Rs. Nil. It upheld the order of the CIT(A).

This ground of appeal filed by the assessee was dismissed.

shailesh.kwebmaker

15. [2016] 75 taxmann.com 270 (Visakhapatnam – Trib.) DCIT vs. Dr. Chalasani Mallikarjuna Rao A.Y.: 2007-08 Date of Order: 21st October, 2016

Section 50C – Provisions of section 50C are
applicable to sale by a registered un-possessory sale-cum-GPA.

FACTS

The assessee, a
doctor by profession, filed his return of income for the assessment year 2007-08.
The assessment was completed u/s. 143(3) of the Act. Subsequently, the
assessment was re-opened, after recording reasons, u/s. 148 of the Act. In the
course of re-assessment proceedings, the Assessing Officer (AO) noticed that
the assessee has sold a residential house property at Dr.No.32-7- 3A, P.S.
Nagar, Vijayawada for a consideration of Rs. 60 lakh by way of registered
un-possessory sale-cum-GPA vide document no.52/2007. As per the said
document, the market value of the property for the purpose of payment of stamp
duty has been fixed at Rs. 82,04,000/-. However, since the assessee had
computed capital gains by adopting sale consideration of Rs. 60 lakh and
claimed exemption u/s. 54 of the Act towards construction of another
residential house property, the AO asked the assessee to show cause why
provisions of section 50C should not be applied and capital gain computed with
reference to value determined by Stamp Valuation Authorities. In response, the
assessee submitted that the provisions of section 50C of the Act are not
applicable since the assessee has transferred property by way of registered
un-possessory sale-cum-GPA. According to the assessee, the provisions of
section 50C of the Act apply where the property has been transferred by way of
registered sale deed. The AO rejected the contentions of the assessee and
computed capital gains by applying the provisions of section 50C of the Act.

Aggrieved, the
assessee preferred an appeal to CIT(A) who held that the provisions of section
50C of the Act have no application when the property has been transferred by
way of un-possessory sale-cum-GPA. He further held that the provisions of
section 50C of the Act are applicable when the property has been transferred
for a consideration which is less than that of the guidelines value payable as
per SRO, then the value as per the SRO has to be adopted on which stamp duty is
payable by the transferor. Since, the impugned property was not registered,
value as per SRO is not applicable. He allowed the appeal

Aggrieved, the
revenue preferred an appeal to the Tribunal.

HELD

It is an
admitted fact that the assessee has transferred property by way of registered
sale-cum-GPA has transferred property by way of registered sale-cum-GPA and
that the sale-cum-GPA is registered in the office of the SRO. The stamp duty
authority has determined the market value of the property at Rs. 82,04,000/-
and has collected ad hoc stamp duty of Rs. 50,000/-. The assessee has computed
long-term capital gain by adopting sale consideration of Rs. 60 lakh shown in
the sale deed. The only dispute is that whether the provisions of section 50C
are applicable or not when the property is transferred by sale-cum-GPA. The
Tribunal observed that in this case, the assessee himself has admitted
long-term capital gain on transfer of asset. This clearly shows that the
transfer took place within the meaning of section 2(47)(v) of the Act. The
moment transfer took place within the meaning of section 2(47)(v) the deeming
fiction provided u/s. 50C is applicable, when the sale consideration shown in
the sale deed is less than the market value determined by the stamp duty
authority for the purpose of payment of stamp duty. Since, there is a
difference between consideration shown in the sale deed and the value
determined by the SRO, the deeming provisions of section 50C are clearly
applicable. It observed that it is illogical and improper on the part of the
assessee to say that the transfer within the meaning of section 2(47)(v) takes
place, but the provisions of section 50C are not applicable when the property
has been transferred by way of un-possessory sale-cum-GPA.

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

shailesh.kwebmaker

14. [2016] 75 taxmann.com 136 (Visakhapatnam – Trib.) B. Subba Rao vs. ACIT A.Ys. : 2004-05 to 2006-07 Date of Order: 8th November, 2016

Sections 139,
153A, 154, 234A – Where a return of income is filed for the first time in response to notice u/s. 153A then interest will be levied u/s. 234A(1)(a) from
the due date of filing return of income mentioned in section 139 of the Act and not
from the due date of filing return of income mentioned in section 153A of the
Act.

In a case
where interest was leviable u/s. 234A(1) but the AO levied interest u/s.
234A(3), it amounts to non-application of a particular provision of the Act and
is undisputedly a mistake apparent from record, which needs to be rectified
u/s. 154 of the Act.

FACTS

The assessee,
an individual, derived income from pension and other sources. In connection
with the search of a group of cases of `S’ Limited, search was initiated
against the assessee as well. The Assessing Officer (AO) issued a notice u/s.
153A calling the assessee to file return of income. The assessee, filed his
return of income, for the first time, in response to notice issued u/s.153A.

The AO
completed the assessment u/s. 143(3) r.w.s. 153A and levied interest u/s. 234B
of the Act with effect from the due date of filing return of income mentioned
in notice u/s.153A of the Act till the date of filing of the return of income
by the assessee.

Subsequently,
the AO issued a notice to the assessee proposing to rectify the mistake in the
order and proposed to levy interest u/s. 234B of the Act from the from due date
of filing return of income u/s. 139 of the Act till the date of filing of
return of income by the assessee instead of from due date of filing return of
income mentioned in notice u/s. 153A of the Act. The assessee submitted that
the levy of interest is a debatable issue which involves prolonged discussion
and cannot be rectified u/s. 154 of the Act. The AO rejected the contentions of
the assessee and passed an order u/s.154 rectifying the mistake.

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

Aggrieved, the
assessee preferred an appeal to the Tribunal where relying upon the decision of
ITAT, Chennai ‘B’ bench in the case of Dr. V. Jayakumar vs. Asstt. CIT
[2011] 46 SOT 68 (URO)/10 taxmann.com 141, it was argued that where a
notice is issued u/s 153A to the assessee, requiring filing return of income
specifying the due date in the notice, because of the word used in the section
“the provisions of this Act shall, so far as may be, apply accordingly as
if such return was a return required to be filed u/s. 139”, the due date
referred to in section139 of the Act gets shifted to the date prescribed in the
notice u/s. 153A of the Act.

HELD

As regards the
legal contention of the assessee viz. that the mistake under consideration
could not be rectified by invoking the provisions of section 154, the Tribunal
held that since the method of computation of interest u/s. 234A is specifically
provided in the Act, there is no ambiguity in the provisions in as much it is
very clear in terms of section 234A(1) and 234A(3). Section 234A(1) deals with
a situation where return is not filed u/s. 139(1) or 139(4) and 234A(3) deals
with a situation where return is filed after determination of income u/s.
143(1) or computation of income u/s. 143(3) or 147. It noted that the AO
applied the provisions of section 234A(3), which is not applicable to this
case. It held that non-application of a particular provision is undisputedly a
mistake apparent from record, which needs to be rectified u/s. 154 of the Act.
It held that the AO has rightly invoked provisions of section 154, to rectify
the levy of interest u/s. 234A.

Once return is
filed in response to notice u/s. 153A, the provisions of section 139
automatically steps in, accordingly, the due date specified in the said section
comes into operation. If the contention of the assessee is accepted, it would
amount to encouraging the non-filing of returns by the taxpayers, who would
take the chance and file returns as and when notice u/s. 148/153A is issued, so
that they can save interest amount on tax payable to the Govt. exchequer for a
period of four or six years as the case may be.

The method of
computation of interest u/s. 234A is specifically provided. There is no
ambiguity in the provisions. Section 234A(1) deals with a situation where
return of income is filed belatedly and also where no return is filed u/s.
139(1) or 139(4) and section 234A(3) deals with a situation where return is
filed u/s. 148/153A after determination of income u/s. 143(1) or computation of
income u/s. 143(3) or 147 of the Act.

The Tribunal
held that when a return is filed for the first time, the provisions of section
234A(1)(a) are applicable and interest is chargeable for the period commencing
on the date immediately following the due date referred u/s. 139 and ending on
the date of furnishing of the return. Since, the assessee has filed return for
the first time u/s. 153A of the Act, the AO rightly charged interest u/s. 234A
from the due date referred in section 139(1) to the date of filing return u/s.
153A of the Act. The Tribunal upheld the order of the CIT(A).

As regards the
reliance by the assessee upon the decision of ITAT, Chennai ‘B’ bench in the
case of Dr. V Jayakumar (supra) it observed that the bench has upheld
the arguments of the assessee without considering the provisions of sections
153A & 234A of the Act in a right perspective.

The Tribunal
dismissed the appeal filed by the assessee.

shailesh.kwebmaker

13. [2016] 161 ITD 217 (Pune Trib.) Quality Industries vs. JCIT A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 14A – When an assessee, a
partnership firm, earns tax free income and disallowance u/s. 14A (r.w. Rule
8D) is to be computed then interest paid, towards the use of partner’s capital,
by the assessee to the partners is not amenable to section 14A in the hands of
partnership firm.

FACTS

The assessee, a partnership firm, engaged in
the business of manufacturing of chemicals etc., had during the relevant
assessment year earned tax free dividend income from investment in mutual funds
which was claimed as exempt income u/s. 10(35) of the Act.

The AO next observed that investment in
mutual funds was made out of interest bearing funds which included interest
bearing partner’s capital also.

The interest so paid to the partners was
claimed as deduction by the assessee against taxable income.

The AO was thus of the view that assessee
had incurred interest expenses which were attributable to earning aforesaid tax
free dividend income. Thus, he invoked provisions of section 14A of the Act
r.w. Rule 8D and proceeded to disallow estimated interest expenditure incurred
in relation to dividend income so earned.

It was the assessee’s contention that while
computing disallowance u/s.14A, disallowance of proportionate interest
attributable to interest bearing partners’ capital is not permissible. It was
submitted that section 14A covers amount in the nature of ‘expenditure’ and not
all statutory allowances and that interest on partner’s capital is not an
‘expenditure’ per se but is in the nature of a deduction u/s. 40(b) just
as depreciation on business capital asset is an allowance and not expenditure.

The AO, however, discarded the various pleas
of the assessee.

The CIT(A) took
note of the contents of the Balance Sheet of the assessee firm for relevant
assessment year and noted that main source of investment in mutual funds have
come from partner’s capital. The partners had introduced capital in the
partnership firm which bears interest @12% per annum. This being so, the
provisions of section 14A are attracted and expenses incurred in relation to
income which does not form part of total income requires to be disallowed.

He accordingly confirmed the action of the
AO and his working of disallowance under Rule 8D.

Aggrieved by the order of the CIT(A), the
assessee filed appeal before the Tribunal.

HELD

The predominant question that arises is
whether, for the purposes of section 14A of the Act, payment of interest to the
partners by the partnership firm towards use of partner’s capital is in the
nature of ‘expenditure’ or not and consequently, whether interest on partners capital is amenable to
section 14A or not in the hands of partnership firm.

In order to adjudicate this legal issue, we
need to appreciate the nuances of the scheme of the taxation. We note that
prior to amendment of taxation laws from AY 1993-94, the interest charged on
partners capital was not allowed in the hands of partnership firm while it was
simultaneously taxable in the hands of respective partners. An amendment was inter
alia brought in by the Finance Act 1992 in section 40(b) to enable the firm
to claim deduction of interest outgo payable to partners on their respective
capital subject to some upper limits.

Hence, as per the present scheme of
taxation, partnership firms complying with the statutory requirements and
assessed as such are allowed deduction in respect of interest to partners
subject to the limits and conditions specified in section 40(b) of the Act. In
turn, these items will be taxed in the hands of the partners as business income
u/s. 28(v).

Share of partners in the income of the firm
is exempt from tax u/s. 10(2A). Thus, the share of income from firm is on a
different footing than the interest income which is taxable under the business
income.

The section
28(v) treats the passive income accrued by way of interest as also salary
received by a partner of the firm as a ‘business receipt’ unlike different
treatments given to similar receipts in the hands of entities other than
partners. In this context, we also note that under proviso to section
28(v), the disallowance of such interest is only in reference to section 40(b)
and not section 36 or section 37. Notably, there has been no amendment in the
general law provided under Partnership Act 1932. The amendment to section 40(b)
as referred hereinabove has only altered the mode of taxation. Needless to say,
the Partnership firm is not a separate legal entity under the Partnership Act.
It is not within the purview of the Income-tax Act to change or alter the basic
law governing partnership. Interest or salary paid to partners remains
distribution of business income.

Section 4 of the Indian Partnership Act 1932
defines the terms partnership, partner, firm and firm name as under :

“Partnership” is the relation
between persons, who have agreed to share the profits of a business, carried on
by all or any of the partners acting for all. Persons who have entered into
partnership with one another are called individually ‘Partners’ and
collectively a ‘firm’ and the name under which their business is carried on is
called the ‘firm name.”

Thus, it is clear that firm and partners of
the firm are not separate person under Partnership Act although they are
separate unit of assessment for tax purposes.

It is relevant here to refer to decision in
the case of CIT vs. R.M. Chidambaram Pillai (1977-106 ITR 292) wherein
Hon’ble Supreme Court has held that:

“A firm
is not a legal person, even though it has some attributes of personality. In
Income-tax law, a firm is a unit of assessment, by special provisions, but it
is not a full person. Since a contract of employment requires two distinct
persons, viz., the employer and the employee, there cannot be a contract of
service, in strict law, between a firm and one of its partners. Payment of
salary to a partner represents a special share of the profits. Salary paid to a
partner retains the same character of the income of the firm. Accordingly, the
salary paid to a partner by a firm which grows and sells tea, is exempt from
tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60
per cent thereof, representing agricultural income and is liable to tax only to
the extent of 40 per cent.”

The Hon’ble
Supreme Court has also held in the case of CIT vs. Ramniklal Kothari (1969
-74 ITR 57) that the business of the firm is business of the partners of
the firm and, hence, salary, interest and profits received by the partner from
the firm is business income and, therefore, expenses incurred by the partners
for the purpose of earning this income from the firm are admissible as
deduction from such share income from the firm in which he is partner.

Thus, the ‘partnership firm’ and partners
have been collectively seen and the distinction between the two has been
blurred in the judicial precedents even for taxation purposes.

Therefore, the relationship between partner
and firm cannot be inferred as that of lender of funds (capital) and borrower
of capital from the partners, and hence, section 36(1)(iii) is not applicable
at all. Section 40(b) is the only section governing deduction towards interest
to partners. To put it differently, in view of section 40(b) of the Act, the
Assessing Officer purportedly has no jurisdiction to apply the test laid down
u/s. 36 of the Act to find out whether the capital was borrowed for the
purposes of business or not.

As per the
scheme of the Act, the interest paid by the firm and claimed as deduction is
simultaneously susceptible to tax in the hands of its respective partners. The
interest paid to partners and simultaneously getting subjected to tax in the
hands of its partners is merely in the nature of contra items in the hands of
the firms and partners. Consequently interest paid to its partners cannot be
treated at par with the other interest payable to outside parties. Thus, in
substance, the revenue is not adversely affected at all by the claim of
interest on capital employed with the firm by the partnership firm and partners
put together. Thus, capital diverted in the mutual funds to generate alleged
tax free income does not lead to any loss in revenue by this action of the
assessee. In view of the inherent mutuality, when the partnership firm and its
partners are seen holistically and in a combined manner with costs towards
interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital
where no disallowance u/s. 14A read with Rule 8D is warranted. Consequently,
the plea of the assessee is merited in so far as interest attributable to partners.
However, the interest payable to parties other than partners, would be
subjected to provisions of Rule 8D.

shailesh.kwebmaker

12. [2016] 161 ITD 211 (Ahmedabad Trib. – SMC) Nanubhai Keshavlal Chokshi HUF vs. ITO A.Y.: 2008-09 Date of Order: 1st August, 2016

Section 48 – If an assessee makes payment
to his brother, who was living with him for years, for vacating his house, the
same would be considered as an expenditure incurred for improvement of asset or
title and would be allowed as deduction while computing long term capital gain
arising on sale of said house.

FACTS

During the relevant assessment year, the
assessee had shown income from long term capital gain arising from sale of
house property.

While computing the said capital gains, the
assessee had claimed deduction of certain amount paid by him, to his brother,
for vacating the house.

The AO as well as CIT(A) declined the
deduction on account of the following reasons:

– Municipal
tax bills submitted by assessee showed that assessee was the sole occupant of
the property.

– Valuation
of the property was done before sale of the said property and the valuation
report of the property, dated 22-06-2007, stated that assessee was the sole
occupant of the property.

– Assessee’s
brother had stated in his statement recorded u/s. 133(1) that he was living
with the assessee, not in capacity as a tenant and was not paying any rent, but
was staying in the house as per assessee’s wish and he was not having right
over the property in any capacity.

– As
per the will of assessee’s father dated 12-06-1957, the different properties
were distributed between the assessee and his brother such that both of them
should get an equal amount of properties valuing Rs. 35,000/- each. That shows
that the assessee had exclusive right over the property on which the assessee
claims that his brother was occupying as tenant.

HELD

Section 48 of the Income-tax Act
contemplates mode of computation of capital gains. It provides that income
chargeable under the head “Capital Gains” shall be computed by
deducting from the full value of the consideration the following amounts, viz.
(i) the expenditure incurred wholly and exclusively in connection with such
transfer, and (ii) cost of acquisition of the asset and the cost of any improvement
thereto.

According to the assessee, his brother was
residing in the house owned by him and while selling the house in order to get
vacant possession, payment of certain sum was made by the assessee’s HUF to
assessee’s brother. As far as payment part is concerned, there is no dispute.
The payment was made through account payee cheque. Assessee’s brother has
confirmed receipt of money and has also filed affidavit to this effect.

The question is whether the payment made by
the assessee to his brother is to be considered as expenditure incurred for
improvement of asset or the title.

On an analysis of the record, I find that
the revenue has approached to the controversy in strictly mechanical way.
Whereas in the present appeal, situation was required to be appreciated,
keeping in mind social circumstances and the relationship of the brothers. What
was their settlement while residing together? What was the feeling of the elder
brother towards their younger brother, when they displaced them from a property
where they were residing for more than 24 years?

Had the controversy been appreciated in a
mechanical manner, and if the brother, who was residing in the house refused to
vacate the house, then, what would be the situation before the assessee. The assessee
might have had to file a suit for possession that might be decided against his
brother and his brother’s ejection from the premises, but that would have
consumed time in our judicial process of at least more than ten to fifteen
years. The prospective buyers may not have been available in such
circumstances. Though the assessee’s brother had not been paying any rent, but
he was paying the electricity bills.

Hence, the payment made by the assessee is
held as made for improvement of title of the property and is allowed as
deduction while computing the long term capital gain.

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15 Section 12A(2) : Proceeding pending in appeal before the CIT (A) should be deemed to be assessment proceedings pending before the AO for the purposes of first proviso to section 12A(2)

(2017) 152 DTR (Coch) (Trib) 137

SNDP Yogam vs. ADIT (Exemption)

A.Ys.: 2006-07 to 2009-10 & 2011-12

Date of Order: 1^st
March, 2016

Section 12A(2) :
Proceeding pending in appeal before the CIT (A) should be deemed to be
assessment proceedings pending before the AO for the purposes of first proviso
to section 12A(2)

Facts

The assessee was not
registered under section/s 12AA for the AYs under dispute. Accordingly, the AO
invoked the provisions of section 167B thereby taxing the whole income at the
maximum marginal rate for all the AYs under dispute. The assessments for the
AYs 2006-07 to 2009-10 were completed on 19^th March 2013.

The assessee had applied
for registration u/s.12AA vide letter dated 30^th January 2013 and
the registration was granted vide order dated 29^th July 2013.

The CIT(A) held that since
the registration was granted on 29^th July 2013, it can be treated as
applicable only from the AY 2013-14. It was not applicable to the assessee for
AYs under dispute and, therefore, it could not be taken that this institution
was registered u/s. 12AA. Accordingly, the order of the Assessing Officer was
confirmed.

On appeal before the ITAT, the assessee submitted that section 12A was
amended recently by the Finance Act 2014 by introducing new provisos to
sub-section (2) of section 12A with .effect .from 1^st October 2014.
As per the first proviso to section 12A(2), once a registration u/s. 12AA is
granted to a charitable organisation in a financial year, then the provisions
of sections 11 and 12 shall apply even for the assessment proceedings which
were pending before the AO on the date of registration. As per the amendment,
no action shall be taken u/s. 47. Following the said amendment, the entire income
of the trust is eligible for exemption u/s. 11 for the AYs under dispute.

However, on the date on which the assessee was
granted registration u/s. 12AA, the proceedings were pending before the CIT(A)
and not the AO.

Held

The first proviso to section 12A(2) was brought in
the statute only as a retrospective effect, with a view not to affect genuine
charitable trusts and societies carrying on genuine charitable objects in the
earlier years and substantive conditions stipulated in section 11 to 13 have
been duly fulfilled by the said trust. The benefit of retrospective application
alone could be the intention of the legislature and this point is further
strengthened by the Explanatory Notes to Finance (No.2) Act, 2014 issued by the
Central Board of Direct Taxes vide its Circular No. 01/2015 dated
21.1.2015

When section 12A of the Act
was amended by introducing new provisos to sub-section (2) of section 12A by
Finance Act, 2014 with effect from 01.10.2014, the assessment orders passed by
the assessing officer in respect of the present assessee were pending in appeal
before the first appellate authority. During such pendency, the assessee was
granted registration u/s. 12AA of the Act on 29.07.2013 with effect from the
assessment yearAY 2013-14. Those appeals were the continuation of the original
proceedings and that the power of the Commissioner of Income-tax was
co-terminus with that of the assessing officer were two well established
principles of law. In view of the above and going by the principle of purposive
interpretation of statues, an assessment proceeding which is pending in appeal
before the appellate authority should be deemed to be ‘assessment proceedings
pending before the assessing officer’ within the meaning of that term as
envisaged under the proviso;. it follows there-from that the assessee
whoich obtained registration u/s. 12AA of the Act during the pendency of appeal
was entitled for exemption claimed

u/s. 11 of the Act.

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14 Section 37(1) – Licence fee paid by assessee, a partnership law firm; to a private limited company for use of goodwill, which was gifted to private limited by an individual for perpetuity, is an allowable deduction u/s. 37(1) and cannot be disallowed on the grounds that the gift of goodwill by individual, of his profession of law, to a company would possibly be violating the Advocates Act, 1961 or the Bar Council Rules.

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

A.Y.s: 2003-04 &
2010-11

Date
of Order :– 6^th September, 2016

FACTS

The assessee, is a
partnership law firm, specializing in intellectual property and corporate laws.

Dr. ‘V’, a practicing
attorney, was the sole and absolute proprietor of the business of a famous law
firm ‘Remfry & Son’ along with the goodwill attached to it. With an
intention of segregating the goodwill in ‘Remfry & Sagar’ from the
attorney’s, and for institutionalising the goodwill in perpetuity by way of
corporatisation, a gift deed was executed by Dr. ‘V’ in favour of ‘RSCPL’, a
private limited entity, whereby the goodwill in “Remfry & Sagar”
was gifted to a newly incorporated juridical/legal entity “RSCPL”.

Thereafter, Dr. V. entered into a partnership with four other partners.
This partnership firm (the assessee) entered into an agreement with RSCPL for
grant of license for the use of goodwill of “Remfry & Sagar”
subject to payment of license fee @ 25% of the amount of bills raised. The
agreement was valid for the term of 5 years. This agreement was later on
renewed and under as per the renewal, license fee was payable @ 28% of the
amount of bills raised.

The assessee claimed
deduction of the aforesaid license fee paid u/s. 37(1).

The
AO disallowed license fee paid by the assessee to RSCPL for the use of goodwill
on the ground that the entire transaction was colourable device adopted to
transfer profits of the assessee-firm to the family members of V, who held
majority shares in RSCPL and to evade tax. The CIT-(A) upheld order of the AO.

On appeal by the assessee
before ITAT-

HELD

It has been demonstrated by
the assessee that the revenue has accepted that both the entities, i.e., the
assessee as well as RSCPL, pay taxes, at the maximum rate and that there is no
loss of revenue on account of this arrangement. Thus, the disallowance made by
the revenue on the ground of diversion of profits is devoid of merit.

Though the revenue has
argued that goodwill of a profession cannot be sold to a company which does not
have a right to carry on practice, no specific law or section is pointed out in
support of the argument. Only several submissions have been made. Certain
judgments of Foreign Courts are cited, which are based on “ethical
considerations” and not legal prohibition. In any event, the Tribunal has
no power or authority to adjudicate the issue as to, whether; the gift of
goodwill by Dr. V, of his profession of law, to a company is violating the Advocates
Act, 1961 or the Bar Council Rules. No authority has held that this arrangement
violates any Act or law of the land, though the assessee firm has been carrying
on its profession of Attorneys at law under this arrangement for the last many
years.

Another important fact that
has to be considered is that, Dr. V had the sole and exclusive rights to the
said goodwill. The goodwill was held by him. Without legal authorisation from
him, the assessee firm could not use the name and style of “Remfry &
Sagar” along with its goodwill and other assets and rights. The
assessee-firm had to seek permissions and licences to continue and carry on
this profession under this name as it is run. Hence obtaining a license is a
must for assessee firm to continue and carry on its profession as the goodwill
is not owned by it. The payment made in pursuance of an agreement which enables
the assessee firm to carry on its profession, in the manner in which it is now
doing, is definitely an expenditure laid down wholly and exclusively for the
purpose of business or profession. The argument of the Special Counsel that the
purpose test contemplated u/s. 37 is not satisfied is devoid of merit.
Irrespective of whether the gift of Dr. V to RSCPL is ethical or not and
irrespective of the fact whether the gift is legally valid or not, from the
view point of the assessee firm, as it could not have continued and carried on
the profession of Attorneys-at-Law in the name of “Remfry &
Sagar” and use its goodwill and all its associated rights without the
impugned agreement with RSCPL. Hence the payment has to be held as that which
is incurred wholly and exclusively for the purpose of business or profession.

For all the aforesaid
reasons the deduction claimed by the assessee, of license fee paid by it to
RSCPL, has to be allowed u/s. 37.

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13 Section 45 – Where conduct of an assessee reveals that he was into the business of real estate, merely because the books of account did not record conversion of capital asset to stock-in-trade or that such a conversion was not mentioned in the tax audit report will not change the characteristics of the income arising from the transactions in question.

[2017] 83 taxmann.com 97
(Visakhapatnam – Trib.)

DCIT vs. Chennupati
Kutumbavathi

ITA No. 45 (Vizag) of
2013

A. Y.: 2007-08

Date of Order: 9^th June, 2017

FACTS

The assessee purchased agricultural land in the year 1980. He
claimed that the said land was converted into stock-in-trade in the year 2006
with an intention to commercially exploit the same. The assessee divided the said land into plots
of different sizes and sold them to a large number of buyers. In the return of income filed, the profit
arising from sale of such plots was shown u/s. 45(2) and under the head
`Profits and gains of business or profession’.

The Assessing Officer (AO) observed that the assessee had
never traded in land and that in the accounts and financial statements of the
assessee for the financial year 2005-06, there was no conversion recorded and
the tax auditor had clearly mentioned that during the year under consideration
(financial year 2005-06), there was no conversion of capital asset into
stock-in-trade. The AO, therefore, held
that the activity carried on by the assessee was not in the nature of adventure
in the nature of trade or commerce. The
AO, accordingly, charged to tax profit arising on sale of plots as Long Term
Capital Gains and while computing long term capital gains he applied the
provisions of section 50C of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal
where it claimed that merely because the books of account did not disclose the
conversion of capital asset into stock-in-trade, the characteristics of the
transaction would not change.

HELD

The
Tribunal observed that the only question that needs to be examined is whether
on the facts and circumstances of the case the profit from sale of land is
assessable as capital gains or as business income. It held that in order to find whether a
transaction of purchase and subsequent sale amounts to an adventure in the
nature of trade, the initial intention is an important factor, but not a
conclusive one. The subsequent events and the assessee’s conduct are also
important factors and the facts to be considered are firstly whether the
transaction was in the line of the assessee’s business and secondly whether it
was an isolated transaction or there was a series of similar transactions. It
is not necessary that in order to constitute trade, there should be a series of
transactions, both of purchase and of sale. Even a single and isolated
transaction can be held to be capable of falling within the definition of
business. The activity or the transaction said to be an adventure in the nature
of trade must be with the object of earning profit.

The
Tribunal noted that the assessee purchased an agricultural land in the year
1980. The assessee has sold the impugned land in the financial year relevant to
assessment years 2007-08. The assessee claimed to have converted said
investment into stock-in-trade as on 31-3-2006, developed the said land into
various plots before it was sold. On
these facts, the Tribunal held that it is very clear that the intention of the
assessee was to purchase the land, divide them into plots and sell the plots
within the period established. Therefore, it clearly indicates that the
intention of the assessee was to carry out adventure in the nature of trade to
commercially exploit the said land. The assessee was involved in the business
of real estate which is evident from the fact that the assessee has computed
resultant profit from sale of impugned land by applying the provisions of
section 45(2) of the Act.

Insofar as application of
the provisions of section 50C since the activity carried out by the assessee
was held to be in the nature of adventure in the nature of trade or commerce
and the resultant profit assessable under the head ‘income from business’, the
Tribunal held that the provisions of section 50C have no application, when the
income is computed under the head ‘income from business or profession’.

The Tribunal dismissed the
appeal filed bythe revenue.

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