ACCOUNTING:

ACIT v. Mehul J. Somaiya

ITAT ‘B’ Bench, Mumbai
Before N.V. Vasudevan (JM) & D.K. Rao (AM)
ITA No. 7118/Mum./2006
AY 2002-03; Decided on 10/12/2008
Counsel for revenue/assessee: G. Gurusamy / C.N. Vaze

S. 145 of the Income-tax Act, 1961 — Method of accounting — Assessee having more than one source of income under the head ‘Business income’ — Whether the assessee has the option to follow different method of accounting in respect of each of the different sources of income under the head — Held, Yes.

Per N. V. Vasudevan

Facts :

During the year the assessee had returned income under the head salary, business and income from other sources. In respect of income under the head business, he had three different sources of income viz., (i) Remuneration from partnership firm where he was a partner; (ii) income from proprietary concern; and (iii) consultancy fee. In respect of the first two sources of business income, the assessee was following mercantile system of accounting, while in case of the latter, the assessee claimed that it was following cash method of accounting. Accordingly, from the consultancy fee of ₹ 7.87 lakh receivable, he offered to tax the sum of ₹ 41,344 i.e., the sum equal to the tax deducted at source by the client and for which the TDS certificate was received by him, for tax.

According to the AO, the assessee was not allowed to adopt different methods of accounting for different sources of income falling under the same head. Therefore, he brought to tax the entire consultancy fee of ₹ 7.87 lakh. On appeal, the CIT(A) allowed the appeal of the assessee.

Held :

The Tribunal noted that the object of the amendment of S. 145 made by the Finance Act, 1995 was only to do away with the mixed system of accounting, by which certain transactions relating to a particular source were recorded following one system and the other transactions following the other system of accounting. According to the Tribunal, if there were more than one sources of income falling under the same head of income, and the assessee follows either cash or mercantile system of accounting for different sources income, it cannot be said that the hybrid system of accounting for different sources of income is being followed. According to it, so long as for a particular source either cash or mercantile system was followed, there can be no objection. Thus, as noted by the CIT(A), since the assessee was consistently following the cash system of accounting for his consultancy income, it accepted the submission of the assessee and dismissed the appeal filed by the Revenue.

ITO v. Chembur Trading Corporation

ITAT ‘C’ Bench, Mumbai
Before Sunil Kumar Yadav (JM) and D.K. Rao (AM)
ITA No. 2593/Mum./2006
AY: 2000-01; Decided on: 21/1/2009
Counsel for assessee / revenue : J.P. Bairagra / Yeshwant Chavan

Project completion method of accounting — AO cannot adopt two methods of accounting in one project to determine the income of the assessee — In the case of an assessee following project completion method, profit arising on sale of TDR which TDR was received as consideration for the project, could not be taxed in the year of sale of TDR.

Per Sunil Kumar Yadav

Facts :

The assessee was in the business of construction of buildings and was regularly following project completion method which method was accepted by the Revenue. The assessee started project of construction of a building known as ‘Kailash Towers’ (KT) on a plot of land at Anik Village, Chembur of which the assessee was the owner. Till 31-3-1994, the assessee received ₹ 32,31,159 as advances for sale of flats in KT. The assessee had incurred expenditure of ₹87,35,285 (which included cost of land and also cost of work done on this project).

While the project was on, the entire plot of land admeasuring 44544.25 sq.mts. was required by the Government of Maharashtra for construction of Eastern Express Freeway and also for construction of tenements for rehabilitation of slum dwellers An agreement was executed between the assessee, the Slum Rehabilitation Authority (SRA) and the Government of Maharashtra through PWD which agreement detailed modalities as to how the land was to be acquired and in what manner TDR was to be granted to the assessee. The agreement was a composite agreement for construction of Eastern Express Freeway to be carried out by the Government of Maharashtra after acquiring land from the assessee and also for rehabilitation of the slum dwellers living in 7500 hutments on the freeway land required for the purpose of Eastern Express Freeway. 1474 tenements and 92 shops were to be constructed by the assessee. The assessee was entitled to receive land TDR for handing over land to the Government and Construction TDR for constructing tenements and shops on land belonging to it. The grant of TDR was to be in phases. The assessee was not entitled to any monetary consideration.

During the previous year relevant to the assessment year under consideration the assessee sold certain TDR and the sale consideration was reflected on the liability side of the balance sheet. Sale consideration of TDR was regarded by the assessee as a receipt of the project to be taxed in the year of completion of the project.

The AO dissected the entire project into two schemes (1) Transfer of land for construction of Eastern Express Freeway by the Government of Maharashtra and the Road TDR granted to the assessee in lieu thereof; (2) Transfer of land and construction of tenements and shops by the assessee itself and the grant of TDR in lieu thereof. The AO, accordingly, applied different methods of accounting to both the projects. In respect of road TDR he taxed the assessee yearwise in the year in which TDR was sold and in respect of the project for transfer of land and construction of tenements and shops he accepted project completion method. In A.Y. 2000-01 the AO made an addition of ₹1,88,86,810.

The CIT(A) held that Road TDR was directly related to the said project and sale proceeds against this TDR were to be recognised as a revenue receipt in the year in which the project was completed.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the agreement was a composite agreement for handing over land for Expressway and also for construction of tenements and shops by the assessee on land belonging to it. The Tribunal also noted that the entire land was acquired in phases and also consideration in the form of TDR was received in phases. Consideration was received in kind. The funds received on sale of TDR were utilised for construction of tenements and shops. The Tribunal held that it was clearly one project and not two projects as they have been treated by the AO. The Tribunal held that the AO cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. The Tribunal stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In the present case, the assessee had been following the project completion method to determine the profits of a project for last so many years, but, during the year under consideration the AO had dissected the project in two segments and for one segment he applied project completion method and for the remaining segment, he determined the profit on sale of TDR. The method of accounting adopted by the AO was held to be neither prevalent nor recognised by the ICAI or under any law. The Tribunal held that the assessee had rightly computed its profit on the basis of the project completion method. Accordingly, it upheld the order of CIT(A) and dismissed the appeal filed by the Revenue.

Pushpa Construction Co. v. ITO

ITA No. 193/Mum./2010 [BCAJ – July-12]

Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

Facts:

The assessee, a partnership firm, engaged in construction activity especially the Slum Rehabilitation Programme (SRA Scheme) launched by the Government of Maharashtra, had undertaken two projects of slum rehabilitation, during the financial year 2005-06, which were not completed as on 31-3-2006. The assessee was following project completion method of accounting.

During the financial year 2005-06, the assessee sold TDR allotted to it by BMC, which TDR was directly linked to the projects undertaken by the assessee, for a consideration of ₹ 2,67,29,626. Since the projects were not complete as on 31-3-2006, this amount was reflected in the balance sheet as on 31-3-2006 as advance.

The Assessing Officer (AO) rejected the contentions of the assessee and brought to tax the entire amount as income of the assessee for A.Y. 2006-07.

Aggrieved, the assessee preferred an appeal where it was also submitted that the entire sale proceeds of TDR totalling to ₹ 6,90,26,192 were reflected in the P & L Account for A.Y. 2008-09 and surplus income of  ₹ 2,78,59,939 was offered. The CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that admittedly the two slum rehabilitation projects were not completed in A.Y. 2006-07 and also that the TDR in quesetion had direct nexus with the two projects undertaken by the assessee. It found that the contention of the assessee is supported by the decision of the jurisdictional High Court in the case of CIT Central I, Mumbai v. Chembur Trade Corporation, (ITA No. 3179 of 2009) order dated 14-9-2011 and also the decision of Mumbai Bench of ITAT in the case of ACIT v. Skylark Building, 48 SOT 306 (Mum.) and also that the assessee has offered the amounts in A.Y. 2008-09 when the projects were completed.

The Tribunal accepted the contention of the assessee and restored the matter back to the file of the AO with a direction to verify whether the assessee has offered sale consideration of TDR in question in A.Y. 2008-09. If it has so offered, then the same should not be taxed in A.Y. 2006-07.

The Tribunal allowed the appeal filed by the assessee.

APPELLATE TRIBUNAL

Shri Rumi K. Pali vs. Dy CIT

ITA No. 7314/Mum/2011 [BCAJ – Jan-13]

S.s. 10(11) – ITAT can consider a new deduction which, inadvertently, was not claimed in the return filed by the assessee. Assessee is entitled to claim interest on PPF to be exempt even though the same was not claimed in the income tax return.

Facts

The assessee in the return of income filed, which return of income was revised on two occasions, as well as in the two revised returns filed by him offered for taxation under the head Income from Other Sources, ₹ 3,81,565 being interest on PPF. The Assessing Officer (AO) completed the scrutiny assessment by accepting the returned income.

In an appeal to CIT(A), the assessee contended that he should be allowed exemption in respect of interest on PPF deposit u/s. 10(11) of the Act. The CIT(A), relying on the decision of the Apex Court in the case of Goetze India Ltd. (284 ITR 323) held that no fresh claim can be made by the assessee. He dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee, it was contended that a statutory claim can be made at any stage; mistake which has crept in the income-tax return was inadvertent; and the assessee cannot be put in a position so as to be taxed on something which he is not legally bound to. Reliance was also placed on the decision of Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (ITA No. 3908 of 2010).

Held

The Tribunal noted that the assessee failed to claim interest on PPF deposits as exempt from tax even in the revised returns and the impugned amount of interest is exempt from tax u/s. 10(11) of the Act. It noted that the Supreme Court, in the case of National Thermal Power Company Ltd. v CIT 229 ITR 383 (SC), has observed that even if a claim is not made before the AO, it can be made before the Appellate Authority. It also noted that the decision of the Bombay High Court on which assessee has placed reliance, having considered the decisions of the Supreme Court in the case of Goetze India Ltd. (supra) and also National Thermal Power Company Ltd. vs. CIT (supra), held as under:

“The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the Assessing Authority and that the judgement does not impinge on the power of the Tribunal u/s. 254.”

Following the above mentioned decision of the Bombay High Court, the Tribunal directed the AO to allow exemption of interest on PPF deposit at ₹ 3,81,565. The appeal filed by the assessee was allowed.

ASSESSMENT

DCIT v. Dalal Street Press Ltd.

ITAT ‘B’ Bench, Mumbai
Before O.K. Narayanan (AM) and
Rajpal Yadav (JM)
ITA No. 3756 /Mum./2003
AY 1997-98; Decided on 20-6-2006
Counsel for revenue/assessee : Sunil Kumar Singh / Jayesh Dadia

S.254(2B) of the Income-tax Act, 1961 – Assessment made without following the directions of the CIT(A) and without giving adequate opportunity to the assessee – Not valid – Appellant also asked to pay cost to the assessee for casual and irresponsible approach.

Per Rajpal Yadav

Facts

The assessee was a division of DSJ Finance Corporation Ltd. and came into being under a scheme of demerger. In the return of income for the year, it returned a loss of ₹ 32.35 lakh which was arrived at after claiming lease rent of ₹ 39.28 lakh payable to ICICI. Since the same was not actually paid it was disallowed by the Assessing Officer. The assessee’s explanation that it was in financial crisis, including the fact that its parent company was also in liquidation, was not accepted by Assessing Officer. On appeal the CIT(A) vide his order dated 6^th November 2000 directed the Assessing Officer to frame fresh assessment order after ascertaining facts from ICICI Ltd. and DSJ Finance Corporation Ltd.

The Assessing Officer did not take any step up to March 2002 and on 27^th March 2002 directed the assessee to supply information and thereafter on the very next day passed an order assessing the income at the same amount of ₹ 7.53 lakh, the amount at which it was assessed earlier by him.

On appeal the CIT(A) after taking note of flagrant violation of the principle of natural justice, annulled the assessment order.

Before the Tribunal the assessee pointed out that since the Assessing Officer miserably failed in complying with the CIT(A) direction, his order was rightly annulled by the CIT(A).

Held

According to the Tribunal, the CIT(A) had co-terminus power with that of the Assessing Officer, therefore instead of annulling the assessment, he should have examined the record at his end and decided the issue on merit. Therefore, it set aside his order and returned the issue back to the file of assessing officer with a direction to follow the directions given by the CIT(A). It further imposed cost of ₹ 5,000 upon the appellant for the casual and irresponsible approach of the Assessing Officer, which led the assessee into two rounds of litigation.

ITO v. Jabbal Woodcrafts India

ITAT ‘D’ Bench, New Delhi
Before C.L. Sethi (JM) and K.G. Bansal (AM)
ITA No.803/D/2009
AY – 1997-98; Decided on 24-9-2010
Counsel for revenue / assessee: A.K. Monga / Salil Kapoor and Sonal Kapoor

S. 143(3) read with S. 252 — De novo Assessment pursuant to order of the Tribunal — Whether AO justified in enhancing assessed income while doing de novo assessment — Held, No.

Facts :

The assessee had filed return of income declaring total income of ₹ 1,980. The income was assessed u/s.143(3) at ₹ 10.19 lakh This order was set aside by the Tribunal to the file of the AO for making fresh assessment after taking into account evidences including the evidence in the form of books of account. In pursuance thereof, the assessment was framed determining the total income at ₹ 40.64 lakh The major addition was on account of share application money of ₹ 38.84 lakh. The CIT(A) on appeal deleted the addition made on this count.

Before the Tribunal, the Revenue contended that when the Tribunal restored the matter to the file of the AO with a view to take into account all the evidences, the AO was well within his right to consider all matters, including the issue regarding share application money, which was not the subject matter of appeal before the Tribunal.

Held :

The Tribunal noted that although it has all the powers to decide an issue before it, in any manner, the accepted position of law is that it has no power to enhance the assessment. In such a situation, the order of the Tribunal restoring the matter to the file of the AO cannot be construed in a manner as to grant power to the AO to include a totally new issue, which has the effect of enhancing the income. Thus, what cannot be done directly, cannot be done indirectly also. Accordingly, it dismissed the appeal filed by the Revenue.

Amiti Software v. ITO

ITAT Bangalore `A’ Bench
Before N. V. Vasudevan (JM) and Jason P. Boaz (AM)
ITA No. 540/Bang/2012

S.s. 143(2), 292B, 292BB – Where a revised return filed is treated as non-est since the original return was not filed within due date mentioned in section 139(1), the period of issue of notice u/s. 143(2) needs to be computed with reference to date of filing original return of income. Notice issued u/s. 143(2) beyond the period stated in the proviso to section 143(2)(ii) does not fall within the term `any mistake, defect or omission’ stated in section 292B. The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case.

Facts

For the assessment year 2008-09, the assessee filed the original return of income on 01- 10-2008 declaring a total loss of ₹ 16,15,127 and also claiming deduction u/s. 10A amounting to ₹ 1,54,83,511. The assessee computed tax payable under MAT u/s. 115JB. The return of income was processed on 27.8.2009 and it resulted in a demand of ₹ 2,05,710. The return filed was beyond the due date prescribed u/s. 139(1).

The assessee filed a revised return on 30.9.2009 in which business income was stated to be ₹ Nil after claiming exemption of ₹ 1,53,83,511 u/s. 10B. Since the original return was filed beyond the due date, the AO treated the revised return to be non-est. A notice dated 19-08-2010 was issued by the AO and served on the assessee. There was no dispute that this was the only notice issued and served and the assessee did not dispute having received this notice.

Since the original return was filed beyond due date mentioned in section 139(1), the AO in view of the provisions of proviso to section 10A(1A) of the Act, denied the deduction claimed u/s. 10A of the Act. He completed the assessment assessing the total income under the normal provisions of the Act and not u/s. 115JB.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that the assessment be annulled since the notice u/s. 143(2) was issued beyond the time limit mentioned in proviso to 143(2) (ii). The CIT(A) did not agree, since the assessee had attended the hearings and participated in the assessment proceedings.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The admitted factual position is that the notice u/s. 143(2) of the Act dated 09-08-2010 was admittedly beyond the period of six months from the end of the financial year in which the return of income was filed by the assessee, as laid down in proviso to section 143(2)(ii) of the Act. It is also not in dispute that this is the only 143(2) notice issued by the AO. The order of assessment is very clear on this aspect. The law is by now well settled that issuance of a notice u/s. 143(2) of the Act within the statutory time limit is mandatory and it is not a procedural requirement which is inconsequential. Reference may be made to the decision of the Hon’ble Delhi High Court in the case of Alpine Electronics Asia Pvt. Ltd. vs. DGIT, 341 ITR 247 (Del), CIT vs. Vardhana Estates Pvt. Ltd., 287 ITR 368 and ACIT vs. Hotel Blumoon, 321 ITR 362 (SC). The contrary view expressed by the Hon’ble Madras High Court, in our view, cannot be followed as the decisions relied on by the ld. counsel for the assessee of the Hon’ble Punjab & Haryana High Court and Allahabad High Court also took the view that non issuance of notice u/s. 143(2) of the Act renders assessment order invalid. Admittedly, notice u/s. 143(2) of the Act not having been served on the assessee within the period contemplated under law, the order of assessment has to be held to be invalid and annulled.

As far as section 292B is concerned, we do not think that the notice issued by the AO u/s. 143(2) of the Act in the present case will fall within any mistake, defect or omission which is in substance and effect in conformity with or according to the intent andpurpose of this Act. The requirement of giving of the notice cannot be dispensed with by taking recourse to the provisions of section 292B of the Act.

As far as provisions of section 292BB is concerned, as laid down in the decisions of the Allahabad High Court in the case of Manish Prakash Gupta ( supra) &Parikalpana Estate Development (P) Ltd. (supra) and Hon’ble Punjab & Haryana High Court in the case of Cebong India Ltd. (supra), the provisions of section 292BB cannot be applied in a case where admittedly no notice u/s. 143(2) had been issued within the time limit prescribed in law.

We may also clarify that the dispute in the present case is not with regard to issue and service of notice u/s. 143(2) of the Act, as admittedly there was only one notice u/s. 143(2) dated 19-08-2010 issued and served on the assessee before completion of theassessment proceedings.The question is as to, whether the said notice was issued and served within the time contemplated u/s. 143(2) of the Act. The provisions of section 292BB lay down the presumption in a given case. It cannot be equated to a conclusive proof. The presumption is rebuttable. The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case. We therefore hold that the provisions of section 292BB of the Act will not be applicable to the present case.

The appeal filed by the revenue was dismissed.

BOOK PROFIT

ACIT v. L.H. Sugar Factory Ltd. (ITAT Lucknow)

ITA No.417/418/Lkw/2013 ; AY 2008-09 & 2009-10
Bench ‘B’; order dated 09.02.2016

S. 115JA/115JB: Capital receipts (such as subsidy & carbon credits), which have no income element, have to be excluded from book profits even if credited to the P&L A/c

Held

From perusal of the decisions of Rain Commodities Ltd. vs. DCIT, 41 DTR 449 and Growth Avenues, we notice that both the decisions dealt with the issue of taxability of capital gains in computing Book profit u/s. 115JB of the Act. These capital gains were otherwise income u/s 2(24) of the Act and exclusion was claimed in computing Book Profit u/s. 115JB on the ground that the said capital gains was exempt either u/s. 47(iv) or u/s. 54EC of the Act, which the Tribunal did not agree. In the present case, however, we are dealing not with capital gains but with pure capital receipt, which does not even have any ‘income’, ‘profits or, gains’ embedded therein. The impugned incentive granted to the Assessee is pure and simple capital receipt, in terms of our decision on ground no. 1 at Para 10 here-in-above, which in turn is supported by the principles laid down by the Apex Court, various high courts & Special Bench of the Tribunal. That being the case, it does not have any income or profit element embedded in it, since the incentive was granted to encourage industrial growth of industrially non developed area. No one can make profit out of the subsidy or incentive granted to it. Hence, it is not chargeable to tax under the Income Tax Act as held by the Apex Court in the case of Padmaraje (supra) and in the light of our fact finding -as above, clearly not includible in P&L account prepared under Part II & Part III of Schedule VI to the Companies Act.

The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all. In a recent decision, the Hon’ble Apex Court in the case of Indo Rama Synthetics (I) Ltd -vs- CIT (2011) 330 ITR 363 (SC) has held that the object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Inclusion of receipt in the computation of MAT would defeat two fundamental principles, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. The real working result can be arrived at only after excluding this receipt which has been credited to P&L a/c and not otherwise.

With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is in line with the principles as laid down by Hon’ble Apex Court in the case of Apollo Tyres (supra). In the case of Apollo Tyres (supra), the question before the Apex Court was whether an AO can, while assessing a company for income tax u/s. 115J of the IT Act, question the correctness of the P&L A/c prepared in accordance with requirements of Parts II and III of Sch. VI to the Companies Act. From the question as framed before the Apex Court it is clear that the issue before the Hon’ble Court was with regard to power of the AO to recast audited accounts prepared in accordance with Part II and Part III of the Sch. VI to the Companies Act. Therefore, for applicability of the decision of the Apex Court the prerequisite is that the accounts are prepared in accordance with Part II arid Part III to Sch. VI of the Companies Act. If however the P&L accounts are not in accordance with Part II and III of Sch. VI to the Companies Act, the said decision cannot be applied and in that situation it does not prohibit the needful adjustment.

Our view as above is supported by the decision of the Special Bench in the case of Rain Commodities. On examination of the said order, we find that at Para 17 (last sub-para) & Para 18, after considering the decision of Supreme Court in Apollo Tyres Ltd (supra), Special Bench have held that if Profit & Loss account is not in accordance with Part II & Part III of Schedule VI to the Companies Act, it is permissible to alter the net profit so as to make it in accordance with Part II & III of Schedule VI, which is the starting point for computation of ‘Book Profit’ in terms of section 115JB. It implies that needful adjustment to exclude the same is not only permissible, but is mandatory so as to make the Profit & Loss Account compliant, with the basic requirement of Section 115JB.

Accordingly, the receipt on account of transfer of carbon credit which is held to be a capital receipt needs to be excluded from profit as per P&L account for the present year while computing the book profit u/s 115JB of the Act.

DCIT v. Binani Industries Ltd. (ITAT Kolkata)

ITA No.144/Kol/2013; AY 2009-10
Bench ‘A’; order dated 02.03.2016

Ss. 14A/ 115JB: (i) Investments in subsidiary companies are strategic investments to whom s. 14A disallowance does not apply (ii) Receipt on forfeiture of share warrants is a capital receipt and has to be excluded from "Book Profits" even if credited to the P&L A/c.

The assessee credited ₹ 12,65,75,000, representing forfeiture of share warrants, to the Profit & Loss account as an extraordinary item. It claimed that as the said receipt was a capital receipt not chargeable to tax, the same had to be excluded while computing the book profits. The Department relied on Apollo Tyres Ltd 255 ITR 273 (SC) and Rain Commodities Ltd. (2010) 131 TTJ (Hyd)(SB) 514 to reject the claim. HELD by the Tribunal:

1. The assessee has duly disclosed the fact of forfeiture of share warrants amounting to ₹ 12,65,75,000/- in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence following the decision of the Mumbai Tribunal in Shivalik Venture (P) Ltd vs. DCIT (2015) 173 TTJ (Mumbai) 238, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon’ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs. CIT reported in (2011) 330 ITR 363 (SC), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment, should be considered for the purpose of computation of book profits u/s. 115JB of the Act and thereafter, the AO has to make adjustments for additions / deletions contemplated in Explanation to section 115JB of the Act.

2. Investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s. 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the form of dividend but only for obtaining controlling interest in the said companies and to further the business interests of the assessee in the said company.

Pal Synthetics Ltd. v. JCIT

ITAT ‘E’ Bench, Mumbai
Before G.E. Veerabhadrappa (VP) and
Rajpal Yadav (JM)
ITA No.1310/Mum/2003
AY 1997-98; Decided on 6-2-2007
Counsel for assessee / revenue : R.K. Bothra / K.L. Maheshwari

S. 115JA of the Income-tax Act, 1961 – Tax payable on book profit – Whether receipt of capital subsidy credited to profit and loss account could form part of book profit – Held, No

Per G. E. Veerabhadrappa

Facts

The issue before the Tribunal was whether a capital subsidy received by the assessee from SICOM and credited to Profit and Loss account would form part of ‘Book Profit’ u/s. 115JA of the Act. According to the Revenue, such receipt was not exempt from tax in terms of Chapter III of the Act. Further, in terms of the provisions, the said sum could not be excluded as it amounted to re-writing the Profit and Loss account prepared under the Companies Act and it could not be done in the light of the Supreme Court decision in the case of Apollo Tyres Ltd.

Held :

The Tribunal noted that the revenue had accepted the fact that the receipt of capital subsidy by the assessee was exempt by virtue of the decision of the Supreme Court in the case of P. J. Chemicals. Further, referring to the decision of the Mumbai Tribunal in the case of Frigsales (India) Ltd., the Tribunal noted the observations made therein viz., that ‘exemption allowed by one provisions of the Act cannot be taken away by another provision of the Act’. Accordingly, it held that if a capital subsidy was exempt from tax, then it cannot be taxed u/s.115JA of the Act.

Cases referred to :

1. ITO v. Frigsales (India) Ltd., 4 SOT 376 (Mum.)

2. CIT v. P. J. Chemicals, 210 ITR 820 (SC)

3. Apollo Tyres Ltd., 255 ITR 273 (SC).

ITO v. Pal Credit & Capital Ltd.

ITAT ‘F’ Bench, Mumbai
Before R.K. Gupta (JM) and V.K. Gupta (AM)
ITA No.7526/M/2004
AY 1997-98; Decided on 20-7-2007
Counsel for revenue/assessee: Alpana Saxena / Jayesh Dadia

S. 115JA of the Income tax Act, 1961 – Minimum Alternate Tax – Determination of Book Profit – Whether amount transferred to ‘lease equalization reserve’ by a lessor was allowable as deduction – Held, Yes

Per V. K. Gupta

Facts

The assessee was engaged in the business of leasing and finance. The issue before the Tribunal was whether the sum of ₹ 4.49 crore, being the amount of lease equalisation reserve, should be added to the book profit u/s.115JA. The assessee claimed that :

• The said amount was debited to the Profit and Loss Account as required under the guidance note issued by the Institute of Chartered Accountants of India (ICAI); and

• It was not transferred to any reserve, but was reduced from the gross block of fixed assets. However, the AO added the said amount to the book profit applying the provisions of Explanation (b) to S. 115JA(2). On appeal, the CIT(A) reversed the order of the AO and allowed the appeal of the assessee.

Before the Tribunal, the Revenue, relying on the Tribunal decision in the case of M. J. Export Ltd., contended that the AO had the power to make adjustments to book profit, which he considered necessary, notwithstanding the Apex Court decision in the case of Apollo Tyres Ltd. Further, relying on the Madras Tribunal decision in the case of Alagendran Finance Ltd., it was contended that the guidance note issued by the ICAI could not override the provisions of the Act.

Held

The Tribunal noted that on identical facts, the Tribunal in the case of SREI International Finance Ltd., had allowed the claim of the assessee. According to it, the decision in the case of Alagendran Finance Ltd. relied on by the Revenue, though rendered on a subsequent date, had not considered the decision in the case of SREI International Finance Ltd. relied on by the assessee. Therefore, applying the judicial principle that when there were two conflicting decisions, the view favaourable to the assessee should be adopted, the Tribunal dismissed the appeal of the Revenue.

Cases referred to

1. DCIT v. SREI Iternational Finance Ltd., 10 SOT 722

2. Apollo Tyres Ltd. v. CIT, 255 ITR 273 (SC)

3. M. J. Export Ltd. v. ACIT, 88 ITD 18

4. Alagendran Finance Ltd. v. ACIT, (2007) TIOL 164 ITAT (Mad.)

ITO v. Cyril Traders Pvt. Ltd.

ITAT ‘G’ Bench, Mumbai
Before A.L. Ghelot (AM) and R.S. Padvekar (JM)
ITA No. 5297/Mum/2004
AY: 1998-99; Decided on: 28/7/2009
Counsel for assessee / revenue: J.D. Mistry / S.B. Prasad

S. 115JA — Stock borrowing charges not debited to P & L Account as required under Schedule VI of the Companies Act can be claimed as revenue expenditure even in the case of an assessee who is mandatorily bound to follow the accounting standards as prescribed.

Per R. S. Padvekar

Facts

The total income of the assessee, assessed u/s. 143(3) of the Act, was a loss of  ₹ 55,37,760. Subsequently vide order passed u/s.143(3) r.w. S. 147 the AO inter alia disallowed ₹ 53,55,000 towards stock borrowing charges incurred by the assessee and claimed in its computation of total income but were not debited to its Profit & Loss Account. The AO held that not debiting the expenditure to P & L Account was in violation of clause (xii)(b) of Rule 3 of Part II of Schedule VI and hence the same was not allowable.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the provisions of Minimum Alternate Tax as contained in S. 115J were considered by the Apex Court in the case of Apollo Tyres Ltd. It observed that the scheme of S. 115JA is identical with that of S. 115J. It held that if the P & L Account prepared by the assessee was not in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956, then to that extent the AO can make the corrections and adjustments, but the AO cannot make disallowance in respect of expenses which are otherwise allowable but are not debited to P & L Account. The Tribunal held that the stock borrowing charges were rightly allowed as a deduction by the CIT(A).

The appeal filed by the Revenue was dismissed.

Cases referred to

1. Kedarnath Jute Manufacturing Co. Ltd. v. CIT, (82 ITR 363) (SC)

2. Tuticorin Alkali Chemcials and Fertilisers Ltd. v. CIT, (227 ITR 172) (SC)

3. DCIT, Cir 3(1) Mumbai v. Adbhut Trading Co. Pvt Ltd., (ITA No. 3597/Mum./2002), dated 25-7-2005

4. ITO v. Adbhut Trading Co. Pvt Ltd., (ITA No. 2869/Mum./2004), dated 25-4-2007

5. ITO v. Vicraze Investments & Trdg. Co. P. Ltd., (ITA No. 6276/M/2004), dated 24-4-2007.

6. Apollo Tyres Ltd. v. CIT, (255 ITR 273) (SC)

ACIT (OSD) v. GTL Ltd.

ITAT ‘G’ Bench, Mumbai
Before P. Madhavi Devi (JM) and Rajendra Singh (AM)
M.A. No.746/Mum/2009 (Arising out of ITA No.4019/Mum/2007)
AY: 1998-99; Decided on 10-3-2010
Counsel for revenue / assessee: Mohd. Usman / K. Shivram & Paras Savla

S. 154 read with S. 115JA of the Income-tax Act, 1961 — Rectification of mistake apparent from record — Provision for doubtful debts debited to Profit and Loss account — Book profit as per S. 115JA assessed without making any adjustment qua the said provisions per Tribunal order — By retrospective amendment such provision made liable for inclusion in book profit — Whether AO justified in claiming that there was mistake apparent from record and accordingly, rectifying the order — Held, No.

Facts

The assessee had filed a return of income for the A.Y. 1998-99 declaring the total income at ₹ 11.62 crore u/s.115JA of the Act. The AO assessed the total income at ₹ 34.63 crore. Later on, it was noticed by the AO that the provision of doubtful debts of ₹ 18.99 lakh was not added back to the profit & loss account while computing income u/s.115JA of the Act. Therefore, the AO passed an order u/s.154 of the Act on 30-12-2004 adding back the provision for doubtful debts u/s.115JA of the Act. On appeal the CIT(A) allowed the same relying upon the decision of the Bombay High Court in the case of CIT v. Echjay Forgins (P) Ltd., (251 ITR 15). The Tribunal vide order dated 17-3-2009 confirmed the order of the CIT(A).

Thereafter, by the Finance Act, 2009 clause (g) was inserted in Explanation to S. 115JA(2) of the Act w.e.f. A.Y. 1998-99 providing that provisions for doubtful debts and advances are disallowable while calculating book profit u/s.115JA of the Act. Relying on the decision of the Karnataka High Court reported in the case of M. Srinivasalu v. UOI, (239 ITR 282), the Revenue contended that an order which is not in accordance with the retrospective law can be rectified u/s.154 of the Act.

Held

The Tribunal noted that in respect of the year under appeal the Tribunal had already decided the case in favour of the assessee by its order dated 17th March, 2009, whereas the retrospective amendment of the provisions received the assent of the President of India on 19-8-2009 i.e., after the order of the Tribunal was passed. Further relying on the Bombay High Court decision in the case of Sudha S. Mehta, it held that the assessment proceedings got concluded before the Tribunal under the then existing law and, therefore, there was no mistake apparent from record in the order of the Tribunal. Accordingly, the Revenue’s miscellaneous application was dismissed.

Quippo Telecom Infrastructure Ltd. v. ACIT

ITA No.4931/Del/2010, AY 2007-08,
Delhi Bench ‘F’, Order dated 18/02/2011

Book Profits – Sec. 115JA/JB – Expenditure for earning tax free income – Not debited to profit and loss account – Provisions of s. 14A not to apply

For AY 2007-08, the assessee invested ₹ 10 crore in shares and units. The assessee claimed that it had incurred no expenditure to earn tax-free income though the AO & CIT (A) made a disallowance of ₹ 19.58 lakhs u/s. 14A r.w. Rule 8D. Before the Tribunal, the assessee claimed that (i) Rule 8D could not apply to AY 2007-08 and (ii) No disallowance u/s. 14A could be made for purposes of computing book profits u/s 115JB. Held:

Under the normal provisions of the Act, Rule 8D cannot apply till AY 2008-09 though the AO is at liberty to identify actual expenditure incurred to earn tax-free income & make disallowance. However, while computing book profit u/s 115JB, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. S. 14A cannot be imported into while computing the book profit u/s. 115JB because clause (f) of Explanation to s. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act. In Goetze (India) Ltd. vs. CIT 32 SOT 101 (Del) it was held that sub-sec. (2) & (3) of s. 14A cannot be imported into clause (f) of the Explanation to s. 115JA. Accordingly, it is held that no addition to book profit can be made on account of alleged expenditure incurred to earn exempt income while computing income u/s 115JB.

DCIT vs. Kaushik Shah Shares & Securities Pvt. Ltd.

ITAT Mumbai `A’ Bench
Before B. Ramakotaiah (AM) and Vivek Varma (JM)
ITA No. 2163/Mum/2013
A.Y.: 2008-09. Decided on: 10th July, 2013.
Counsel for revenue / assessee: Surinder Jit Singh/ Jinesh Doshi

Section 88E, 115JB — It is the gross tax payable under normal provisions without deducting rebate u/s. 88E is to be compared with tax payable u/s. 115JB. From the higher of the two, rebate u/s. 88E is to be allowed. Rebate u/s. 88E is allowable even from tax payable on book profits u/s. 115JB.

Facts

The Assessing Officer noticed that the assessee had made tax payment under normal provisions by comparing its tax liability (before claiming rebate u/s. 88E) on total income with income u/s. 115JB. The assessee submitted that tax rebate is a step which comes after determining income-tax payable on total income computed as per applicable provisions. It supported its view by income tax return ITR 6 prescribed by CBDT wherein gross tax liability before claim of rebate u/s 88E is first to be compared with tax credit under MAT and then from the higher of the MAT liability and tax liability under normal provisions of the Act, tax rebate u/s. 88E is to be reduced to arrive at a final tax payable by the assessee. The contention of the assessee was rejected by the AO.

Aggrieved, the assessee preferred an appeal to CIT(A) where it was contended that rebate u/s. 88E was also to be allowed while working out tax liability u/s. 115JB for the purpose of determining tax liability u/s. 115JB. Reliance was placed on decision of Bangalore Bench of ITAT in the case of Horizon Capital Ltd and also on the decision of Mumbai Bench of ITAT in the case of Naman Securities Finance Pvt. Ltd. The CIT(A) allowed the appeal of the assessee on this ground.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the issue is covered by the decision of the Karnataka High Court in the case of CIT vs. Horizon Capital Ltd. (ITA No. 434 of 2010 dated 24.10.2011) and by the following decisions of coordinate Bench –

1 Ambit Securities Broking P. Ltd. vs. ACIT (ITA No. 7856/M/2011, AY 2008-09, order dated 6.6.2013);

2 DCIT vs. Arcadia Share & Stock Brokers Pvt. Ltd. (ITA No. 1515/M/2012, AY 2008-09, order dated 20.3.2013);

3 SVS Securities Pvt. Ltd. (ITA No. 6149/M/2011, AY 2008-09, order dated 8.8.2012).

Since the CIT(A) had followed the decision of the co-ordinate Bench in the case of Horizon Capital Ltd which was confirmed by the Karnataka High Court and also the decision of the co-ordinate Bench in the case of Naman Securities Finance Pvt. Ltd. which in turn has been followed by other co-ordinate Benches, the Tribunal did not see any merit in the grounds raised by the revenue.

The appeal filed by the revenue was dismissed.

BUSINESS – SET UP / COMMENCEMENT

M/s. Multi Act Realty Enterprises P. Ltd. v. ITO

ITAT ‘B’ Bench, Mumbai
Before Joginder Singh (JM) and Ashwani Taneja (AM)
ITA No.7274/Mum/2011
AY: 2008-09; Decided on 28.08.2015

Counsel for assessee / revenue: Satish Mody / Vijay Kumar Soni

Expenses after Set Up of business is allowable deduction even if no income earned

Facts

The assessee was in the business of dealing in immovable properties and development rights etc. It was observed for by the AO that no business income was earned by the assessee company during the year. However, in the income tax expenditure account, the assessee has debited various expenses such as travelling expenses, conveyance, printing & stationery, audit fees, professional fees, sundry expenses and interest on statutory payments etc. aggregating to ₹ 2,69,275/-. The AO disallowed these expenses on the ground that there was no business income received by the assessee during the year. The assessee contested this issue before the Ld. CIT(A), wherein the Ld. CIT(A) confirmed the disallowance on the ground that no business was carried out during the year.

Held

The assessee has already purchased residential flat for the purpose of resale/lease, and therefore assessee was apparently ready to do its business. Under these circumstances, it can be said that the business is set up by the assessee during the year under consideration. For the deductibility of expenses incurred after this stage, earning of the business income is not a mandatory condition under the law. The assessee may not have been successful in getting customers or earning the business income, but if the assessee has done requisite preparations and if the assessee can be said to be in a position to cater to its customers, then it can be said that business is set up and it would amount to carrying on the business and accordingly the expenses would stand allowable to the assessee, irrespective of the fact whether actually assessee got any customer and earned any business income during the year or not. Thus, the disallowance made by the AO is contrary to law and facts and the same is deleted and the AO is directed to allow the expenses claimed by the assessee amounting to ₹ 2,69,275/-.

BUSINESS EXPENSES

Pawan Kumar Parmeshwarlal v. ACIT

ITAT ‘C’ Bench, Mumbai
Before D. Manmohan (VP) and B. Ramkotaiah (AM)
ITA No.530/Mum/2009
AY: 2005-06; Decided on 11-1-2011
Counsel for assessee / revenue: Assessee in person / P.N. Devdasan

(A) S. 14A of the Income tax Act, 1961 - Disallowance of expenditure to earn exempt income - Assessee maintaining separate books of account for the purpose of business and the investments, from which the exempt income was earned - No disallowance made on the ground of personal expenditure while assessing business income - Held that no disallowance can be made u/s.14A.

(B) S. 36(2) of the Income-tax Act, 1961 - Bad debts in the business of vyaj badla - Whether allowable - Held, Yes.

Facts

The assessee was an individual, the proprietor of M/s. Pawankumar Parmeshwarlal, dealing in shares and securities. During the year under appeal, the assessee had claimed as exempt the income earned by way of dividend ₹ 3.19 lakh, interest on RBI bonds ₹ 1.11 lakh and PPF interest of ₹ 0.07 lakh According to the assessee, none of these activities required any expenditure and as such no amount was disallowable u/s.14A. However, the AO was of the view that assessee would have spent some amount for earning the tax-free incomes and disallowed an amount of ₹ 0.2 lakh u/s.14A.

The assessee had claimed the sum of ₹13.16 lakh as bad debts in the business of vyaj badla and the same was disallowed by the AO.

On appeal before the CIT(A), in respect of claim re : disallowance u/s.14A, the CIT(A) directed the AO to compute deduction as per Rule 8D. In respect of the claim for bad debts, he relied on the decision in the case of Arshad J. Choksi v. ACIT, (51 ITD 511), and held that the conditions u/s.36(2) were not satisfied in the badla transactions.

Held

(A) In respect of disallowance u/s.14A :

The Tribunal noted that the assessee was maintaining separate books of account for the purpose of business and the investments, from which the exempt income was earned, were made in his personal capacity. Further, while assessing the business income, no part of expenditure claimed by the assessee was treated or disallowed by the AO on the ground of being of personal in nature. In view of this, it held that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity. Further, it noted that the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, (328 ITR 81) has considered Rule 8D to be applicable prospective and since the assessment year involved was before the introduction of Ss.(2) and Ss.(3) of S. 14A, it held that there was no question of disallowing the amounts invoking Rule 8D.

(B) In respect of bad debts :

According to the Tribunal, the lower authorities were not correct in disallowing the claim of bad debts. It noted that the assessee, being a stockbroker, had advanced money as part of his business activity. Therefore, relying on the decision of the Special Bench Mumbai Tribunal in the case of DCIT v. Shreyas S. Morakhia, (5 ITR TRIB.1), it held that the amounts advanced by the assessee in the course of business activity were to be treated as an allowable amount u/s.36(2).

Godrej Industries Ltd. v. DCIT

ITA No.1090/Mum/09
Bench ‘G’, Order dated 08/10/2010; AY 2005-06

Business expenses – S.14A disallowance – Interest on borrowing – Disallowance on ground that assessee ought to have repaid borrowing instead of investing in tax-free investments – Disallowance not justified

The assessee earned tax-free dividends of ₹ 21.73 crore from shares & units and claimed that the investment in the shares & units having been made out of own funds, no part of the interest on the borrowed funds could be disallowed u/s 14A. The AO, relying on Abhishek Industries 286 ITR 1 (P&H) held that the assessee ought to have utilized the own funds for repaying the borrowing instead of investing in shares and that it was a case of indirect diversion of borrowed funds into the shares and units to earn tax-free income. Interest of ₹ 9.91 crores was disallowed on a pro-rata basis. This was upheld by the CIT (A). On appeal by the assessee, HELD:

1. The facts showed that the borrowed funds were utilized for business purposes and the investment in shares & units was made out of own funds. As per the fund flow statement for the year, ₹ 46 crore were generated from operations while the net investment made in the year was only ₹ 40.60 crore. While the aggregate investment was ₹ 316.46 crore, the own funds in the form of capital & reserves were ₹ 335.36

2. The AO’s argument that the assessee could have utilized its surplus funds for repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) where Abhishek Industries was distinguished and it was held disallowance u/s 14A of interest on borrowed funds was not permissible if the investment in shares was made out of own funds .

DCIT v. Jindal Photo Ltd.
ITA Nos. 814/Del./2011

Section 14A — Rule 8D can be invoked only after AO records his satisfaction on how the assessee’s calculation is incorrect. Onus is on the AO to show that expenditure has been incurred for earning tax free income. Disallowance u/s.14A cannot be made on the basis of presumptions.

The AO disallowed a sum of ₹ 31,1,542 u/s.14A of the Act by invoking Rule 8D. However, he did not record satisfaction as to how the assessee’s calculation was not correct. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) upheld the applicability of Rule 8D but he reduced the amount of disallowance to ₹19,43,022 by reducing the amount of disallowance on account of interest but as regards disallowance of administrative expenses he upheld the action of the AO. He also upheld the applicability of Rule 8D.

Aggrieved, the Revenue preferred an appeal to the Tribunal and the assessee filed cross-objections.

Held

The Tribunal noted that the assessee has suo motu made a disallowance u/s.14A. The Tribunal also noted that the AO has invoked Rule 8D without recording satisfaction as to how the assessee’s calculation is incorrect. Upon considering the ratio of various decisions of the Tribunal and the decision of the Punjab & Haryana High Court in the case of CIT v. Hero Cycles, (323 ITR 518), the Tribunal held that for invoking Rule 8D the AO must record satisfaction as to how the claim of the assessee is incorrect. If that is not done, provisions of Rule 8D cannot be invoked. An ad hoc disallowance cannot be madeunder Rule 8D. The onus is on the AO to establish that expenditure has been incurred for earning exempt income. Disallowance u/s.14A cannot be made on the basis of presumption that the assessee must have incurred expenditure to earn tax-free income. Since the AO had not recorded satisfaction regarding the assessee’s calculation being incorrect and since such satisfaction is a pre-requisite for invoking Rule 8D, the CIT(A) erred in partially approving the action of the AO.

The Tribunal dismissed this ground of the appeal filed by the Department.

Cases referred:

1. CIT v. Hero Cycles, (323 ITR 518) (P&H)

2. ACIT v. Eicher Ltd., (101 TTJ 369) (Del.)

3. Maruti Udyog v. DCIT, (92 ITD 119) (Del.)

4. Wimco Seedlings Ltd. v. DCIT, (107 ITD 267) (Del.) (TM)

5. Punjab National Bank v. DCIT, (103 TTJ 908) (Del.)

6. Vidyut Investment Ltd. (10 SOT 284) (Del.)

7. D. J. Mehta v. ITO, (290 ITR 238) (Mum.) (AT)

ACIT v. Punjab State Co-op. & Marketing Fed Ltd.

ITA No.548/Chd/2011, AY 2007-08,
Bench ‘B’, Order dated 30/9/2011

No S. 14A disallowance in absence of nexus between investment in tax-free securities & borrowed funds. S. 14A disallowance cannot exceed exempt income.

In AY 2007-08, the assessee received dividend of ₹ 4 lakhs in respect of investment in shares made in earlier years No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The AO held that as in the earlier years, the assessee had borrowed funds, s. 14A applied. He applied the rate of interest paid on the borrowings and disallowed ₹ 12.73 lakhs. This was deleted by the CIT (A). On appeal by the department, HELD dismissing the appeal:

1. If there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted
   (Winsome Textiles 319 ITR 204 (P&H) & Hero Cycles 323 ITR 518 followed);

2.  As the total dividend income received was ₹ 4 lakhs, a disallowance of ₹ 12 lakhs by invoking s.14A is not warranted.

Dy. CIT v. Southern Paper Products Pvt. Ltd.

ITAT Cochin Bench, Cochin
Before N. Barathvaja Sankar (AM) and Riyaz S. Padvekar (JM)
ITA No.395/Coch./2005
AY 1999-2000 : Decided on 24-9-2007
Counsel for revenue / assessee : T.R. Indira / R. Sreenivasan

S. 31 of the Income tax Act, 1961 – Current repairs – Expenditure incurred on repairs and replacement of worn-out equipments and other assets – Expenses disallowed on the ground that expense allowable are only those which are necessitated by the wear and tear of the relevant year, but not the accumulated repairs – Whether AO justified – Held, No

Per N. Barathvaja Sankar

Facts

The assessee was in hotel business since 1984. During the year, it incurred expenditure aggregating to ₹ 20.48 lakh on repairs and replacement of worn-out equipments in its bar and conference room. According to the Assessing Officer, the expenditure had resulted in acquiring of new assets, like furniture, cots, fridge, T.V. stand, etc. According to him, u/s.31, only such repairs as were necessitated by the day-to-day wear and tear during the relevant year were allowable as current repairs, and not the accumulated repairs Since the expenditure had resulted in the acquisition of new assets, the Assessing Officer disallowed the sum of ₹ 10.04 lakh, by treating the same as capital expenditure. He, however, allowed the depreciation thereon.

Being aggrieved, the assessee appealed before the CIT(A) and submitted that ever since the hotel was constituted in 1984, there had not been any replacement and by effluxion of time, the panelling comprising of plywood and coir as well as interior and cots and other furnishings in the rooms had become obsolete and worn out and it had necessarily to be replaced keeping with the status of the company. It was also pleaded before the CIT(A) that the works, such as the wooden ceiling work, bar front door and side doors, wooden with glass work, bar panelling, floor tiling, fittings and electrical items, etc. could not be held as acquisition of new assets and that the expenses disallowed by the Assessing Officer were necessarily repair expenditure. The CIT(A), after considering the nature of the expenses and circumstances of the case of the assessee and also in the light of the judicial pronouncements, restricted the disallowance to ₹ 3.36 lakh by treating the same as of capital expenditure.

Held

According to the Tribunal, the CIT(A) had elaborately dealt with the matter by citing various decisions and applying the ratio to the items involved in the assessee’s case and accordingly, upheld his order and dismissed the Revenue’s appeal.

ACIT vs. Keshav Kumar Tiwari

ITAT ‘H’ Bench, New Delhi
Before G.C. Gupta (JM) & K.G. Bansal (AM)
ITA No.1386/Del/2005
AY 1999-2000; Decided on : 13/3/2009
Counsel for Revenue / Assessee: Jadgeep Goel / O.P. Sapra

Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

The assessee failed to produce books of account and supporting vouchers before the AO. He applied the provisions of Section 44AD and assessed the income. He rejected the assessee’s claim to allow depreciation out of the income estimated. Before the CIT(A) the assessee contended that since his turnover was more than ₹ 40 lakh, the provisions of Section 44AD were not applicable, hence its claim for depreciation was justifiable. The CIT(A) accepted the assessee’s contention and allowed the appeal of the assessee.

Before the Tribunal the Revenue accepted the fact that the turnover was above ₹40 lakh. However, it justified the action of the AO in applying the provisions of Section 44AD, as according to it, the correctness of the accounts statement filed by the assessee was not verifiable and all the conditions for application of the said provisions were present and satisfied. For the same, it relied on the Board Circular no. 684, dt. 10.6.1994.

Held

The Tribunal accepted the contention of the assessee and held that since the turnover of the assessee was more than ₹ 40 lakh, the provisions of Section 44AD were not applicable. It also held that the Revenue was justified in rejecting the book result and in applying a flat rate of 8%, though the issue admittedly was not before it. However, as regards the allowance of depreciation, it held in favour of the assessee by relying on the decision of the Allahabad high court in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Cases referred to :

CIT vs. Bishambhar Dayal & Co., 210 ITR 118 (All.)

MindaSai Limited vs. Income Tax Officer

I.T.A. No.: 2974/Del/13 Assessment year: 2009-10

(I) Section 32(2) - Unabsorbed depreciation pertaining to assessment year 2002-03 or before can be set-off after a period of eight years

(II) Section 115JB – In the absence of exempt income addition to book profit applying provisions of section 14A cannot be made.

Following issues amongst others were raised before the tribunal:

1. Whether the unabsorbed depreciation of ₹ 4.39 crore which pertained to the assessment years 1999-2000 and 2000-01, can be set off against business income during the current assessment year;

2. I n the absence of exempt income whether disallowance u/s. 115JB on the ground that the amount pertained to disallowance u/s.14A, can be made.

The assessee’s claim for set-off against business income of unabsorbed depreciation brought from the assessment year 1999-2000 and 2000-01, aggregating to ₹ 4.39 crore, was rejected by the AO as according to him the unabsorbed depreciation pertaining to the assessment years prior to the assessment year 2002-03 could only be carried forward for eight subsequent assessment years For the purpose, he relied on a Special Bench decision of the Delhi Tribunal in thecase of DCIT vs. Times Guaranty Limited [(2010) 4 ITR (Trib) 210 Mumbai. SB]. On appeal, the CIT(A) upheld the decision of the AO.

Applying the provisions of Clause (f) of Explanation to section 115JB(2) the AO disallowed expense of ₹ 2 lakh u/s. 14A. On appeal, the CIT(A) confirmed the order. Before the Tribunal, the assessee contended that since it has not earned any exempt income during the year, the disallowance u/s. 115JB was not called for. While the revenue relied on the orders of the lower authorities and contended that once the assessee has on its own accepted this disallowance, the adjustment u/s. 115JB in respect thereof was only a natural corollary thereto.

Held:

i) Re: Depreciation: The Tribunal referred to the decision of the Gujarat high court in the case of General Motors India Pvt. Ltd. vs. DCIT [(2013) 354 ITR 244(Guj)] and noted its “considered opinion” to the effect that “any unabsorbed depreciation available to an assessee on 1st day of April 2002 will be dealt with in accordance with the provisions of section 32(2) asamended by Finance Act, 2001”. Accordingly, it observed that the legal position is that the restriction of eightyears, which was in force till the law was amended by the Finance Act 2001 w.e.f. 2002-03, does not come into play. Further, relying on the decisions in the cases of Tej International Pvt.Ltd.vs. DCIT[(2000) 69 TTJ 650] and ACIT vs. Aurangabad Holiday Resorts Pvt. Ltd. [(2007) 118 ITD 1], the Tribunal accepted the plea of the assessee.

ii) Re: Disallowance u/s 14A: Relying on the Delhi High Court’s decision in the case of CIT vs. Holcim India Pvt. Ltd. [2014 TIOL 1586 HC DEL IT] wherein it is held that unless there is an exempt income, disallowance u/s. 14 A cannot be invoked, the Tribunal accepted the assessee’s pleas and held that adjustment under Clause (f) of Explanation to section 115JB (2) cannot be made.

DCIT vs. UAE Exchange & Financial Services Ltd.

ITA No. 91/Bang/2014
[Ref-BCAJ-Nov-2014]

Section 32 – Printers, scanners, port switches and projectors qualify for depreciation @ 60% being the rate applicable to compute₹

Facts

The assessee company was carrying on business of money transfer, money changing, travel and ticketing, insurance support services and gold loan. In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had claimed depreciation @ 60% on printers, scanners, Port switches, projectors, etc. He was of the view that these items qualify for depreciation @ 15% since these do not suffer same rate of obsolescence as computers and they cannot be classified as compute₹ He rejected the argument of the assessee that these are parts of PCs and cannot independently work in isolation. He, accordingly, allowed depreciation on these @ 15%.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the CIT(A) has followed the decision of the Special Bench of the Tribunal in the case of DCIT vs. Datacraft India Ltd. (40 SOT 295)(Mum)(SB) wherein it is held that routers and switches are to be classified as computer peripherals and depreciation at the rate of 60% be allowed. The CIT(A) had also considered the decision of the Delhi High Court in the case of CIT vs. M/s. Bonanza wherein it is held that depreciation @ 60% is allowable on computer peripherals.

The Tribunal held that the printers, scanners, projectors as well as port-switches are all functionally dependent on computers and therefore, the order of CIT(A) is in consonance with the precedents on the issue. It observed that the DR was not able to place any other contrary decision before it. The Tribunal confirmed the order of the CIT(A).

The appeal filed by the revenue was dismissed.

ACIT vs. Connaught Plaza Restaurants Pvt. Ltd.

ITA No.- 5466/Del/2013
[Ref-BCAJ-Oct-2014]

S. 32 – Point of Sales (POS) systems qualify for depreciation @ 60% being the rate applicable to compute₹

Facts

In the course of assessment proceedings, the Assessing Officer (AO) noticed from the tax audit report that additions to Computers included a sum of ₹ 65,89,449 towards POS on which depreciation was claimed @ 60%. The AO held that POS could be regarded as computer accessories but not as computer. It is only computers and computer software which qualify for depreciation @ 60%. The rate of 60% cannot be extended to computer accessories and peripherals. He rejected the contention of the assessee that the POS systems are capable of performing the basic functions performed by a computer such as data processing, storage, etc and therefore are similar to computers The AO allowed depreciation on POS @ 25% i.e. the rate applicable to normal plant and machinery.

Aggrieved, the assessee preferred an appeal to CIT(A) who following the decision of the Delhi High Court in the case of CIT vs. Rajdhani Powers Ltd. (ITA No. 1266/2010) decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the CIT(A) had on perusing the technical specifications of POS from the brochure filed held that the POS terminal is akin to computer in terms of basic features and can be categorized as `Computers’. It also noted that he had followed the order of the jurisdictional High Court in the case of CIT vs. Rajdhani Powers Ltd. (supra) and therefore no interference was called for.

The appeal filed by the revenue was dismissed.

DCIT v. MTZ Polyfilms Ltd.

ITA No. 5015/Mum./2009

Section 36(1)(iii), section 37(1) and section 43B — Interest paid on unpaid purchase consideration — It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1)(iii) — Further held that the provisions of section 43B are not applicable to such interest.

The assessee was engaged in the business of manufacturing of polyester films. It had its manufacturing facilities at GIDC, Gujarat. It was allotted plot of land by GIDC. As per the terms of allotment the assessee was required to pay the purchase consideration of the land in instalments with interest. For the year under consideration the assessee had paid the sum of ₹99.97 lakh as interest to GIDC and the same was claimed as business expenditure. According to the AO the expenditure was of capital in nature. On appeal the CIT(A) allowed the appeal and held that the expenditure was of revenue in nature.

Before the Tribunal the Revenue supported the order of the AO and further contended that since the interest to GIDC was unpaid, it is not allowable u/s.43B.

Held

The Tribunal, as per the order of the CIT(A), noted that the fact that the production by the assessee had commenced in October, 1988 was not controverted. Accordingly, it held that the interest paid during the year cannot be considered as capital expenditure. Further, it referred to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. v. CIT, (1953) (56 ITR 52), where the interest paid on purchase consideration of the assets by the amalgamated company was held as allowable as business expenditure u/s. 10(2)(xv) of the 1922 Act (equivalent to section 37(1) of the 1961 Act) According to the Apex Court, the expression ‘capital’ used in section 10(2)(iii) of the 1922 Act (equivalent to section 36(1)(iii) of the 1961 Act), in the context in which it occurred, meant money and not any other asset. The Apex Court further observed that an agreement to pay the balance consideration due by the purchaser did not in truth give rise to a loan. On that basis the Apex Court held that the interest paid was not allowable as deduction u/s.10(2)(iii) of the 1922 Act, but as business expenditure u/s.10(2)(xv) of the 1922 Act. Applying the above ratio, the Tribunal held that the interest paid to GIDC by the assessee was allowable u/s.37(1). It further agreed with the assessee that the provisions of section 43B would also not apply to the facts of the present case, since unpaid sale consideration cannot be said to be monies borrowed.

Hemchand & Co. v. ITO

ITAT ‘I’ Bench, Mumbai
Before Sunil K. Yadav (JM) and K. K. Boliya (AM)
ITA Nos. 5146/Mum./2002
A.Y. : 1997-98. Decided on : 6-10-2006
Counsel for assessee/revenue : S. M. Lala/ Vijay Shankar

S. 37(1) of the Income-tax Act, 1961 — Allowability of disputed liability — Assessee following mercantile system of accounting claimed as business expenditure liability to the extent admitted by it — Appellate authority allowed only amount actually paid — Whether assessee justified in its claim — Held, Yes.

Facts:

The assessee was in possession of and using land taken on lease from National Airport Authority of India. The said lease expired on 15-8-1994, when it was paying lease rent of ₹ 192 per sq. m. The renewal of lease agreement was under negotiation and a dispute arose regarding the amount of lease rent. The lessor demanded a lease rent @ ₹ 1,200 per sq. m., while the assessee offered ₹ 616 per sq. m. The dispute could not be resolved and therefore the assessee provided in its books of account the expenditure on lease rent payable ₹ 12.82 lakh calculated @ ₹ 616 per sq. m. Against the said liability, the assessee had paid ₹ 6.03 lakh during the year under the appeal.

During the course of assessment, the AO treated the said liability as contingent liability and disallowed the same. On appeal, the CIT(A) agreed with the AO, but held that to the extent of actual payment (₹ 6.03 lakh), the expenditure should be allowed. Being aggrieved, the assessee appealed before the Tribunal.

Held:

The Tribunal noted that the assessee was following mercantile system of accounting and therefore the income had to be assessed and expenditure had to be allowed on accrual basis. According to it, to the extent the amount provided by the assessee, there was no dispute and it was an ascertained liability. However, the Tribunal found the order of the CIT(A) allowing only the portion of the liability paid actually as illogical, as it is tantamount to forcing cash system of accounting in respect of the expenditure of lease rent. According to it, the liability had to be allowed or disallowed on accrual basis. According to it, the liability to the extent provided by the assessee had been crystallised and the assessee was justified in claiming the same as business expenditure. Accordingly, the claim of the assessee was fully allowed.

ACIT v. Raj Oil Mills Ltd.

ITAT ‘A’ Bench, Mumbai
Before D. Manmohan (VP) and Rajendra Singh (AM)
ITA No. 5781/M/2007
AY: 2003-04; Decided on: 27/5/2009
Counsel for assessee / revenue : Sanjay Parikh / Sanjay Agarwal

S. 37(1) — Treatment of deferred revenue expenditure — Expenditure on brand promotion and brand building classified in the books of account as deferred revenue expenditure — Allowable as revenue expenditure.

Facts

The assessee was engaged in the business of manufacturing and trading of edible and hair oils, cosmetics and hygiene products. For the relevant year the assessee had incurred total expenditure of ₹ 1.53 crore on brand promotion and brand building. Out of the same, a sum of
₹ 33.15 lakh had been debited to the profit and loss account and the balance amount of ₹ 1.20 crore had been treated as deferred revenue expenditure in the books of account. In the return of income the assessee had claimed the entire amount of ₹ 1.53 crore as revenue expenditure. According to the AO the accounting treatment given by the assessee clearly showed that the assessee was to derive benefits from the said expenditure for a number of years He therefore disallowed the amount of ₹ 1.20 crore shown by the assessee as a deferred expenditure and added to the total income. On appeal, the CIT(A) allowed the appeal of the assessee.

Held

The Tribunal noted that the Assessing Officer had disallowed the claim mainly on the basis of the accounting treatment given by the assessee in the books of accounts. According to it, the advertisement expenditure was basically incurred for promoting the sale of the products. While incurring such expenses the assessee may derive some enduring benefits but as held by the Supreme Court in Empire Jute Co.’s case, test of enduring benefit was not conclusive in understanding the true nature of expenditure. A particular expenditure can be considered as capital expenditure only if there was some advantage in the capital field i.e., when the assessee had acquired any new assets or any new source of income. In case the expenditure had been incurred only for conducting the business more efficiently and more profitably, there being no advantage in the capital field, such expenses had to be treated as revenue expenditure as held by the Supreme Court in the above case. In the case of the assessee, by incurring expenditure on advertisement, it had not acquired any new asset or any new source of income. The expenditure had been incurred only for better profitability by promoting the sales. Such expenditure, according to the Tribunal had to be treated as revenue expenditure, irrespective of the accounting treatment given in the books as the accounting treatment is not conclusive in understanding the true nature of expenditure.

Case referred to

Empire Jute Company (124 ITR 1) (SC)

Hansraj Mathuradas v. ITO

ITA No. 2397/Mum./2010

Section 37(1) — Business expenditure — Whether the expenditure, which are subjected to FBT, can part thereof be disallowed on the ground that the same are not for the purpose of the business — Held, No.

The assessee is a partnership firm engaged in the business of providing services as insurance surveyor and loss assessor. In one of the grounds before the Tribunal, the assesse had challenged disallowance made by the AO and confirmed by the CIT (Appeals), conveyance and telephone expenses of ₹ 4,818 and ₹ 17,224 out of ₹ 24,088 and ₹ 86,120, respectively. In the absence of any record maintained by the assessee in the form of log book or call register to establish that the said expenses were wholly and exclusively for the purpose of its business, the same were disallowed by the AO to the extent of 20%.

Held

The Tribunal referred to the CBDT Circular No. 8/2005, dated 29-8-2005 and opined that once fringe benefit tax is levied on expenses incurred, it follows that the same are treated as fringe benefits provided by the assessee as employer to its employees and the same have to be appropriately allowed as expenses incurred wholly and exclusively incurred by the assessee for the purpose of its business.

Tricon Enterprises Ltd. v. ITO

ITA No. 6143/Mum./2009

Section 36(1)(vii) — Bad debts — Assessee’s claim, who was an exporter, for allowability of bad debts was rejected on the grounds that the assessee was allowed deduction u/s.80HHC as also that it had not obtained RBI’s permission for write-off — Whether the lower authorities justified — Held, No.

The assessee was 100% exporter. Its claim for allowability of ₹ 33.6 lakh as bad debts was disallowed by the AO on the grounds amongst others that it was allowed deduction u/s.80HHC. The CIT(A) dismissed the appeal for the reason that the assessee had not taken RBI’s permission for writing off of debts.

Held

The Tribunal noted that the assessee had not included the unrealised export bills while claiming deduction u/s.80HHC. Further, relying on the decision of the Delhi High Court in the case of CIT v. Nilofer I. Singh, (309 ITR 233), it held that obtaining RBI’s permission for write-off of dues on a foreign importer was an irrelevant factor, so far as admissibility of deduction as bad debt was concerned. Relying on the Supreme Court decision in the case of TRF Ltd. v. CIT, (323 ITR 397), the Tribunal allowed the appeal of the assessee.

Dy. CIT v. Delhi Financial Corporation

ITAT ‘H’ Bench, New Delhi
Before Vimal Gandhi (President) and R.C. Sharma (AM)
ITA No.4566/Del./2005
AY 2002-03 : Decided on 7-9-2007
Counsel for revenue/assessee : Himalini Kashyap / Rano Jain and V. Jain

S. 36(1)(viia)(c) of the Income tax Act, 1961 – Provision for bad and doubtful debts – Assessee following cash system of accounting – Allowability of provision so made – Held, that deduction being statutory, allowable

Per R. C. Sharma

Facts

The assessee was a state financial corporation providing long-term financial assistance by way of granting loans and lease finance to industrial units. It was following the cash method of accounting. During the year under appeal, the assessee had claimed deduction to the extent of 5% of its total income by way of provision for bad and doubtful debts u/s. 36(1)(viia)(c) of the Act. The said claim was denied by the AO for the reason that the assessee was following the cash method of accounting. According to him, such deduction could be allowed only when the income which had been accrued but not received was offered for taxation, as in the mercantile system of accounting. He further observed that allowing the provisions under the cash system of accounting defeats the very purpose of abolishing the hybrid system of accounting. On appeal, the CIT(A) allowed the deduction.

Held :

According to the Tribunal, as per the plain reading of the provisions of S. 36(1)(viia)(c), no condition of any specific system of accounting to be followed by the assessee had been provided. Therefore, the deduction being a statutory deduction, had to be allowed on the basis of the provisions made in the books of accounts, notwithstanding the fact that the assessee was following the cash system of accounting. It further noted that in the assessee’s case, the debts also included the amount of loans/advances, which were not affected by the method of accounting being followed by the assessee.

Central Electronics Ltd. v. AO

ITAT ‘B’ Bench, New Delhi
Before R.P. Tolani (JM) and R.C. Sharma (AM)
ITA. Nos. 233 & 1821/Del. of 2009
AY: 2004-05 & 2005-06; Decided on: 27/11/2009
Counsel for assessee / revenue: R.S. Singhvi / Ashima Nab & Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production. S. 145A — Valuation of inventory in accordance with the method of accounting regularly followed — Assessee justified in valuing three years old inventory at nil value.

Facts

The assessee was engaged in the business of developing and producing various electronic components, sophisticated systems, solar photovoltaic cells and other allied items for defence and other government departments. In its accounts it used to treat items of loose tools and small dies used in production as consumables. At the time of purchase of tools/dies the same were entered in the stock as consumable tools and were charged to consumption as and when issued for production activities. However, the AO treated the same as of capital nature subject to depreciation @ 25%, the rate applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was regarding allowability of ₹ 50.2 lakhs claimed by the assessee towards provision for slow moving inventory. As per the method of accounting regularly followed, the assessee used to write off all inventories which were more than three years old. According to the AO — the writing off was premature and was not allowable under the Act. The assessee justified its method of accounting on the ground of obsolescence resulting from change and/or upgradation in technology with the passage of time. It was submitted that the inventory so written off had no market value and for all practical purposes had only scrap value. The same was shown as income in the year of sale.

Held

The Tribunal noted that the assessee was a Government undertaking and the accounting policy was being followed consistently. Its accounts were audited by CAG. Further, relying on the judgment of Rajasthan High Court in the case of Wolkem India Ltd., it allowed the claim of the assessee.

Case referred to

CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

Premier Ltd. v. DCIT

ITAT ‘C’, Bench Mumbai
Before S.V. Mehrotra (AM) and Asha Vijayaraghvan (JM)
ITA No. 2091/Mum./2008
AY: 2004-05; Decided on: 30/6/2009
Counsel for assessee / revenue : Jayesh Dadia / Yeshwant V. Chavan

S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

Facts

The assessee was carrying on the business of manufacture and sale of automobiles and machine tools. During the year under appeal, it had incurred expenditure of ₹ 2.93 crore on van project. In its return of income the same was claimed as revenue expenditure though in its books of account, the same was capitalised and shown as ‘Capital work in progress’. The AO rejected the claim of the assessee for reasons amongst others, as under :

• The expense incurred was for development of a new car and hence cannot be termed as revenue expenditure;

• As per the Annual Report of the assessee — the project was under implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO, observing that the project was new business and not the expansion of an existing business.

Before the Tribunal, the Revenue justified the orders of the lower authorities and further contended that :

• The assessee had enhanced the capacity by installing new assembly line; and

• The expenditure was for manufacturing of altogether a different car.

Held

According to the Tribunal the moot point for consideration was whether the expenditure incurred in launching a new model could be treated as expansion of same business or a new business. It referred to the CIT(A)’s observation that if the assessee had incurred expenditure for expansion of the production capacity of its Premier Padmini car or any of the cars which it was already manufacturing, it would amount to a case of expansion. According to the CIT(A), the product sought to be manufactured was a totally new product, even if it was a car. The Tribunal did not agree to it. According to it, the test to be applied for deciding whether a particular project was an expansion of the existing line of business or a new business was to determine whether there was unity of control and management and interlacing of funds or not. It noted that those two aspects in the case of the assessee had not been disputed by the Revenue. Therefore, it held that the expenditure incurred on the van project was revenue in nature being for expansion of the business. Accordingly, the appeal filed by the assessee on this ground was allowed.

Karisma Kapoor v. ACIT

ITAT ‘A’ Bench, Mumbai
Before D.K. Agarwal (JM) and B. Ramakotaiah (AM)
ITA No. 6780/Mum./2008
AY: 2004-05; Decided on: 20/10/2009
Counsel for assessee / revenue: K. Gopal / Virendra Ojha

S. 28 and S. 37(1) — Exchange loss arising on application of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of fund for investment purpose would not affect the allowability of loss.

Facts

The assessee was a film actress. She had shown her professional receipts to the tune of ₹ 6.12 crore and declared a total income of ₹ 6.04 crore. During the course of assessment the AO noticed that the assessee had claimed foreign exchange loss of ₹ 7.25 lakh. As per the assessee the loss was arising out of exchange rate difference in the EEFC account. The assessee had a large amount of dollar fund in the account at the beginning of the year and after deposits during the year into the same account, it was closed and converted into Indian Rupees. On conversion, due to reduction in the value of dollar vis-à-vis Rupee, there was a loss/reduction in the professional income accounted, which was claimed as a loss.

This method of accounting, which was based on Ac-counting Standard 11, was consistently followed by the assessee and the Department had also assessed the profits earned therefrom in earlier years However, during the year, the AO disallowed the exchange loss, holding that the funds after conversion were utilised for investing in tax relief bonds/fixed deposits. Thus, since according to the AO, the utili-sation of foreign currency balance was not for profes-sional purposes, the exchange loss was disallowed.

Before the Tribunal the Revenue contended that the Assessing Officer’s finding was correct that the amount was not utilised for professional activities. It also relied on the decision of the Calcutta High Court in the case of invest import and contended that the capital loss cannot he allowed.

Held

According to the Tribunal the facts do indicate that the assessee had deposited her professional receipts in the said EEFC account. Secondly, as noted by the CIT(A), the assessee was consistently following the Mercantile system of accounting and also AS-11. Further, according to it, the ultimate utilisation of the professional receipts after its conversion from dollar to Indian Rupee was not material (relevant). The subsequent utilisation of the amount cannot convert such loss as capital loss. According to it, the Calcutta high Court decision relied on by the revenue, was distinguishable by facts and hence, cannot be applied to the facts of the assessee’s case.

If further observed that the CIT(A) also erred in up-holding that it was a notional loss. This was an actual loss after conversion of balance in US into Indian Rupee. Accordingly, it was held that the loss was an allowable loss against professional receipts.

Case referred to

CIT v. Invest Import, 137 ITR 310 (Cal.)

Tata International Ltd. v. ACIT

ITAT ‘I’ Bench, Mumbai
Before A.L. Ghelot (AM) and Sushma Chowla (JM)
ITA No. 5591/M/2005
AY: 1999-2000; Decided on: 11/9/2009
Counsel for assessee / revenue : Dinesh Vyas / R.P. Meena

S. 37(1) — Business expenditure — Reimbursement of expenditure incurred in running the school — Whether allowable — Held, Yes.

Facts

The assessee was engaged in the business of export. One of the issues before the Tribunal was regarding the allowability of expenditure incurred on the maintenance of a school run by TATA at Dewas. The school was situated at the place where the assessee’s factory was located and substantial number of students of the school were children of the assessee’s employees. During the year the assessee had paid the sum of ₹ 1,88,540 by way of reimbursement, part of the expenditure incurred in running the School. The same was disallowed by the lower authorities.

Held

According to the Tribunal, the case of the assessee was covered by the Tribunal decision in the assessee’s own case for the A.Ys. 1992-93 , 1993-94 and 1994-95 which was later affirmed in the assessee’s own case for the A.Ys. 1996-97 to 1998-99. Noting the fact that the school was situated at the same place where the assessee’s factory was located and substantial number of students of the school were children of the assessee’s employees, the expenditure claimed was allowed.

Case referred to

Tata International Ltd. ITA No. 4823 to 4825/M/2005 dated 26-3-2009.

Anang Tradevest Pvt. Ltd. v. ITO

ITAT ‘A’ Bench, Mumbai
Before D. Manmohan (VP) and Abraham George (AM)
ITA No. 10/Mum./2008
AY: 2003-04; Decided on: 10/8/2009
Counsel for assessee / revenue : Prakash Jhunjhunwala / R.S. Srivastava

S. 28, S. 36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee Bond is allowable as a business loss/expenditure. Mere fact that the assessee has claimed the amount written off in the course of business as ‘bad debt’ does not preclude him from claiming the same as business loss/expenditure .

Facts

The assessee, as a part of its business activity, was introducing certain clients to M/s. Joindre Capital Services Ltd., who entered into share purchase and sale transactions for such clients. As per the terms of the agreement entered into between the assessee and M/s. Joindre Capital Services Pvt. Ltd., assessee had to indemnify Joindre Capital Services Ltd., in case clients introduced by the assessee failed to honor any of their commitments.

During the previous year in respect of three parties, assessee had shown a sum of ₹11,90,779 as bad debts written off. The Assessing Officer (AO) held that such claim could not be allowed since assessee was a sub-broker and the debt was never taken into account for computing the income of the assessee for the relevant previous year or any preceding previous years

The CIT(A) held that the bad debt written off was rightly disallowed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where disallowance of bad debt of ₹ 11,90,779 was taken as a ground. In the course of the hearing, the assessee withdrew the original ground and by way of an additional ground claimed that this sum of ₹ 11,90,779 paid under a performance guarantee bond be allowed either as business expenditure u/s.37(1) or as business loss. On behalf of the assessee it was contended that the Tribunal has in the case of India Infoline Securities (P) Ltd. v. ACIT, (25 SOT 123) (Mum.) held that losses incurred by an assessee in the course of his business as a stock broker, on account of default of his clients, could be claimed as a business loss.

Held :

Neither the AO nor the CIT(A) had gone through the agreement entered into by the assessee with Joindre Capital Services Ltd., for verifying whether such claim could be allowed as business expense or loss. The fact that the assessee had claimed the amount as bad debt would not preclude it from claiming the amount as business loss or expenses, since the write off was done in the course of business only.

With a view to verify whether the claim of the assessee was in relation to clients introduced by it to M/s. Joindre Capital Services Ltd., as also whether the indemnity agreement with Joindre Capital Services Ltd. was applicable, in relation to such write off effected by the assessee, the Tribunal set aside the orders of the AO and the CIT(A) and restored the matter back to the AO for considering the issue afresh in accordance with law after giving proper opportunity to the assessee to represent its case.

DCIT v. Orgo Chem Guj. Pvt. Ltd.

ITAT ‘H’ Bench, Mumbai
Before K.C. Singhal (JM) & A.K. Garodia (AM)
ITA No. 7872 /Mum./2004
AY 2001-02; Decided on 17/8/2007
Counsel for revenue/assessee: D.K. Rao / Mayur Shah

S. 40A(2)(b) of the Income-tax Act, 1961 — Payments to relatives — Discount on sales given to sister concern — Whether covered under the provisions — Held, No.

Facts

The assessee had given sales discount of ₹ 19.3 lakh to its sister concern. Since no such discount was given to other parties, the AO treated the same as unreasonable and disallowed it u/s. 40A(2)(b). On appeal, the CIT(A) noted that the sales to other parties were only of meager amount, while the sale to sister concern was in bulk. Accordingly, the assessee’s appeal was alllowed.

Held

According to the Tribunal, a bare reading of the provisions reveals that such provision could be invoked only where an expenditure was incurred in respect of which, payment was to be made to the sister concern. In case of discount on sales, no payment was made by the assessee as it only reduced the sale price. Therefore, relying on the Madhya Pradesh High Court decision in the case of Udhaji Shrikrishanadas, it held that the assessee’s case was not covered u/s.40A(2)(b).

Case referred to

Udhaji Shrikrishanadas, 139 ITR 827 (M.P.)

Shabro International v. Addl. CIT

ITA No. 6629/Mum./2008

S. 40(b) — Remuneration to working partner as per the partnership deed — Partnership deed gave power to modify the terms of remuneration — Whether the existence of such term would render remuneration not qualified for deduction — Held, No.

Facts

The assessee, a firm, executed a supplementary partnership deed on 20-6-2004 to provide for the payment of interest and remuneration to the working partne₹ As per the deed, the remuneration was to be calculated as a percentage of the profit as per S. 40(b) of the Act. One of the clauses in the deed further provided that the partners may decide to pay remuneration at a lower amount or not to pay remuneration or to pay remuneration on any other criteria or ratio. According to the AO, as explained in Circular No. 739, dated 25-3-1996, since the partnership deed did not contain a specific provision for calculating the amount of remuneration, no remuneration was allowable. He further held that in any case, the remuneration for the period till 20-6-2004, since it pertained to the period prior to the date of the execution of the deed, cannot be allowed. The CIT(A) on appeal upheld the order of the AO.

Held

According to the Tribunal, the Board Circular referred to by the Tribunal required that either the remuneration payable to each of the working partners is laid down in the deed or the deed must lay down the manner of ascertaining such remuneration. Referring to the supplementary deed, the Tribunal noted that the deed did provide the manner of quantifying the remuneration to the partne₹ According to the Tribunal, the presence of clause 3(d) which empowered the partners to lower the remuneration or to not pay the remuneration, did not erase the other clauses which clearly laid down the amount of remuneration payable. It further observed that even in the absence of the said clause 3(d), the partners had the power to alter the remuneration payable. Accordingly, the orders of the lower authorities were modified to the said extent.

Golden Stables Lifestyles Centre P. Ltd. v. CIT

ITAT ‘G’ Bench, Mumbai
Before Pramod Kumar (AM) and Smt. Asha Vijayraghavan (JM)
ITA No.5145/Mum/2009
AY: 2005-06; Decided on 30-9-2010
Counsel for assessee / revenue: Anil Sathe / Abani Kanta Nayar

S 40(a)(ia). Provisions of S. 40(a)(ia) are not applicable to expenditure which has accrued prior to 10-9-2004 when the Finance Act, (No. 2) 2004 got the presidential approval — Amendment to S. 40(a)(ia) by the Finance Act, 2010 which extends the time limit for all TDS payable throughout the year has been introduced as a curative measure and therefore would apply to earlier years also.

Facts :

The Assessing Officer (AO) disallowed amounts aggregating to `29,52,389 u/s.40(a)(ia) on the ground that assessee had deposited TDS late in the Government Account. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) rejected the contention made on behalf of the assessee that S. 40(a)(ia) as amended with retrospective effect by the Finance Act, 2008 and Explanatory Notes to the Finance Bill, 2004 issued by the CBDT vide Circular No. 5/2005, dated 15-7-2005 were brought in to existence after the end of the financial year 2004-05. He also rejected the contention that the assessee had complied with the very intention of introduction of S. 40(a)(ia) i.e., compliance of TDS provisions in case of residents and curbing bogus payments.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that the CBDT has in its Circular No. 1 of 2009, dated 27-3-2009 clarified the amendment made to S. 40(a)(ia) by the Finance Act, 2008 with retrospective effect from 1-4-2005 was to mitigate hardship caused by the above provisions of S. 40(a)(ia) while maintaining TDS discipline. The Tribunal also noted that there has been a further amendment to this Section by the Finance Act, 2010 whereby time limit for payment of TDS deducted/deductible during the year has been extended till the due date of filing return of income. The Tribunal observed that this is similar to provisions of S. 43B. The Supreme Court has in the case of CIT v. Alom Extrusions Ltd., (319 ITR 306) held the amendment to S. 43B to be retrospective in operation. The amendment made by the Finance Act, 2008 to the provisions of S. 40(a)(ia) being with retrospective effect shows that it was curative in nature and was brought in to ameliorate the hardship caused on account of nominal delay in payment of TDS. Applying the ratio of the decision of the Apex Court, the Tribunal held the amendment brought in by Finance Act, 2010 to be curative in nature and therefore applicable to all earlier years also. The Tribunal directed the AO not to disallow the expenditure (i) which has accrued prior to 10-9-2004 when the Finance Act (No. 2) 2004 got the presidential approval, up to which date the provisions of S. 40(a) (ia) will not be applicable and (ii) expenditure in respect of which TDS has been paid by the assessee before the due date of filing of the return.

The ground of appeal filed by the assessee was allowed.

M/s. Alpha Projects Society P. Ltd. v. DCIT

ITA No.2869/Ahd/2011, AY 2005-06
Bench ‘C’, Order dated 30/03/2012

Business expenditure – S.40(a)(ia) – Disallowance for non-deduction of TDS – Amendment by Finance Act 2010 is retrospective – Special Bench verdict not to be followed in view of High Court verdict.

In AY 2005-06, the assessee made payments to contractors & for professionals & technical services. Though TDS was deducted, it was paid after the end of the FY but before filing the ROI. The assessee pleaded that s. 40(a)(ia), as amended by the FA 2010 w.e.f. 1.4.2010 to provide that no disallowance should be made if the TDS was paid before the due date of filing the ROI should be held to be retrospective . However, the AO & CIT (A), rejected the claim by relying on Bharati Shipyard Ltd 132 ITD 53 (Mum) (SB). On appeal to the Tribunal, Held allowing the appeal:

The issue involved has now been decided by the Calcutta High Court in CIT vs. Virgin Creators against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd 132 ITD 53 (Mum) has taken a view that the amendment is prospective in nature and would apply accordingly. Respectfully following the decision of the Calcutta High Court in the case of Virgin Creators the order of the CIT(A) is not sustainable and the assessee’s appeal is allowed.

Similar view taken in – Shri Piyush C. Mehta v. ACIT, ITA No.1321/Mum/2009, AY 2005-06, Bench ‘C’, order dated 11/04/2012; Rajamahendri Shipping & Oil Field Services Ltd. v. Addl. CIT, ITA No.352/Vizag/2008, AY 2005-06, order dated 13/04/2012

Shri Jitendra Mansukhlal Shah v. Dy. CIT

ITA Nos. 2293 & 2294/Mum/2013

Provision of sec. 40(a)(ia) of the Act not to apply for non deduction of tax at source in respet of amount already paid during the financial year and does not remain payable

Held-

“5. We have heard both the parties and their contentions have carefully been considered. Recently, Mumbai Tribunal has decided such issue in favour of the assessee by considering the earlier decisions. Judicial Member is one of the party to the said decision The relevant observations of the Tribunal are as under:

“5. We have heard both the parties and their contentions have carefully been considered. After careful consideration, respectfully following the decision of Co-ordinate Bench in the case of M/s. Vivil Exports P. Ltd. vs. ITO (supra), we delete the disallowance. For the sake of completeness relevant observation of the Tribunal from the said decision are reproduced below:

4. Though number of grounds were urged before us in the grounds of appeal annexed to Form No. 36, at the time of hearing the learned counsel for the assessee submitted that the assessee having made the payment, section 40(a)(ia) cannot be attracted because it speaks of the amount “payable” and it does not cover the amount already paid. In this regard he relied upon the following decisions of the ITAT Chennai Benches wherein the Bench had taken into consideration the decision of the ITAT Special Bench in the case of Merilyn Shipping & Transport, the order of which was suspended by the High Court but at the same time there was a subsequent judgement of the Hon'ble Allahabad High Court in the case of M/s. Vector Shipping Services (P) Ltd. wherein it was held that section 40(a)(ia) applies only to those amount which remains payable by the end of the previous year. In other words, in respect of payments already made section 40(a) (ia) is not attracted: - i. ACIT vs. M/s. Eskay Designs - ITA No. 1951/Mds/2012 dated 09.12.2013. ii. ITO vs. Theekathir Press – ITA No. 2076/Mds/2012 & CO No. 155/Mds/2013 dated 18.09.2013. The learned counsel for the assessee also submitted that though there are contrary decisions of the other Hon'ble High Courts, i.e. Hon'ble Calcutta High Court and Hon'ble Gujarat High Court, in the light of the decision of the Hon'ble Allabahad High Court it can be said the there can be two views possible in this matter in which event the one which is in favour of the assessee has to be followed in the light of the decision of the Hon'ble Supreme Court in the case of Vegetable Products Ltd. 88 ITR 192. Accordingly the Chennai Bench held that section 40(a)(ia) is not attracted in respect of the amount already paid by the assessee. 5. The learned D.R., on the other hand, could not place before us any contrary judgement on this issue. Though the learned D.R. promised to file written submissions within one day, it was not filed. In other words, there is no contrary decision on this issue. 6. Having regard to the circumstances of the case, without going into the other aspects, which were in fact not argued either by the assessee or by the Revenue, we hold that section 40(a)(ia) is not attracted in respect of payment already made by the end of the previous year. The AO is directed to verify the claim of the assessee and if it is in line with the view taken herein the same may be considered accordingly. As regards levy of interest under section 234B and 234C of the Act, the same is consequential in nature and need not to be considered independently. 7. In the result, the appeal filed by the assessee is treated as allowed for statistical purposes

5.1 Moreover, Hon’ble Allahabad High Court in the case of CIT vs. Vector Shipping Services (P) Ltd.(supra) has held that for disallowing expenses from business and profession on the ground that TDS has not been deducted, amount should be payable and not which has been paid by end of the year. The said decision of Hon’ble Allahabad High Court was made subject to Special Leave Petition filed before Hon’ble Supreme Court and their Lordships vide their order dated 02/07/2014 in CC No.8068/2014 have dismissed the SLP and copy of this order is filed by the assessee at page 31 of the paper book and the said order read as under:

“SUPREME COURT OF INDIA
RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (C)…..
CC No.(s) 8068/2014
(Arising out of impugned final judgment and order dated 09/07/2013 in ITA 122/2013 passed by the High Court of Judicature at Allahabad)

COMMISSIONER OF INCOME TAX-MUZAFFAR NGR. Petitioner(s)
VERSUS
M/S. VECTOR SHIPPING SERVICES (P) LTD. Respondents (s)

With appln.(s) for c/delay in filing SLP and office report) Date:02/07/2014 This petition was called on for hearing today.

CORAM: HON’BLE THE CHIEF JUSTICE HON’BLE MR.JUSTICE MADAN B. LOKUR HON’BLE MR. .KURIEN JOSEPH

For Petitioner(s) Mr. Mukul Rohatgi, Attorney General Mr. Rupesh Kumar, Adv. Mr. Sahil Tagotra, Adv. Mr. Anil Katiya, Adv. For Respondent(s)

UPON hearing the counsel the Court made the following ORDER

Heard Mr. Mukul Rohatgi, learned Attorney General, or the petition.
Delay in filing and refilling special leave petition is condoned.
Special leave petition is dismissed.
Digitally signed by
Rajesh Dham
Date: 02.07.2014”

5.2 In view of above discussion, the decision relied upon by Ld. DR would have no application and we have to accept the claim of the assessee to the extent of labour payments are made during the year under consideration and to that extent no disallowance should be made.”

Baba Farid Vidyak Society v. ACIT

ITA No. 180/ASR/2010 

Section 40(a)(ia) r.w.s. 194C and 194J — Disallowance of expenditure on account of non-deduction of tax at source — Whether the provisions applicable to the assessee-society engaged in charitable activities — Held, No.

For non-deduction of tax at source from the payments made towards advertisement expenses, the AO disallowed the sum of  ₹ 5.10 lakh and taxed the same as business income. Before the CIT(A) the assessee contended that since its income is not chargeable u/s. 26 to section 44AD under the head ‘Business income’, the provisions of section 40(a)(ia) were not applicable. However, the CIT(A) upheld the order of the AO.

Held

Relying on the Amritsar Tribunal decision in the case of ITO v. Sangat Sahib Bhai Pheru Sikh Educational Society, (ITA Nos. 201 to 203/ASR/2004, dated 31-3-2006), which in turn was based on the Mumbai Tribunal decision in the case of CIT v. India Magnum Fund, (74 TTJ 620), the Tribunal accepted the contention of the assessee and allowed the appeal of the assessee.

Inder Prasad Mathura Lal v. ITO

ITA No. 1068/JP/2010

Section 40(a)(ia) — Disallowance of expenditure on account of non-deduction of TDS — Non-deduction was on account of non-allotment of TAN — Whether the disallowance was justified — Held, No.

For non-deduction of tax at source the AO disallowed the sum of ₹4.62 lakh paid by the assessee towards brokerage and commission. The non-payment was on account of the non-receipt of TAN. The assessee pointed out that he had immediately applied for TAN when the bank refused to accept tax payment without TAN. However, till 31-3-2005 TAN was not allotted. Hence, he again applied for TAN which was finally allotted on 15-4-2005 and the tax was paid on 25-4-2005. Since the tax was not paid by the year-end, the amount paid by way of brokerage and commission was disallowed by the AO u/s.40(a)(ia). On appeal, the CIT(A) confirmed the order of the AO.

Held

The Tribunal noted that the assessee was depositing TDS in time up to 7-12-2004. He had also applied for TAN and since the bank refused to accept TDS without TAN, he was unable to pay tax. Thus, according to it, the assessee was prevented from performing his obligations under the law despite his bona fide efforts and he cannot be regarded as defaulter. For the purpose, it also relied on the decisions of the Calcutta High Court in the case of Modern Fibotex India Ltd. & Another v. DCIT, (212 ITR 496) which was approved by the Apex Court in the case ofCIT v. Hindustan Electro Graphites Ltd., (243 ITR 48) and also on the Hyderabad Tribunal decision in the case of ACIT v. Jindal Irrigation Systems Ltd., 56 ITD 164 and Nagpur Bench of Tribunal decision in the case of Canara Bank v. ITO, (121 ITD 1).

The Tribunal further noted that the provisions of section 40(a)(ia) are amended by the Finance Act, 2010 w.e.f. 1-4-2010 to provide that the expenditure shall not be disallowed if TDS is paid on or before the due date specified in section 139(1). According to it, if the amendment is curative or is intended to remedy unintended consequences or to render the statutory provisions workable, the amendment was to be construed to relate back to the provisions in respect of which it applies to the remedy. It referred to the following decisions where it was held that the amendments were retrospective though such retrospectivity was not mentioned by the Legislature while introducing the provisions. The cases relied on were:

• Allied Motors Pvt. Ltd. v. CIT, (139 CTR 364) (SC);

• CIT v. Alom Extrusion Ltd., (319 ITR 306) (SC);

• CIT v. Podar Cements Pvt. Ltd., (226 ITR 625) (SC); and

• CIT v. Gold Coin Health Food Pvt. Ltd., (304 ITR 308) (SC).

Further, relying on the decisions of the Ahmedabad Tribunal in the case of Kanubhai Ramjibhai v. ITO, (135 ITD 364) and of the Mumbai Tribunal in the case of Bansal Parvahan India Pvt. Ltd. v. ITO, (137 TTJ 319), where it was held that the amendment in section 40(a)(ia) was curative in nature, it allowed the appeal of the assessee.

Akber Abdul Ali v. ACIT

ITA No. 5538/Mum./2008

Section 40(a)(ia) r.w. section 194A — Disallowance of interest for failure to deduct tax at source — Payment of disputed amount with interest as per the Court order — Interest paid without deduction of tax at source — Whether AO justified in disallowing the same — Held, No.

The assessee was liable to pay the sum of ₹ 68.54 lakh to one of its creditors On account of his failure to pay, the suit for recovery was filed by the said creditor. The Court passed the decree settling the amount at ₹ 55 lakh, which also included the sum of ₹18.5 lakh towards interest.

In the return of income filed by the assessee, the amount paid by way of interest was claimed as deduction. Since the assessee had not deducted tax at source, the AO disallowed the claim u/s. 40(a)(ia). The CIT(A) on appeal upheld the order of the AO.

Before the Tribunal, the assessee contended that the amount was paid in accordance with the decision of the High Court. The interest payable under the decree of the Court was a judgment debt, therefore, he was not obliged to deduct tax at source.

Held

In view of the ratio laid down by the Bombay High Court in the case of Madhusudan Shrikrishna v. Emkay Exports, (188 Taxman 195), the Tribunal agreed with the assessee and held that the assessee had no obligation to deduct tax at source on the interest amount of ₹ 18.5 lakh paid to the creditor.

ITO vs. Pritesh D. Shah (HUF)
ITAT Ahmedabad `B’ Bench
Before G. C. Gupta (VP) and T. R. Meena (AM)
ITA No. 175/Ahd/2013
A.Y.: 2009-10. Decided on: 4th October, 2013.
Counsel for revenue/assessee: P. L. Kureel / A. C. Shah

Ss. 40(a)(ia), 194C, 194IA – Provisions of S/s. 194C, 194IA are not applicable to amounts paid by Clearing & Forwarding Agent, on behalf of his client, receipts whereof are issued in the name of the client.

Facts

The assessee, a clearing & forwarding agent, had charged service charges known as agency charges from its clients whose goods were exported through various ports mainly in Gujarat & Maharashtra. In respect of the amounts paid by the assessee on behalf of its clients, receipts whereof were issued by the recipients in the name of the clients, the assessee did not deduct tax at source. The assessee contended that it was merely a facilitator in the export business of its clients. The assessee received from its clients reimbursement of amounts paid on their behalf and also service charges/agency charges. It was only the agency charges which were credited as income to P&L account of the assessee.

The Assessing Officer (AO) made an addition of ₹ 1,69,11,269; ₹ 23,01,424 and ₹ 26,76,785 u/s. 40(a) (ia) r.w.s. 194C & 194I of the Act on the ground that the assessee had failed to deduct tax at source on payments made by it on behalf of its clients.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee received railway freight, shipping freight, ICD charges, etc from its clients by way of reimbursement of expenses. It held that the assessee is merely a facilitator in the export business of its clients and facilitates to and fro movement of client’s goods both in land and overseas using road, rail, air and sea routes including temporary storage of the goods in custom bonded warehbouse for legal and procedural purposes, etc. The assessee received reimbursement of expenses incurred and also service charges. The Tribunal noted that the receipts were issued by various parties in the name of clients of the assessee and not in the name of the assessee and that it is only the agency charges which are credited to the P & L account of the assessee.

The Tribunal held that for applicability of provisions of section 194C and section 194I, the relationship of contractor and payee pursuant to contract between the parties is essential. In the facts of the assessee’s case, the Tribunal held that such a relationship is missing.

The Tribunal noted the finding given by CIT(A) that the clients of the assessee are reimbursing monies paid by the assessee to such agencies along with the assessee’s commission or handling charges and also that the CIT(A) has referred to number of decisions where the Hon’ble Courts have held that TDS provisions are not attracted in cases involving reimbursement of expenses held that addition on account of payments made to various parties on behalf of its clients by the assessee could not be sustained and deserves to be deleted. The Tribunal confirmed the order passed by CIT(A).

The appeal filed by the revenue was dismissed.

Rakesh Tak v. ITO (ITAT Jaipur)

ITA No.888/Jp/2014; AY 2009-10
Bench SMC; Order dated 04.11.2015

S. 40(a)(ia), though inserted w.e.f. 01.04.2013, is retrospective in operation because it is curative and intended to remedy an unintended consequence. Accordingly, if the payee has paid the tax, the payer will not suffer a disallowance

Held:

(i) The second proviso to s. 40(a)(ia) inserted by the Finance Act, 2012 is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax, and, therefore, the second proviso although inserted with effect from 1st April, 2013 is curative in nature and has retrospective effect.

(ii) Where in any subsequent year in which the tax has been deducted and deposited, the intention of the legislature clearly is not to disallow the legitimate business expenditure. The allowance of such expenditure is sought to be made subject to deduction and payment of tax at source. However, in a case where the deductee/payee has paid tax and as such the person responsible for paying is no longer required to deduct or pay any tax, legitimate business expenditure would stand disallowed since the section contemplated by the first proviso viz. deduction and payment of tax in a subsequent year would never come about. Such unintended consequence has been sought to be taken care of by the second proviso inserted in section 40(a)(ia) by the Finance Act, 2012. The Memorandum explaining the second proviso as introduced in Finance Bill, 2012, reported in 342 ITR (Statutes) 234 at pages 260 & 261 even though state that the amendment will take effect from 1st April, 2013 but this amendment, in my opinion, is retrospective in operation. ( CIT vs. Virgin Creations (Kol), Ansal Land Mark Township (P) Ltd. vs. CIT [CM Appl. No. 3774 of 2015 in ITA No. 160 of 2015] and Ballabh Das Agarwal vs. ITO (ITAT Kolkata) followed)

Knight Frank (India) Pvt. Ltd. v. Addl. CIT
ITAT Mumbai `A’ Bench
Before B. Ramakotaiah (AM) and Vivek Verma (JM)
ITA No. 2021/Mum/2011
A.Y.: 2007-08. Decided on: 10th July, 2013.
Counsel for assessee/revenue: M. M. Golvala/ Kalik Singh.

Sections 43B, 145A. Provisions of section 145A do not apply to service tax. Accordingly, service tax is not includible in cost of components.

Facts

The assessee had not considered service tax for computing cost of components. In the course of assessment proceedings the Assessing Officer (AO) asked the assessee to explain why the same should not be included in view of the provisions of section 145A. Rejecting the submissions made by the assessee, the AO enhanced the trading profit by ₹ 69,20,599 and added the same to the total income returned by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) who sustained the order of the AO on the point of inclusion of service tax by invoking the provisions of section 145A.

Aggrieved, the assessee preferred an appeal to the Tribunal where it placed reliance on the decision of Delhi High Court in the case of CIT vs. Noble & Hewitt (I) Pvt. Ltd. (305 ITR 324)(Del) and Chennai ITAT decision in the case of ACIT vs. Real Image Media Technologies Pvt. Ltd. (306 ITR 106)(AT-Chennai).

Held

The Tribunal held that since the assessee is a service provider company patently the provisions of section 145A cannot be made applicable because the provision was specifically introduced for the purposes of manufacturing segment of the business. It noted that section 145A(a)(ii) mentions “…by the assessee being goods to the place of location & conditions as on the date of valuation are required to be included.” It also noted that the issue is now covered by the decisions relied upon by the assessee. Following the said decisions, the Tribunal set aside the order of CIT(A) and directed the AO to delete the addition.

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

BUSINESS INCOME / BUSINESS LOSS / BUSINESS SET UP

ACIT v. Trident Textile Mills Limited.

ITA No. 1169/Mds/2012 [BCAJ – Mar-13]

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

Facts

The assessee, manufacturer and domestic seller of grey fabric, filed its return of income for the AY 2008-09 declaring a loss of ₹ 31,31,568. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had acquired a 1250 MW windmill, from M/s Suzlon Energy, for captive consumption. The purchase order contained compensation clause, which provided that the assessee was entitled to compensation in case of any loss of generation on account of non-availability of the machine below 95% @ 3.67/KWH or as per the TNEB tariff during the warranty period. He also noticed that the generation of power unit did not touch the assured level of 37 lakh units. The assessee had filed a compensation case before the Jurisdictional High Court raising claim of ₹ 17,58,014 up to 15-9-2007 for shortfall in generation of power. Since the other party had not accepted the assessee’s claim for compensation and also the case was pending before the Court, the assessee had not declared the amount claimed as its income. The AO held that, since the assessee was entitled to compensation as per the agreement, he taxed the sum of ₹ 17,58,014 as the income of the assessee.

Aggrieved, the assessee preferred an appeal to the 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 capacity assured was never achieved and the assessee had initiated compensation proceedings before the Honourable High Court. The High Court had referred the case to the Sole Arbitrator, who expired during the pendency of the arbitration proceedings. The Tribunal held that it is unable to concur with the stand of the Revenue that merely by initiating the compensation suit, the amount claimed therein is liable to be assessed as assessee’s income. It also noted that the other party has not admitted any compensation or its part as payable to the assessee nor there any decree in favour of the assessee so as to realise the amount. It held that once the arbitration proceedings are pending, the outcome of the assessee’s claim involved still hangs in balance. It observed that when there is no actual receipt of any amount or accrual, the same cannot be taken as income of the assessee. It held that the amount claimed by the assessee as compensation cannot be taken to be its income. The Tribunal upheld the order of CIT(A).

The appeal filed by the Revenue was dismissed.

ITO v DKP Engineers & Construction P. Ltd.

ITA No. 7796/M/2010 [BCAJ – Nov-12]

Ss. 28, 45 – In case of assessee following project completion method, sale proceeds of TDR allotted consequent to development of road need to be reduced from WIP.

Facts

The assessee company engaged in construction activity had undertaken to develop the D.P. Road leading to Vikroli property on which it was to construct flats. Upon development of the road, the assessee became entitled to TDR which was sold on 5.8.2005. Cost incurred on development of road was considered as part of WIP and the sale consideration of TDR was reduced from WIP which had the effect of reducing the total expenditure incurred till the end of the year, on the project under development. The AO assessed the receipts arising on sale of TDR under the head `Income from Capital Gains’.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the receipt of TDR had direct nexus with the work done by the appellant and was incidental to the entire project undertaken. It held that the assessee was correct in reducing the sale proceeds of TDR from work-in-progress. The Tribunal confirmed the order passed by the CIT(A) and dismissed the appeal filed by the revenue.

ACIT vs. Amit Anil Biswas

ITAT ‘F’ Bench, Mumbai
Before Sunil Kumar Yadav (JM) & D.K. Rao (AM)
ITA No. 1019/Mum/2006 and ITA No. 5762/Mum/2006
AY 1997-98 & 2003-04, Decided on 30/3/2009
Counsel for Revenue / Assessee: None / Arvind Sonde

Section 41(1) — Whether the sum of ₹ 1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A. Ys. 1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon transfer to capital account during the financial year 2002-03 it has assumed the character of income, as it was no more payable and did not represent liability as falsely disclosed in the accounts by the assessee – Held: No.

The assessee had received professional fees for executing off-shore project during the financial years 1994-95 and 1995-96. The gross bills raised in relation to the work were to the tune of ₹ 2,46,95,375 and after setting off various expenses and amounts written off, the net professional fees were to the tune of ₹ 1,77,27,681. This sum was grouped under ‘current liabilities’ as off-shore project advances in the balance sheet as on 31.3.1996 and then carried forward to subsequent years till 31.3.2002. During the financial year 2002-03, this amount of ₹ 1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a protective basis to the income of the assessee for the AY 1997-98, after reopening the assessment on the ground that the assessee had earned this income in that assessment year and also made an addition on substantive basis in AY 2003-04 on the ground that this amount had assumed the character of taxable income, as it was no more payable and did not represent any liability as falsely disclosed in the accounts by the assessee. The AO invoked the provisions of S. 41(1) of the Act. He also held that the opening balance was a Revenue receipt which was transferred to capital account in financial year 2002-03 and therefore this amount was taxed by him on a substantive basis as income of AY 2003-04.

The CIT(A) decided the issue in favour of the assessee and held that the income had accrued during the financial year relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt to the capital account in the year relevant to AY 2003-04, it cannot be held to be taxable in AY 2003-04.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

On perusal of the documents filed, the Tribunal noted the following facts :

The agreement for rendering particular services was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd. and according to the work schedule, the required work was to be completed pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th April, 1995. The work was completed before start of the monsoon. The payments were received by the assessee between 6.4.1995 to 1.6.1995. While making payments, the payer had deducted TDS. Accounts were finally settled within financial year 1996-97.

Based on the above facts, the Tribunal held that as per mercantile system of accounting the income was earned by the assessee in AY 1996-97, though the assessee had grouped this receipt as current liability. The Tribunal observed that any nomenclature given to a Revenue receipt would not change its character. It observed that it is unfortunate that this income generated by the assessee was not noticed by the Revenue and the treatment given by the assessee to this receipt was accepted by them. In AY 2003-04 when the assessee transferred the amount to capital account, the Revenue realised its mistake and tried to tax this as income in AY 2003-04 or in AY 1997-98 by reopening the assessment. The Tribunal held that since the income was not generated in those assessment years it cannot be taxed by applying any method of accounting. The Tribunal observed that the Revenue should be more vigilant to keep a check and make necessary verification if they have any doubt, but they have no power to tax the income of a different assessment year in a year in which they notice the mischief committed by the assessee. The Tribunal held that the law in this regard is very clear that the Revenue can make the assessment of any undisclosed income within the permissible limit, but they cannot tax the income of different assessment years in a year in which they notice it.

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

Case referred :

1 CIT vs. T. V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC).

Machines & Electronics Pvt. Ltd. v. Jt. CIT

ITA Nos. 163/PN/2008

S. 41(1) — Remission or cessation of liability — Receipt of advance money against order remaining unclaimed — Creditor under liquidation — Whether AO justified in treating the unclaimed sum as income — Held, No.

Facts :

The assessee had received the sum of ₹ 36.33 lakh in the F.Y. 1996-97 from a party called PMA Ltd. as advance against sales. Before the assessee could supply the material, PMA went into liquidation. The last correspondence with the party was in February 1999 when a liquidator informed the assessee about the fact of liquidation.

Applying the ratio of the decision of the Supreme Court in the case of T. V. Sundaram Iyenger & Sons Ltd., of the Chennai High Court in the case of Aries Advertising Pvt. Ltd. and of the Delhi High Court in the case of State Corporation of India Ltd., the AO treated the said unclaimed amount as the income of the assessee. On appeal the CIT(A) agreed with the order of the AO and noted that since the amount remained unpaid for a long period, it assumed the character of trade receipt taxable u/s.41(1) of the Act. He also relied on the decision of the Karnataka High Court in the case of Mysore Thermo Electric Pvt. Ltd.

Held :

According to the Tribunal, the provisions of S. 41 would apply where an allowance or deduction had been made of loss or expenditure in the assessment of earlier year and in any subsequent years the assessee availed the benefit by way of remission or cessation of such trading liability. In the case of the assessee, the impugned amount was not of the character of ‘trading liability’ for which the assessee had ever obtained any benefit or deduction or allowance in any of the past years Further, there was no evidence or any specific communication to indicate the remission or waiver of debt by the creditor. Hence, according to the Tribunal, the provisions of S. 41(1) were not applicable. For the purpose it also relied on the decisions of the Calcutta High Court in the case of S. K. Bhagat & Co. and of the Rajasthan High Court in the case of Shree Pipes Ltd. According to it, all the decisions relied on by the lower authorities were distinguishable on facts and hence, not applicable to the case of the assessee.

Cases referred to :

1. S. K. Bhagat & Co. v. CIT, 275 ITR 464 (Cal.);

2. CIT v. Shree Pipes Ltd., 301 ITR 240 (Raj.);

3. U. B. Engineering Ltd., ITA No. 1368/PN/06 dated 31-8-2009;

4. T. V. Sundaram Iyenger & Sons Ltd., 222 ITR 344 (SC);

5. CIT v. Aries Advertising Pvt. Ltd., 255 ITR 510 (Mad.);

6. CIT v. State Corporation of India Ltd., 247 ITR 114 (Del.);

7. Mysore Thermo Electric Pvt. Ltd. v. CIT, 221 ITR 504 (Kar.)

Terra Agro Technologies v. ACIT

ITA No. 1503/Mds./2010

Sections 28(iv) and 41(1) — Remission of loan liability — Loan utilised for the purpose of acquisition of capital assets — Whether loan liability remitted taxable — Held, No.

During the year under appeal, the assessee had shown ₹13.54 crore as extra ordinary income in the profit and loss account. It represented ₹6 crore as unsecured loan from corporate written back and ₹7.61 crore, being concession given by banks towards waiver of principal amount of loan. According to the AO, the said income, which was taxable u/s.28(iv), had escaped assessment. Hence, the case was reopened and income was assessed u/s.143(3) r.w.s. 147. On appeal, the CIT(A) confirmed the order of the AO.

Before the Tribunal the assessee challenged the reopening of the case and contended that the facts were known to the AO while passing the original order and it was merely a change of opinion. It was further contended that even if all the procedures are considered to be correctly followed by the AO, the reopening made on the basis of a reason was not sustainable in law. According to it, in all cases of remission of liability, it was section 41(1) which would be applicable and not section 28(iv).

The Revenue supported the orders of the lower authorities and relied on the order of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons v. CIT, (222 ITR 344) and the decision of the Bombay High Court in the case of Solid Containers v. DCIT , (308 ITR 417). According to it, the loans availed by the assessee were utilised for the purpose of carrying on of the business and therefore the AO was right in holding that it was the benefit which arose to the assessee during the course of its business and taxable u/s. 28(iv).

Held

The Tribunal agreed with the assessee and relying on the decision of the Supreme Court in the case of Commissioner of Agricultural Income Tax v. Kerala Estate Mooriad Chalapuram, (161 ITR 155) held that since the loan received was utilised for acquiring capital assets, the amount remitted was not taxable u/s. 41(1). According to the Tribunal the decision of the Chennai High Court in the case of Iskraemeco Regent Ltd. v. CIT, (196 Taxman 103) was also directly applicable to the case of the assessee. According to it, the said decision had considered the decisions of the Bombay High Court not only in the case of Solid Containers Ltd. v. DCIT, (308 ITR 417), but also that of Mahindra & Mahindra Ltd. v. CIT, (261 ITR 501). Further it was noted that the said decision had also distinguished the decision of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons, which was relied on by the Revenue. Accordingly, the appeal of the assessee was allowed.

ACIT vs. Foseco India Ltd.

ITAT ‘F’ Bench, Mumbai
Before R.S. Syal (AM) & V.D. Rao (JM)
ITA No. 7307/Mum/2007 and CO No. 63/Mum/2008
AY 2003-04; Decided on 25/3/2009
Counsel for Revenue/Assessee: J.V.D. Langstich / H.P. Mahajani

Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

The assessee had given a security deposit of ₹5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee stated that the owner had not returned the money and accordingly claimed the same as ‘bad debt’. This amount was written off by the assessee. The Assessing Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the claim for bad debt could not be allowed. No relief was allowed in the first appeal. On an appeal to the Tribunal.

Held

Sub-Section (2) of Section 36 provides that no deduction for bad debt shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee.

The Tribunal noted that this amount was not taken into account in computing the income of the assessee of an earlier or current year.

Satisfaction of the provisions of S. 36(2) is a pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had not satisfied the provisions of S. 36(2), it was not entitled to claim deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was given as security for acquiring godown for carrying on the business. The Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held that loss due to irrecoverable advance/security given for the purpose of trade is allowable. The Tribunal also noted that the Bombay High Court had in the case of IBM World Trade Corporation held that the money advanced by the assessee to the landlord for the purposes of and in connection with the acquisition of the premises on lease was not recoverable, such loss of advance was a business loss.

The Tribunal found the facts of the present case to be on all fours with the facts of the case before the Bombay High Court. It accordingly allowed this ground of the cross-objection.

Cases referred

1. CIT vs. Mysore Sugar Co. Ltd., 46 ITR 649 (SC)

2. IBM World Trade Corporation Ltd. vs. CIT, 186 ITR 412 (Bom).

Mehul H. Mehta vs ITO

ITAT ‘B’ Bench, Mumbai
Before R.K. Gupta (JM) and Rajendra Singh (AM)
ITA No. 8531 / M / 2004
AY: 2001-02; Decided on: 15/6/2009
Counsel for assessee / revenue : Pradip Kapasi / Malathi R. Sridharan

Section 28 — Non realisability of balances lying with a bank in FD and current accounts held to be allowable as business loss.

Facts

The assessee was conducting business as a proprietor. His banker was Madhavpura Mercantile Co-op. Bank Ltd. From the balance in his current account with the bank, on 12.03.2001, he received a pay order of ₹ 6.75 lakhs favouring a company in which he was a director. On the very next day, the bank collapsed due to a securities scam and the RBI suspended all its operations with immediate effect. Consequently, the pay order was not cleared. In addition, the assessee also had fixed deposits worth ₹ 4 lakhs with the bank with provision for availing credit facilities for business purposes. As there was no hope to recover any money, he claimed sum of ₹ 0.3 lakhs towards balance in his current account, the ₹ 6.75 lakhs pay order and the fixed deposit worth ₹ 4 lakhs as a business loss.

The AO disallowed the claim for the following reasons:

• The bank had not denied its liability to pay while confirming the above balance in May 2001;

• On 7.9.2001, the assessee himself had applied for revalidation of the pay order;

• The fixed deposit was a surplus fund withdrawn from the business by the assessee.

The CIT (A) confirmed the AO’s order, as according to him, the amount claimed as loss was out of the loans received by the assessee just a few days prior to the collapse of the bank. Further, he observed that even if it was accepted that the FD ₹ had been pledged for business, based on the decision of the Madras High Court in the case of Menon Impex Ltd., it did not show any direct nexus of the FDR with business.

Before the Tribunal, the revenue justified the orders of the lower authorities and submitted that the amounts written-off were in fact loans taken; and hence, it was a loss of capital and not a business loss.

Held

According to the Tribunal, though the money in the bank account was accountable as mainly loans received by the assessee, there was no dispute that the current account was being operated for the purpose of carrying on business. Therefore, according to the Tribunal, the money lost was during the course of carrying on business. Hence, the loss was a business loss. Further, relying on the decision of the Mumbai High Court in the case of Goodlass Nerolac Paints Ltd. that once it was established that an amount related to trade and had become bad, the decision of the assessee to write-off the amount in a particular year should not be interfered with, it allowed the claim of the assessee.

Cases referred to:

1. Goodlass Nerolac Paints Ltd. 188 ITR 1 (Mum)

2. Menon Impex Ltd. 259 ITR 406 (Mad)

London Star Diamond Company (I) P. Ltd. v. DCIT

In the Income Tax Appellate Tribunal “D” Bench, Mumbai
Before Vijay Pal Rao, (J. M.) and D. Karunakara Rao, (A. M.)
I.T.A. No.6169/M/2012
Assessment Year: 2009-2010. Date of Order: 11.10.2013
Counsel for Assessee/Revenue: Soli Dastur and Nikhil Ranjan/Dipak Ripote

Section 43(5) – Loss on forward exchange contracts held as incidental to export activity hence allowed as business loss.

Facts

The assessee is engaged in the business of trading and manufacturing of rough and polished diamonds. It had entered into forward contracts with the banker to safeguard against the exchange fluctuations of export considerations/sale profits as per RBI guidelines. Total of forward contracts entered into during the was ₹ 135.99 crore and the cancellation thereof aggregated to ₹ 126.3 crore. The total exports during the year was ₹ 107.57 crore. Total outstanding receivable in foreign exchange was much higher than any of these figures. It filed its return of income declaring the total income of ₹ 35.29 lakh. The AO examined the applicability of the provisions of section 43(5) of the Act in general and clause (c) of the proviso to section 43(5) in particular and held that the foreign exchange contracts constituted speculative transactions under the said provisions and treated the loss on cancellation thereof of ₹ 4.69 crore as the speculation loss and assessed the income of the assessee at ₹ 5.04 crore. On appeal, the CIT(A) upheld the order of the AO.

Before the tribunal, the revenue relied on the orders of the AO and the CIT(A) and contended that the certain data showed that the total of Forward exchange Contracts on certain dates were more than the exports receivable and also questioned the asssessee‘s failure to demonstrate the paisa to paisa and date-wise correlation between the Forward Contracts and the Export Invoices.

Held

The tribunal laid down the following principles:

• Considering the judgment of the Calcutta High court in the case of CIT vs. Sooraj Muill Magarmull (129 ITR 169) which was followed by the Bombay High Court in the case of CIT vs. Badridas Gauridu Pvt. Ltd. (261 ITR 256), it held that the Forward Contracts are commodities falling in the definition of speculative transactions governed u/s. 43(5);

• Forward exchange contracts when entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds, are to be considered integral or incidental to the export activity of the assessee and therefore, the losses or gains constituted the business loss or gains and not the speculation activities. For the purpose it relied on the decisions of the Mumbai tribunal in the case of D. Kishorekumar and Co. (2 SOT 769), the Bombay High Court in the case of CIT vs.Badridas Gauridu (P) Ltd. (supra) and the Calcutta High Court in the case of CIT vs. Sooraj Muill Magarmull (supra).

The tribunal then noted that the loss suffered by the assessee on account of the cancellation of forward exchange contract was broadly of two types viz., loss suffered on cancellation of matured contracts (₹ 4.15 crore) and loss suffered on cancellation of pre-matured contracts (₹ 64 lakh). According to the tribunal, the former being related to the Forward exchange contracts which are integral or incidental to the exports of the diamonds, should be allowed as business loss in view of the binding High Court or Tribunal decisions/ judgments in the case of D. Kishore kumar and Co ( supra), Badridas Gauridu Pvt. Ltd. (supra), Sooraj Muill Magarmull, (supra). In the case of loss suffered on cancellation of pre-matured contracts, the tribunal observed that the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it observed that it is not required that there must be 1:1 precise correlation between Forward exchange Contacts and the corresponding export invoice. So long as the total Contracts does not exceed the exports of the year plus outstanding export receivable, the Forward exchange Contracts can constitute hedging transaction‘. In the case of loss suffered on cancellation of pre-matured contracts, the tribunal allowed the loss of ₹ 42 lakh accepting the explanation of the assessee that the maturity date of those contracts fell during the weekend days and therefore, the assessee cancelled the contracts three days prior to the due date. As regards the other contracts cancelled prior to longer than three days it held that losses therefrom should also be allowed as business loss so long as the same are integral part of the exports. However, according to it, the assessee needs to answer as to why it went for premature termination and the onus was on the assessee as per the ratio of the Apex Court in the case of CIT vs. Josef John (67 ITR 74). Accordingly, to examine this part of the loss, the matter was remanded to the AO.

Section 43(5) - Derivatives include foreign currency and call/put option are transactions of derivative markets and cannot be termed as speculative in nature.

IVF Advisors Pvt. Ltd. vs. ACIT

ITA No. 4798 /Mum/2012 Assessment Year: 2009-10

The assessee, an investment management consultant, filed its return of income for assessment year 2009-10 returning a total income of ₹ Nil. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has claimed a loss of ₹ 93,63,235 on account of foreign currency futures. The AO disallowed the loss of ₹ 93,63,235 by considering it to be a speculative transaction in view of the provisions of section 43(5) r.w.s. 2(ac) of the Securities Contracts (Regulation) Act, 1956.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the assessee is not in the manufacturing and merchanting business, and is also not a dealer or investor in stocks and shares and therefore the loss on foreign currency futures is not in the nature of hedging loss and that such loss was not incurred in the course of guarding against loss through future price fluctuation in respect of contract for actual delivery of goods manufactured or in respect of stock of shares entered into by a dealer. He held that the provisions of clause (d) of the proviso to section 43(5) were not applicable. He, accordingly, confirmed the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal considered the provisions of section 43(5) of the Act and observed that clause (d) of the proviso to section 43(5) excludes the transaction of trading in derivatives referred to in section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out on a recognised stock exchange from the purview of the definition of the term `speculative transaction’. Considering the definition of the term `derivative’ in section 2(ac) of the Securities Contracts (Regulation) Act, 1956, it observed that derivatives also includes securities. It noted that the Madras High Court has in the case of Rajashree Sugar & Chemicals Ltd. vs. Axis Bank Ltd. AIR (2011), Mad 144 has defined the term derivative to include foreign currency as underlying security of the derivative. It also noted the meaning of the term `derivative’ as explained in the section `Frequently Asked Questions’ on the website of SEBI. On going through the copies of the contract notes, it found that the assessee had entered into either a call option or a put option and on the settlement day, the transaction has been settled by delivery. Either the assessee has paid US Dollar on the settlement day or has taken delivery of the US Dollar.

The Tribunal held that there remains no doubt that the transaction of the assessee cannot be treated as a speculative transaction. Derivatives include foreign currency and call/put option are transactions of derivative markets and cannot be termed as speculative in nature. The Tribunal held that the transactions entered into by the assessee were not speculative transaction and therefore, the loss incurred had to be allowed.

The Tribunal allowed the appeal filed by the assessee.

ACIT vs. GMS Motors Pvt. Ltd.

ITA No.3530/Del/2012 [Ref-BCAJ-Oct-2014]

Ss. 3, 28 – In a case where premises are taken on rent, manpower was hired, registration under MVAT and CST was obtained and deposit was paid to company whose vehicles were to be sold and sales of some spare parts had been sold, it cannot be said that the business of sales-cum-service centre has not been set up merely because sale of cars has not taken place.

Facts

The assessee was to commence a business of sale-cumservice centre. During the previous year it took the premises on rent, hired man power who were paid salaries by cheque, obtained registration required under Maharashtra VAT Act, 2002 and Central Sales Tax Act, 1956 and also deposited certain amount with Mahindra & Mahindra Ltd., whose vehicles were to be sold by the assessee. The assessee had also sold some spare parts.

The Assessing Officer (AO) disallowed expenses aggregating to ₹ 56,80,117 incurred towards financial charges and staff administrative charges on the ground that the sale of cars had not taken place during the previous year and therefore the business was not set up and hence deduction of expenses was not permissible.

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

Held

The Tribunal noted that the term `previous year’ as defined in s. 3 has a relationship with setting up of the business and not with the commencement of the business. It noted that the Apex Court has in the case of CIT vs. Ramaraju Surgical Cotton Mills Ltd. (63 ITR 478)(SC) has held that the business is set up when it is ready to discharge the functions for which it is being set up and the Delhi High Court has in the case of CIT vs. Samsung India Electronics Ltd. (356 ITR 354)(Del) has held that business commences on doing first activity like purchase of raw materials, etc.

Considering the ambit of the term `setting up of the business’ in the light of the above mentioned judicial pronouncements the Tribunal held that any income arising after the date of setting up of the business is chargeable to tax and, similarly, any expenditure incurred after the setting up of the business is deductible subject to other relevant provisions. The activities carried out by the assessee, amply demonstrate that the business was set up though sale of vehicles did not take place during the year. The Tribunal noted that it was not the case of the AO that the expenses were non-genuine or capital in nature. The Tribunal upheld the order passed by CIT(A).

The appeal filed by the revenue was dismissed.

BUSINESS INCOME OR HOUSE PROPERTY

Krishna Land Developers P. Ltd. v. DCIT

ITA No. 1057/Mum./2010

Sections 22, 28 — Rental income for letting out premises, which are duly notified as IT Park and can be used only for a specific purpose along with provision of complex service facilities and infrastructure for operation such business is chargeable to tax under the head ‘Income from Business’ .

The assessee had let out on leave and licence basis for a period of 33 months property purchased by it along with the infrastructure, equipment and facilities, which were prescribed both by the Ministry of Commerce as well as the CBDT. The I.T. Park was duly notified by the Ministry of Commerce and also by the CBDT. The assessee offered licence fees in respect of this activity, for taxation, under the head ‘Income from Business’. The Assessing Officer (AO) relying on the decision of the Apex Court in the case of Shambhu Investments P. Ltd. v. CIT, 263 ITR 143 (SC) held that the income is assessable under the head ‘Income from House Property’. Aggrieved the assessee preferred an appeal to the CIT(A).

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

Held

The Tribunal noted that the property in question was not a simple building but an I.T. Park with all infrastructure facilities and services. It observed that the Ministry of Commerce and Industries, notifies certain buildings as I.T. Park only if various facilities and infrastructure, as specified by the Department, are provided. It noted that all the technical requirements, infrastructures, facilities and services were being provided for in the building and it was for this reason that not only the Ministry of Commerce & Industries but also the CBDT notified the same as an I.T. Park which entitles the assessee to earn certain incentives. It also observed that the intention of the assessee while purchasing the property is to participate in the I.T. Park and it cannot be said that the intention is only to invest in property. The Tribunal observed that:

“The assessee is offering complex services by way of providing operation place in a notified I.T. Park, with all services and amenities such as infrastructure facilities, waiting room, conference room, valet parking, reception, canteen, 24 hours’ securities, internal facilities, high-speed lift, power back-up, etc. Just because a sister concern incurred this expenditure and claims reimbursement from the assessee, it cannot be said that the facilities are not provided for by the assessee. Whoever maintains them, the fact remains that it is the assessee who ultimately bears such expenditure for the services and undertakes to provide such services. The facilities are made available by the assessee to the person occupying the premises.”

The Tribunal noted that the Gujarat High Court has in the case of Saptarshi Services Ltd. 265 ITR 379 (Guj.) held that the income earned from business centre is to be assessed under the head ‘Income from Business and Profession’ and SLP filed by the Revenue against this judgment was rejected by the Supreme Court [264 ITR 36 (St)]. It also noted that the Mumbai Bench of ITAT has in the case of ITO v. Shanaya Enterprises, (ITA No. 3648/Mum./2010, A.Y. 2006-07, order dated 30th June, 2011) held that when the property is used for specific purposes and in the nature of providing complex services, the income is taxable under the head ‘Income from Business’.

Applying the propositions laid down in the abovementioned decisions, the Tribunal held that since the property can be used only for a specific purpose i.e., I.T. operation and the assessee has provided complex service facilities and infrastructure for operating such business, the income in question be assessed under the head ‘Income from Business & Profession’. It set aside the order passed by the CIT(A) and allowed this ground of the assessee’s appeal.

ITO v. Shanaya Enterprises

ITA No.3648/Mum/10,
Mumbai Bench ‘J’, Order dated 30/06/2011

Property Rental assessable as “business profits” if commercial activities carried out

The assessee let out its studio to production houses for shooting TV serials etc and offered the hire charges to tax as “business income”. The AO relied on Sultan Brothers vs. CIT 51 ITR 353 (SC) & CIT vs. Shambhu Investments 263 ITR 143 (SC) and held that as the “main intention” was letting out of property, the hire charges was assessable as “Income from house property“. The AO noted that TDS on the hire charges was deducted u/s 194-I. On appeal, the CIT (A) reversed the AO on the ground that the assessee had “exploited the property by way of commercial activity” and the receipts constituted “business income“. On appeal by the department to the Tribunal, HELD dismissing the appeal:

1. The law laid down in CIT vs. Shambhu Investment 249 ITR 7 (Cal) approved in 263 ITR 143 (SC) is that merely because income is attached to immovable property cannot be the sole factor for assessment of such income as income from property. What has to be seen is the primary object of the assessee while exploiting the property. If the main intention is to let out the property, the income is assessable as “income from house property” while if the main intention is to exploit the immovable property by way of complex commercial activities, the income is assessable as business income {Sultan Brothers 51 ITR 353 (SC) explained as not being in conflict with Shambhu Investments 263 ITR 143 (SC)};

2. On facts, the case was not one of simplicitor renting of premises but there was significant value addition to the premises by providing all incidental and support services to facilitate cine shooting and related activities. The assessee had exploited the property by way of “complex commercial activities”. It was a “commercial adventure” involving marketing and promotions as also appropriate improvisations on a case to case basis. Accordingly, the hire charges were assessable as “business profits”. The fact that tax was deducted u/s. 194-I was irrelevant.

BUSINESS INCOME OR CAPITAL GAINS

ITO v. Navneet Kumar Malpani

ITAT ‘B’ Bench, Jaipur
Before I.C. Sudhir (JM) and B.P. Jani (AM)
ITA No.223/Jp/2006
AY 2001-02 : Decided on 27-8-2007
Counsel for revenue/assessee:Sanjay Kumar / Mahendra Gargieya and Shravan Gupta

S. 14 of the Income tax Act, 1961 – Heads of Income – Loss on sale of units in mutual fund – Assessee’s claim to treat it as business loss and allow it to be set off against his other income rejected by AO holding the same as capital loss – On facts held that loss was business loss and can be set off against other income

Per B. P. Jain

Facts

During the year under appeal, the assessee had earned dividend of ₹ 2.77 lakh and suffered a loss of ₹ 2.63 lakh on sale and purchase of the mutual fund units. In his return of income filed, the dividend income was claimed as exempt and the loss was claimed as short-term capital loss. Subsequently, during the assessment proceedings, the assessee claimed that the loss be treated as business loss and be set off against his other income. The AO, relying on the Supreme Court decision in the case of McDowell and Co., observed that the assessee had adopted a dubious method to avoid tax. Accordingly, he treated the loss as capital loss and set off the same against the dividend income. Thus, the assessee’s claim to treat the loss as business loss and to set it off against his other income was rejected. On appeal, the CIT(A) allowed the appeal of the assessee.

Held

The Tribunal noted that :

• The assessee was engaged in frequent transactions of purchase and sale of shares and units in mutual funds.

• The units of mutual funds were purchased from open market and were not allotted to him on application.

• The entire holding was also sold in the open market.

• The period of holding was short.

• In accounts, the assessee had treated the same as profit from trading in shares and mutual funds.

Thus, according to it, the totality of facts and circumstances suggested that the assessee intended to do a business in shares and mutual funds. Therefore, according to it, the resultant loss or profit had to be held as loss from business. In support, it also relied on the decisions listed at Serial Nos. 1 to 3 below. Accordingly, the CIT(A)’s order was upheld and appeal of the Revenue was rejected.

Cases referred to :

1. CIT v. Karam Chand Thapar & Sons Ltd., 115 ITR 250 (Cal.);

2. CIT v. Vikram Cotton Mills Ltd., 169 ITR 597 (SC);

3. Neerja Birla v. ACIT, 66 ITD 148 (Mum.);

4. McDowell and Co. v. Commercial Tax Officer, 154 ITR 148 (SC).

Editor’s Note : This decision was for a period prior to insertion of S. 94(7), w.e.f. A.Y. 2002-03, provisions of S. 94(7) would also have to be considered.

ACIT v. Sai Ashish Bandra Co-op. Hsg. Soc. Ltd.

ITAT ‘E’ Bench, Mumbai
Before R.K. Gupta (JM) and A.K. Goradia (AM)
ITA No. 5232/Mum./2004
AY: 2000-01; Decided on: 22/8/2007
Counsel for assessee / revenue : Vijay Mehta / K. Kamakshi

S. 28 and S. 45 — Gains arising to the society on sale of 50% of the areas constructed by the builder, at his own cost, by utilising additional FSI received by society from BMC in lieu of roads taken over by BMC are chargeable to tax as Capital Gains.

Per R. K. Gupta

Facts

The assessee co-operative society was formed in 1971. The land on which the building of the society stood had roads on two sides. The BMC acquired some part of the society’s land in 1991 and again in 1994 for the purposes of road widening and as compensation therefor granted additional FSI to the society which the society decided to utilise on existing building. Accordingly, the society entered into an Agreement with the builder pursuant to which the builder agreed to put up the entire construction at his own cost and in turn would be entitled to 50% of the area of the constructed flats. The society was entitled to the balance 50% of the area of the constructed flats. The construction was completed in 1999. Upon completion of construction, the flats coming to the share of the society were sold for ₹ 1,06,18,000. The sale consideration of flats was returned by the society as long term capital gains. The AO reassessed this amount under the head ‘Income from Business’ on the ground that the society did not have funds for construction and therefore it indirectly has obtained loan from the builder and has instructed the builder for appointing architect for getting various sanctions of plans and approvals to construct the flats. These factors, according to him, were indicative that the society was engaged in a trade with profit motive.

Aggrieved, the society preferred an appeal to the CIT(A) where it contended that the income be assessed as long term capital gains or alternatively, if it is assessed as business income, then, in terms of S. 45(2), fair market value of FSI on date of conversion should be taken as cost for computing profits of the said business. The CIT(A) held that the income was chargeable to tax as ‘Income from Capital Gains’.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

There is no evidence on record that the amount spent by the assessee was loan. The builder was to put up construction at its own cost and in turn would be entitled to 50% of the area of the constructed flats and after completion of the project the remaining 50% of the area shall be given to the society which can be sold by the society. BMC had allowed FSI to the society in lieu of land taken over by the BMC. The Tribunal concurred with the findings and decision of the CIT(A) viz. that there were no business considerations in undertaking the transaction by the assessee, the assessee could have either sold FSI or utilised it by constructing additional areas; by deciding to utilise it in construction of additional areas it had maximised its gains but maximisation of gains cannot by itself impress a transaction with the character of business; the society did not have profit sharing arrangement with the builder; the transaction under consideration cannot be held to be a business transaction.

The Tribunal dismissed the appeal filed by the Revenue.

DCIT v. Mahender Kumar Bader (ITAT Jaipur)

ITA No.605/Jp/2013; AY 2008-09
Order dated 18.03.2016

In view of CBDT Circular No. 6/2016 dated 29.02.2016, if assessee has consistently shown shares as an “investment” and offered gains as capital gains, AO is not entitle to urge that the same constitutes “stock-in-trade” and assess gains as business profits on grounds that there were substantial and frequent transactions and motive was to earn profit and holding period of such shares was very short.

Held

Before us the moot question which is required to be decided is whether the income earned by the assessee on account of share is required to be treated as business income or required to be treated as short term capital gain. After the matter was heard on 11.02.2016, the CBDT came out with the Circular No. 6/2016 dated 29.02.2016 in the following manner. In view of the circular, we have clearly noticed that the issue raised in this appeal stands fully covered by the Circular issued by the CBDT. Since the assessee has treated the securities as investment and not as stock in trade in all the years, therefore, in view of the CBDT Circular No. 6/2016 dated 29.2.2016 , the revenue is not permitted to take a contrary view in the present year and claimed that the security is stock in trade and, therefore, the profit/gain caused to the assessee be treated as business income. In our view, there is no merit in the contention of the revenue and is deserves to be dismissed in view of the circular - CIT vs. Karamchand Thapar & Sons Ltd. 115 ITR 250 (Cal.) Trupti Investment Co. vs. ITO 35 ITD 200 (ITAT Ahmedabad) ITA No. 605/JP/2013 DCIT vs. Shri Mahender Kumar Bader CIT vs. Sugar Dealers 100 ITR 424 (All.) CIT vs. Guest Keen & Neetlefold Ltd. 115 ITR 205 (Cal.) CIT vs. Manna Lal Nirmal Kumar Surana 264 ITR 116 (Raj.) CIT vs. Simpson General Finance Co. Ltd. 230 ITR 222 (Mad.) ACIT vs. Khetan Kumar A Shah, 242 ITR 83 (Kerala) Ashoka Viniyoga Ltd. vs. CIT 70 ITR 381

Nagindas P. Sheth HUF v. ACIT

I.T.A. Nos.961/Mum/2010 & 1836/Mum/10
Mumbai Bench ‘G’, Order dated 05/04/2011
AY 2006-07

Capital Gains vis-à-vis business income – Share transactions – Despite large number of share transactions, profits assessable as capital gains.

The assessee HUF offered income from sale of shares as short-term capital gains (STCG). The AO held the income to be business profits on the ground that (i) the assessee had 158 share transactions in the year which showed the intention to trade, (ii) The regularity and frequency of transactions showed no intention to hold shares to earn dividend and (iii) Instead of one or two demat accounts, the assessee had adopted a professional approach and transacted through several brokers On appeal, the CIT (A) held that profit on sale of shares held for less than 30 days was business profits while other profits was STCG. On appeal by the assessee and department, HELD deciding in favour of the assessee:

The fact that the assessee has transacted in 158 shares should not be the sole criterion to come to the conclusion that assessee is a trader in shares. The gains earned by the assessee deserve to be assessed as capital gains because:

1. The assessee was holding the shares in its books as an investor;

2. The assessee did not have any office or administration set up;

3. The shares were acquired out of own funds and family funds and not through borrowings;

4. there was not a single instance where the assessee had squared-up transactions on the same day without taking delivery of the shares;

5. In the previous and subsequent assessment years, the AO had vide scrutiny assessments treated the assessee as an investor.

DCIT v. Shri Mahender Kumar Bader

ITA No.605/JP/2013, Jaipur Bench,
Order dated 18/03/2016
AY 2008-09

Capital Gains – Huge frequency – Repititive transactions – Shares held as investments - Not Business income – In view of CBDT Cir. No. 6/2016 dated 29.02.2016

Facts

The details submitted by the assessee along with return of income and during the course of assessment proceedings, D-mat account of assessee and transactions in D-mat account of broker reveals that assessee has done voluminous transactions in shares & units. The transactions are frequent and amount involved is very large. The assessee has done many transactions of purchase & sale during the year. The volume of transactions can be ascertained from the details of shares transaction entered into by the assessee. On careful analysis of the entire portfolio and resultant purchase and sale of scrips, the AO observed that the transactions entered into by the assessee are numerous periodic, repetitive with great amount of regularity & periodically. The AO also observed that there has been a systematic and regular trading pattern and shares have been purchased and sold at very regular intervals. This feature is seen in respect of buying of shares of a single company or in respect of buying and selling of shares of many a company for a very short holding period of a few days and few months. It is well settled that whenever an activity is periodic, systematic and regular with a clear profit motive it can certainly assume the character of a business activity. During the assessment proceedings, the assessee explained that he is investing with intention to keep invested in shares for the purposes of earning income from capital gains and dividend thereon. The AO found the explanation of the assessee unacceptable seeing the details furnished by the assessee as hardly one can earn any dividend with such short period of holdings. The AO noticed that the average holding period in many scrips ranges from merely few day to few months. From the details furnished it is clear that out of total no. of shares, most of transactions held is for less than 5 months, many of the shares have been sold within few days of purchase.

Held

The moot question which is required to be decided is whether the income earned by the assessee on account of share is required to be treated as business income or required to be treated as short term capital gain. After the matter was heard on 11.02.2016, the CBDT came out with the Circular No. 6/2016 dated 29.02.2016 in the following manner :-

“ Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-intrade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.”

Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.

3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following-

1. Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,

2. In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

3. In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.

 4. It is however clarified that the above shall not apply to such transactions in shares/securities where the genuineness of the transaction is itself questionable such as bogus claims of long term capital/short term capital loss or any other sham transactions.

5. It is reiterated that the above principles have been formulated with the sole object of reducing the litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.”

In view of the circular, we have clearly noticed that the issue raised in this appeal stands fully covered by the Circular issued by the CBDT. Since the assessee has treated the securities as investment and not as stock in trade in all the years, therefore, in view of the CBDT Circular, the revenue is not permitted to take a contrary view in the present year and claimed that the security is stock in trade and, therefore, the profit/gain caused to the assessee be treated as business income. In our view, there is no merit in the contention of the revenue and is deserves to be dismissed in view of the circular.

Ramesh Babu Rao v. ACIT

ITA No.3719/Mum/2009
Mumbai Bench ‘D’, Order dated 13/04/2011
AY 2005-06

Capital Gains vis-à-vis business income – Large volume in shares – Not deciding factor to hold assessee as trader

The assessee, a retired professor, offered gains from sale of shares as short-term capital gains (STCG). The AO assessed the gains as business profits on the ground that (a) in the earlier years, the assessee had offered similar gains as business profits and the volume of transactions was higher in the present year, (b) there were 54 scrips which were purchased and sold during the year which resulted in sales of more than ₹ 24 crores, (c) In one particular share, the assessee purchased on 54 occasions and sold on on 25 occasions within a short duration. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

The assessee was an investor and the gains are assessable as capital gains because:

1. The assessee was a good timer of purchase and sale of shares thereby substantially increasing his gains in the stock market;

2. The large turnover was because of bulk purchases and sales in a scrip. There were very few transactions of purchase and sale, as the assessee was purchasing in block of a particular share in large volume. Accordingly, large volume cannot be a deciding factor to hold as a trader;

3. The assessee was not a broker or sub-broker and did not have any office establishment;

4. The assessee did not do any speculative activity nor indulge in any sales without delivery;

5. The shares were shown as capital assets in the books of account;

6. The assessee had not pledged any shares with any financial institutions, nor borrowed any funds

ACIT v. Naishadh V. Vachharajani

ITA No.6429/Mum/2009
Bench ‘B’, Order dated 25/2/2011; AY 2006-07

Business income v. Capital gains – Assessee showing investment in shares – Period of holding of shares very short and high volume – Profit on sale of shares assessable as short term capital gains.

The assessee, a marine consultant, offered income by way of LTCG, STCG, speculative profit & profit from futures trading. The AO held that as the volume of transactions was high (222), the period of holding of the STCG shares was short (2 -5 Months) & there was speculation & F&O profit, the LTCG & STCG was assessable as business profit. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

1. As regards the LTCG, the shares were held for several years and so the assessee has acted as investor and not as a trader and so the gains are assessable as LTCG;

2. As regards the STCG, the view of the CIT(A) had to be upheld because

1. There was no intra-day trading,

2. Most of the shares were held for a period of 2 to 5 months,

3. In the preceding AY, the AO did not assess the STCG as business income and on the principles of consistency, a different view cannot be taken on the same facts,

4. The assessee has no borrowings and

5. Merely because there was a speculative business does not mean that even delivery based transactions of shares should be assessed under the head business.

[Editorial Note: This decision of the Tribunal is upheld by Bombay High Court]

ACIT v. Vinod K. Nevatia

ITA No.6556/Mum/2009
Bench ‘F’, AY 2005-06, order dated 3/12/2010

Capital gains or business income – Short period of holding shares does not per se suggest business activity

The assessee, a stock broker with NSE, offered short-term capital gains (“STCG”) of ₹ 47.23 lakhs. The AO assessed the STCG as business profit on the ground that (a) the purchase to sale ratio was higher than the ratio in the earlier year and (b) the assessee had borrowed funds of ₹ 21.73 crores which were mixed with common funds and not segregated and (c) the assessee had not been able to show his intent to hold the scrips. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

1. In Circular No. 4/2007 dated 15.6.2007 the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio and a trading portfolio;

2. The assessee had maintained separate books of account as well as separate demat accounts in respect of his trading & investment activity. The manner in which books are kept is an important piece of evidence as per Raja Bahadur Visheshwar Singh vs. CIT 41 ITR 685 (SC);

3. Whether the assessee’s conduct is that of an investor or a trader depends on the facts and circumstances of the case. No single fact is decisive nor has any acid test been laid down in any judgment;

4. Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares;

5. On facts, the AO proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. However, it was categorically pointed out before the CIT(A) that no part of the borrowed funds was utilized for acquisition of shares on investment account. Nothing was brought on record by the department to controvert this fact;

6. Further, the AO accepted the assessee’s claim of LTCG to the extent of ₹ 2 crore which implies that he has accepted the assessee’s claim regarding holding investment portfolio.

Nehal V. Shah v. ACIT

ITA No.2733/Mum/2009
Bench ‘B’, AY 2005-06, order dated 15/12/2010

Capital gains or business income – Multiple orders for purchase/ sale of shares may constitute one transaction

The assessee offered short term capital gain (STCG) of ₹ 1.07 crore on sale of shares. The AO held the assessee to be a trader in shares & assessed the gains as business profits on the ground that (a) there was high frequency of 127 purchase & 83 sale transactions, (b) there were instances where delivery was not taken and shares were sold within a short period, (c) 88% of the shares sold were purchased during the year and (d) the available capital was turned over 85 times to make purchases of ₹ 23 crore & sales of ₹ 29 crore. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

1. The AO had not correctly calculated the number of transactions because sometimes a single transaction is split by the computers trading of the stock exchanges into many smaller transactions but that does not mean that assessee has carried so many transactions. If someone places an order for purchase of 1000 shares and the same is executed by the electronic trading system of stock exchange into 100 smaller transactions, it does not mean that 100 transactions have been entered into. The assessee had carried out only 31 purchase and 25 sale transactions which cannot be said to be a great volume of transactions;

2. At the end of the year, the assessee was holding shares worth ₹ 11.56 crore with a market value of ₹17.69 crores. If assessee was a trader, he would have definitely realized the huge profit of almost ₹ 6 crore immediately and not carried out the stock to the next year;

3. The transactions in which no delivery was taken and it was settled in the same day appear to be cases where the particulars were wrongly carried out on behalf of the assessee by the broker & that’s why assessee got them settled on the same day;

4. The assessee has not borrowed any money and he was occupied full time in the business of garments;

5. In identical circumstances in the case of the assessee’s sister, the Tribunal had decided in favour on the ground that (a) the assessee’s background did not indicate she was familiar with the share business, (b) there was no borrowing for the shares, (c) the shares were shown as a capital asset in the balance sheet, (d) the AO had accepted the LTCG, (e) the average investment in one scrip is taken was about ₹ 45.00 lakhs which appeared to be too high for an individual to hold as stock-in-trade, (f) the portfolio contained many shares of blue chip companies, (g) there were no dealings in futures and options and (h) about 30 scrips were sold and there were 49 purchases & 43 sales (treating multiple lots on the same day as one transaction).

Radials International v. ACIT

ITA No.1368 (Del) of 2010, AY 2006-07,
Bench ‘F’, Order dated 16/12/2011

Capital Gains v. Business Income – Long term and short term gains on sale of shares – Transactions done through PMS – Transactions taxable as business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO & CIT (A) held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, Held dismissing the appeal:

In a Portfolio Management Scheme, the choice of securities and its period of holding is left to the portfolio manager and the assessee has no control. Only the portfolio manager can deal with the Demat account of the assessee. While, at the time of depositing the amount, the assessee will make entry in his books of account as investment in PMS, he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. Since the assessee comes to know about the purchase and sale of shares under PMS after the expiry of the quarter, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of the year the shares available in the DEMAT account can be entered. Therefore, at the time of deposit of amount, the intention of the assessee was to maximize the profit. As the purchase and sale of shares under PMS is not in the control of the assessee at all, it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The portfolio manager carried out trading in shares on behalf of his clients to maximize the profits. Therefore, it cannot be said that shares were held by the assessee as investment . The fact that the transactions were frequent and its volume was high indicated that the portfolio manager had done trading on behalf of the assessee. The fact that the shares remaining at the end of the year were shown under the head ‘investment’ makes no difference. Even the LTCG is assessable as business profits and s. 10(38) exemption is not available. The fact that the AO took a contrary view in the preceding year is irrelevant. There is no difference between similar transactions carried out by an individual in shares and the transactions carried out by portfolio manager. There is, however, a difference between investment in a mutual fund and PMS.

CAPITAL RECEIPT

ACIT vs. Goodwill Theatres Pvt. Ltd.
ITAT Mumbai `G’ Bench
Before R. K. Gupta (JM) and N. K. Bllaya (AM)
ITA No. 8185/Mum/2011
A.Y.: 2008-09. Decided on: 19th June, 2013.
Counsel for revenue / assessee: D. K. Sinha /Vijay Mehta

Mesne Profits received, for unauthorised occupation of the premises, constitute capital receipt not chargeable to tax. The decision of the Madras High Court in the case of CIT vs. P. Mariappa Gounder (147 ITR 676) is distinguishable on facts. Mesne profits, being capital receipts, were deductible while computing book profits u/s. 115JB.

Facts I

During the year under consideration the assessee company received mesne profits for unauthorized occupation of the premises from Central Bank of India who was in possession of rented premises belonging to the assessee.

The tenancy of Central Bank of India (“the Bank”) ended on 1-6-2000. The Bank handed over possession of the premises to the assessee on 30-09- 2003 though the Supreme Court had vide its order directed the bank to handover the possession by 30-6-2003. The Small Causes Court vide its order dated 28-3-2007 (received by the assessee on 30th June, 2007) disposed off the suit filed by the assessee company for mesne profit for the period 1-6-2000 to 30-9-2003 by fixing the compensation to be ₹ 3,33,38,960 plus interest thereon at 6% i.e. ₹  8,33,474 per month.

The application of the Bank to stay execution and operation of the order dated 28-3-2007 was disposed of by the Small Causes Court by directing the Bank to pay ₹ 1,47,28,280. The Bank also filed an appeal against the determination of mesne profits, which appeal was admitted and was pending. In the meantime, the Bank paid assessee company ₹ 1,47,28,280 which the assessee regarded it as capital receipt. The Assessing Officer relying on the ratio of the decision of the Madras High Court in the case of P. Mariappa Gounder 147 ITR 676 (Mad) considered this amount to be chargeable to tax.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that in the case before the Madras High Court which has been affirmed by the Supreme Court the issue was of the year of taxability of mesne profit. Relying on the ratio of the decision of Special Bench of Mumbai Tribunal in the case of Narang Overseas P. Ltd. 111 ITD 1, appeal against which was dismissed by Bombay High Court vide order dated
25-6-2009 (ITA No. 1797 of 2008), the CIT(A) allowed the appeal of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Fact II : The assessee had treated the sum of ₹1,47,28,280 as capital receipt and had taken it directly to capital reserve account without crediting the profit & loss account. The AO held that since the receipt is revenue in nature the same needs to be added back to book profit in view of the provisions of section 115JB. He brought the same to tax while computing the book profits.

Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the addition by observing that the receipt is capital in nature. However, while deleting the addition he observed that since the mesne profit is reflected in profit & loss account, it is rightly taxable for computing book profit, hence, on principle, the findings of AO were upheld.

Aggrieved by these observations the assessee preferred an appeal to the Tribunal.

Held I : The Tribunal noted that the AO decided the issue against the assessee by following the decision of Madras High Court in the case of P. Mariappa Gounder ( supra). The Special Bench of the Mumbai Tribunal has while deciding the case of Narang Overseas (supra) considered the decision of the Madras High Court and also the decision of the Supreme Court confirming the decision of the Madras High Court. It also noted that the decision of the Special Bench has been confirmed by the Bombay High Court vide order dated 25-6-2009. The Tribunal found the order of CIT(A) to be in consonance with the order of the Special Bench. The Tribunal confirmed the order of the CIT(A) on this issue.

Held II: The Tribunal held that since the mesne profit is capital in nature in view of the decision of the Special Bench, they cannot be brought to tax u/s. 115JB of the Act. Even Explanation 2 to section 115JB supports the case of the assessee. CIT(A) was justified in deleting the addition computed by the AO u/s. 115JB of the Act. The Tribunal observed that the assessee’s counsel is correct in objecting to the findings of the CIT(A).

CAPITAL GAINS

DCIT vs. Kemper Holding Pvt. Ltd.
ITAT Mumbai `A’ Bench
Before Sanjay Arora (AM) and Sanjay Garg (JM)
ITA Nos. 6426/M/2011
A.Y.: 2008-09.
Decided on: 26th April, 2013.
Counsel for revenue/assessee: Surinder Jit Singh/Pradeep Sagar

Section 2(47) – Conversion of warrants into shares is neither an extinguishment nor relinquishment of any rights in the assets.

Facts

During the financial year 2006-07 the assessee was allotted 7,00,000 warrants of ₹ 100 each. 10% of the cost of the warrant was paid on allotment and the balance 90% was to be paid at the time when the warrants were to be converted into shares. During the financial year 2007-08, the assessee paid the balance 90% and the said warrants were converted into shares. The market price of each share on the date of conversion was ₹ 231.35.

The Assessing Officer (AO) held that the assessee while exercising his option for conversion of warrants into equity shares had extinguished his rights in warrants and simultaneously gained rights in equity shares. He held that the shares were purchased at the price of ₹ 100 when their market value was ₹ 231.35. Therefore, he held that the assessee had gained a benefit of ₹ 131.35 per warrant. Thus ₹ 9,45,00,000 was charged to tax as long term capital gain in the hands of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who deleted the addition of ₹ 9,45,00,000 on the ground that there was no transfer at all and the AO had taken market value of the shares to be the full value of consideration. He even rejected the alternative contention of the AO that the said benefit is taxable u/s. 28(iv) of the Act.

Aggrieved the revenue preferred an appeal to the Tribunal.

Held :

The conversion of warrant into shares by paying the remaining 90% amount was neither any extinguishment nor relinquishment of any rights in the assets. It observed that the assessee had purchased the warrants by paying 10% of the pre-determined price of the shares. There was an option for the assessee to get the said warrants converted into shares by paying 90% of the amount within the stipulated period, the non payment of which would have resulted in forfeiture of money. So the money paid for warrants was just an advance payment for the purchase of shares and the assessee exercised its rights within the stipulated time and got the shares allotted by paying the remaining 90% amount at the predetermined value of the shares. It can be said to be an investment in shares. The capital gain would have arisen if the assessee would have sold the said shares in the market at a higher price. The shares have been retained by the assessee and the gain or fall in the market value of the said shares does not itself constitute any transfer under the Act. The purchase of shares at a specified rate, which were booked by paying 10% amount in advance neither amounts to any transfer of shares or warrant by the assessee nor does it invite any tax liability under the Act. The Tribunal also held that the AO has wrongly and illegally interpreted proviso (iv) to section 48 of the Act. The Tribunal confirmed the order passed by CIT(A).

The Tribunal dismissed the appeal filed by the revenue.

DCIT v. Hemal Raju Shete
ITAT Mumbai `H’ Bench
Before P. M. Jagtap (AM) and Dr. S. T. M. Pavalan (JM)
ITA No. 2198/Mum/2010
A.Y.: 2006-07. Decided on: 10th July, 2013.
Counsel for revenue/assessee: P. K. Shukla/J. D. Mistry & M. A. Gohel.

Sections 45, 48. What is to be taxed is the gain received or accrued. Accordingly, deferred consideration under the share sale agreement cannot be taxed. Maximum cap provided in the agreement cannot be equalled either with sale value nor with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of calculating capital gains.

Facts

The assessee filed its return of income for AY 2006-07 declaring total income of ₹ 11,68,470. The assessee had shown long term capital gain of ₹ 42,38,674 on sale of 75,000 shares of Unisol Infrastructures Ltd and had claimed exemption u/s. 54EC by investing the sale proceeds in bonds of SIDBI. In the course of assessment proceedings, on examining the agreement dated 25.1.2006 pertaining to transfer of shares the Assessing Officer (AO) noticed that the said agreement grants absolute right to the assessee as well as other transferors to receive the specified amount in a deferred manner with nomenclature of `initial’ and `deferred’ consideration being employed.

The AO reworked the share of the assessee in the alleged total consideration `accrued’ to the transferors by clubbing the initial consideration and deferred consideration and thereby assessed the capital gain at ₹ 4,91,94,923. He therefore made an addition of ₹ 4,48,54,923 to the total income returned by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee since according to him the deferred gain could not be taxed as the gain was not received nor accrued to the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee it was pointed out to the tribunal that clause 3 of the agreement dealing with consideration provided that ₹ 20 crore is the maximum limit. This clause served as a cap to the effect that the aggregate of initial and deferred consideration shall not exceed the cap of ₹ 20 crore. The manner of computation of deferred consideration was explained to demonstrate that the assessee may or may not get the deferred consideration. It was pointed out that since there was no certainty of receiving the amount and also that the quantum to be received was not known, taxing the maximum cap provided is not tenable.

Held

On perusal of the agreement the tribunal found that the amount of ₹ 20 crore was the maximum amount which could be received by the assessee’s group. This amount comprised initial consideration and deferred consideration. There was no guarantee for receipt of this maximum amount by the assessee’s group. In view of these facts, the tribunal agreed that what is to be taxed is the gain received or accrued and not the notional/hypothetical income. It held that the decision of the Supreme Court in the case of CIT vs. George Henderson & Co. Ltd. and that of ITAT in Mrs. Alpana Piramal, relied upon by DR have no application as the ratio in the said cases is applicable when the dispute relates to adopting the full value of consideration visà-vis the sale consideration which is not the case in the present appeal. Maximum cap mentioned in the agreement cannot be equated either with sale value consideration (sic sale consideration) or with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of claiming capital gains. The Tribunal upheld the order passed by CIT(A).

The appeal filed by the revenue was dismissed.

Om Shanti Co-op Hsg. Society Ltd. v. ITO

ITAT ‘C’ Bench, Mumbai
Before D. Manmohan (VP) and R.K. Panda (AM)
ITA No. 2550/Mum./2008
AY: 1999-2000; Decided on:28/8/2009
Counsel for assessee / revenue : Subhash Shetty / Virendra Ojha

Ss. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

Facts

The assessee, a co-operative society, on request of the developer granted him permission to construct 2 floors having 8 flats, on the existing building of the assessee by utilising TDR FSI available to the developer. As consideration, the developer paid ₹ 26 lakhs to the assessee and ₹ 5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of land on which 12 flats were constructed by utilising maximum FSI available to them. These persons formed a society. Since the assessee had no right to construct further structure, there was no question of exploiting any of its available right so as to earn income out of it. The assessee had regarded the amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by the assessee-society resulted into transfer by way of relinquishment of the right i.e., ‘to load TDR and construct additional floors’ and since there was no cost of acquisition, in absence of details, he taxed the entire consideration of ₹26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A) who enhanced the assessment and charged even ₹66 lakhs, being the amount paid by the developer to individual members of the society, as long-term capital gains in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The assessee and its members had exhausted the right available while constructing the flats and therefore the assessee and its members had no right to construct additional floors on the existing building. The Tribunal noted that TDR was not obtained by the assessee and sold to the developer. The Tribunal held that the assessee had not transferred any existing right to the developer, nor any cost was incurred/suffered prior to permitting the developer to construct the additional flooe Since there was no cost of acquisition, following the ratio of the decision of the Apex Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held to be not assessable as capital gains.

The Tribunal dismissed the appeal filed by the Revenue.

Cases referred to :

1. CIT v. B. C. Srinivasa Setty, (1981) 128 ITR 294 (SC)

2. Deepak S. Shah v. ITO, (2009) 29 SOT 26 (Mum.)

3. M/s. New Shailaja CHS Ltd. v. ITO, ITA 512/M/2007 dated 2-12-2008

4. Maheshwar Prakash-2 Co-op Hsg. Soc. Ltd v. ITO, (2009) 118 ITD 223 (Mum.)

ITO v. Ashok Hindu Co-op. Hsg. Soc. Ltd.

ITAT ‘D’ Bench, Mumbai
Before N.V. Vasudevan (JM) and R.K. Panda (AM)
ITA No.630/Mum/2006
AY: 2002-03; Decided on 29-9-2008
Counsel for revenue / assessee: K.K. Mahajan / Satish Modi

S. 45. Beneficial ownership of the balance FSI and right to use TDR was that of the members of the society. The members transferred the rights and received consideration for such transfer.

Facts

The assessee-society was the owner of land together with two buildings situated thereon. The society had sixteen members who held, on ownership basis, sixteen flats in the said buildings. It was possible to construct additional flats on the existing buildings by utilising balance FSI of the property and FSI that may be obtained from other properties under the TDR scheme. The total area of the property was 1063.60 sq. mts., it was possible to construct 11,448 sq. feet on the said property by procuring TDR FSI.

The society, at its Special General Body Meeting held on 15th July, 2001 passed a resolution to the effect that the benefit of constructing additional flats by utilising any FSI available on the said property and by bringing in TDR/FSI belongs to the members equally. Each member thus became entitled to 715.50 sq. feet by way of TDR/FSI. The society agreed that each member would be entitled at their own costs to procure proportionate TDR/FSI and to use his/her respective entitlement for constructing a new flat for himself or each member may grant development rights to a common developer.

The developer vide agreement dated 29-8-2001 agreed to pay to the society an amount of ₹1,76,000 as well as carry out works of repairs and improvements to the existing buildings and compound of the society in consideration of the society permitting the developer to construct additional floors from the entitlement of each of the members of the society.

The developers agreed to pay each of the members a lump sum of ₹7,00,000 as compensation for inconveniences and hardships faced or to be faced by the members during and on account of additional construction. Further, in consideration of the member granting development rights in respect of his/her entitlement to the developers, the developers agreed to pay the member a lump sum monetary consideration of ₹ 7,20,000.

In the course of assessment proceedings u/s. 147, the assessee took the stand that by virtue of a resolution passed by the Managing Committee of the society, the society has specifically authorised each of the members to sell and transfer their proportionate rights in the FSI and development of the building with the consent of the society, which means the society has renounced its rights in favour of individual members and on the basis of this resolution and upon renouncement of the rights in favour of individual members, the members were fully authorised and having accepted the renunciation, have a legal sanction to sell their proportionate right to the builders for development. The income received by individual members is their individual income and the same is not liable to be taxed in the hands of the society. The members had filed their return of income offering to tax receipts on sale of their rights. The AO held that since the society is the owner of the plot of land, the FSI/TDR is available to the society and individual members cannot transfer the FSI/TDR directly to the developers He taxed the entire compensation received (including amounts received by the members) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who upon considering the definition of the term ‘society’ as defined in the Maharashtra Co-operative Societies Act and also the fact that the Bombay Stamp Act provides for payment of stamp duty by each member at the time of purchase of individual flat and that such registered agreements are deemed to be conveyance, held that capital gains have to be taxed in the hands of the members of the society who have accounted for the same in their individual returns of income. He allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal held that the order passed by the CIT(A) does not call for interference. It held that the beneficial ownership was that of the members of the society. It was the members who transferred the rights and received consideration for such transfer. The Tribunal agreed with the view of the CIT(A) holding the conclusion of the AO to the contrary to be not proper.

The appeal filed by the Revenue was dismissed.

Auro Ville Co-op. Hsg. Soc. Ltd. v. ACIT

ITAT ‘H’, Bench
Before Pramod Kumar (AM) and Smt. Asha Vijayraghavan (JM)
ITA No.570/Mum/2008
AY: 2004-05; Decided on 31-3-2010
Counsel for assessee / revenue: Tarun Ghia / S.K. Pahwa

S. 45. According to Circular No. 9, the legal ownership in flats vests in individual members and not in the co-operative society - Flat owners have proportionate interest in the land and building - Amount received for permitting developer to construct additional area - Held not income of the society.

Facts

Vide development agreement dated 15-2-2004 entered into between the assessee society, its members and the developer, the assessee society allowed the developer to construct an additional area aggregating to 30,000 sq.ft for a consideration of ₹ 10.41 crore. Of this sum of ₹ 10.41 crore an amount of ₹ 15 lakhs was retained by the assessee and the balance amount was distributed amongst its members in proportion to area of the flat. The assessee in its revised return of income declared amount received from developers as ‘Income from Other Sources’.

The Assessing Officer (AO) was of the view that the assessee was the rightful owner of the land and the legal ownership vested with it. Since the assessee was held to be the legal owner, the capital gain was assessed as income of the assessee. The AO considered the consideration of ₹ 10.26 crores received by flat owners to be income of the assessee.

Aggrieved the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who upheld the assessment done by the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that the assessee, co-operative housing society, was registered under the Maharashtra Co-operative Societies Act, 1960 as a Tenant Co-partnership Hsg. Society under Rule 10(1) Clause 5(b). It also noted that the flat owner members have transferred their individual entitlement/right to TDR/FSI in favour of the developers and were entitled to receive directly from the developers aggregate compensation of ₹ 10.26 crores. All the individual flat owners offered for taxation their share of compensation, in their respective return of income. The Tribunal held as under :

“According to CBDT Circular No. 9, dated 25-3-1969, the legal ownership in flats is vested in individual members and not in the co-operative society. Further, the flat owners have proportionate interest in the land and building. The society is only ostensible owner and in reality and truth, the flat owners own the land and building for which they have paid full consideration and amount received from the developer by the flat owner in their individual capacity is the income of the individual flat owner. The flat owners have relinquished their interest in the property. The society has no right or control over such income of the individual owners”

The Tribunal observed that the benefit of additional TDR was derived and enjoyed by the members of the assessee-society and no income has accrued to the society. Following the decision of the Mumbai Bench of ITAT in the case of Jethalal D. Mehta v. DCIT, which held that such rights do not have any cost of acquisition, the Tribunal held that there is no merit in computing any capital gains on the sale of the said TDR in the hands of the assessee society.

The appeal filed by the assessee was allowed.

B.V. Kodre (HUF) v. ITO

ITA Nos. 834/PN/2008

Section 2(47)(v) — Since the assessee had not received full consideration nor handed over possession of the property, capital gains cannot be assessed in the year of execution of the development agreement.

The assessee, B. V. Kodre (HUF), entered into a development agreement on 26-6-2003 with M/s. Deepganga Associates, whereby the HUF gave rights of development of an agricultural land to M/s. Deepganga Associates. The development agreement was stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act, 1958. Under the said article stamp duty was leviable @ 1%. The said article applied if possession of the property was not handed over. In cases where possession of property is handed over, the instrument would be covered by Article 25 and the stamp duty leviable would be 5%. Clause 10 of the agreement provided that possession would be given to the developer on receipt of full payment of consideration. Of the total consideration of ₹ 60 lakhs the amount of ₹ 38,48,150 was given by the developers to the assessee.

The assessee submitted that since it has not handed over possession of the property and also entire consideration has not been received, there was no transfer. Mere registration of development agreement does not give rise to a transfer. It was contended that since there was no transfer, capital gain is not chargeable to tax in the year under consideration. The AO did not agree with the contentions of the assessee. He noted that transfer u/s. 2(47)(v) is wider than that as per the Transfer of Property Act, 1882. He noted that clause 5 of the development agreement allowed the developer to amalgamate, divide, plan and construct. According to him, this indicated that it was a transaction u/s.2(47)(v) of the Act. He charged capital gain to tax.

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

Aggrieved, the assessee preferred an appeal to ITAT where it relied on the ratio of the following decisions:

1. General Glass Company (P.) Ltd., 14 SOT 32 (Bom.)

2. ITO v. Smt. Satyawati Devi Verma, (2010) 124 ITD 467 (Del.)

3. Smt. Raja Rani Devi Ramna v. CIT, (1993) 201 ITR 1032 (Pat.)

Held

The Tribunal noted that it has not been rebutted by the Revenue that the development agreement has been stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act and not under Article 25. It also noted that clause 10 of the development agreement provides that property as stated in clause 1 of the agreement will be transferred and the purchase deed will be executed only after the receipt of the payment of entire consideration of ₹ 60 lakhs and payment of stamp duty. The Tribunal held that registration is prima facie proof of an intention to transfer but it is no proof of an operative transfer, if there is a condition precedent as to payment of consideration. The transfer u/s.2(47) of the Act must mean any effective conveyance of capital asset to the transferee. Accordingly, where the parties had clearly intended that despite the execution and registration of the sale deed, transfer by way of sale would become effective only on payment of the entire sale consideration, it had to be held that there was no transfer made. Upon considering the ratio of the 3 decisions relied upon by the assessee, the Tribunal observed that the agreement in question does not establish that a transaction of sale of property was completed in terms of provisions of section 2(47)(v) of the Act r.w.s. 53A of the Transfer of Property Act, as neither the sale consideration was paid, nor the possession of the property was handed over to the vendor, and so, the capital gain worked out by the AO and added to the income of the assessee was not justified. The amount received out of the agreed consideration, during the year, at best can be treated as advance towards the agreed consideration of the transaction.

The Tribunal further held that it is an established proposition of the law that the AO is required to make just and proper assessment as per the law based on the merits of the facts of the case before it. Just assessment does not depend as to what is claimed by the assessee, but on proper computation of income deduced based upon the provisions of law. An AO cannot allow the claims of the assessee if the related facts and provisions of law do not approve it and similarly it is also the duty of the AO to allow even those benefits about which the assessee is ignorant but otherwise legally entitled to it.

The facts of the present case are distinguishable from the facts before the Apex Court in the case of Goetze (India) Ltd. v. CIT. In the case before the Apex Court the assessee subsequent to filing of return of income, claimed a deduction by filing a letter. The AO disallowed it on the ground that there was no provision in the Act to allow an amendment in the return without revising it. The action of the AO was upheld. In the present case the question is whether there was a transfer u/s.2(47) of the Act to make an assessee liable to pay capital gains tax. There is no estoppels against proper application of the law.

The Tribunal allowed the appeal filed by the assessee.

Compiler’s Note: It appears that the assessee had originally returned capital gain and subsequently in the course of assessment proceedings took a plea that the same is not chargeable to tax since there is no transfer.

Shri Ishverlal Manmohandas Kanakia v. ACIT

ITA No.2650/Mum/2010, AY 2006-07,
Mumbai Bench ‘I’, order dated 08/02/2012

Capital Gains – Transfer of land with TDR – No cost incurred for acquiring TDR – Gains not taxable even if land has cost since cost of improvement (TDR) could not be determined.

The assessee was the owner of land acquired in 1963. Pursuant to the Development Control Regulations, 1991, the assessee was entitled to construct up to 1:1 FSI on the property. The assessee was also entitled to load Transferable Development Rights (“TDR”) on the property. The assessee entered into a development agreement with a developer pursuant to which the developer agreed to develop on the said land by utilizing the FSI & TDR and paid compensation to the assessee. The assessee claimed that the TDR was an “improvement” of the land and as a “cost of improvement” of the land could not be determined, no capital gains was chargeable. In appeal, the CIT (A) held that the FSI and TDR were separate & distinct assets and that while the TDR did not have a cost, the FSI did and if both were transferred together, there was a “cost” for the “asset” and capital gains was chargeable. On appeal by the assessee, held allowing the appeal:

The assessee transferred “Development Rights” being the FSI and the “right to load TDR” on the land. While the right to construct on the land by consuming FSI was a capital asset which was acquired at a cost, the right to load TDR arose pursuant to the DC Regulations, 1991 without payment of any cost. The said right to “load TDR” was an improvement to the “capital asset” held by the assessee. If the “cost of improvement” of an asset is not determinable, capital gains are not chargeable. The result was that even the consideration attributable to the FSI (which had a cost) was not assessable to tax (principle laid down in Jethalal D. Mehta 2 SOT 422 (Mum) & Maheshwar Prakash CHS 24 SOT 366 (Mum) in the context of transfer of only TDR followed).

Ishtiaque Ahmad v. ACIT
ITAT Bench ‘C’, New Delhi
Before D.R. Singh (JM) and K.G. Bansal (AM)
ITA No. 863/D/2009
AY: 2002-03; Decided on: 28/8/2009
Counsel for assessee / revenue : J.J. Mehrotra / D.N. Kar

S. 48. Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

Per K. G. Bansal

Facts

The assessee had purchased a piece of land in October 2006 out of borrowed funds. The land was sold in the year under appeal. While returning income as long term capital gains — it claimed registration charges of ₹ 4.63 lakh and the interest paid by him during the years 1997-98 to 2001-02 aggregating to ₹ 72 29 lakh, as the cost of improvement. The claim was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the registration charges, however, the claim for indexation was denied. In respect of interest paid, the CIT(A) agreed with the AO and held that the interest payable on loan taken for acquisition of the land was not part of the cost of acquisition/improvement.

Held

The Tribunal noted that the registration charges paid was treated as cost of improvement of the land and as such allowed as deduction by the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed with the submission of the assessee that the provisions contained in clause (ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost of any improvement’ had respectively been substituted. Therefore, it was held that the assessee was entitled to indexation with reference to the registration charges paid.

In respect of interest paid — the Tribunal agreed with the assessee that as held by the Delhi High Court in case of CIT v. Mithlesh Kumari, the actual cost of the asset need not be only those costs incurred on the date of acquisition. Accordingly, relying on the decision of the Delhi High Court ( supra), it held that interest paid on borrowed funds for purchase of land after its actual purchase constituted cost of the land. It further held that in terms of second proviso to S. 48, the cost has to be indexed for working out the capital gains.

Case referred to :

CIT v. Mithlesh Kumari, (1973) 92 ITR 9 (Del.)

Smt. Neera Jain v. ACIT

ITA No.1861/Mum/2009

S. 48. When interest-bearing borrowed funds are utilised for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest (including interest on funds borrowed for shares applied for but not allotted) is to be treated as cost of acquisition of shares allotted.

Facts

The assessee applied for 1,26,000 shares of Punjab National Bank. For this purpose she borrowed  ₹ 4 crores @ 15% p.a. for 15 days and paid interest of ₹ 2,63,015. She was allotted 4,635 shares. The entire amount of interest of ₹ 2,63,015 was capitalised as cost of shares allotted. Similarly, the assessee applied for 8,76,000 shares of NTPC Ltd. For this purpose she borrowed ₹ 4.88 crores @ 17% p.a. for 17 days and paid interest of ₹ 3,87,317. She was allotted 73,403 shares. The entire amount of interest of  ₹ 3,87,317 was capitalised as cost of shares allotted.

The assessee sold the shares allotted. While computing capital gains on sale of shares allotted the entire amount of interest capitalised was regarded as cost of acquisition and claimed as deduction.

The Assessing Officer (AO) disallowed the entire interest of ₹ 6,50,330 (₹ 2,63,015 + ₹ 3,87,317).

The CIT(A) allowed the claim of deduction for interest to the extent of borrowed amount utilised for the purpose of payments of shares allotted by Punjab National Bank and NTPC. The assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that there was no dispute that the entire loan was borrowed for the purpose of acquiring the shares of Punjab National Bank and NTPC and also that immediately after allotment of shares, money refunded by both the companies was refunded to the financie₹ The Tribunal held that the fact that applied shares were not allotted in full will not deprive the assessee from claiming the entire interest paid as part of the cost of acquisition of the shares allotted, as money borrowed has direct nexus with acquisition of shares. The Tribunal directed the AO to treat the interest paid by the assessee to both the financiers as part of cost of acquisition of shares and allow the same as a deduction.

This appeal of the assessee was allowed.

DCIT v. Fritz D. Silva (Mumbai ITAT)

ITA No.236/Mum/2010; AY 2005-06
Bench ‘E’; order dated 08.05.2015

S. 48: Interest on borrowed money utilized for acquiring shares can be capitalized as cost of acquisition

Held

The controversy before us is as to whether the interest paid by the assessee on loans taken for acquiring the shares in the past can be allowed as a deduction u/s. 48 as cost of acquisition while computing capital gain on sale of such shares. On this aspect, the Ld. Representative for the respondent assessee relied upon the Judgment of Hon’ble Madras High Court in the case of Trishul Investments Ltd. 305 ITR 434 (Madras) which is directly on the point. In the case before the Hon’ble Madras High Court, the assessee was carrying on the business of investment in shares/securities and the profit derived from sale of shares was held subject to capital gains. Apart from other issues, the Revenue had contested the order of the Tribunal wherein the assessee was allowed the interest liability incurred on borrowings utilized to acquire the shares, while determining the cost of acquisition of shares for the purpose of computing capital gain. As per the Hon’ble High Court, the Tribunal was correct in holding that the interest paid for acquisition of shares would partake of the character of cost of shares and, therefore, the same was rightly capitalized along with the cost of acquisition of shares. The Hon’ble High Court affirmed the decision of this Tribunal that the interest payable on moneys borrowed for acquisition of shares should be added to the cost of acquisition of shares for the purpose of computing capital gains. The aforesaid legal position propounded by the Hon’ble Madras High Court fully covers the conclusion drawn by the CIT(A) in the present case. Notably, it is not disputed by the Revenue that the interest costs in question were incurred on the funds utilized for acquisition of shares in the past. In fact, as per the Statement of Facts filed before the CIT(A), the assessee had tabulated the amount of interest capitalized along with the cost of shares, which were purchased in the past. The assessee had also asserted before the CIT(A) without rebuttal, that the interest cost so incurred in the past was not claimed as a deduction against any other income. Be that as it may, in so far as the factual position is concerned, there is no denial by the Revenue that monies borrowed have been utilized for acquisition of shares in question. Therefore, having regard to the factual findings of the CIT(A), in our view, the legal position as propounded by the Hon’ble Madras High Court in the case of Trishul Investments Ltd. (supra) supports the plea of the assessee that interest paid for acquisition of the shares would partake the character of cost of shares and, therefore, assessee had rightly capitalized the interest along with the cost of acquisition for the purpose of computing capital gains.

(Macintosh Finance Estates Ltd vs. ACIT (2007) 12 S0T 324 (Mum) (Trib) not followed, CIT vs. Trishul Investments Ltd (2008) 305 ITR 434 (Mad) (HC) followed)

Kewal Silk Mills v. ACIT

ITA No. 4335/Mum/2012 [BCAJ – Jan-13]

Ss. 2(14). 45, 55(2) – Right to use a portion of the shed, in which the looms and machinery taken on license basis are situated, by way of permissible use on license basis as incidental to using the said looms and machinery is covered by the term “any kind of property” and is therefore a capital asset. Amount received on surrender of such right is chargeable to tax under the head Income from Capital Gains and not Income from Other Sources.

Facts

The assessee, a partnership firm, through its partners entered into an agreement dated 13-6-1972 with Modern Textile Rayon and Silk Mills Pvt. Ltd. (Modern) whereby it took on license basis, for a period of one year, loom and machinery described in first schedule of the said agreement on a monthly compensation of ₹ 3,250 per month. Modern was the tenant of the shed belonging to Mr. Paresh S. Shah. This agreement referred to the assessee as licensee. The assessee was entitled to use a portion of the shed in which the looms were situated by way of permissible use on license basis only as incidental to using the said looms and machinery. The agreement provided that the assessee shall never be construed as sublessee in any form of the said portion of the said shed. The assessee was also provided with access to the said portion of the said shed through portion of the shed retained by the licensors or otherwise. Thus, as per the agreement the assessee had incidental right of premises through which the looms were to be used. The said right of the assessee was recognised from the date of the agreement till the date of its surrender.

The assessee regarded this right as sub-tenancy and in the return of income filed the amounts received on surrender thereof were offered for taxation under the head Income from Capital Gains after claiming exemption u/s. 54EC of the Act.

The Assessing Officer after going through various clauses of the agreement dated 13.6.1972 came to the conclusion that the assessee was not a sub-tenant of the land which had been sold by the owner thereof but only had an incidental right to use the shed and that the amounts received are not assessable as capital gains. He also examined the purchasers of the said land who mentioned that only Modern and M/s Saurdeep Chemicals Pvt. Ltd were tenants of the land purchased by them. However, actual possession and occupation was held by the assessee and payments have been made to the assessee in order to get peaceful and vacant possession of the property. The AO observed that the payment received was in the nature of nuisance value and assessee did not have any capital right since the possession of portion of the shed was incidental to the license granted to it for use of machinery. The amount received was assessed to tax under the head Income from Other Sources.

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 incidental right to use the premises was provided by the agreement dated 13.6.1972 itself and also that the assessee was referred to as the licensee in the said agreement. By an amendment in 1973, which is subsequent to the date of the agreement entered into by the assessee, certain licensees have been deemed to be tenants u/s. 15A of the Bombay Rent, Hotel & Lodging and House Rates Control Act, 1947 and were to be considered as tenants. Therefore, in any case the assessee had acquired the status of tenant of the landlord. As per provisions of section 55(2) tenancy right has been considered to be a capital asset. Moreover, the definition of capital asset as per section 2(14) of the Act is wide enough to cover “property of any kind” and the type of right acquired by the assessee in the property used by it cannot in any manner be said to be less than “any kind of property” held by the assessee.

The Tribunal also observed from some of the rent receipts filed by the assessee before the Tribunal that the amount being paid by the assessee was considered to be rent by the other parties and thus parties in principle had accepted that the assessee was the tenant from whom the rent was being received by the other party. The further correspondence between the assessee and its licensor, the purchaser of the land and the assessee are also describing the right of the assessee as tenancy right only and the deed executed between purchaser of the premises and the assessee is also described as deed of surrender of tenancy. Thus, the assessee was enjoying a right over the property in the nature of being tenant of the same for the last so many years and that right of the assessee cannot be considered as evaluated much less than the right of tenancy right.

The assessee, in fact, was enjoying the possession of the impugned property and for peaceful vacation thereof it had received the impugned amount which was described by both the parties as the amount paid for surrender of tenancy rights. The assessee had acquired the said right long back and licensor to the assessee also had recognised the said right of the assessee. The right of the assessee was undisputed and nature thereof was “property of any kind” which was held by the assessee and was to be termed as capital asset within the meaning of section 2(14) of the Act. Tenancy right has also been recognised as capital asset within the meaning of section 55(2)(a) of the Act.

The tribunal held that the amount received by the assessee is assessable as capital gains and not as income from other sources. The appeal filed by the assessee was allowed.

DCIT v. Cable Corporation of India Ltd.
ITAT ‘E’ Bench, Mumbai
Before Pramodkumar (AM) and V.D. Rao (JM)
ITA No. 5592/Mum./2002
AY: 1995-96; Decided on: 29/10/2009
Counsel for assessee / revenue: Arvind Sonde / Vandana Sagar

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

Facts

During the previous year relevant to the assessment year under consideration, the assessee sold a flat which formed part of block of assets and on which depreciation was claimed and was allowed @ 5%, for a consideration of ₹ 9,00,000. The District Valuation Officer (DVO), on a reference by the Assessing Officer (AO), valued the flat at ₹ 66,44,902. For the purposes of computing the amount of depreciation allowable, the AO computed the written down value of the block by reducing the value determined by the DVO instead of reducing the consideration for which the flat was sold. He, therefore, disallowed depreciation of ₹ 2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal and held that for computing written down value it is only the sale consideration of the asset sold, which needs to be deducted and not the fair market value of the asset sold.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

In view of the provisions of S. 43(6)(c) read with Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset is sold, the block of assets shall stand reduced by ‘moneys payable’ in respect of the asset sold. The expression moneys payable refers to ‘the price at which it is sold’. What really matters is the price at which the asset is sold and not its fair market value. The AO does not have any power to tinker with the sale price of the asset sold. The AO ought to take the sale price for computing the WDV of the block.

The Tribunal dismissed the appeal filed by the Revenue.

ITO vs. D. Chetan Kumar & Co.
ITAT Mumbai 'D’ Bench
Before Rajendra (AM) and Dr. S. T. M. Pavalan (JM)
ITA No. 6886/Mum/2011

Ss. 43(6), 50 – The term 'acquired’ used in section 50 is not synonymous with acquisition of title to the property. Use of asset is not a condition for availing the benefits of section 50. In a case where amounts are paid and registration had been complete, though possession was not received, it can be said that the assessee has acquired the property for the purpose of section 50.

Facts:

The assessee had, vide agreement dated 5-4-2007, sold business premises, whose stamp duty value was ₹ 48,47,850, for a consideration of ₹ 39,00,000. Depreciation was claimed on the premises sold and they constituted part of block of asset. The assessee had purchased two new galas vide agreements dated 28-03-2008 for ₹ 27,28,462 and ₹ 12,71,538. The building in which the galas were situated were under construction and possession of these galaswas not with the assessee as on 31-03-2008.

The Assessing Officer held that since the possession of new galas purchased were not with the assessee as on 31-3-2008, they could not be said to be forming part of block of assets for financial year 2007-08 and therefore when the sale consideration of the property sold is reduced from the block of assets, the block would cease to exist and the sale consideration in excess of the opening written down value would be taxed u/s. 50. Since the stamp duty value was not disputed by the assessee, the AO adopted stamp duty value to be the sale consideration. He charged ₹ 47,69,046 as short term capital gains.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that a reading of Clause (c) of section 43(6) would reveal that the written down value had to be adjusted by actual cost of any asset falling within the block acquired during the year. The assessee had purchased two galas and the entire amount of ₹ 40 lakh had been paid, registration had been completed, therefore, the assessee had acquired the assets as per section 43(6)(c). The term used in section 50 was “acquired during he previous year”. Referring to the decision of the jurisdictional Tribunal in the case of Orient Cartons Ltd. (60 ITD 87), he held that the use of the asset was not a condition precedent for making an adjustment in block of asset. There was no explicit requirement in the statutory provision to the effect that the new asset should also be used in a business carried on by the assessee and that if there was no business carried on by him, the deduction could not be given. He also held that the word “acquired” in section 50 was of a very amorphous word and the acquisition of the property in that section was not synonymous with acquisition of title to the property. Accordingly, he held that the assessee had acquired the premises within the meaning of section 50 of the Act and therefore was entitled for adjustment of cost of the property with that of WDV of the block of assets for the purposes of capital gains. He allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held : The Tribunal noted that a similar view had been taken in the case of Lalbhai Kalidas & Co. Ltd. (ITA No. 5832/Mum/2011, AY 2007-08 dated 08-11-2013). Following the said decision, the Tribunal upheld the order of the CIT(A) on this ground.

This ground of appeal of the revenue was dismissed.

Prabodh Investment & Trading Company P. Ltd. v. ITO

ITA No. 6557/Mum./2008

Section 50 — Capital gains arising on transfer of a capital asset (flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming depreciation and also gave the flat on rent is chargeable as long-term capital gains after allowing the benefit of indexation.

The assessee, a private limited company, carried on business of investment. During the previous year 2003-04 it sold a flat for ₹1,30,00,000. This flat was purchased by the assessee in the year 1987. Depreciation on this flat was claimed up till A.Y. 1991-92. In A.Ys. 1992-93 and 1993-94 the assessee claimed depreciation only in books of account but not in the return of income. For A.Y. 1994-95 and all subsequent years the assessee did not provide any depreciation in respect of the flat as the same was not used as office premises during the year. The flat was classified as a fixed asset in the balance sheet and was shown at cost less depreciation.

In the return of income the profit arising on transfer of this flat was shown as long-term capital gain. The long-term capital gain was computed after taking indexation benefit and also exemption u/s.54EC. The assessee relied upon the decision of the Bombay High Court in CIT v. Ace Builders P. Ltd., (281 ITR 210) for claiming indexation benefit even in respect of a depreciable asset. The Assessing Officer held that the decision of the Bombay High Court was not applicable to the case of the assessee and since the flat was the only asset in the block, the capital gain arising on sale of flat was taken to be short-term capital gain u/s. 50(1).

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the nature of asset continued to be a business asset in absence of anything to suggest that the assessee had taken a conscious decision to treat the flat as an investment. He distinguished the decision of the Cochin Bench of ITAT in Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) on the ground that in the said decision the property was specifically treated by the assessee as an investment in the books of account. He upheld the order passed by the AO.

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

Held:

The judgment of the Bombay High Court in Ace Builders was not concerned with the benefit of cost indexation. The decision is confined to relationship between section 50 and section 54E of the Act. The assessee cannot rely upon this decision to contend that the cost indexation benefit should be given even in the case of computation of short-term capital gains u/s. 50 of the Act.

On facts, the decision of the Cochin Bench of the Tribunal in Sakthi Metal Depot is applicable, in which it has been held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the claim of depreciation was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirtysix months from the date of sale, it would be a case of long-term capital gains. The Tribunal held that the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent, it ceased to be a business asset. It noted that the order of the Cochin Bench of ITAT applies in favour of the assessee. The Tribunal observed that the principle of the order, dated 31-1-2007, of the Mumbai Bench of ITAT, in the case of Glaxo Laboratories (I) Ltd., though laid down in a different context, would support the assessee in the sense that it is possible for a business asset to change its character into that of a fixed asset or investment. The Tribunal directed that the capital gains be assessed as long-term capital gains after allowing the benefit of cost indexation as claimed by the assessee.

This ground was allowed.

Cases referred to:

(i) CIT v. Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.)

(ii) Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.)

ITO v Smt. Kusum Gilani

ITAT Delhi ‘D’ Bench
Before A.D. Jain (JM) & K.G. Bansal (AM)
ITA No. 1576/Del/2008
AY: 2004-05; Decided on:11^th December, 2009
Counsel for revenue / assessee: B.K. Gupta / Kapil Goel

Ss. 50C and 69B– Provisions of S. 50C do not apply to the purchaser of property. S. 69B requires collection of independent evidence to show that any undisclosed investment was made by the assessee in purchase of property failing which the buyer could not be saddled with the liability on account of undisclosed investment.

Per K. G. Bansal

Facts

While assessing the total income of the assessee, the Assessing Officer made an addition of ₹ 9,49,400 on account of investment made by the assessee in the purchase of property. The amount of addition represented the difference between the value of the property as determined by the stamp valuation authorities and the purchase consideration paid by the assessee.

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

Aggrieved by the order of CIT(A) the Revenue preferred an appeal to the Tribunal where it was contended that the addition was made u/s. 69B though the assessment order did not mention the section. The Revenue also contended that the tribunal direct the AO to make a reference to the valuation officer u/s. 142A for determining the value of investment in the property during the year.

Held

The Tribunal following the order in the case of Smt. Chandni Bhuchar held that, in the case of the purchaser of the property, –

1. The provisions of S. 50C do not apply,

2. The AO ought to collect evidence indicating that the assessee paid money over and above the amount disclosed in the purchase deed.

The Tribunal noted that there was no such evidence on record.

Following the order in the case of Smt. Chandni Bhuchar, it also held that it cannot issue directions to the Revenue in second appeal to make a reference to the Valuation Officer.

The Tribunal dismissed the appeal filed by the Revenue.

Cases referred to:

1. Smt. Suman Kapoor ITA No. 2193 (Del)/ 2009 dated 05.08.2009

2. Smt. Chandni Bhuchar ITA No. 1580 (Del)/2008 dated 27.02.2009

3. Shri Sharad Gilani (ITA No. 1577/ Del/ 2009dated 15.04.2009

Kishori Sharad Gaitonde vs. ITO

ITAT Mumbai Bench ‘SMC’, Mumbai
Before A.L. Ghelot (AM)
ITA No. 1561 / M / 09
AY: 2005-06; Decided on: 27/11/2009
Counsel for assessee / revenue: L.K. Doshi / S.K. Madhukar

Section 50C – Transfer of tenancy right – Held such transaction not covered under the provisions of section 50C.

Facts

During the year, the assessee had sold a tenancy right for ₹ 30 lakhs. In her return of income, the assessee had computed the long term capital gain based on the said consideration. However, the AO observed that for the purpose of stamp duty, the Sub-Registrar had adopted the market value of ₹ 33.11 lakhs. Therefore, applying the provisions of section 50C, he computed the capital gain based on the market value of ₹ 33.11 lakhs.

One of the issues raised before the tribunal was whether the provisions of section 50C were applicable to a tenancy right.

Held

The tribunal noted that by virtue of section 50C, a legal fiction had been created for assuming the value adopted or assessed by any authority of the State Government as the full value of sale consideration received in respect of transfer of land or building. Relying on the decisions of the Supreme Court in the case of Amar Chand Shroff and in the case of Mother India Refrigeration Industries Pvt. Ltd., the tribunal observed that the legal fiction cannot be extended beyond the purpose for which it was enacted. Accordingly, it noted that as per the plain reading of the provisions of section 50C, it applies only to those items of capital assets which are either land or building or both. Since in the case of the assessee, the capital assets transferred was tenancy right, it held that the provisions of section 50C were not applicable.

Cases referred to:

1. CIT vs. Amar Chand Shroff 48 ITR 59 (S.C.);

2. CIT vs. Mother India Refrigeration Industries Pvt. Ltd. 155 ITR 711 (S.C.)

Anil G. Puranik v. ITO

ITA No. 3051/Mum./2010

Section 49(1), section 50C — Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred — Section 50C applies to a capital asset being ‘land or building or both’ and not to ‘any right in land or building or both’ — Leasehold rights in plot of land is not ‘land or building or both’ — Section 50C does not apply to leasehold rights.

On 16-8-2004, the assessee was allotted leasehold rights in a plot of land for a period of 60 years under ‘12.50% Gaothan Expansion Scheme’. The allotment was in lieu of agricultural land owned by the assessee’s father which land was acquired by the Government of Maharashtra. The lease agreement, in favour of the assessee, was executed on 8-8-2005. On 25-8-2005, the assessee transferred its rights in the said plot for a consideration of ₹ 2.50 crore. In the return of income, the assessee took the stand that since the plot which was transferred by the assessee was received in consideration for agricultural land which was not a capital asset, this plot is also not a capital asset and hence gain on its transfer is not chargeable u/s. 45 of the Act. Alternatively, it was contended that the market value of the plot on the date of its allotment to the assessee be taken to be its cost of acquisition. The Assessing Officer (AO) held that though the original land was agricultural, the allotted land was not agricultural and therefore the land transferred was capital asset. He held that by virtue of section 49, the cost of acquisition of original land in the hands of the assessee’s father has to be regarded as the cost of acquisition of the land transferred by the assessee. Also, he invoked the provisions of section 50C and considered the market value of land as per stamp valuation authorities to be full value of consideration.

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

1. There were two distinct transactions — the first was the acquisition by the Government of land belonging to the assessee’s father, against which the assessee, as legal heir, was given lease of plot on 16-8-2004. This transaction got completed when the assessee got the leasehold rights viz. on 16-8-2004. The second transaction was transferring, on 25-8-2005, leasehold rights in the plot for a consideration of ₹ 2.50 crore. The second asset i.e., leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act.

2. The sole criteria for considering whether the asset transferred is capital asset u/s. 2(14) or not is to consider the nature of asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. The second asset i.e., the leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act. Hence, gains arising on transfer of leasehold rights were chargeable to tax u/s. 45 of the Act.

3. Section 49(1) provides that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. In order to apply the mandate of section 49(1), it is a sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in clauses (i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of section 49(1) to such converted asset. The lower authorities erred in applying the provisions of section 49(1) to transfer of leasehold rights.

4. Since the market value of the leasehold rights, on the date of allotment, constituted full value of consideration for transfer of lands belonging to the assessee’s father, the cost of acquisition of leasehold rights will be its market value on the date of allotment. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred.

5. Section 50C is a deeming provision which extends only to land or building or both. Deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. The distinction between a capital asset being ‘land or building or both’ and any right in land or building or both is well recognised under the Income-tax Act. The deeming fiction in section 50C applies only to a capital asset being land or building or both, it cannot be made applicable to lease rights in land. As the assessee had transferred lease rights for sixty years in the plot and not land itself, the provisions of section 50C cannot be invoked.

The appeal filed by the assessee was allowed.

DCIT v. Tejinder Singh

ITA No. 1459/Kol./2011

Section 50C — Transfer of leasehold rights in a building does not attract provisions of section 50C.

The assessee along with one Amardeep Singh had vide registered lease deeds dated 19th November, 1992 acquired from Shree Khubchand Sethia Charitable Trust (Owner), leasehold rights for 99 years, in a house property at Kolkata.

By a tripartite registered deed dated 20th July, 2007 entered into between the owner, the assessee and Amardeep Singh (lessees) and three entities viz. Sugam Builders Pvt. Ltd., Neelanchal Sales and Suppliers Pvt. Ltd. and Pleasant Niryat Pvt. Ltd. (purchasers), the purchasers purchased this property. Under this deed dated 20th July, 2007 the owner transferred its ownership and reversionary rights in the said property for a consideration of ₹ 1,00,00,000; the lessees for a consideration of ₹ 3,19,00,000 gave up all their rights and interests in the said premises. Thus, purchasers paid total consideration of ₹ 4,19,00,000 — ₹ 1,00,00,000 to the owner and ₹1,59,50,000 to the assessee and ₹ 1,59,50,000 to Amardeep Singh — co-lessee. As against the consideration of ₹ 4,19,00,000 the stamp duty valuation of the property was ₹ 5,59,57,375.

The Assessing Officer (AO) computed the capital gains by adopting the stamp duty valuation to be the full value of consideration and notionally divided the said amount amongst the owner and the lessees in the ratio of actual consideration received by them. Accordingly, as against actual consideration of ₹ 1,59,50,000 the AO computed capital gain by adopting ₹ 2,12,47,375 to be the full value of consideration. He considered the lease rents paid over a period of time, duly indexed, to be the indexed cost of acquisition and on this basis arrived at LTCG of ₹1,84,17,692. Since the assessee had invested ₹ 1,96,03,685 and not the entire consideration adopted by the AO for computing capital gains, the AO granted proportionate exemption u/s. 54F and charged balance ₹ 14,46,692 to tax as LTCG.

Aggrieved the assessee preferred an appeal to the CIT(A) who relying upon various Tribunal decisions held that provisions of section 50C do not apply to transfer of leasehold right.

Aggrieved the revenue preferred an appeal to the Tribunal and the assessee filed cross-objection on the ground that the CIT(A) has not adjudicated the alternative ground of the assessee viz. for the purposes of section 54F, full value of consideration does not mean value determined u/s.50C.

Held

The Tribunal noted that the assessee was a lessee of the property which was sold by the owner of the property, yet the AO had treated the assessee as a seller apparently because the assessee was a party to the sale deed. The Tribunal held that in case of purchase of tenanted property the buyer pays the owner for ownership rights and if he wants to have possession of the property and remove the fetters of tenancy rights he would pay the tenants for surrendering their tenancy rights. Merely because the amount is paid at the time of purchase of the property, the character of receipt will not change.

The provisions of section 50C are not applicable where only tenancy rights are transferred or surrendered. On facts, the assessee had the rights of the lessee and not ownership rights. The assessee had granted, conveyed, transferred and assigned leasehold right, title and interest.

The Tribunal dismissed the appeal filed by the Revenue.

[Followed in decision of Mumbai ITAT in Farid Gulmohamed v. ITO (Mum), order dated 16.03.2016]

Abbas T. Reshamwala v. ITO
ITAT ‘A’ Bench, Mumbai
Before N.V. Vasudevan (JM) and R.K. Panda (AM)
ITA No. 3093/Mum./2009
AY: 2006-07: Decided on: 30/11/2009
Counsel for assessee / revenue: Ajay R. Singh/Vikram Gaur

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value .

Per R. K. Panda

Facts

During the year the assessee had sold an industrial gala for a consideration of ₹ 20 lakhs. Based thereon the assessee had offered to tax the sum of ₹18.73 lakh by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at ₹44.62 lakhs. The assessee brought to the notice of the AO the various negative factors He also filed a valuation report of the registered valuer, according to which, the value of the said premises was ₹ 18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s. 50C of the Act.

However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at ₹ 44.62 lakhs u/s. 50C and made the addition of ₹ 25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

Held

According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

Kalpataru Industries v. ITO

ITAT ‘H’ Bench, Mumbai
Before S.V. Mehrotra (AM) and P. Madhavi Devi (JM)
ITA No. 5540/Mum/2007
AY: 2005-06; Decided on: 24/8/2009
Counsel for assessee / revenue : K. Shivram / Pradip Hedaoo

S. 50C in the event of the assessee contending that valuation as done by Stamp Valuation Authority is not acceptable to him and asking the Assessing Officer to make a reference to the Valuation Officer, it is mandatory on the part of the Assessing Officer to make such a reference notwithstanding that the assessee has not filed an appeal against such valuation .

Per P. Madhavi Devi

Facts

The assessee, a partnership firm, filed its return of income declaring total income of ₹ 1,75,108. The assessee had sold its factory premises for a consideration of ₹ 15,05,000 and had shown profit on sale of factory premises amounting to ₹ 10,94,721. The market value of the factory premises as per stamp valuation authorities was ₹ 43,98,500. The assessee drew the attention of the AO to the observations of the Bombay High Court while admitting the petition filed by Practicing Valuers Association and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and contended that the valuation given in the stamp duty ready reckoner cannot be universally accepted. It was also submitted that it had not preferred an appeal against the valuation as done by Stamp Valuation Authorities since the purchaser had already paid stamp duty. However, the assessee requested the AO to make a reference to the valuation cell of the Department as per the provisions of S. 50C. The AO held that the reference to the valuation officer is optional and since the assessee had not objected to the value adopted by the stamp valuation authority there was no need to refer the matter to the valuation officer. He, accordingly, adopted the value of the property at ₹ 43,98,500 and computed short term capital gain at ₹ 35,89,503.

The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it mainly argued that the matter be sent back to the file of the AO with a direction to refer the same to the valuation officer for valuing the property at market rate. It was also pointed out that the assessee was not the owner of the land but was only a lessee and capital gain has arisen on transfer of leasehold rights. It was also contended that in the case of assignment of rights after obtaining necessary permission, S. 50C is not applicable.

Held

The assessee had transferred leasehold rights and had itself offered capital gain on the same. S. 50C is a special provision for determining full value of consideration in certain cases. The assessee while making the claim before the AO has to satisfy him that the valuation adopted by the stamp valuation authority is not based on sound criteria. In such a case, the AO is bound to refer the matter to the DVO for arriving at the fair market value of the property. The assessee had vide its letter filed with the AO relied upon two decisions to the effect that the valuation given in the stamp duty ready reckoner cannot be universally adopted. In such cases, it is necessary for the AO to refer the matter to the DVO. The Tribunal has in ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO, (2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be read as ‘should’ and the AO has no discretion but to refer the matter to the DVO for the valuation of the property. The Tribunal remanded the issue to the file of the AO with a direction to refer the valuation of the property to the DVO and determine the value in accordance with law.

The assessee’s appeal was allowed.

Irfan Abdul Kader Fazlani vs. ACIT

ITA No. 8831/Mum/11
[Ref-BCAJ (Mar-13)]

Section 50C does not apply to transfer of immovable property held through company.

Facts

The assessee was holding 306 equity shares of ₹ 100 each in a private company (‘the company’). The total share capital of the company was 3,813 equity shares of ₹ 100 each. The company owned two flats in a residential building and was earning rent income from the same. During the year under appeal the assessee sold the shares for ₹ 37.51 lakh and capital gain was offered on that basis. According to the AO the assess engineered the sale of the shares of all other shareholders of the company and thereby effectively transferred the immovable property belonging to the company. According to him, it was an indirect way of transferring the immovable properties, being the flats in the building. He accordingly ‘pierced the corporate veil and invoked the provisions of section 50C and computed the capital gains by adopting the stamp duty value of the flats.

Held

The tribunal noted that the provisions of section 50C applies on fulfillment of two conditions viz., (i) when a transfer of “capital asset, being land or building or both” takes place; and (ii) the consideration for a transfer is less than the value “assessed” by any authority of a State Government for stamp duty purposes. It further observed that the term “transfer” as used in the provisions would only cover direct transfer. While in the case of the assesse, the assets transferred were shares in a company and not land and/or building. The flats were owned by the company who continues to remain its owner even after the transfer of the shares by the assesse. Secondly, the consideration for transfer received by the assessee is also not “assessed” by any authority. Thus, the other condition to attract the provisions of section 50C is also not complied with. According to it, since the provisions of section 50C are deeming provisions, the same have to be interpreted strictly in accordance with the spirit of the provisions. Therefore, the appeal filed by the assesse was allowed and it was held that the AO’s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee was not proper and it does not have the sanction of the provisions of the Act.

ACIT vs. The Upper India Chamber of Commerce

ITA No. 601 /Lkw/2011
[Ref.-BCAJ-Dec – 2014]

Ss. 11, 12A, 50C - Provisions of section 50C cannot be invoked in the case of a society or a charitable trust registered u/s. 12A of the Act. In such a case income is to be computed as per section 11(1A) of the Act which is a complete code by itself.

Facts

The assessee, a society registered u/s. 12A of the Act, transferred its capital asset whose stamp duty value was more than the consideration accruing or arising on the transfer of the asset. The net consideration arising on transfer of capital asset was invested by the assessee in other capital asset. The Assessing Officer (AO) made an addition of ₹ 43,78,588 on account of capital gain arising out of sale of property by applying 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 Tribunal.

Held

The question of applicability of provisions of section 50C of the Act on transfer of capital asset in the case of a charitable society was examined by the Tribunal in the case of ACIT vs. Shri Dwarikadhish Temple Trust, Kanpur (ITA No. 256 & 257/Lkw/2011), in which the Tribunal has held that where the entire sale consideration was invested in other capital asset, provisions of section 50C of the Act should not be invoked. The Tribunal noted the following observations from the said order –

“6.1 From the order of the CIT(A), we find that the assessee is a charitable and religious trust registered u/s. 12A of the Act. It is also noted by the Assessing Officer that the assessee has sold immovable property for total sale consideration of ₹ 2.25 lakh and the entire sale consideration was invested in other capital asset i.e. fixed asset with bank. The Assessing Officer invoked the provisions of section 50C of the Act and computed the capital income at ₹ 66.38 lakh based on the value adopted by stamp duty authorities for stamp duty purposes. We find that the CIT(A) has decided this issue in favour of the assessee by following the Tribunal decision in the case of Gyanchand Batra vs. Income Tax Officer 115 DTR 45 (Jp. Trib).

6.2 We also find that it is specifically mentioned in section 50C(1) of the Act that the stamp duty value is to be considered as full value of consideration received or accruing as a result of transfer for the purpose of section 48 of the Act. It is true that the assessee is a charitable trust and the income of the assessee has to be computed u/s .11 of the Act. As per sub-section (1A) of section 11 of the Act, if the net consideration for transfer of capital asset of a charitable trust is utilised for acquiring new capital asset, then the whole of capital gain is exempt. Considering all these facts, we do not find any reason to interfere in the order of CIT(A) on this issue.

6.3 Regarding the reliance placed by the Learned D.R. of the Revenue on the judgment of the Hon’ble Kerala High Court rendered in the case of Lissie Medical Institutions vs. CIT(supra), we find that in that case, it was held by the Hon’ble Kerala High Court that claim of depreciation is not allowable on the assets which were considered as application of income at the time of acquisition of assets. In our considered opinion, this judgment is not relevant in the present case.

6.4 As per the above decision, we find that no interference is called for in the order of CIT(A).” The Tribunal observed that the CIT(A) has adjudicated the issue based on legal provisions and various judicial pronouncements while holding that section 11(1A) of the Act which lays down a complete system of taxability of capital gains in respect of an institution approved by the CIT u/s. 12A of the Act is a complete code. The Tribunal held the order of the CIT(A) to be in accordance with law. It confirmed the order of CIT(A).

The appeal filed by revenue was dismissed.

ACIT v. RPG Life Sciences Ltd.

ITAT ‘C’ Bench, Mumbai
Before P.M. Jagtap (AM) and V.D. Rao (JM)
ITA No. 1579/Mum./2006
AY: 2002-03; Decided on : 31/8/2009
Counsel for assessee / revenue : B.V. Jhaveri / Yashwant V. Chavan

S. 50B read with S. 2(42C) — Slump sale — Sale of one of the manufacturing divisions of the assessee — Whether the transaction could be considered as slump sale — On the facts, Held : No.

Per P. M. Jagtap

Facts :

The assessee was engaged in the business of manufacturing pharmaceutical and agrochemical products. During the year under consideration, its agrochemical division was sold for an agreed consideration of ₹72.70 crores. During the course of assessment proceedings, the assessee was asked to explain as to why the said sale be not treated as a slump sale and capital gain arising therefrom be not computed u/s.50B. In reply, the assessee explained that it had sold the assets and liabilities of its agrochemical division by identifying the value of each and every item. In support, the break up of the agreed consideration of ₹72.7 crore was given. The attention of the AO was drawn to the various schedules of the agreement where the fixed assets were valued item-wise by ascertaining the value of land, building, plant and machinery, furniture and fixtures and capital work-in-progress separately.

However, the assessee’s submissions were not found acceptable by the AO for reasons, amongst others, as under:

• Assessee had transferred the entire undertaking as a going concern along with all existing employees.

• The intention of the contracting parties was to sell the agrochemical undertaking and not the land, building, plant and machinery and furniture and fixtures and other intangible and current assets, all of which comprised the agrochemical division separately.

• The individual assets of agrochemical division were not separately valued but only group of assets were valued.

• The valuation report valuing individual assets and/or schedules to the agreement listing out individual assets and value thereof have no relevance unless the consideration is determined on the basis of itemised value.

• All the licences, old records of account books, vouchers pertaining to agrochemical business were also transferred by the assesses.

Accordingly, it was held that that the sale of the agrochemical division by the assessee was slump sale and the capital gain arising there from was chargeable to tax in its hand as per the provisions of S. 50B.

On appeal the CIT(A) accepted the stand of the assessee that sale of its agrochemical division was not a slump sale.

Held :

The Tribunal noted that as confirmed by the CIT(A) in his order — all the fixed assets as well as the current assets of agrochemical division were valued. The fixed assets were valued itemised by ascertaining the value of each and every asset separately and after adding non-compete fee of ₹ 4 crore to the said value, the value of the fixed assets was worked out at ₹ 54.33 crore. In a similar manner, net current assets were valued at ₹ 58.38 crore and after deducting the value of net current liabilities therefrom, the total value was arrived at ₹ 88.68 crores. As against the said value, the consideration finally agreed was ₹ 72.70 crore and the reconciliation to explain the difference between the same was also furnished. The Revenue was not able to controvert or rebut the findings recorded by the CIT(A). Therefore, the Tribunal upheld the order of the CIT(A).

Kumarpal Amrutlal Doshi v. DCIT

ITA No. 1523/Mum/2010
Mumbai Bench ‘G’, Order dated 9/2/2011
AY 2006-07

Deduction – Sec. 54EC – Cheque issued within 6 months of transfer for acquiring bonds eligible for deduction u/s. 54EC – Cheque cleared and bonds issued after 6 months – Relief available.

On 9.8.2005 (AY 2006-07) the assessee earned LTCG on sale of land. u/s. 54EC, NABARD bonds were a “specified asset” till 31.3.2006 and the assessee had time till 9.2.2006 (6 months) to make the investment. The assessee issued a cheque on 7.2.2006 and sent it by courier to NABARD. The cheque was encashed on 13.2.2006 and the bonds were allotted on 15.2.2006. The AO & CIT(A) rejected the claim on the ground that (i) NABARD bonds were not a “specified asset” as of 1.4.2006 & (ii) the investment was not within 6 months of the transfer. On appeal to the Tribunal, HELD allowing the appeal:

1. The department’s argument that for AY 2006-07 only the “specified assets” as of 1.4.06 should be considered is not acceptable. Instead, the law as it stood on the date of transfer of the capital asset has to be applied;

2. When a payment is made by cheque, then the ‘date of payment‘ is the ‘date of the cheque‘ even though the cheque may be encashed subsequently. As the cheque was issued within 6 months of the transfer, S. 54EC relief was available even though the cheque was encashed, and bonds were allotted, later .

Alkaben B. Patel vs. Income Tax Officer
In the Income Tax Appellate Tribunal Special Bench, Ahmedabad
Before G.C. Gupta V. P.), Mukul Kr. Shrawat (J. M.) and N.S. Saini (A. M.)
ITA No.1973/Ahd/2012

Section 54EC –Term ‘month’ used in the provisions does not mean 30 days but it means ‘calendar month’ therefore investments made before the end of the calendar month eligible for deduction .

Issue

The issue before the Tribunal was - whether for the purpose of section 54EC the period of investment of six months should be reckoned after the date of transfer or from the end of the month in which transfer of capital asset took place?

The assessee had earned Long Term Capital Gain on sale of a flat. She invested the gain earned in purchase of NHAI bonds and claimed deduction u/s. 54 EC. The sale of flat took place on 10th of June, 2008 and the bonds were purchased on 17th of December, 2008.According to the AO, the assessee was required to invest the capital gain in the specified asset within a period of six months from the date of thetransfer i.e. 10th of December 2008, and that requirement was not complied with by the assessee; hence, not eligible for the deduction u/s. 54EC of IT Act. The contention of the assessee was that since the application for the purchase ofthose bonds was tendered in the bank on 8^th December, 2008,which was within the period of six months from the date of the transfer of the Long Term Capital Asset, the assessee was eligible for the deduction u/s. 54EC. Alternatively, the assessee’s contention was that up to the endof the month of December 2008, the said investment was eligible for the deduction. According to the AO as well as the CIT(A), the assessee was unable to establish that the impugned application for investment in NHAI bond was actually tendered on 8th of December, 2008. They were also not convinced with the alternate contention of the assessee.

Before the Tribunal, the revenue justified the orders of the lower authorities and contended that the Income-tax Act and the Income-tax Rules have used two types of phraseology in respect of the computation of period for the purpose of prescribing a limitation. The first type of wordings used is "not exceeding 6 months from the date on which application is made" or "anytime within a period of 6 months after the date of such transfer". These words are used in section 54EC and section 281 B as well as in Rule 10K(2) and Rule 11AA(6). The second type of wordings used are "6 months/4months/1 month from the end of the month" in which a particular order is made/received/application is received. This wording is found in section 275 and section 154(8) as well as in Rule 6DDA(5). It was emphasised that the wordings are unambiguous and the intention of the legislation is apparent that wherever the end of the month is to be calculated then the intention is made clear in the statute itself. Otherwise as per the language, a particular date is to be taken into account for the purpose of calculation of days/ months. It was therefore pleaded that in a situation when the intention of the legislation is clear, then there is no necessity to take the help of "General Clauses Act,1897" as suggested by the assessee.

Further, it was pleaded that in section 54EC, the limitation of period for an investment has been pre scribed as "at any time within a period of 6 months from the date of such transfer". In ordinary sense, a ‘month’ is a period from a specified date in a month to the date numerically corresponding to the date in the following months, less one. For example, if a particular date is 10th June, 2008, one month shall be up to 9th July, 2008. Therefore, the term "month" has been used in section 54EC in an ordinary sense and the same should not exceed more than 30 days.The wordings of the section should not be replaced by any other wordings. Therefore, in the said example, one month cannot be extended up to 31st July, 2008. If that would have been the intention of the legislation, then certainly these words ought to have been prescribed in the provisions of section 54EC of the Act. The revenue also relied on the following decisions:

• Dhanraj Singh Choudhary vs. Nathulal Vishwakarma 16 taxmann.com249 (SC);

• Chironjilal Sharma HUF vs. UOI, (unreported decision of the Supreme Court);

• Jethmal Faujimal Soni vs. ITAT    231 CTR332(Bom.);

• Kumarpal Amrutlal Doshivs. DCIT (Appeal) (ITA No, 1523Mum/2010, order dated 9.2.2011);

• Shree Ram Engg. & Mfg Industries vs. ACIT (ITANo.3226& 3227/Ahd/2011);

• Hindustan Unilever Ltd. vs. Deputy Commissioner of Income-tax [191 Taxman 119 (Bom.)];

• S. Lakha Singh Bahra Charitable Trust [15Taxmann.com 97(Asr)].

Held:

The Tribunal noted the argument of the revenue that since the statute has prescribed the limitation of six months, the words viz., “at any time within a period of six months” must not be replaced by the words “at any time within a period of end of six months”. However, according to the tribunal, the incentive provision is to be examined by “purposive construction of statute” or “constructive interpretation of statute” which is neither “liberal interpretation of statute” nor a ‘literal interpretation of statute’. It further added that, it is the true intention of the enactment, which is required to be considered by a court of law.

To resolve the controversy i.e., whether the intention of the legislator was to compute six calendar months or to compute 180 days,the tribunal relied on a decision of the Allahabad High Court in the case of Munnalal Shri Kishan Mainpuri, 167 ITR 415 where the Court while answering the dispute in respect of law of limitation held that, there is nothing in the context of section 256(2) to warrant the conclusion that the word ‘month’ in it refers to a period of 30 days. Therefore, it was held by the Apex court that reference to six months in section 256(2) is to six calendar months and not 180 days. Similarly, it was noted that in the case of Tamal Lahiri vs. Kumar P. N. Tagore, 1978 AIR 1811/1979 SCC (1) 75, the Apex court opined while interpreting section 533 of Bangalore Municipal Act, 1932 the expression six months in the said section means six calendar months and not 180 days.

The Tribunal also noted that in a few more sections of the Income-tax Act, the legislature had not used the terms “Month” but has used the number of days to prescribe a specific period e.g. first provison to section 254(2A) where it is provided that the Tribunal may pass an order granting stay but for a period not exceeding 180 days.This according to the Tribunal was an important distinction made in the statute while prescribing the limitation period. Therefore, the tribunal concluded that in the absence of any definition of the word ‘month’ in the Act, the definition of General Clauses Act 1897 shall be applicable. Accordingly, the tribunal held that the investment in question qualifies for the deduction u/s. 54EC.

Pyare Mohan Mathur HUF v. ITO

ITA No. 471/Agra/2009

Section 2(22B), section 50C, section 55(2)(b)(i) — Cost of acquisition of the property u/s. 55(2) (b)(i) will be its fair market value as on 1-4-1981 as determined by the registered valuer and not the circle rate.

The assessee sold property acquired by him prior to 1-4-1981. The assessee computed capital gains by considering fair market value of the property on 1-4-1981 to be its cost of acquisition. The fair market value adopted by the assessee was on the basis of a valuation report of a registered valuer. The Assessing Officer (AO), on the basis of Inspector’s Report, took circle rate list dated 8-6-1981 and valued the land on 1-4-1981 on the basis of circle rate and regarded this value to be the fair market value to be considered as cost of acquisition for computing capital gains.

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

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

Held:

The Tribunal noted that the term ‘fair market value’ is defined in section 2(22B) and no rules have been made for purpose of determining fair market value. The assessee had relied on the valuation report which he obtained from the registered valuer who is technical person and duly approved by the Department, whereas the AO had deputed the Inspector who brought the circle rate of the village where the land was situated and had adopted the circle rate to be fair market value. There is no provision under the chapter relating to capital gains which states that circle rate will be treated as cost of acquisition. Circle rates are notified by the State Government for levy of stamp duty for registration of sale deeds. The circle rates are deemed to be full value of consideration received or accruing as a result of transfer u/s. 50C. But this section nowhere states that circle rates as notified will be the fair market value. The Tribunal held that in view of the provisions of section 55A once the assessee has submitted the necessary evidence by way of valuation report made by the Registered Valuer, the onus gets shifted on the AO to contradict the report of the Registered Valuer. The registered valuation officer is a technical expert and the opinion of an expert cannot be thrown out without bringing any material to the contrary on record. In case the AO was not agreeable with the report of the Registered Valuer, he was duty bound to refer the matter to the DVO for determining the fair market value of the land as on 1-4-1981 which he failed to do so. The Tribunal held that the Revenue has not discharged the onus but merely rejected the fair market value taken by the assessee. It set aside the order of the CIT(A) and directed the AO to re-compute the capital gain after taking the fair market value of the land as on 1-4-1981, as claimed by the assessee.

This ground of appeal filed by the assessee was allowed.

Nirupama K. Shah v. ITO

ITA No. 348/Mum./2010

Section 54F — Amounts paid for completion of flat purchased in semi-finished condition, pursuant to a tripartite agreement entered into by the assessee with the contractors and the builder form part of cost of new house even though such agreement was entered prior to agreement for purchase of house.

The assessee who was 50% co-owner of a flat at Walkeshwar sold the same for a sum of ₹ 2.30 crores as per transfer deed dated 15-1-2006. The assessee invested sale proceeds in purchase of a house property vide agreement dated 26-5-2006 for ₹ 45.60 lakh. The assessee had before completion of the building incurred expenditure of ₹ 43 lakhs as per three supplementary agreements dated 22-4-2006. The assessee, therefore, treated the cost of the new house at ₹ 88.60 lakhs for the purpose of claiming deduction u/s. 54F.

The assessee explained to the AO that the flat purchased was in a semi-finished condition without flooring, plumbing, wiring, etc. Therefore, for providing internal basic amenities as mentioned in the main agreement, the assessee entered into a supplementary agreements which were also signed by the builder. The AO observed that the supplementary agreements were entered prior to the main agreement. The main agreement did not have reference of the supplementary agreements. The main agreement clearly provided that the builder was providing the flat with all basic amenities required for making the premises habitable. He did not allow the exemption with reference to this sum of ₹ 43 lakhs and held the expenditure of ₹ 43 lakhs incurred by the assessee to be cost of improvement of the flat, which could not be considered for deduction u/s. 54F.

Aggrieved the assessee preferred an appeal to the CIT(A) where he submitted that since the assessee was in urgent need of the flat and the flat being purchased was in skeletal condition, the seller suggested that the assessee engage other contractors for finishing the work. It was because of this reason that the supplementary agreement was entered into before the main agreement. The assessee substantiated his contentions by referring to letter dated 29-3-2006 written by the builder. The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that the assessee took possession of the flat on 15-5-2006 and thereafter the registered deed was executed on 26-5-2006. The Tribunal held that the claim of the assessee cannot be rejected only on the ground that the agreement had been entered into prior to taking over possession of the flat. The claim of the assessee to engage other contractors to expedite work as suggested by the builder cannot be held unjustified on the facts of the case. It held that all expenditure incurred for acquisition of the new flat prior to taking over possession has to be considered as part of the cost. However, in order to verify that the assessee has not claimed any bogus expenditure to inflate the cost so as to claim higher deduction or show double expenditure in respect of the same type of work, the Tribunal set aside the order passed by the CIT(A) and restored the matter to the file of the AO for passing a fresh order after necessary examination.

The Tribunal allowed the appeal filed by the assessee.

Note: It appears that the reference to section 54F should be a reference to section 54, since the assessee had sold a residential house.

Vasudeo Pandurang Ginde v. ITO

ITA No. 4285/Mum./2009 [BCAJ – July-12]

(1) Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes.

(2) Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase — Whether the provisions of section 94(7) attracted — Held, No.

Facts

(1) The assessee had made long-term capital gain on sale of shares. The sales proceeds were invested in purchase of row house and exemption u/s.54F was claimed. One of the grounds on which the exemption was denied by the AO was that the house purchased by the assessee was in the joint name of his wife.

(2) The assessee had purchased units of mutual funds of ₹ 3 crore on 26-12-2003. On the very same date, the assessee received a dividend of ₹ 1.16 crore. On 29-3-2004, the assessee redeemed the units for ₹ 1.7 crore and thereby booked a short term capital loss of ₹ 1.3 crore. The AO found that the cheque of ₹3 crore for the purchase of units was actually realised on 30-12-2003 and therefore, according to him, the period of holding before the redemption of the said units on 29-3-2004 was only 88 days i.e., less than 3 months. Therefore, according to him, the transaction was hit by the provisions of section 94(7) of the Act. The AO was also of the view that the entire transaction of sale and purchase of mutual fund units was nothing but a colourable device for setting off of the capital gains arising on sale of shares. Accordingly, the set off of short term capital loss claimed by the assessee was denied.

On appeal the CIT(A) confirmed the denial of exemption u/s. 54F. While on the issue regarding applicability of section 94(7) he noted that the provisions of section 94(7) lays down three cumulative conditions, the non-fulfilment of any one of the conditions would result into non applicability of section 94(7). Thus, if the date of the purchase as claimed by the AO was 30-12-2003, then it cannot be said that the units were purchased within three months prior to the record date because the record date was 26-12-2003 when the dividend was declared. Thus, one of the conditions essential for application of section 94(7) is not fulfilled. Secondly, the CIT(A) noted that the mutual fund had accepted 26-12-2003 as the date on which the units were allotted to the assessee. Based on the said date, the second conditions viz. that the units are sold within a period of three months was also not fulfilled. Accordingly, it was held that the provisions of section 94(7) were not applicable. As regards the point raised by the AO that the entire transaction was a colourable device, the CIT(A) relying on the decision of the Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd., Appeal No. 18 of 2006 held that as the conditions of section 94(7) have not been fulfilled, no disallowance was permissible.

Held

(1) The Tribunal noted that the total consideration for the house had been met by the assessee. According to it the assessee had added the name of his wife only for the sake of convenience. It also drew support from the provisions of section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration. Further, relying on the decisions listed below, the Tribunal held that since the total consideration for the house had been paid by the assessee, the exemption cannot be denied on this ground. The decisions relied on are as under:

• ITO v. Arvind T. Thakkar in ITA No. 7338/Mum./2005 vide order dated 29-4-2011;

• Ravinder Kumar Arora v. ACIT in ITA No. 4998/Del./2010 vide order dated 11-3-2011; and

• DIT v. Mrs. Jennifer Bhide, (2011) 15 Taxmann 82 (Kar.).

(2) As regards section 94(7) The Tribunal noted that the whole issue revolved around the date of purchase of units. The Tribunal agreed with the findings of the CIT(A) and the appeal filed by the Revenue was dismissed.

CHARITABLE PURPOSES / TRUST:

ADIT(E) v. The Stock Exchange

ITAT ‘E’ Bench, Mumbai
Before G.E. Veerabhadrappa (VP) and
Rajpal Yadav (JM)
ITA Nos.4870/M/02; 5242/M/03 & 5798/M/04
AY 1999-2000 to 2001-02; Decided on 4-1-2007
Counsel for revenue/assessee : S.C. Gupta / B.V. Jhaveri & Rajesh Shah

S. 11 of the Income-tax Act, 1961 – Whether the income of the Bombay Stock Exchange was from property held for charitable purposes and accordingly, exempt from tax – Held, Yes .

Per Rajpal Yadav

Facts

The assessee’s claim for exemption u/s.11 of the Act was rejected by the AO, on the ground that the basic purpose of the exchange was to support, protect and to encourage the business of stock-brokers and dealers and in this process no interest of public was served. On appeal, the CIT(A) allowed the appeal of the assessee, relying on the decisions given by his predecessor in the A.Ys. 1991-92 to 1998-99 and also on the decision of the Apex Court in the case of Surat Art Silk Cloth Manufacturers’ Association and also in the cases of Pune Stock Exchange and The Stock Exchange, Ahmedabad.

Being aggrieved, the Revenue appealed before the Tribunal and contended that for the purpose of S. 11, incomes should be derived from property held under a trust. However, in the case of the assessee, there was no trust deed and the property was not held upon the trust. It was also emphasised (relying on the Mumbai Tribunal decision in the case of Atco Health Care) that each year was an independent year and the exemption granted in earlier years cannot be the criteria for grant of the exemption. A reference was also made to the Bombay High Court decision in the assessee’s own case where the Court had mentioned the assessee as an association of mutual concern. Alternatively, it was submitted that the exemption u/s.11 should be confined to only such portion of income which was applied to charitable or religious purpose. Relying on the Supreme Court decision in the case of Jindal Dye Intermediate Ltd., it was also suggested that the Tribunal should refer the matter to a larger Bench.

Held

The Tribunal did not find any force in the Revenue’s contention that to avail exemption the property should be held under a trust and no trust deed was discernible in the case of the assessee, for the reason that right from its very inception, under the old Act as well as under the new Act, the assessee had been recognised as charitable institution which was holding property as legal entity, and enjoying the benefit of S. 11. According to it, the Revenue cannot draw any benefit by relying on the decision of the Tribunal in the case of Atco Health Care, as the decision was based on the facts of that case. According to it, the need to refer the matter to a larger Bench, as held by the Supreme Court in the case of Jindal Dye Intermediate Ltd., would arise only when the Tribunal disagreed with the decision of the co-ordinate Bench. However, in the assessee’s case, the Revenue was not able to persuade the Tribunal to take a different view than the one taken by the Tribunal in the assessee’s own case for the A.Ys. 1991-92 and 1992-93. According to the Tribunal, the CIT(A) had rightly held that the assessee was not engaged in any business activity, hence, the provisions of S. 11(4A) were not applicable.

Sudhir Thackersey Charitable Trust v. DIT

ITA No. 5031/Mum./2010

Section 12AA — Registration of Trust — Delay in application for registration — Refusal to grant registration on the ground that the trust was claiming exemption u/s.11 even though it was not registered — Whether the refusal was on the valid ground — Held, No

The assessee trust came into existence vide trust deed dated 24th August, 2006. It had not applied for registration till 30-10-2009. However, all along the trust was carrying on its activities and duly filing its return of income with claims for exemption u/s.11. The DIT refused to grant registration for the reason that the assessee was claiming exemption u/s.11 even though it had not complied with the mandatory provisions of registration. According to him the assessee had concealed its income by claiming exemption which otherwise it was not entitled to.

Held

According to the Tribunal the reason for refusal to grant registration as given by the DIT was not relevant to the consideration on which an application for registration of a trust or charitable institution is to be examined. Further, it also noted that the assessee had admitted an inadvertent lapse in nonfiling of registration application and also the fact that the trust had not accepted any donation, other than corpus donation at the time of formation of the trust. According to it, the lapse by the assessee cannot be visited with the consequence of its being declined registration later also, which approach was not supported either by any specific legal provisions or plain logic or rationale. The DIT was only required to examine if the objects of the trust were charitable and the activities were bona fide. Further noting that the assessee had placed enough relevant details and supportive evidences in support of the trust objects being charitable and the activities being bona fide, the Tribunal directed the DIT to grant registration.

Shri 1008 Parshwanath Digamber Jain Mandir Trust v. DIT

ITA No. 5544/M/2009

Section 12AA — Registration of charitable trust — Trust constituted with the object clause consisting of charitable as well as religious — Whether entitled for registration — Held, Yes.

The assessee trust had applied for registration u/s. 12AA of the Act. Its objects, as per its trust deed, were charitable as well as religious. According to the DIT, since the objects were admixture of religious as well as non-religious, relying on the decision of the Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust v. CIT, (248 ITR 587) and the decision of the Supreme Court in the case of State of Kerala v. M. P. Shanti Verma Jain, (231 ITR 787), the registration u/s.12AA was denied. Before the Tribunal, the Revenue justified the order of the DIT on the ground that at the time of grant of registration u/s.12AA, it was necessary that he was satisfied that the objects are charitable and as per section 2(15), which defines the term ‘charitable purpose’, religious purpose is not part of charitable purpose.

Held

According to the Tribunal, the trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s. 11. For the purpose, reliance was placed on the decision of the Gujarat High Court in the case of ACIT v. Bibijiwala, (AA) Trust (100 ITR 516). It further observed that when the assessee seek exemption u/s.11, the same would be allowed subject to provision of section 13(1)(a) and (b) of the Act. According to it, the decisions relied on by the Revenue were on different facts, hence, not applicable to the case of the assessee.

Khar Gymkhana vs. DIT(E)
In the Income-tax Appellate Tribunal Mumbai
Bench ‘A’, Mumbai
Before B. Ramakotaiah, (A. M.) and Vivek Varma, (J. M.)
I.T.A. No.: 373/Mum/2012
Asst. Year: 2009-10. Decided on 10-07-2013
Counsel for Assessee/Revenue: A. H. Dalal/ Surinder Jit Singh

Section 12AA — Order cancelling Registration of the trust for carrying on activities in the nature of trade, commerce or business revoked. Registration restored.

Facts

The assessee trust was granted registration under section 12A(a) since the year 1984. During the course of the assessment proceedings, the AO noticed that the assessee had earned income by the sale of liquor at ₹ 1.45 crore, canteen compensation at ₹ 20.67 lakh, card and daily games, at ₹ 0.82 lakh, guest fees at ₹ 31.50 lakh and income from banquet. According to the AO these receipts were clearly in the nature of business income and were in excess of the monetary limit as laid down in the provisions of section 2(15) r.w. proviso which has come into effect from A.Y. 2009-10. Therefore, he concluded that such entity cannot be considered as for charitable purpose. Since the assessee is not for charitable purpose then the trust itself becomes non-genuine as it loses its public charitable status and accordingly the provision of section 12AA(3) of the Act gets attracted. Thus in view of the facts and circumstances the AO held that the assessee trust has become non-genuine and the registration as allowed to it in earlier years u/s. 12AA was cancelled/ withdrawn w.e.f A.Y. 2009-10.

Before the tribunal, the assessee contended that the rigours of section 12AA get attracted "if the activities of the trust or institution are not genuine or are not being carried out in accordance with the objects of the trust, as the case may be.” According to the assessee just because the legislature has inserted section 2(15), registration, as allowed by the Income-tax Department cannot get cancelled, without the change of objects and character of the trust. He further placed reliance on the earlier decisions of the tribunal in ITAs no. 4315 & 4316/ Mum/2010 in assessee's own case.

On the other hand, the revenue justified the order of the DIT and submitted that with the insertion of section 2(15), the character of the charitable trust has got very limited scope. It becomes ineligible for registration, if the trust gets into the field of trade or profit making.

Held

The tribunal noted that the case of the department was that the assessee had crossed the twin conditions, as mentioned in section 12AA(3), viz., ”that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution". However, it noted that in the instant case, the department had nowhere mentioned that "social intercourse among members" was not one of the objects of the trust, when it was originally formed on 4-10-1934. Further, it also noted that in the tribunal orders in the assessee’s own case which were relied on by the assessee, the aspect of section 2(15) had also been taken and adjudicated upon. Thus, noting that none of the revenue authorities have made any observation/comments on the objects recited as early as 04-10-1934 of the assessee trust, the twin conditions existing in section 12AA(3) and for ignoring the existing orders of the coordinate Bench in the case of the assessee and following the principles of judicial propriety, as well as the facts coming out of the documents placed before it, the tribunal held that the revenue has erred in cancelling the registration u/s. 12AA(3).

Ghatkopar Jolly Gymkhana vs. Director of Income tax (E)
In the Income Tax Appellate Tribunal "G" Bench, Mumbai
Before D. Karunakara Rao, (A. M.) and Sanjay Garg (J. M)
ITA No. 882/Mum/2012

Sections 2(15), 12A and 12AA – Charitable trust carrying on the activities which are in the nature of trade, commerce or business receipts there from exceeding the limit prescribed under second provisi on to section 2(15) – Action of the AO in cancellation of registration by treating the trust as non-genuine not justifiable.

Facts

The assessee is a club registered u/s. 12A as a charitable trust. The DIT(E) noticed that the assessee was carrying on activities in the nature of trade, commerce or business and its gross receipts there from during the year were in excess of ₹ 10 lakh, the limit then prescribed under second proviso to section 2(15). According to him since the activities of the assessee did not fall within the definition of charitable purpose as defined u/s. 2(15), the assesseetrust became non-genuine and as such the provisions of section 12AA(3) got attracted. He accordingly cancelled the registration w.e.f assessment year 2009-10 and declared the assessee as non-charitable trust. Before the tribunal the revenue justified the order of the DIT(E).

Held

According to the tribunal, before the insertion of the second proviso from 1-4-2009, the definition of charitable purpose when read with first proviso was very restrictive. However, by the insertion of the second proviso the rigour of the first proviso has been diluted and is not applicable if the trust carries on business activities and the gross receipts therefrom is ₹ 10 lakh or less. Thus, according to the tribunal, from 01-04-2009 the carrying out of the activities of trade, commerce or business by a charitable trust is not barred so as to exclude its activities from the definition of charitable purposes. However, a limitation has been imposed to the effect that the gross receipts from such activities should not be more than ₹10 lakh. The tribunal further noted that the use of the term “previous year” in the second proviso is also more relevant. It means the benefits will not be available to the assessee for the assessment year in which the gross receipts exceed the limit of ₹ 10 lakh. It does not mean that such benefits will not be available to the trust in the years during which its receipts does not exceed ₹ 10 lakh. According to the tribunal, in cases where the receipts from the activities in the nature of trade, commerce or business exceed the limit of ₹ 10 lakh, the registration of the trust as the charitable institution does not get affected, rather, it is the eligibility of the said trust to get tax exemption/benefits which gets affected that too for the relevant year during which the gross receipts of the trust crosses the limit of ₹ 10 lakh. For the said proposition, the tribunal also relied on the decision of the Jaipur bench of the Tribunal in the case of Rajasthan Housing Board vs. CIT (2012) 21 Taxmann.com77.

Accordingly, the tribunal held that the action of the CIT(A) in relying upon the second proviso to section 2(15) for cancelling the registration of the trust was not correct or justified. The only effect will be that the Assessee will not be entitled for exemption or tax benefits which otherwise would have been available to it being registered as charitable institution, for the relevant year during which its income has crossed the limit of ₹ 10 lakh. Subject to the same, the tribunal ordered the restoration of the registration granted to the trust.

National Horticulture Board vs. Assistant Commissioner of Income

I.T.A. No.: 4521/Del/12 Assessment year: 2009-10

Section 2(15) –First proviso to Section 2(15) will not apply where the services are rendered for fees but it is only subservient to the charitable objects of the institute and is not in the nature of business itself.

The assessee is a society under the Societies Registration Act, 1860 and registered u/s. 12A(a). Its objectives include promoting, encouraging and developing horticultural activities in the country. As a part of pursuing its objective, one of the activities that the assessee was involved in was disbursement of subsidy received from the Ministry of Agriculture in respect of qualified horticulture projects. In the course of the assessment proceedings, the AO noticed that the assessee had received a sum of ₹ 2.21 crore on account of cost of application form and the brochure from the subsidy seeke₹ The AO was of the view that the amounts so received were for services rendered to the customers, which is in the nature of business, commerce and trade, and, therefore, the activities of the assessee cannot be treated as charitable activities of the nature as contemplated by section 2(15). On appeal, the CIT(A) confirmed the order of the AO, as according to him,the assessee’s claim was hit by second limb of first proviso to section 2(15).

Before the Tribunal, the revenue relied on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency vs. Chief Commissioner of Income Tax [(2013) 356 ITR360] and contended that as long as the services are rendered to a business, trade or commerce, irrespective of the motives of the person rendering such services, the services so rendered vitiate the charitable character of the assessee rendering such services.

Held

The Tribunal noted that there is no dispute as regards the objects of the assessee viz., objects of general public utility, which is also a charitable purpose as per the law; and as confirmed by the lower authorities, the first limb of first proviso to section 2(15) is not attracted on the facts of the case of the assessee. As regards the revenue’s case, that the case is covered under the second limb of first proviso to section 2(15), on the basis that the assessee has rendered services “in relation to trade, commerce or business” for a consideration, the Tribunal relying on the decision of the Delhi High Court in the case of GS1 vs. Director General of Income Tax (Exemptions)[(2013) 360 ITR 138], observed that the scope of second limb extends only to such cases in which a business is carried out to feed the charitable activities. For invoking second limb of first proviso to section 2(15), it is sine qua non that the assessee extends services to business, trade or commerce and such services have been extended in the course of business carried on by the assessee. According to it, even in a situation in which an assessee receives a fees or consideration for rendition of a service to the business, trade or commerce, as long as such a service is subservient to the charitable cause and is not in the nature of business itself, the disability under second limb of first proviso to section 2(15) will not come into play. Further, it also noted that in another decision of the Delhi High Court in the case of The Institute of Chartered Accountants of India vs. DGIT (Exemptions) [(2013) 358 ITR 91], the rendition of services by the assessee was viewed in conjunction with the overall objectives of the assesse and once it was seen that those services were not in the nature of trade, commerce or business per se, the mere charging of fees for services so rendered, were held to be sub-servient to the charitable objectives and it was held to have no effect on the overall charitable objects of the assessee.

As regards the case law relied on by the revenue the tribunal preferred to follow the decision of the jurisdictional High Court.

Sunder Deep Education Society vs. ACIT
In the Income Tax Appellate Tribunal Delhi Bench ‘ G’ New Delhi
Before Rajpal Yadav (J. M.) and T. S. Kapoor (A. M.)
ITA No. 2428/Del/2011

Sections 11, 12 and 68 – Failure to present donors on being summoned – Donations cannot be taxed as income under section 68.

Facts

The assessee is registered under the Societies Registration Act, 1860 and u/s. 12AA of the Income tax Act, 1961. It also enjoys exemption u/s. 80G. The assessee runs educational institutions conducting various professional courses. In respect of the voluntary contribution aggregating to ₹ 1.97 crore received during the year, the assessee was not able to produce the donors when summoned by the AO who, as claimed by the assessee, had madethe said donations. Therefore, the AO held that the same were anonymous and unexplained cash credit and added the said amount as the assessee’s total income as per section 115BBC and section 68.

Before the CIT(A) the assessee submitted the name and address of the persons who had made donations along with other particulars prescribed by the Act. The CIT(A) agreed that the donations could not be treated as ‘anonymous’. However, according to him, since the assessee could not prove the donations amount of ₹ 1.97 crore the same was treated as unaccounted income by him and brought to tax u/s. 11(4) read with section 68/69/69C.

Before the tribunal, the revenue did not challenge the CIT(A)’s finding that the donations were not anonymous but contended that as held by the CIT(A), the same were taxable u/ss. 68 and 69 as income from other sources and the benefit of section 11 and12 would not be available to the assessee.

Held

The tribunal referred to the decision of the Delhi tribunal in the case of Shri Vivekanand Education & Welfare Society (ITA No. 2592 / Del / 2012) which was based on the decision of the Delhi high court in the case of DIT (Exem) vs. Keshav Social & Charitable Trust (278 ITR 152) where the Court observed that the fact that complete list of donors was not filed or that the donors were not produced, does not necessariiy lead to the inference that the assesse was trying to introduce un-accounted money by way of donation receipts. The Court further observed that as the assesse had disclosed the donation as income, the provisions of section 68 cannot beapplied. Applying the ratio, the tribunal held that the said receipts of ₹ 1.97 crore would be governed by the provisions of sections 11 and 12 of the Act and if 85% thereof is applied towards the objects of the trust, then the income assessable would be nil.

Sree Sree Ramkrishna Samity v. DCIT
In the Income Tax Appellate Tribunal Kolkata Bench ‘ C ’ Kolkata
Before Mahavir Jain (J. M.) and M. Balaganesh (A. M.)
ITA Nos. 1680 to 1685/Kol/2012, AY 2003-04 to 2008-09
Order dated 09.10.2015

Sections 12 A(2) – Proviso inserted by Finance (No. 2) Act, 2014 w.e.f. 1.10.2014 – Is retrospective – Exemption to be allowed u/s. 11 for earlier years even in absence of 12AA registration

Facts

Shree Shree Ramakrishna Samity is a society, registered under the West Bengal Society Registration Act, 1961 on 10.8.1986. The predominant object of the society includes promotion, development, preservation and rendering of social and cultural services in the matters of advancement of tenets and precepts of Lord Shree Shree Ram Krishna Paramhansa Dev irrespective of caste and creed of the humanity at large. The objects further include promotion of physical and mental development of youths, to make them worthy citizen for the service of the mother land, co-ordination of social, cultural and religious activities of allied organizations, organization of sevadal for rendering services to the suffering humanity, acquiring, establishment, starting, aiding, maintaining and management of schools, colleges, libraries, hospitals for the benefit of the public, helping needy students for prosecution of studies, helping the aged, sick and helpless and indigent persons, construction, maintenance, improvement, development, alteration of any building necessary by the Governing Body and to engage and assist such other philanthropic activities deemed appropriate by the Governing Body of the Society etc.

The assessee society took up the construction of an old age home since October 2000 with active financial support of the Siliguri Municipal Corporation for which contributions from the public were forthcoming and the same were duly accounted for in the audited accounts recording receipts and expenditures of the society. The said old age home was subsequently inaugurated by His Excellency the Governor of West Bengal. The assessee society was in receipt of the following donations from various parties for the purpose of construction of old age home:

The said donations were credited specifically to a bank account opened exclusively for the purpose of deposit of the receipts of donation and in the balance sheet, the receipt of donation was clearly accounted for as receipt of donation for the said purpose shown separately. These donations received were utilised for construction of old age home named “Shesh Basanta”. The Learned AO held that the assessee society is not registered u/s. 12AA of the Act and accordingly not eligible for exemption u/s. 11 of the Act . Accordingly, the Learned AO brought to tax the rental income derived by the assessee society as income from house property, interest income and donations received from various donors under the head income from other sources. This action was upheld by the Learned CITA for the same reason.

Held

The objects of the assessee society are charitable in nature within the meaning of section 2(15) of the Act on which fact there is absolutely no dispute. It is pertinent to note that the registration u/s. 12AA of the Act was granted to the assessee on 29.10.2010 with effect from 1.4.2010. Admittedly, the notice u/s. 148 of the Act was issued by the DCIT, Circle 2 Siliguri for the Asst Years 2003-04 to 2008-09 on 30.3.2010. Even for the earlier years , the assessee society was carrying on the same charitable objects as per the trust deed on which fact also there is absolutely no dispute. The receipts were brought to tax only on the pretext that the assessee society is not having registration u/s 12AA of the Act in the Asst Years 2003-04 to 2008-09.

It is relevant at this juncture to get into the amendment brought in section 12A by Finance Act 2014 with effect from 1.10.2014 by way of insertion of first proviso to section 12A(2) of the Act which is reproduced below for the sake of convenience :

Section 12 A(2) Where an application has been made on or after the 1st day of June 2007, the provisions of section 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made:

Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessement year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year:

Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year:

Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under section 12AA.

Admittedly, the reassessment proceedings were pending before the learned AO for the Asst. Years 2003-04 to 2008-09 as on the date of granting registration u/s. 12AA of the Act on 29.10.2010 with effect from 1.4.2010 as reassessment proceedings got commenced pursuant to issuance of notice u/s. 148 on 30.3.2010 as stated supra. Admittedly, the objects and activities of the trust had remained the same in preceding assessment years also i.e Asst Years 2003-04 to 2008-09. Though this first proviso to section 12A(2) talks about pendency of assessment proceedings, it is relevant to get into the definition of the term ‘assessment’ in section 2(8) of the Act, wherein it is defined as “assessment includes reassessment”. Hence even reassessment proceedings that were pending would also come under the ambit of the first proviso to section 12A(2) of the Act.

The second proviso to section 12A(2) also provides that no action u/s. 147 of the Act shall be taken merely for non-registration of trust or institution. Reading this proviso with the first proviso to section 12A(2) and applying the Rule of Harmonious Construction, it could safely be concluded that the legislature in its wisdom had only brought this proviso to prevent genuine hardship that could be caused on the assessee due to non-registration u/s 12AA of the Act and accordingly in our opinion, the provisos to section 12A(2) of the Act is to be construed as retrospective in operation.

The third proviso to section 12A(2) of the Act also provides that the first and second proviso shall not be applicable if the trust or institution had been refused registration earlier or the registration granted earlier is cancelled by the Commissioner u/s 12AA of the Act. This also goes to prove that the first and second proviso shall be made applicable for the trusts for earlier assessment years also who had not applied for registration u/s 12AA of the Act at all.

We hold that the registration of trust under section 12A of the Act once done is a fait accompli and the AO cannot thereafter make further probe into the objects of the trust. Reliance in this regard is placed on the decision of the Hon’ble Apex Court rendered in the case of ACIT vs Surat City Gymkhana reported in (2008) 300 ITR 214 (SC). Drawing analogy from this judgement, the logical inference could be that as long as the objects were charitable in nature in the earlier years and in the year in which registration u/s 12AA was granted, the existence of trust for charitable purposes in the earlier years cannot be doubted with. Even otherwise, no adverse findings were given by the revenue with regard to the existence of the assessee society for charitable purposes in the assessment years under appeal.

It will be relevant to get into the Explanatory Notes to the Provisions of the Finance (No. 2), 2014 as given in CBDT Circular No. 01 / 2015 dated 21.1.2015 in reference F.No. 142 / 13 /2014-TPL which is reproduced herein below for the sake of convenience :-

Para 8 – Applicability of the registration granted to a trust or institution to earlier years

Para 8.2 Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organizations. Due to absence of registration, tax liability is fastened even though they may otherwise be eligible for exemption and fulfill other substantive conditions. However, the power of condonation of delay in seeking registration was not available.

This clearly goes to prove that 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. Apparently the statute provides that registration once granted in subsequent year, the benefit of the same has to be applied in the earlier assessment years for which assessment proceedings are pending before the Learned AO, unless the registration granted earlier is cancelled or refused for specific reasons. The statute also goes on to provide that no action u/s 147 could be taken by the AO merely for non-registration of trust for earlier years

Shree Bhanushali Mitra Mandal Trust v. ITO
In the Income Tax Appellate Tribunal Ahmedabad Bench ‘ SMC ’
Before Goerge Goerge K (J. M.)
ITA No. 2515/Ahd/2015, AY 2011-12
Order dated 22.02.2016

Sections 12 A(2) – Proviso inserted by Finance (No. 2) Act, 2014 w.e.f. 1.10.2014 – Is retrospective – Exemption to be allowed u/s. 11 for earlier years even in absence of 12AA registration.

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. Apparently the statute provides that registration once granted in subsequent year, the benefit of the same has to be applied in the earlier assessment years for which assessment proceedings are pending before the ld. A.O., unless the registration granted earlier is cancelled or refused for specific reasons. The statute also goes on to provide that no action u/s147 could be taken by the AO merely for non-registration of trust for earlier years

In the instant case, it is not in dispute that registration was granted w.e.f. 17.12.2013 by the order of CIT(A) dated 08.05.2014. It is also not in dispute that objects and activities of the assessee trust are charitable in nature during the relevant financial year. 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 17.12.2013 w.e.f. the assessment year 2013-14. The appeal is 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 which obtained registration u/s 12AA of the Act during the pendency of appeal was entitled for exemption claimed u/s 11 of the Act.

The explanatory Memorandum to Finance (No. 2) Bill, 2014, which sought to amend section 12A explains the objects and reasons for making such amendments. The explanation makes it clear that it was in order to provide relief to such trusts in respect of which, due to absence of registration u/s 12AA tax liability got attached though otherwise they were eligible for exemption by fulfilling other substantive conditions that the amendment was brought in. That being so, denying such benefit to a trust like the assessee who had obtained registration u/s 12AA during the pendency of the appeals filed against the orders of the assessing authority, by narrowly interpreting the term, 'pending before the assessing officer' so as to exclude its pendency before the appellate authority, will be doing violence to the provisions of the Statute and, as such, liable to be interfered with.

Moreover, under the Scheme of the Act, sections 11 and 12 are substantive provisions which provide for exemptions to a religious or charitable trust. Sections 12A and 12AA detail the procedural requirements for making an application to claim exemptions under sections 11 and 12 by the assessee and the grant or rejection of such application by the commissioner. Thus, in my view, sections 12A and 12AA are only procedural in nature. Hence, it is not the registration u/s 12AA by itself that offers immunity from taxation. A receipt whether it is revenue or capital in nature is to be decided at the assessment stage. Being procedural in nature, in my view, liberal interpretation will give effect to the intention of the amendment, thereby removing the hardship in genuine cases like the present assessee under consideration.

CONDONATION OF DELAY IN FILING APPEAL

Y. P. Trivedi vs. JCIT
ITAT Mumbai `G’ Bench
Before Vijay Pal Rao (JM) and Rajendra (AM)
ITA No. 5994/Mum/2010
A.Y.: 2005-06. Decided on: 11th July, 2012.
Counsel for assessee/revenue: Usha Dalal/AK Nayak

Delay in filing appeal due to CA’s fault is bonafide and must be condoned. Courts should take a lenient view on the matter of condonation of delay provided the explanation and the reason for delay is bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way.

Facts

The appeal filed by the assessee before the Tribunal was delayed by 496 days. The assessee filed an application for condonation of delay as well as affidavit of the assessee and his CA explaining the reasons for delay in filing the appeal. It was explained that the CA of the assessee on receiving the order of CIT(A) gave it to the person maintain records of appeal matters for taking photocopy and sending to assessee’s office for filing appeal. The said order got mixed up with other papers and the appeal could not be filed in time. Upon the same being noticed the appeal was filed after tracing the order. It was submitted that the delay is neither deliberate nor willful but due to misplacement of the order in the office of the CA and therefore, it was a bonafide mistake. Relying on the decision of the SC in the case of Collector, Land Acquisition v. Mst. Kajiji (167 ITR 471)(SC) it was contended that Justice oriented approach has to be taken by the Court while deciding the matter of condonation and the case should be decided on merits and not on technicalities.

Held

The Tribunal observed that the facts of the case do not suggest that the assessee had acted in a mala fide manner or the reasons explained is only a device to cover an ulterior purpose. It is settled proposition of law that the Court should take a lenient view on the matter of condonation of delay. However, the explanation and the reason for delay must be bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way. The Court should be liberal in construing the sufficient cause and should lean in favour of such party. Whenever substantial Justice and technical considerations are opposed to each other, cause of substantial Justice has to be preferred. Since the appeal could not be filed due to bonafide mistake and inadvertence, the Tribunal, in the interest of Justice, condoned the delay in filing the appeal.

DEEMED DIVIDEND

Uday K. Pradhan v. ITO (ITAT Mumbai)
ITA No.4669/Mum/2014; AY 2005-06
Bench ‘F’; Order dated 06.04.2016

S. 2(22)(d): Redemption of preference shares does not constitute "deemed dividend" .

Held

As can be seen by s. 2(22)(d), there should be a reduction of its capital and distribution to the shareholders out of the accumulated profits. Section 80(3) of the Companies Act states that the redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorised share capital. By virtue of Section 80(3) redemption of preference shares cannot be considered as reduction of authorised share capital, therefore, treating them as deemed dividend does not arise, as the provisions of section 2(22)(d) can only be invoked only when there is distribution of accumulated profits by way of reduction of share capital. Therefore the question of invoking deemed dividend provision on this transaction does not arise, eventhough the redemption of shares are to be made out of the profits of the company by virtue of section 80(1) of the Companies Act. However, since it cannot be treated as reduction of authorised share capital by virtue of section 80(3) of the Companies Act, the amount received by assessee on redemption of preference shares cannot be treated as deemed dividend

DEDUCTIONS

ITO v. Foresee Information Systems Pvt. Ltd.

ITAT Bangalore ‘A’ Bench
Before Gopal Chowdhry (JM) and N.L. Kalra (AM)
ITA No 3014/Bang/2004; 1363 and 1364/Bang/2005
AY 2002-03 to 2004-05; Decided on 16-3-2007
Counsel for revenue/assessee : S.S. Manthri / Padamchand Khincha

S. 10A of the Income-tax Act, 1961 – Assessee, originally a firm, registered itself under Part IX of the Companies Act and became a company – Claim for deduction made in the status of a company denied on the ground that it was not a new undertaking – Whether AO justified – Held, No

Facts

Prior to its existing avatar, the assessee was a firm, which was originally constituted in November 1993. It registered itself as a company under Part IX of the Companies Act, 1956 on 24-7-2001. During its existence as a firm it was in export of software and was claiming deduction u/s.80HHE. The assessee got itself registered as STP unit on 3-1-2002 and claimed deduction u/s.10A for the first time in the A.Y. 2002-03. The claim was rejected by the AO, on the grounds that the conditions of S. 10A(2)(ii) and (iii) were not fulfilled. According to him, the assessee’s case was also hit by the provisions of S. 10A(9). On appeal, however, the CIT(A) allowed the claim of the assessee.

Before the Tribunal, the Revenue contended that the relief under the provisions of S. 10A was available only to a newly established industrial undertaking. According to it, the provisions of S. 10A(2) were also not fulfilled because the so-called newly formed company was using 100% assets which were already put to use in India by the firm.

Held

The Tribunal agreed with the CIT(A) that in the assessee’s case, the conversion of a firm into a company was not a transfer as held by the Bombay High Court in the case of Texspin Engineering and Manufacturing Works. Therefore, according to it, there was no violation of any condition of S. 10A(2)(ii) and (iii).

Further, noting the fact that the undertaking got itself registered as STP unit for the first time in the year 2002 and started claiming deduction u/s.10A for the first time from the A.Y. 2002-03, the Tribunal relying on the Board Circular No. 1/2005 and the EXIM Policy permitting existing DTA unit to get itself registered as EOU, upheld the order of the CIT(A) and held that the assessee was entitled to deduction u/s.10A of the Act.

Case referred to

CIT v. Texspin Engineering and Manufacturing Works, 263 ITR 345 (Bom.)

Shangold India Ltd. v. ITO

ITAT ‘E’ Bench, Mumbai
Before D.K. Agarwal (JM) & D.K. Rao (AM)
ITA Nos. 6041 & 6568/Mum./2002
AY 2003-04 & 2004-05; Decided on 6/5/2009
Counsel for Assessee/Revenue: A.R. Shah / L.K. Agrawal

Section 10A of the Income tax Act, 1961 — Exemption to new undertaking in FTZ — (i) Whether receipt by way of reimbursement of expense eligible for exemption — Held : Yes (ii) Whether AO justified in denying the exemption in a case where export proceeds received after 6 months but within the period of one year — Held : No.

Per Karunakara Rao

Facts

The issues before the Tribunal were as under :

1. The assessee was denied exemption u/s. 10A in respect of ₹ 0.35 lakh received from Export Promotion Council by way of reimbursement of exhibition participation costs. The corresponding expense was incurred by the assessee in the earlier year. According to the AO, the receipt cannot be said to have been derived from export activity, hence the claim for exemption u/s. 10A qua the said receipt was denied by him. On appeal, the CIT(A) confirmed the AO’s order holding that the proximate source of the receipt was the grant and was not the export proceeds.

2. Whether the delayed payments towards the employees’ contribution to ESIC u/s. 2(24) r.w. Section 36 were chargeable under the head ‘Income from other sources’ as held by the AO or as business income as claimed by the assessee.

3. The assessee was denied exemption u/s. 10A in respect of the sum of ₹ 21.16 lakh since, the same was received beyond the specified period of 6 months.

Held

1. The Tribunal relied on the Delhi Tribunal decision in the case of Perot System TSI Ltd. It noted that the said decision was in the context of reimbursement by the EXIM bank. According to the Tribunal, the decision had generated the legal principle viz., where the expenses which were reimbursed had direct link with the business of the assessee’s undertaking, the same were eligible for exemption u/s. 10A. Applying the said proposition, the Tribunal held that the reimbursed amount received from Export Promotion Council was directly linked to the business of the assssee's undertaking and therefore, entitled to deduction u/s. 10A.

2. The Tribunal agreed with the assessee’s reasoning that when the contribution was made in time, such payments were allowed as business expenditure, accordingly, the disallowance if any made in this regard could only give rise to business income. Accordingly, it was held that the delayed payments towards the employees’ contribution to ESIC was taxable as business income.

3. The Tribunal noted that as per Section 10A(3) below Explanation 1, the RBI was authorised to grant extension to the said period of 6 months. Accordingly, relying on the Circular No. 28 of 30.3.2001 and Circular No. 91 of 1.4.2003, the Tribunal agreed with the assessee that for the unit in the SEZ, the RBI has granted extension period of one year. Hence, it was held that the export proceeds realised within the extended period were eligible for exemption u/s. 10A.

Case referred to

Perot System TSI Ltd. (2007) (16 SOT 350) (Delhi).

Mural Overseas Ltd. v. Addl. CIT

ITA Nos.777 & 900/Ind/2004 & 295 & 356 (Ind) of 2006,
AY 2001-02 & 2002-03, Indore Special Bench, order dated 28/03/2012

Deduction – Sec. 10B – Existing units – Extension of relief w.e.f. 1-4-1999 – Period of 5 years extended to 10 years – Extension of relief period available to existing units

The assessee, a 100 % EOU, commenced commercial production in AY 1992-93 and was entitled to claim exemption u/s 10B(3) in any 5 consecutive assessment years falling within the period of 8 years The assessee did not claim a deduction in the first 3 assessment years as there was a loss and claimed it for the first time in AY 1995-96. The eligibility period was upto AY 1999-2000. With effect from 1.4.1999, the period of exemption prescribed u/s 10B(3) of 5 years was substituted by 10 years The assessee claimed that it was entitled for exemption u/s 10-B for a further period of two years i.e. AY 2000-01 and 2001-02. Thereafter, w.e.f. 1.4.2001, s. 10B was substituted by the Finance Act, 2000. The assessee’s claim was resisted by the AO & CIT (A) on the ground that the benefit applied only to “new undertakings” set up after that date and not to existing units. Held by the Special Bench:

(i) In AY 1999-2000, before expiry of the original time limit of five consecutive assessment years for which deduction was available as per then applicable law, the amended law became applicable and the assessee was accordingly eligible for deduction for the extended period of 10 years, as against 5 years allowed under the preamended law ( DSL Software Ltd followed);

(ii) If there is only one decision of a non-jurisdictional Hon’ble High Court on the issue, it is binding on the Special Bench in view of the settled principle of judicial proprietary;

(iii) The department’s argument that the new units set up by the assessee was a mere “capacity extension” and not a separate industrial undertaking on the basis that the certificates granted by the EOU authorities was for enhanced capacity and not for setting up a new industrial undertaking is not acceptable because S. 10B does not stipulate the issue of a separate approval for each unit from the competent authority. The only requirement is that the undertaking should be approved ( Saurashtra Cement & Chemical Industries 260 ITR 181 (SC) distinguished)

(iv) On the question whether export incentives are “derived” from the undertaking and are eligible for deduction u/s 10B, s. 10B(4) stipulates a formula by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, though s. 10B(1) refers to profits “derived” by the EOU, the manner of determining such eligible profits has to be done as per the formula. S. 10B(4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking and be eligible for deduction.

Laxmi Civil Engineering P. Ltd. v. ACIT

ITA Nos.431/PN/07, 435/PN/07, 254/PN/08 & 766/PN/09,

Pune Bench ‘A’, Order dated 8/06/2011

S. 80IA(4) - S. 80-IA(4) deduction available even to contractor who merely develops but does not operate & maintain the infrastructure facility

Relying on the judgement of the Larger Bench in B. T. Patil & Sons 126 TTJ 577 (Mum), the assessee’s claim for deduction u/s 80-IA(4) was denied by the Tribunal on the ground that the assessee was only a contractor and had not complied with all the conditions specified in sub-clauses (a), (b) & (c) of clause (i) of s. 80-IA(4). The order was recalled pursuant to the assessee’s MA claiming that the judgement of the Bombay High Court in ABG Heavy Industries Ltd 322 ITR 323 covered the issue in its favour. HELD deciding the issue afresh:

The issues as to (i) whether the word “contractor” is synonymous with “developer” within the meaning of s. 80-IA(4)(i) and (ii) whether the condition in clause (c) is applicable to a developer who is not carrying on the business of operating and maintaining the infrastructural facilities are covered by the judgement in ABG Heavy Industries 322 ITR 323 (Bom). There, it was held that the department’s contention that since the assessee was not “operating and maintaining the facility”, he was not eligible for s. 80-IA(4) deduction was wrong because a harmonious reading of s. 80-IA(4) led to the conclusion that the deduction was available to an assessee who (i) develops or (ii) operates and maintains or (iii) develops, operates and maintains the infrastructure facility. The 2001 amendment made it clear that the three conditions of development, operation and maintenance were not intended to be cumulative in nature. A developer who is only developing the infrastructure facility cannot be expected to fulfill the condition in sub-clause (c) which is an impossibility and requiring it to be fulfilled will be an absurdity. The result is that even a contractor who merely develops but does not operate or maintain the infrastructure facility is eligible for s. 80-IA(4) deduction ( B.T.Patil & Sons Belgaum vs. ACIT 126 TTJ 577 (Mum) impliedly held not good law).

Hercules Hoists Ltd. v. ACIT (Mum)

ITA Nos.7943, 7944, 7946, 2255/Mum/2011; AY 2005-06 to 2008-09; order dt.13/02/13

S. 80-IA(5): Loss of eligible unit, even if set-off against non-eligible profits, has to be aggregated & carried forward for set-off against future eligible profits

The assessee set up two windmills, the income from which was eligible for deduction u/s 80IA. The assessee suffered a loss in the said Wind Mills and claimed a set-off of the same against its other income. The AO and the CIT(A) rejected the claim by relying on Gold Mine Shares 113 ITD 209 (SB) (Ahd) where it was held that in view of s. 80-IA(5), the loss suffered by the eligible unit cannot be set off against the profits of other units / other business in the initial year of assessment or subsequent years of eligible years of assessments. The Tribunal had to consider the following legal issues: (i) what is the “initial assessment year“?, (ii) whether the loss/ depreciation from the eligible unit is entitled to be set-off against the other income?, (iii) whether the said loss/ depreciation of the eligible unit is, after set-off against the other income, still required to be notionally carried forward for set-off against the future profits of the eligible unit? Held by the Tribunal:

(i) The “initial assessment year” is the year in which the eligible unit commences operations. It is not the year in which the assessee chooses to claim deduction. The requirement of s. 80-IA(5) is that the loss and unabsorbed depreciation of the eligible unit should begin to be aggregated from the “ initial assessment year” to the last allowable year. The aggregation has to continue for every year irrespective of whether s. 80-IA (1) deduction for that year is exigible or not;

(ii) If the eligible unit has no profit, the loss & depreciation of the eligible unit is entitled to be set-off against the other income. However, despite such set-off, the loss and depreciation has to be aggregated and notionally carried forward for set-off against the future profits of the eligible unit.

Shree Cement Ltd. vs. Addl. CIT
In the Income Tax Appellate Tribunal Jaipur Bench,
Jaipur Before Hari Om Maratha (J.M.) and N.K. Saini (A.M.)
ITA No. 503/JP/2012

Section 80IA(8) – Where more than one market value/Arm’s Length Value is available and the assesse is entitled to adopt the market value of its choice. Section 2(24) – Receipt on account of Carbon credit is capital receipt not liable to tax.

1. Re: Claim u/s. 80IA:

Facts

The assessee claimed deduction u/s. 80IA in respect of its Power Generation undertaking. Power generated by the power undertaking is predominantly used by the assessee captively at its cement unit. For computing the profitability of the power captively consumed, in terms of provisions of section 80IA(8), the assessee considered the market value or Arm’s Length Value being the value at which independent power supplier had sold power to Power Distribution Companies (DISCOMs) in the State of Rajasthan. While the AO applied the rate at which power is supplied by the State Electricity Grid to assessee’s cement unit and accordingly, re-computed the deduction eligible u/s. 80IA. The CIT(Appeals) upheld the action of the AO.

Before the tribunal, the revenue justified the orders of the lower authorities on the grounds amongst others, that:

• The assessee has adopted market price of its choice in computing the transfer price and such discretion cannot be allowed to the assessee;

• On the point of selection of price from the basket of market values, it submitted that there is no such provision in the acT which gives assessee such prerogative.

• Since, the assessee itself is drawing power from the State grid on regular basis, Grid rate is the best market price available which should be adopted for computing deduction u/s. 80IA.

Held

According to the tribunal, the issue before it is where there are two or more market values available and if the assessee has adopted a ‘value’ which is ‘market value’, whether it is permissible for the Revenue to still replace the same by another ‘market value’. The tribunal, on perusal of section 80IA(8) noted that the statute provides that the assessee must adopt ‘Market Value’ as the transfer price. In the open market, where a basket of ‘Market Values’ are available, the Act does not put any restriction on the assessee as to which ‘Market Value’ it has to adopt. It is purely assessee’s discretion. As long as the assessee has adopted a ‘Market Value’ as the transfer price, that is sufficient compliance of law. Even if assessee’s cement unit has purchased power, also from the Grid or that assessee’s Power Unit has also partly sold its power to grid or third parties that by itself, does not compel the assessee or permit the Revenue, to adopt only the ‘grid price’ or the price at which the Eligible Unit has partly sold its power to grid or third parties, as the ‘market value’ for captive consumption of power to compute the profits of the eligible unit. Any such attempt is clearly beyond the explicit provisions of section 80IA(8) of the Act. The above principles are also supported by the decision of Special Bench of Bangalore Tribunal in Aztec Software & Technology Services Ltd. vs. ACIT 107 ITD 141 as well as Mumbai Tribunal decision in the case of ACIT vs. Maersk Global Service Centre (I) Pvt. Ltd. 133 ITD 543. Since the assesse had adopted a rate at which actual transactions had been undertaken by the unrelated entities and the volumes of transaction as relied upon were also substantial, the appeal filed by the assesse on this ground was allowed.

Re: Receipt from Carbon Credit is capital receipt or revenue receipt

Facts

The assessee’s project 'Optimum Utilisation of Clinker' had generated CER or Carbon Credit by reducing emissions from clinkerisation and from power generation. The said project generated CERs against which the assessee received ₹ 16.02 crore which has been claimed as ‘capital receipt’. In the assessment order, the Assessing Officer held that cost of acquisition of Carbon Credit is NIL & the entire receipt is taxable as capital gain. However, in the computation, it has been added as Business income. The CIT (Appeals) on appeal held that the receipt was in the nature of benefit arising from the business of the assessee and is taxable as ‘Business Income’ u/s. 28(iv) of the Act.

Before the tribunal the revenue submitted that the receipt on account of carbon credit was related to the business of the assessee and the assessee had undertaken activities which had resulted in the receipt on account of carbon credits. Hence, the amount so received had to be considered as related to the business of the assessee and should either be considered as revenue receipts chargeable to tax as business income, or the net amount after deduction of expenditure if any, incurred for the same should be considered as chargeable to tax under the head capital gains.

Held

The tribunal relied on the decisions of the Hyderabad Tribunal in the case of My Home Power Ltd. vs.DCIT 151 TTJ 616 (Hyd), the Chennai Tribunal in the cases of Sri Velayudhaswamy Spinning Mills (P.) Ltd. vs. DCIT 40 taxmann.com 141 and Ambika Cotton Mills Ltd. vs. DCIT I.T.A. No. 1836/Mds/2012 and held that receipt on account of Carbon Credit is capital in nature and neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains. In its above view, the tribunal also drew support from the decision of the Supreme Court in the case of Vodafone International Holdings vs. UOI 341 ITR 1 wherein the Supreme Court held that treatment of any particular item in different manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically provides for taxability of carbon credit as business receipt and Income Tax Act does not do so, the tribunal held in favour of the assessee and the addition made by the AO was deleted.

ACIT v. Bengal Ambuja Housing Development Ltd.

ITAT ‘C’ Bench, Kolkata
Before Dinesh K. Agarwal (JM) and Jugal Kishore (AM)
ITA No.1735/Kol/2005 & CO No.1595/Kol/2005
AY 2002-03; Decided on 24-3-2006
Counsel for revenue / assessee : D.S. Damle / M.W. Haque

S. 80IB(10) of the Income tax Act, 1961 – Deduction in respect of income from development and building of housing projects – Project consisting of residential units where the individual flat size varied between 800 sq. ft. to 3,000 sq. ft. – Whether the assessee entitled to claim deduction (computed on proportionate basis) – Held Yes.

Per Jugal Kishore

Facts

The assessee was engaged in the business of development and construction of residential apartments. One of its projects consisted of 261 residential units and the individual flat size varied between 800 sq.ft to 3,000 sq.ft. It had claimed deduction u/s. 80IB(10) of the Act with reference to the profit attributable to the built-up area, which was occupied by the residential units having individual flat size of less than 1,500 sq.ft. The profit was computed on a proportionate basis — based on the ratio of the built-up area of the eligible sized flats to the total area of the project. Similar deduction was also claimed with reference to the income earned on account of the forfeited amount on cancellation of the agreement by the prospective buyers and on the sale of scrap (‘other income’).

According to the AO, the deduction was allowable only where each and every residential unit comprised in the project had maximum built-up area of 1,500 sq.ft. Further, in respect of the other income, since the said income was not derived directly from the project itself, according to him, no deduction could be allowed. Thus, the assessee’s claim was rejected. On appeal, the CIT(A) gave partial relief by allowing deduction in respect of the profit derived on sale of flats. However, in respect of the other income, he upheld the order of the AO. So both the parties filed appeal before the Tribunal.

Held

The Tribunal noted that the provisions of S. 80IB(10) do not provide for denial of deduction, if a housing complex contains both, the smaller and larger residential units. Following the decision in the case of Bajaj Tempo Ltd., where the Supreme Court had observed that such provisions should be interpreted liberally, it upheld the order of the CIT(A) qua the deduction claimed with reference to the profit on sale of residential units.

In respect of the income earned on account of the forfeited amount on cancellation of the agreement by the prospective buyers, the Tribunal found that the said receipts by the assessee were directly related to the construction and development of the housing complex, and hence, eligible for deduction u/s.80IB(10). As regards the income from scrap, it was noted that it was not the case of the Revenue that such scrap was from the business, other than the business of construction and development of residential complex. Thus, according to it, the scrap was generated from the construction and development activity only. Thus, according to the Tribunal, the CIT(A)’s action in denying the deduction was not correct, accordingly, the assessee’s cross appeal on the point was allowed.

Case referred to
Bajaj Tempo Ltd. v. CIT, 196 ITR 188 (SC)

Dy. CIT. v. Vimal Builders and Vimal Builders v. Dy. CIT

ITAT ‘F’ Bench, Mumbai
Before M.A. Bakshi (VP) and R.K. Panda (AM)
ITA No. 3646/Mum./2007 & 2730/Mum./2007
AY: 2003-04; Decided on: 28/7/2009
Counsel for assessee / revenue : R.R. Vora and Manoj Anchalia / J.V.D. Lanstich

S. 80IB(10) — Amenities provided by the assessee at the time of construction itself, though by way of a separate agreement, are to be treated as part of the housing project undertaken by the assessee — Deduction u/s. 80IB(10) is allowable in respect of receipts for amenities — When there is direct nexus between the funds borrowed and funds advanced to sister concerns interest received on amounts advanced can be netted off against interest paid.

Per R. K. Panda

Facts:

The assessee was engaged in the business of constructing residential buildings. During the assessment year under consideration the assessee had claimed deduction of ₹ 3,15,40,268 u/s. 80IB(10). The Assessing Officer (AO) noted that the assessee had considered receipts for amenities as part of total sales and had claimed deduction u/s. 80IB on the profit element contained in receipts for amenities. He observed that the amenities included superior quality flooring, false ceiling, fans and tubes, superior quality fittings in toilets, box grills and pipe gas from Mahanagar Gas Limited. The AO did not consider profit derived from providing amenities as part of total sales and accordingly denied benefit of deduction on an amount of ₹ 22,12,360 being the profit on amenities receipts of ₹ 55,34,797.

The CIT(A) held that provision of amenities should be treated as part of the housing project undertaken by the assessee and since these amenities are provided by the assessee at the time of construction itself, though by way of a separate agreement, the profit element in receipts for amenities qualifies for deduction u/s.80IB(10). He allowed the appeal of the assessee.

The CIT(A), in the course of appeal proceedings before him, noted that the assessee had advanced monies to its sister concerns and had received interest of ₹ 16,27,802 which interest was netted off against interest paid. After giving an opportunity to the assessee, he held that interest receipts should be excluded for the purpose of calculating deduction u/s.80IB(10) of the Act. He directed AO to recompute the deduction u/s.80IB(10) by excluding interest receipts.

Aggrieved, the Revenue and the assessee preferred appeals to the Tribunal.

Held

The Tribunal noted that the extra amenities are provided only to purchasers of the flats at the time of purchase of flat itself and no such activity has been undertaken for any other person; the agreement for sale of flat and for provision of extra amenities were both entered on the same date; work for extra amenities was carried out through the same contractor at the time of construction of the flat itself. It found merit in the submission that extra amenities given to the buyer cannot be provided in isolation as the same are inextricably connected with the housing project and the decision of providing such extra amenities to the buyer was a commercial decision and within the conditions of S. 80IB(10) of the Act. Accordingly, this ground was decided in favor of the assessee.

As regards the exclusion of interest receipts for computing deduction u/s.80IB(10) the Tribunal after considering the submissions made on behalf of the assessee (viz. that the funds were borrowed from banks and private parties for the purpose of its housing project; the borrowings from the banks were for a specified period and prepayment would have resulted into levy of penalty interest and therefore funds were advanced to sister concerns on a temporary basis so as to recoup part of the interest costs) directed the AO to give an opportunity to the assessee to prove the nexus that borrowed funds were used for giving advances on which interest has been earned and if the assessee can prove such nexus then netting may be allowed.

D. K. Construction v. ITO

ITA No.243/Ind./2010

S. 80IB(10) of the Income-tax Act, 1961 Deduction in respect of profits and gains arising from development of housing project Date of completion of the housing project  Relevant date is not the date of issuance of the completion certificate by the local authority but the date of completion as mentioned in the certificate

Facts

The assessee was engaged in the business of civil construction, building and developing housing project. It claimed deduction of ₹ 36.63 lakh u/s. 80IB(10) of the Act. According to the AO, the housing project was not completed prior to the prescribed date of 31-3-2008. The contention of the assessee was that it had completed the project before the prescribed date and the local authority was duly informed of the fact vide its letter dated 21-3-2008. According to the assessee, merely because the completion certificate was not issued by the local authority, over which the assessee had no control, the same could not be made a basis for denial of claim. However, according to the AO, the availability of the completion certificate before the date prescribed was a must for the allowance of deduction u/s.80IB(10). Therefore, he rejected the assessee claim for deduction. On appeal, the CIT(A) confirmed the disallowance.

Held

According to the Tribunal, what is crucial is not the date of issue of letter by the local authority, but the date mentioned in the letter certifying completion of the project. Therefore, it rejected the contention of the Revenue to the effect that the date of completion shall be taken as the date on which the certificate is physically issued by the local authority.

ITO v. Chheda Construction Co. (Joint Venture)

ITA No. 2764/Mum./2009

Section 80IB(10) — Amendment to section 80IB(10) w.e.f. A.Y. 2005-06 restricting the commercial area to 5% is not applicable to projects commenced prior to 1-4-2005.

The assessee, a builder and land developer, had entered into an agreement to develop and construct a building project on land situated at Mira Taluka, Dist. Thane. For A.Y. 2005-06, the assessee filed a return of income in which it claimed deduction u/s. 80IB(10) of the Act. The AO noted that the housing project which consisted of 94,255 sq. ft had shopping area to the extent of 7,935 sq. ft. The AO denied the deduction on the ground that in view of the amendment to section 80IB(10) w.e.f. 1-4-2005, the assessee was not entitled to deduction u/s.80IB(10) of the Act.

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

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

Held

The Tribunal noted that the assessee’s project had commenced prior to 1-4-2005. It also noted that in the case of Brahma Associates, the High Court has held that the amendment to section 80IB is prospective in operation. Since the assessee’s project had commenced in December 2003, the Tribunal held the amendment to be not applicable to the assessee’s case.

The Tribunal dismissed the appeal filed by the Revenue.

Baba Promoters & Developers v. ITO

ITA Nos. 629/PN/2009; 625/PN/2009 and 159/PN/2010

Section 80IB(10) — While computing the area of plot, the area of a plot acquired subsequently for providing approach road also needs to be included in the measurement of total plot area. Areas of open land/garden/store/gym room meant for common use are not to be included for calculating built-up area of the residential unit. Merger of flats, after purchase, by the owners thereof to make it into a larger flat for their own convenience cannot be a cause for denial of deduction u/s. 80IB(10).

The assessee-firm started construction of a residential project at Aundh, Pune. As per the original lay-out plan approved by Pune Municipal Corporation (PMC), the total area of the plot was shown to be 3995.34 sq.mts. i.e., marginally less than the prescribed area of 1 acre. The assessee submitted that in addition to the above-stated area of land, an additional land measuring 5 ‘Are’ was also acquired by the assessee for the approach road to the said project vide a separate agreement made with the same landlords from whom the above-stated area of 3995.34 sq.mts. of land was purchased. On including this area, the size of the plot exceeded 1 acre. The assessee submitted that if this area would not have been acquired, the PMC would not have sanctioned the plan and issued commencement certificate. The AO visited the site and being satisfied allowed the deduction.

The CIT found this order to be erroneous and prejudicial to the interest of the revenue on the ground that: (1) the area of the plot is less than 1 acre; (2) as per sale agreement of row house, the saleable area mentioned is more than 1500 sq. feet; (3) in A.Y. 2005-06 the AO has in order passed u/s.143(3) denied deduction u/s.80IB(10); and (4) flats have been merged together and the modification is not as per approved plans.

Aggrieved, the assessee filed an appeal questioning the validity of revisional order passed u/s.263 of the Act.

Held

The Tribunal noted that in the case of Haware Engineers and Builders (P) Ltd. v. ACIT, (11 Taxmann.com 286) (Mum.) deduction claimed u/s. 80IB(10) was denied by the A.O. on the ground that the additional plot acquired subsequently, by allotment, was a distinct plot which cannot be included in computation of the area of the plot. The Mumbai Bench of Tribunal held that in case an assessee finds that he is not eligible for deduction u/s. 80IB(10), because size of the plot on which project is built is less than minimum necessary size, and he makes good that deficiency, and ensures that all the necessary pre-conditions are satisfied and approvals obtained, the assessee is eligible for deduction u/s.80IB(10). It was further held that the fact that he satisfied the conditions later, does not adversely affect its claim for deduction. What is material is that at the point of time when matter comes up for examination of the claim, the necessary pre-conditions for being eligible to claim are satisfied. The Tribunal held that the facts in the present case are similar as the assessee has acquired the additional land of 5 ‘Are’ subsequently after the acquisition of the main plot of land from the same seller. It held that it is a well-established proposition of law that for transfer of a plot within the meaning of the Act, the requirement is handing over of the possession and payment of consideration. Thus, registration of document of the transaction is not the foremost requirement to establish the transfer for the purpose of the Act. The Tribunal also noted that the Pune Bench of the Tribunal has in the case of Bunty Builders v. ITO held that housing project constitutes development plan, roads and grant of other facilities, therefore, those areas should exist within the prescribed limits and area to be considered as part and parcel of the project. In the present case, after addition of 5 Are of land purchased by the assessee vide agreement dated 20th March, 2004, for the purpose of approach road, to the area given in the lay-out plan, it fulfils the prescribed area for eligibility of claiming deduction u/s.80IB(10) of the Act.

As regards the second ground about row house having area exceeding 1500 sq.ft., the Tribunal noted that sale area included area of open land/garden and if that is excluded, then area of the row house is less than 1500 sq.ft.

As regards the merger of flats and thereby exceeding the prescribed limit of 1500 sq.ft. being taken as a basis for denial of deduction in A.Y. 2005-06, the Tribunal held that there is no substance since it is undisputed fact that each flat was within the prescribed limit of 1500 sq.ft. area and if after purchasing of 2 flats the owner(s) of flats merges it into a larger flat, the claimed deduction cannot be denied to the assessee.

The Tribunal held that the grounds on which the assessment order has been treated as erroneous and prejudicial to the interest of the Revenue are debatable and hence revisional powers cannot be invoked.

The Tribunal allowed the appeal filed by the assessee.

DCIT v. Tide Water Oil Co. (India) Ltd.

ITA No. 2051/Kol./2010

Section 80IB, Form No. 10CCB — By filing Form No. 10CCB in the course of reassessment proceedings (which form was not filed with the return of income, nor was it filed in the course of assessment proceedings) the assessee is not making any fresh claim for deduction u/s.80IB but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings.

For A.Y. 2003-04, the assessee filed its return of income by due date mentioned in section 139(3) of the Act. In the return of income filed the assessee claimed deduction u/s.80IB. The Assessing Officer (AO) assessed the total income u/s. 143(3) to be ₹ 7,31,51,920 as against returned income of ₹ 5,16,02,964 by restricting deduction u/s.80IB on allocation of corporate expenses proportionately over all units. Subsequently, the AO noticed that the assessee had not filed audit report in Form No. 10CCB, hence is not eligible for deduction u/s.80IB and due to that the income has escaped assessment. The AO initiated proceedings u/s. 147 r.w.s. 148 of the Act.

In the course of reassessment proceedings the assessee filed Form No. 10CCB and claimed that non filing of Form No. 10CCB is only a technical default and since original Form No. 10CCB was filed along with return of income u/s.148, technical default is removed and deduction u/s. 80IB should be allowed. The AO noticed that the due date of filing return of income u/s. 139(3) was 30-11-2003 and the assessment u/s.143(3) was completed on 31-3-2006, but the audit report filed along with return u/s. 148 was dated 23-2-2007 and also balance sheet of Silvasa Unit, in respect of which deduction u/s. 80IB was claimed, was audited on 23-2-2007, whereas the P & L Account of Silvasa unit was audited on 16-10-2003. He held that there was severe non-compliance on the part of the assessee. He, accordingly, denied claim for deduction u/s.80IB. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) confirmed the jurisdiction, but he allowed the claim of the assessee u/s. 80IB by holidng that submission of audit report in Form No. 10CCB is directory in nature and it is not mandatory and that submission of audit report even during reassessment proceedings is sufficient compliance u/s. 80IB of the Act. The assessee did not challenge the decision of the CIT(A) confirming jurisdiction. Therefore, the assumption of jurisdiction became final.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the AO while framing assessment u/s. 143(3) of the Act, originally, accepted the claim of deduction u/s. 80IB of the Act despite the fact that there was no audit report in Form No. 10CCB i.e., that means that the AO was also under bona fide belief that the assessee is entitled to deduction u/s.80IB of the Act and he allowed the same. It was subsequently that he noticed that the assessee had not filed the audit report along with return of income, nor had it filed the same during the course of assessment proceedings. He, accordingly, recorded reasons and re-opened the assessment. The Tribunal held that the assessee is not making any fresh claim for deduction u/s.80IB of the Act, but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings. The Tribunal held that there is no infirmity in allowing the claim of deduction even though the assessee has filed audit report in Form No. 10CCB during the course of reassessment proceedings. It upheld the order of the CIT(A).

The Tribunal dismissed the appeal filed by the Revenue.

ITO vs. Yash Developers

ITAT Mumbai `G’ Bench
Before B. R. Mittal (JM) and N. K. Billaya (AM)
ITA No. 809/Mum/2011 and 3644/Mum/2012

S/s. 80AC, 80IB(10), 139 – Amendment made to section 80IB(10) w.e.f. 01-04-2005 whereby as per Clause (d), limit has been imposed on the extent of commercial area which a project can contain, does not apply to projects approved before that date. Claim for deduction made in a return of income filed u/s. 139(4) will be decided on merits even though return of income is not filed within the time prescribed as per section 139(1) of the Act.

Facts

The assessee, a partnership firm, engaged in the business of developing and construction filed its return of income for assessment year 2007-08 declaring total income of ₹ Nil after claiming deduction u/s. 80IB(10) of ₹ 74,684. For the assessment year 2008-09, the assessee filed return of income on 30-09-2009 by declaring total income at ₹ Nil after claiming deduction of ₹ 24,85,233 u/s. 80IB(10) of the Act.

The Assessing Officer (AO) denied deduction u/s. 80IB(10) of the Act for assessment year 2007-08 on the ground that the assessee had constructed shops with the aggregate built up area of 3,382 sq. ft which constituted commercial area of 6.12% of the total built up area which was in excess of the limit prescribed by Clause (d) of section 80IB(10) as amended by the Finance (No. 2) Act, 2004 w.e.f. 01-04-2005. Since the assessee had not fulfilled one of the conditions, the AO denied deduction u/s. 80IB(10). For assessment year 2008-09, the AO also stated that the assessee did not file the return of income within the stipulated time prescribed u/s. 139(1) of the Act. In view of the provisions of section 80AC of the Act, the AO denied the claim of ₹ 24,85,233 made u/s. 80IB(10) of the Act.

Aggrieved, the assessee filed an appeal to CIT(A) who allowed the appeal filed by the assessee for both the years

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The Tribunal observed that on similar facts in the assessee’s own case for the same project, the Tribunal by its order dated 29-07-2011 relating to assessment years 2005-06 and 2006-07, the assessment years which also fall after the amendment made by insertion of Clause (d) to section 80IB(10) of the Act, applicable from 1.4.2005 has held that the assessee is eligible to claim deduction u/s. 80IB(10) of the Act in respect of the housing project. As there was no change in the facts and circumstances in the assessment years under consideration, the Tribunal applied the said decision of ITAT to these years as well. It also observed that the similar issue had also come before the Hon’ble Gujarat High Court in the case of Manan Corporation vs. ACIT (214 Taxman 373 (Guj), while considering the appeal for assessment year 2006-07 wherein it was held by their Lordship that the condition of limiting commercial establishment/ shops to 2,000 sq. feet which has come into force w.e.f. 01-04-2005 would be applicable for the project approved on or after 01-04-2005 would be applicable for the project approved on or after 01-04-2005 and where the approval of the project was prior to 31-03-2005, the amended provision would have no application for those projects. The Tribunal observed that the Gujarat High Court placed heavy reliance on the decision of the Bombay High Court in the case of Brahma Associates (333 ITR 289)(Bom). The Tribunal held that the issue is covered not only in the assessee’s own case for assessment years 2005-06 and 2006-07 but also by the decision of the Gujarat High Court in the case of Manan Corporation (supra). The Tribunal rejected the appeal filed by the revenue.

In respect of the return being filed beyond due date prescribed u/s. 139(1) of the Act, the Tribunal observed that the issue is covered in favor of the assessee by the decision of the Bombay High Court in the case of Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust (207 ITR 368)(Bom) which has been considered by the CIT(A) while deciding the same in favour of the assessee. Following the said decision, the Tribunal held that there is no reason to interfere with the order of the CIT(A). This ground of appeal taken by the department for assessment year 2008- 09 was also rejected.

Naresh T. Wadhwani vs. Dy. Commissioner of Income Tax

ITA Nos.18, 19, 20, 60 & 61/PN/2013
[Ref.-BCAJ-Dec – 2014]

Section 80 IB (10)(c) and (14)(a) - Open terrace cannot be a part of the ‘built-up area

Facts

The assessee’s claim for deduction u/s. 80IB(10) was rejected by the lower authorities on the ground that the condition prescribed in clause (c) of section 80IB(10) was not complied with. As per sub-Clause (c) of section 80IB(10) the residential units in the housing project cannot have built-up area of more than 1,500 sq.ft. The housing project of the assessee in Pune city was approved by the local authority on 29.07.2005. The AO applied the definition of ‘built-up area’ contained in section 80IB(14) (a). According to him, as per the said definition, the area comprising of the projected terrace was also to be considered as part of the ‘built-up area’. Based thereon the AO computed the area and found that six of the residential units of the housing project were having built-up area in excess of 1500 sq.ft. Therefore, he denied the claim of the assessee for deduction u/s. 80IB(10) of ₹1.4 crore. On appeal the CIT(A) upheld the stand of the AO that the built-up area of the aforesaid six units was violative of the condition prescribed in Clause (c) of section 80IB(10). He, however, allowed pro-rata deduction in respect of profits from the residential units of the project which complied with the requirements of section 80IB(10)(c) of the Act. Not being satisfied with the order of the CIT(A), assessee as well as the Revenue are in appeal before the tribunal.

Before the Tribunal, the revenue submitted that open terrace was a private terrace which was available for use of the owner of the unit to the exclusion of othe₹ It also relied on the decisions of the Hyderabad Tribunal in the case of Modi Builders & Realtors (P.) Ltd., (2011) 12 taxmann. com 129 and of the Mumbai Tribunal in the case of Siddhivinayak Homes, Mumbai vs. Department of Income Tax, vide ITA No. 8726 / Mum / 2010 order dated 26.09.2012, for the proposition that all projections and elevations at the floor level are liable to be included in the definition of ‘built-up area’ for the purposes of examining the condition prescribed in Clause (c) of section 80IB(10) of the Act. According to it, the built-up area for the purpose has to be understood in the light of what has been sold by the assessee builder to the respective custome₹

Held:

Relying on the decision of the Madras High Court in the case of M/s. Ceebros Hotels Private Limited vs. DCIT (Tax Case (Appeal) No. 581 of 2008 order dated 19.10.2012) the Tribunal held that the area of open terrace cannot be a part of the ‘built-up area’ in a case where such terrace is a projection attached to the residential unit and there being no room under such terrace, even if the same is available exclusively for use of the respective unit holders The Tribunal also observed that as per the said decision, terrace area would not form part of the built-up area even if the assessee sold it to the purchaser as a private terrace.

SM Energy Teknik & Electronics Ltd v. DCIT

ITAT ‘C’ Bench, Mumbai
Before Dr. O. K. Narayanan (AM) and Shailendra K. Yadav (JM)
ITA No. 141/Mum./2000
A.Y. 1996-97. Decided on : 18-4-2006
Counsel for assessee/revenue: Deepak Tralshawala & Poonam Somaiya/P. K. Das

S. 80HHC of the Income-tax Act, 1961 — Deduction in respect of export profit — Export of goods made directly by the assessee from one country to another country — Whether eligible for relief — Held, Yes.

Per Shailendra K. Yadav

Facts :

The assessee had purchased machinery from Germany and sold it directly to a party in Dhaka, Bangladesh without bringing the same into Indian territory. Its claim for deduction u/s.80HHC qua the said transaction was rejected by the AO on the ground that the export was not out of India. On appeal, the CIT(A) confirmed the AO’s order.

Before the Tribunal, the order of the CIT(A) was justified by the Revenue and it was further contended that the legislative intent was to give boost to the export of Indian products. It also relied on certain decisions.

Held :

Referring to the definition of ‘export out of India’ as given in Explanation (aa) to S. 80HHC, the Tribunal, relying on the Allahabad High Court decision in the case of Ram Babu & Sons and on the Supreme Court decision in the case of Silver & Arts Palace and on the Board Circular No. 621, noted that the said Explanation applies only to sales made over the counter in a shop, emporium or such other establishment. Therefore, the Explanation has no relevance to the case of the assessee.

The Tribunal noted that:

• The relevant documents showed that it was the assessee who had purchased machinery and in exercise of its right as the owner, had exported the said machinery to a party in Bangladesh.

• Third-country trade was a recognised feature of the Import Export Policy.

Further, relying on the Supreme Court decision in the case of Bombay Burma Trading Corporation, Madras High Court decision in the case of N. S. Gumpex Pvt. Ltd. and of the Mumbai Tribunal decision in the case of Asif Taherbhai, it noted that the literary meaning of the term ‘export’ means sending goods to another country. It did not mean only sending goods out of one’s own country to another. According to it, the reliance placed by the Revenue on the decision of the Mumbai Tribunal in the case of Hindustan Lever Ltd. was misplaced, as the said decision did not have occasion to consider the Bombay High Court decision in the case of Bombay Burma Trading Corporation (188 ITR 122).

Cases referred to

1. Ram Babu & Sons, 222 ITR 606 (All.)

2. Silver & Arts Palace, 259 ITR 684 (SC)

3. Bombay Burma Trading Corporation, 242 ITR 298 (SC)

4. CIT v. N. S. Gumpex Pvt. Ltd., 268 ITR 277 (Mad.)

5. Asif Taherbhai, (ITA No. 101/Mum./2002)

6. Hindustan Lever Ltd., 58 ITD 555 (Mum.).

Dy. CIT v. Vallabh Metal Inc

ITAT ‘H’ Bench, Delhi
Before I.P. Bansal (JM) and Shamim Yahya (AM)
ITA No. 2564/Del./2009
AY: 2004-05; Decided on: 27/11/2009
Counsel for assessee / revenue: Piyush Kaushik / N.K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading .

Per Shamim Yahya

Facts

One of the issues before the tribunal was regarding the year in which the exports made by the assessee under certain invoices fall. The AO noted that exports under Invoice Nos. 435 to 444, though dated March, the corresponding bills of lading were dated April. The assessee contended that during the financial year itself the goods were dispatched and the custom clearance was obtained. However, the AO held that these goods cannot be considered as export of the current year. On appeal the CIT(A) held that the AO’s view that the bill of lading was the date of sale was absolutely contrary to the provisions of explanation (aa) of S. 80HHC.

Before the Tribunal the Revenue submitted that the bill of lading was the authoritative document for dealing with the period of export sales. It was further submitted that those goods had been exported on FOB (Free on Board) wherein risk passes to buyer, once goods were delivered on board of the ship by the seller.

Held :

The Tribunal noted the following facts :

1. It had been regular system of accounting wherein exports were accounted according to the date of export invoices;

2. The goods had been dispatched from the factory premises of the assessee and had been duly cleared by the customs during the financial year;

Further, referring to Explanation (aa) to S. 80HHC defining ‘export out of India’ and relying on the decision of the Apex Court in the case of Silver and Arts Place which explains what is ‘export out of India’, the Tribunal upheld the order of the CIT(A).

Case referred to :

CIT v. Silver and Arts Place, 259 ITR 684 (SC).

Asst. CIT v. J. P. Software and Exports Pvt. Ltd.

ITAT ‘C’ Bench, Mumbai
Before G.E. Veerbhadrappa (VP) and T.K. Sharma (JM)
ITA No. 6191/Mum/2004
AY 2001-02; Decided on 2-3-2007
Counsel for revenue / assessee : P.K. Das / K. Shivaram

S. 80HHF of the Income Tax Act, 1961 – Deduction in respect of profits and gains from export of films – Transfer of telecast rights of film by way of assignment – Lack of documentary evidence indicating export out of India not fatal – Held, assessee entitled to deduction

Per T. K. Sharma

Facts :

The assessee was engaged in the business of production, distribution and export of feature films. During the year under appeal, it had received a sum of ₹ 9.5 crore for the transfer of satellite rights in respect of the feature films ‘Refugee’ and ‘Border’ to a party in Hong Kong. With reference to the same, its claim for deduction u/s. 80HHF was rejected, on the ground that it was not able to furnish any documentary evidence to show that it was exported out of India. On appeal, the CIT(A) allowed the assessee’s appeal.

Before the Tribunal, the Revenue contended that the basic and primary condition of the provisions of S. 80HHF was that the export was out of India and if the same was not satisfied, no deduction could be allowed. It also relied on the decisions of the Delhi High Court in the case of Sanjeev Malhotra and of the Mumbai Tribunal in the case of Siemens Ltd.

Held

The Tribunal noted that the provisions of S. 80HHF contain the phrase ‘transfer by any means’, which according to it imply that transfer should not be through any unlawful means, i.e., smuggling, piracy, etc. It also noted that it was not the case of the AO that the transfer of the tapes was through unlawful means. According to it, if the transfer of right was by way of assignment through an agreement, it was immaterial as to who performed the procedural formalities. The absence of strict adherence to the procedure would not vitiate the factum of the exports, since the tapes were admittedly received abroad. The Tribunal also agreed with the CIT(A)’s view that the AO’s action, to exclude it from export turnover without bringing any evidence on record, indicating that the transaction was domestic sale, cannot be sustained. Also, relying on the Co-ordinate Bench decision in the case of K. R. Films, the Tribunal upheld the order of the CIT(A).

Cases referred to :

1. K. R. Films v. ITO, (ITA No. 4858/Mum./05)

2. Sanjeev Malhotra v. CIT, 286 ITR 364 (Del.)

3. Siemens Ltd. v. DCIT, (ITA No. 4829/Bom./98 dated 31-10-2006).

DEEMED DIVIDEND

Anil Kumar Agrawal vs. ITO

ITA No. 6481/Mum/2007

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a case where a shareholder holding more than 10% of the shareholding in a company in which public are not substantially interested is a debenture holder of such a company and also has current account with such a company, while considering whether such a shareholder has taken a loan or advance from the said company aggregate of balance in debenture account and also current account needs to be considered — Held : Yes.

Per Abraham P. George

Facts

The assessee was a shareholder of Star Synthetics Pvt. Ltd. (SSPL) having more than 10% of its shareholding. The assessee had also subscribed to 4% non-secured convertible debentures issued by SSPL of ₹50,00,000. The Board resolution which approved the issue of debentures provided that a debenture holder could have a current account with the company, provided that the debit balance in current account could not exceed the amount of debentures subscribed by the debenture holder. The Assessing Officer (AO) noted that the assessee had two accounts with SSPL — one in his individual name and another in the name of his proprietory concern. The aggregate amount of loans taken by the assessee and his proprietary concern from SSPL was ₹23,65,000. SSPL had reserves of ₹64,28,793. The AO regarded the aggregate of amounts borrowed by assessee and his proprietary concern as deemed dividend u/s. 2(22)(e).

Aggrieved, the assessee preferred an appeal to the CIT(A) where he submitted that the AO ought to have considered the balance in debenture account alongwith the balance in the current account of the assessee and his proprietary concern, and if so considered the assessee did not owe any amount to SSPL. He also submitted that while considering the amount of accumulated profits of SSPL, the balance of share premium should not be considered as forming part of accumulated profits. The CIT(A) was of the opinion that since debentures are for a fixed period and bear a fixed rate of interest, their nature is different from that of an unsecured loan. He confirmed the addition made by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal after considering the meaning of the term ‘debenture’ as per various dictionaries and judicial precedents held that debenture account is only a loan account and that while considering the amount of loan taken by the assessee from SSPL the AO ought to have considered all the three accounts viz. the debenture account, the assessee’s personal account and the account of his proprietary concern and then concluded whether the assessee has received any loan from SSPL.

Since upon consideration of the balance in all the three accounts in aggregate the assessee did not owe any money to SSPL, the addition made by AO and confirmed by CIT(A) was deleted by the Tribunal.

As regards inclusion of share premium in computation of accumulated profits, the Tribunal found the issue to be covered in favour of the assessee by the decision of the Delhi Tribunal in the case of Maipo India.

Cases referred :

DCIT vs. Maipo India Ltd. , (116 TTJ 791)(Del.); Narendra Kumar vs. UOI, (1960)(47 AIR 0430)(SC).

IFB Agro Industries Ltd. vs. Joint Commissioner of Income-tax
In the Income Tax Appellate Tribunal ‘B’ Bench Kolkata
Before P. K. Bansal (A. M.) and George Mathan (J. M.)
ITA No. 1721/Kol/2012

Section 2(22)(e) – Deemed dividend – Intercorporate deposit is neither loan nor advance hence not covered u/s. 2(22)(e).

Facts

The assessee had received Inter-corporate deposits of ₹ 11.20 crore. from IFB Automotive Pvt. Ltd., a company wherein the assessee held 18.82% of the shares. The said deposit was treated by the AO as a loan and invoking the provisions of section 2(22) (e), he taxed the said receipt as income of the assessee. On appeal, the CIT(A) confirmed the order of the AO.

Before the tribunal, the revenue supported the orders of the lower authorities and further relied on the decision of the Bombay High Court in the case of Star Chemicals Pvt. Ltd. reported in 203 ITR 11, wherein it has been held that a loan to a shareholderto the extent to its accumulated profits was liable to be treated as deemed dividend.

Held

The tribunal noted that the dispute primarily revolves around the issue as to whether the Inter corporate deposits received by the assessee from M/s. IFB is a ‘loan’ or ‘advance’ or is a ‘deposit’. It further noted that the provisions of section 2(22)(e) refers to only ‘loans’ and ‘advances’ it does not talk of a ‘deposit’. According to the tribunal, the fact that the term ‘deposit’ cannot mean a ‘loan’ and that the two terms ‘loan’ and the term ‘deposit’ are two different and distinct terms, is evident from the explanation to section 269T as also section 269SS of the Act where both the terms are used. Further, it was noted that the second proviso to section 269SS of the Act recognises the term ‘loan’ taken or ‘deposit’ accepted. The tribunal then observed that once it is accepted that the terms ‘loan’ and ‘deposit’ are two distinct terms which has distinct meaning then, if term ‘loan’ is used in a particular section, the deposit received by an assessee cannot be treated as a ‘loan’ for that section.

Further, on perusal of the decision of the Special Bench of the Ahmedabad bench Tribunal in the case of Gujarat Gas & Financial Services Ltd. reported in 115 ITD 218 which had taken into consideration the decision of the Special Bench of the Delhi Tribunal in the case of Housing & Urban Development Corporation Ltd. reported in 102 TTJ (SB) 936 and of the Bombay tribunal in the case of Bombay Oil Industries Ltd. reported in 28 SOT 383, the tribunal opined that the Inter corporate deposits cannot be treated as a loan falling within the purview of section 2(22)(e) of the Act. Accordingly, the addition representing inter-corporate deposits treated as loan by the AO and confirmed by the CIT(A) was deleted by the tribunal.

As regards the decisions relied on by the CIT(A) as also by his counsel before the tribunal, it observed that the same were on ‘loans’ and none of thedecisions referred to by them discussed anywhere that deposits were to be treated as loans.

DEEMING PROVISIONS – Sec. 68 to 69D

Phase Holdings Pvt. Ltd. v. ITO

ITAT ‘F’ Bench, Mumbai
Before Pramod Kumar (AM) and Sushma Chowla (JM)
ITA No. 8566/Mum./2004
A.Y. 2001-02. Decided on : 23-12-2005
Counsel for assessee/revenue : B. V. Jhaveri/Ajay

S. 69 of the Income-tax Act, 1961 — Unexplained investment — Assessee in construction business following project completion method — AO, based on the estimation of the work in progress made by him, taxed the difference as unexplained investment — Assessee’s accounts were audited and all expenditure was duly supported by bills and vouchers — Whether AO’s action justified — Held, No.

Facts

The assessee, engaged in the business of construction, was following project completion method. During the year under consideration, the total work in progress amounted to ₹ 2.1 crore, including the cost of land. During the course of the assessment proceedings, the assessee was asked to furnish various details like the plot area, FSI available, cost of construction, rate per sq. ft., etc. It was also asked to furnish a valuation certificate from a registered valuer along with the plan copy and the RCC drawings. The assessee furnished the information asked for, except the details regarding cost and rate of construction, which it contended, cannot be ascertained as the construction was not completed. The structural engineer, when summoned, also confirmed that it was difficult to comment on the total cost of the project. However, the AO, based on information available with him, made an estimate of the cost of the project at ₹ 1.87 crore and the difference of ₹ 36.59 lakh was deemed as income u/s.69 of the Act. The CIT(A) on appeal upheld the valuation made by the AO.

Held

The Tribunal noted that:

1. The assessee’s books of accounts were audited;

2. The expenditure on the project was backed by bills and vouchers and the AO had not found any discrepancy in the maintenance thereof;

3. The estimates made by the AO were mere surmises and hypothetical figures and had no basis.

In view of the above, according to the Tribunal, there was no scope for enhancement in the value of work in progress as shown by the assessee, and accordingly, the assessee’s appeal was allowed.

Haresh A. Dhanani v. ACIT

ITAT ‘SMC’ Bench, Mumbai
Before A.L. Ghelot (AM)
ITA No. 5850/M/2008
AY: 2002-03; Decided on: 22/5/2009
Counsel for assessee / revenue: R. Ajay Singh / Malati Sridharan

S. 68 — Cash credit — Loan amount received in earlier year converted into gift — Valid gift

Facts

During the year under appeal the assessee had claimed to have received gift of ₹ 2.5 lakh from his uncle on the occasion of his marriage anniversary. As per the facts noted, the said amount had been shown by the assessee in his balance sheet as loan from his uncle up to 31-3-2001. During the year under consideration, the said loan was converted into gift vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and the amount was transferred to his capital account from the loan account. According to the AO since the gift was not received by actual delivery of cash/cheque, it cannot be considered as valid gift and he treated the said amount as unexplained cash credit in the hands of the assessee u/s.68 of the Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case of Dr. R. S. Gupta and upheld the order of the AO.

Held

According to the Tribunal, the case relied on by the CIT(A) was distinguishable on the facts. In the case of Dr. R. S. Gupta, the amount was deposited with a third person while in the case of the assessee, the loan amount was with him only which was converted as gift. Further, it observed that even if the gift was not considered as genuine gift, the addition of ₹ 2.5 lakh was not warranted u/s.68 because the credit entry as loan was there as on 31-3-2001 with the assessee himself and there was no fresh cash credit during the year.

Case referred to :

CIT v. Dr. R. S. Gupta, 165 ITR 36 (SC)

Dilip Sambhaji Shirodkar vs. ITO
ITAT “D” Bench, Mumbai
Before P.M.Jagtap (A.M.) and Dr S.T.M. Pavalan (J. M.)
ITA No.8899/Mum/2010
Assessment Year: 2006-07. Decided on 12.06.2013
Counsel for Assessee/Revenue: Jitnedra Jain & Sachin Romani / Rajarshi Dwivedy

Section 69 – Acquisition of a flat in lieu of the surrender of a tenancy right - Existence of difference in value between consideration for tenancy right acquired and the value of the new flat received in lieu thereof not sufficient ground for making addition.

Facts

The assessee was an individual engaged in the occupation of goldsmith. In his return of income he had declared a total income at ₹ 0.80 lakh. The AO, in assessment made u/s. 143(3) found that during the year under consideration the assessee had purchased a property worth ₹ 50.35 lakh. The AO treated this impugned investment as unexplained and made an addition of ₹ 50.35 lakh u/s.69. On appeal, the CIT(A) confirmed the action of the AO.

Before the tribunal, the assessee submitted that he had acquired tenancy right as per Agreement dated 09-04-2001 for a sum of ₹ 4 lakh. Thereafter, pursuant to the agreement dated 07-10-2005, the assessee was allotted a flat in another building in lieu of surrender of his tenancy right. The value of the flat allotted in lieu of surrender of tenancy right was ₹ 50.35 lakh as per the valuation done by the Stamp Duty Authorities, while registering the agreement. He further submitted that the consideration on the surrender of the tenancy rights, equal to the value of the new flat, stood fully invested in a residential flat, the Long Term Capital Gain arising on the said transaction was not chargeable to tax u/s.54F. The contention of the revenue was that the assessee had not been able to prove that he had received the flat by virtue of the surrender of tenancy rights.

Held

The tribunal agreed with the assessee that the agreement dated 07-10-2005 clearly indicated that the new flat was acquired by the assessee in lieu of surrender of his tenancy right in the old building. The perusal of the agreement dated 09-04-2001, also indicated that the old tenants transferred the tenancy rights in respect of the said property to the assessee for a consideration of ₹ 4 lakh. Secondly, as regards the reasoning of the CIT(A) that the acquisition value of ₹ 4 lakh had not been paid by the assessee, the tribunal found merit in the contention of the assessee that the same had been by way of constructive payment made by the builder on behalf of the assessee, which according to it was not a new practice of the developer in business of construction industry. Thirdly, regarding the finding of the lower authorities as to the difference in values between the consideration for relinquishment of rights by the old tenant (₹ 4 lakh) and the market value of the new flat (more than ₹ 50 lakh), the tribunal opined that it was beyond the purview of the lower authorities to suspect a transaction solely on the ground of adequacy/inadequacy of consideration in the absence of any other corroborating evidence and thereby making any adverse inferences. Further, the value as adopted by AO was based on the valuation determined by the stamp duty authorities while registering the agreement dated 07-10-2005. Therefore, it held that mere suspicion without evidence on record could not be the basis for making an addition to income u/s. 69 and hence, the addition made was deleted.

DEPRECIATION

Godfrey Phillips India Ltd. vs. Addl. CIT

ITA No. 7682/Mum/2010 and ITA No. 8549/Mum/2010 [BCAJ – Feb-13]

Section 32, Appendix to Income-tax Rules – UPS being energy saving device is entitled for higher depreciation @ 80%.

Facts

The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 in ITA No. 2792/M/06; for AY 2003-04 in ITA No. 1071/M/2007; for AY 2004-05 in ITA No. 5569/M/2007 and for AY 2005-06 in ITA No. 6964/M/2008. The Tribunal noted the following observations in respect of AY 2002-03:

“13. We have heard the rival contentions. Short question is whether UPS is a `Automatic Voltage Controller’ falling within the heading of energy saving device in the Appendix to the Income-tax Rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Once Legislature deemed that an `Automatic Voltage Controller’ is a specie falling within energy saving device, it is not for the Assessing Officer or Ld CIT(A) to further analyse whether such an item would (sic was) indeed be an energy saving device. In fact it is beyond their powe₹ Hence the only question to answer, in our opinion is whether an UPS is an `Automatic Voltage Controller’. It is mentioned in the product brochure (Paper Book Page 64) that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion, there cannot be a quarrel that UPS was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the voltages remained controlled. Therefore in our opinion, a UPS would definitely fall under the head of `Automatic Voltage Controller’. We are fortified in taking this view by the decision of Jodhpur Bench in the case of Surface Finishing Equipment (supra). As for the decision of the Delhi Bench in the case of Nestle India (supra) referred by the Ld. DR, there the question was whether UPS could be considered as `computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an Automatic Voltage Controller and hence in our opinion that case would not help the Revenue here. Therefore, we are of the opinion that the assessee was eligible for claiming 100% depreciation on UPS. Disallowance of ₹ 6,82,443 therefore stands deleted. Ground number 3 is allowed.”

Following the above mentioned decision, the Tribunal decided the issue in favour of the assessee. This ground was decided in favour of the assessee.

MITC Rolling Mills P. Ltd. vs ACIT
ITAT "B" Banch, Mumbai
Before D. Manmohan, (V.P.) and Rajendra, (A. M.)
ITA No.2789/Mum/2012
Assessment Year: 2009-10. Decided on13.05.2013
Counsel for Assessee/Revenue: T. M. Gosher / Mohit Jain

Section 32(1)(iia) – Additional depreciation on Plant and Machinery – Where the plant and machineries were put into use for less than 180 days in the year of installation and hence, disentitled the assessee to the 50% of the additional amount of depreciation, the assessee was entitled to the balance 50% of the additional depreciation in the subsequent year.

Facts

The assessee was engaged in the business of manufacture and sale of iron and steel. Assessee installed certain new plant and machinery after September, 2007. For the previous year relevant to A. Y. 2008-09 the plant and machinery having been put to operation for less than 180 days the assessee claimed only 50% of the additional depreciation and the balance 50% was claimed in the previous year relevant to A. Y. 2009-10, which is the year under appeal. The AO as well as the CIT(A) were of the opinion that the assessee was not entitled to claim balance 50% deprecation in the subsequent year u/s. 32(1)(iia) of the Act. The case of the assessee was that it is a onetime incentive allowed to the assessee under the Act where the object was to encourage establishment of industries and hence, balance 50% was allowable in the year under consideration.

Held

The tribunal placed reliance upon the following decisions of the Delhi tribunal:

1. DCIT vs. Cosmo Films Ltd. 139 ITD 628

2. ACIT vs. Sil Investment Ltd. 54 SOT 54

The tribunal noted that as per the Delhi tribunal, there was no restriction on allowing balance of one time incentive in the subsequent year if the provisions are constructed reasonably, liberally and in a purposive manner. According to it, the additional benefit was intended to give impetus to industrialisation and in that direction the assessee was entitled to get the benefit in full when there was no restriction in the statute to deny the benefit of balance 50% when the new plant and machinery was acquired and put to use for less than 180 days in the immediately preceding year. Accordingly, it was held that the assessee was entitled to depreciation in the subsequent year if the entire depreciation was not allowed in the first year of installation.

DCIT vs. Swarna Tollway Pvt. Ltd.
In the Income Tax Appellate Tribunal Hyderabad Bench ‘A', Hyderabad
Before Chandra Poojari, (A. M.) and Asha Vijayaraghavan, (J. M.)
ITA No. 1184 to 1189/Hyd/2013

Section 32 – Assessee entitled to claim depreciation in respect of assets held under BOT.

Facts

The assessee was awarded the contract by the NHAI for widening, rehabilitation and maintenance of the existing two-lane highway into a four-lane on BOT basis. The entire cost of construction of ₹ 714.61 crore was borne by the assessee. The assessee claimed depreciation for the years under appeal. The AO held that no ownership, leasehold or tenancy rights were ever vested with the assessee for the assets in question, i.e., roads, in respect of which it had claimed depreciation and, therefore, disallowed the depreciation claimed on the highways.

On appeal by the assessee, the CIT(A) observed that though the NHAI remained the legal owner of the site with full powers to hold, dispose of and deal with the site consistent with the provisions of the agreement, the assessee had been granted not merely possession but also right to enjoyment of the site and NHAI was obliged to defend this right and the assessee has the power to exclude othe₹ In view thereof and relying on certain decisions he held that the assessee was entitled for depreciation. Against this, the Revenue went in appeal before the tribunal.

Held

The tribunal referred to the decision of the Apex court in the case of Mysore Minerals Ltd. vs. CIT (239 ITR 775) wherein the meaning of word "owner" was explained. In the said case, the Court had allowed the assessee’s claim for depreciation where the title deeds were not executed and possession was given. Further, the tribunal referred to the case of CIT v. Podar Cement (P.) Ltd. (226 ITR 625) (S.C.) where the Court considered the meaning of the word "owner" in section 22 and held that the owner is a person, who is entitled to receive income from the property in his own right. Further, relying on the decision of the Apex Court in the case of R.B. Jodha Mal Kuthiala vs. CIT (82 ITR 570), the Allahabad High Court in the case of CIT vs. Noida Toll Bridge Co. Ltd. (213 Taxman 333) and of the Hyderabad tribunal in the case of M/s. PVR Industries Ltd. (ITA No. 1171, 1175/Hyd/07 and 1176, 1196/Hyd/08 dated 08-06- 2011), dismissed the appeal filed by the revenue.

HOUSE PROPERTY

Cambridge Construction (Delhi) Ltd. v. Dy. CIT

ITAT ‘A’ Bench, New Delhi
Before P. N. Parashar (JM) and P. M. Jagtap (AM)
ITA No. 3470/Del./2003
A.Y. 1997-98. Decided on : 31-10-2006
Counsel for assessee/revenue : Ved Jain/S. N. Jibbu

S. 23 of the Income-tax Act, 1961 — Vacancy allowance can be claimed even if the property was let out only for a short period during the year and it was under renovation for the rest of the year.

Per Shri P. M. Jagtap

Facts

For the relevant assessment year, the assessee had given its premises on rent for a period of 19 days at the end of the year. For the entire period before that, the premises were being renovated. The assessee showed annual value of the said property for the full year (365 days) and claimed vacancy allowance for the remaining period of 346 days. The Assessing Officer held that the premises could reasonably be treated as ready for occupation only for a period of 3 months. He, therefore, calculated the annual value for 90 days and allowed the vacancy allowance for 71 days i.e., 90 days minus 19 days. He observed that if the property was not in a position to be let out for a part of the year because it was being renovated, then the question of calculating the annual value of the said property for that period would not arise at all. The CIT(A) confirmed the order of the Assessing Officer.

Held

The Tribunal set aside the CIT(A)’s order and allowed the assessee’s claim. The Tribunal noted as under:

1. It was held by the Calcutta High Court in the case of Liquidator, Mahmudabad Properties Ltd. v. CIT, 83 ITR 470, that merely because the property was in a state of disrepair, it cannot be said that the same had no annual value.

2. The Calcutta High Court has also held that annual value u/s.23 is deemed to be the sum for which the property might reasonably be expected to be let out from year to year — which is based on the idea of hypothetical tenancy and for this purpose, the property has to be considered as it is at the time of valuation for determination of the annual value.

3. Therefore, the assessee had rightly calculated the annual value for the entire year under consideration and the action of the lower authorities was totally unjustified.

4. The assessee was also entitled to vacancy allowance for 346 days, since the property was let out for a period of 19 days during the year.

Mahalaxmi Sheela Premises CHS Ltd. v. ITO

ITA Nos. 784, 785 & 786/Mum./2010

Sections 22, 28 and 58 — Income received on lease of a portion of terrace of the building and a wall of the building for the purpose of fixing of hoarding, neon sign, etc., is assessable under the head ‘Income from House Property’.

The assessee leased out portion of terrace of the building and a wall of the building to one M₹ Sudha Vora, for the purpose of fixing of hoarding, neon sign, etc. The Assessing Officer, while assessing the total income for A.Y. 2000-01, assessed the income under the head ‘Income from Other Sources’ on the ground that the amount received by the assessee was not for letting of a building or terrace or any land appurtenant thereto but on account of allowing M₹ Sudha Vora to display the advertisement of neon sign, illuminated hoarding, of a size 60 ft x 20 ft on the terrace and also illuminated hoarding of size 20 ft x 50 ft on a vertical wall of a building facing Pedder Road. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the terrace has not been let out but merely permission has been granted to use the terrace only to set up the hoarding and to display the hoarding. He also observed that the lessee could use only a portion of the terrace and the purpose of utilisation was not for stay, etc. He upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

Before the Tribunal, the assessee relied on the following case laws:

1. ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd., (ITA No. 7225/Mum./2005, order dated 28-4-2008)

2. Dalamal House Commercial Complex Premises Co-op. Society Ltd. v. ITO, (ITA No. 2286/ Mum./2008, order dated 29-5-2009)

3. Sharda Chambers Premises Co-op. Society Ltd. v. ITO, (ITA No. 1234/Mum./2008, order dated 1-9-2009)

4. Matru Ashish CHS Ltd. v ITO, (ITA No. 316/Mum./2010, order dated 27-8-2010)

5. S. Sohan Singh v. ITO, (16 ITD 272) (Del.);

and

6. CIT v. Bajaj Bhavan Owners Premises Co-op. Society Ltd., (ITA No. 3183 of 2010/Mum.).

The Tribunal noted that in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd. v. ITO, Mumbai ‘B’ Bench of the Tribunal in ITA No. 5048/Mum./2004, A.Y. 2001-02 and ITA No. 1433/Mum./2007, for A.Y. 2002-03 and ITA No. 1434/Mum./2007, for A.Y. 2003-04, order dated 4-11-2009, the facts were that the assessee had allowed a telecom company to erect the tower on their terrace in consideration of an amount of ₹5,93,700 and claimed it as being chargeable under the head ‘Income from House Property’. The Tribunal following the decision in the case of Sharda Chamber Premises v. ITO, (supra) and ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd. held such income to be chargeable under the head ‘Income from House Property’.

The Tribunal further noted that the jurisdictional High Court in ITA No. 3183 of 2010 in para 3 of judgment dated 16th August, 2011 confirmed the findings of the Tribunal in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd.

In view of the aforesaid binding judgment of the jurisdictional High Court, the Tribunal set aside the impugned order of the CIT(A), allowed the ground raised by the assessee and directed the AO to assess the income in question under the head ‘Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

Buharia Estate & Co. v. DCIT

ITAT ‘A’ Bench, Chennai
Before Chandra Poojari (AM) and R.S. Padvekar (JM)
ITA No.3247/Mds/2004
AY 2001-02; Decided on 7-8-2007
Counsel for assessee/revenue : G.N. Gopalarathnam / Shaji P. Jacob

S.22 of the Income Tax Act, 1961 – Income from house property – Annual value – In addition to the letting of premises, the assessee was also responsible to provide additional facilities and amenities to its tenants – Equipments required for such additional facilities and amenities given on rent to the party to whom the task relating to provision of additional facilities and amenities was outsourced – The amount received by the said party from the tenants also considered by the AO while determining the annual value – Whether the action of the AO justified – Held, No

Per R. S. Padvekar

Facts

The assessee was engaged in the business of real estate and leasing out of properties. It had let out its premises to different tenants and was deriving rental income from them. As per the terms of the agreement between the assessee and its tenants, the assessee had to provide different amenities to the tenants and also carry out maintenance.

The assessee entered into an agreement with another company called Buharia Trading Co. (P) Ltd. (‘lessee’) to which the equipments like airconditioner, lift, generator, etc. were given on lease and as per the agreement between the assessee and the said lessee company, the assessee was receiving lease hire charges of ₹ 43.68 lakh per annum, which was shown under the head ‘business income’ and the assessee had declared the loss after set-off of depreciation. The assessee firm had given the contract for providing the amenities to the tenants and also maintenance of the complexes to the said lessee, which had collected the sum of ₹71.54 lakh from the tenants, who claimed to have provided amenities and maintenance and services to the tenants. The AO was of the opinion that the agreement between the assessee and its tenants was inseparable one and whatever was collected from the tenants as amenities and maintenance charges was a part of the rent. Further, applying the decision of the Supreme Court in the case of McDowell and Co. Ltd., he held that the agreement between the assessee and the lessee was a colourable device in the attempt to reduce tax liability.

The CIT (Appeals) on appeal, concurred with the finding of the AO that a combined reading of the lease agreement between the assessee and its tenants and between Buharia Trading Co. (P) Ltd. and the tenants made it clear that the services rendered to the tenants were not separable from the letting out of the premises and M/s. Buharia Trading Co. (P) Ltd. had not acted independently in its own right; rather the said company had no say in any matter and was not accountable to the tenants in any manner. The CIT (Appeals) finally came to the conclusion that letting out of the buildings by the assessee to the tenants and the provision of amenities and maintenance services to its tenants was one whole unitary process and cannot be separated and the decision of the Madras High Court in the case of Indian Metal and Metallurgical Corporation was applicable to the assessee’s case in principle.

Held

Relying on the decision of the Madras High Court in the case of Tarapore & Co., it was held that the amount received from the tenants for providing amenities and maintenance cannot form part of the annual value of the property for the purpose of S. 22 of the Act. Thus, according to it, only the actual rent received from the tenants would be relevant for the purpose of determining income under the head ‘Income from house property’.

As regards the CIT(A)’s view that by outsourcing its contractual obligations to the lessee, the assessee had adopted dubious and colourable device to avoid payment of legitimate tax, it observed that in order to meet the requirements of business in the modern era, one needs back-up of huge manpower and systematic elaborate planning, like industrial service, which in all the cases may not be possible for the landlord to provide. Secondly, it was noted that the assessee had not given equipments free of cost, but had charged hire charges from the lessee. Therefore, relying on the decision of the Madras High Court in the case of M. V. Valliappan & Others, it held that the arrangement with the lessee entered into by the assessee could not be said to be made with an intention to divert its income and reduce its incidence of tax. Accordingly, the order of the CIT(A) to consider the amount collected by the lessee from the tenants towards the amenity charges while determining the annual value was held as unjustified.

Cases referred to

1. Tarapore & Co. v. CIT, 259 ITR 289 (Mad.)

2. M. V. Valliappan & Others v. ITO, 170 ITR 238 (Mad.)

3. Indian Metal and Metallurgical Corporation v. CIT, 215 ITR 424 (Mad.).

DCIT v. Reclamation Realty India Pvt. Ltd., DCIT v. Reclamation Properties India Pvt. Ltd., DCIT v. Reclamation Real Estate Co. India Pvt. Ltd.

ITA Nos. ITA No. 1411/Mum./2007, 1412/Mum./2007 and 1413/Mum./2007

Income-tax Act, 1961, S. 23 - For applying provisions of S. 23(1)(a) of the Act, municipal valuation/ratable value should be the determining factor - Since the rent received by the assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act.

Facts

M/s. Reclamation Real Estate Co. Pvt. Ltd., the assessee, owned premises admeasuring 15,645 sq.ft. situated on 9th floor of a building known as Mafatlal Centre ("the property"). It had let out the property to J. P. Morgan Chase Bank on an annual rent of ₹ 2,87,87,660. The lease commenced from 17-12-1998 for a period of 152 weeks up to November 2001. The lease was thereafter renewed for a further period of 156 weeks from November 2001. The lease was to expire in November 2004. When the lease was renewed in April 2002, the entire rent for the period of lease i.e., for 156 weeks, was paid by the tenant. This was a sum of ₹8,58,91,050. In addition, the tenant also paid a refundable interest free security deposit of ₹ 2,60,00,000. Rate of rent at ₹ 2,87,87,660 (being rent for the previous year 2003-04) in terms of rate per sq.ft. worked out to ₹ 152.50 per month. Municipal valuation of the property was ₹ 27,50,835.

Since the amount of rent received (₹ 2,87,87,660) was more than the municipal valuation of the property, the assessee adopted actual rent received as the annual value of the property.

According to the AO, the municipal valuation as adopted by the municipal authorities did not reflect the true sum for which the property might reasonably be expected to let from year to year. He held that the rent of ₹ 152.50 per sq.ft. was too low and the rent was reduced due to the fact that the rent for the entire period of lease was paid in advance and tenant had also given an interest-free security deposit. He estimated the annual value by allocating notional interest on rent received in advance and interest-free security deposit and arrived at an annual value of ₹ 3,42,23,856. He held that he was not adding notional interest on security deposit and rent received in advance to the actual rent received for determining annual value u/s. 23(1)(b) of the Act, but was treating the same as the sum for which the property might reasonably be expected to let from year to year u/s. 23(1)(a) of the Act.

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

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal considered the original provisions of S. 23 of the Act and the amendments made thereto by Taxation Laws Amendment Act, 1975 w.e.f. 1-4-1976 and noted that :

1. Circular No. 204, dated 24-7-1976 gives an indication as to how the expression ‘the sum for which, the property might reasonably be expected to let from year to year’ used in S. 23(1)(a) has to be interpreted;

2. the Calcutta High Court in CIT v. Prabhabati Bansali, (141 ITR 419) concluded that the municipal valuation and the annual value u/s. 23(1)(a) are one and the same;

3. the decision of the Calcutta High Court has been followed by the Bombay High Court in the case of M. V. Sonawala v. CIT, 177 ITR 246 (Bom.);

4. the Bombay High Court has in the case of Smitaben N. Ambani v. CWT, 323 ITR 104 (Bom.) in the context of Rule 1BB to the Wealth Tax Rules, which uses the same expression the sum for which the property might be reasonably expected to let from year to year as is found in S. 23(1)(a) of the Act, held that ratable value as determined by the municipal authorities shall be the yardstick.

The Tribunal held that :

1. The charge u/s.22 is not on the market rent but is on the annual value and in the case of property which is not let out, municipal value would be a proper yardstick for determining the annual value. If the property is subject to rent control laws and the fair rent determined in accordance with such law is less than the municipal valuation, then only that can be substituted by the municipal value;

2. The Bombay High Court which is the jurisdictional High Court has held that ratable value under the municipal law has to be adopted as annual value u/s. 23(1)(a) of the Act. The decision of the Mumbai Bench of ITAT in the case of Makrupa Chemicals (108 ITD 95) (Mum.), following the decision of Patna High Court in the case of Kashi Prasad Katarvka v. CIT, (101 ITR 810) (Pat.) has held that ratable value is not binding on the AO if the AO can show that the ratable value under the municipal law does not represent correct fair rent. Since the decision of Mumbai Tribunal is contrary to the ratio laid down by jurisdictional High Court it cannot be followed. Also, the decision in the case of Baker Technical Services (P) Ltd., on which reliance was placed by the Revenue, being contrary to the decision of the Bombay High Court, cannot be followed;

3. The decisions in the case of Fizz Drinks Ltd. and Tivoli Investment & Trading Co. (P) Ltd., relied upon by the Revenue, are distinguishable;

4. The municipal valuation/ratable value adopted by the municipal authorities in respect of the property at ₹ 27,50,835 should be the determining factor for applying the provisions of S. 23(1)(a) of the Act. Since the rent received by the assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s. 23(1)(b) of the Act. Notional interest on interest-free security deposit/rent received in advance should not be added to the same in view of the decision of the Bombay High Court in the case of J. K. Investors (Bombay) Ltd.

The appeal filed by the Revenue was dismissed.

Bhawanji Kunverji Haria vs. ACIT
ITAT Mumbai `B’ Bench
Before B. R. Mittal (JM) and N. K. Billaiya(AM)
ITA No. 5642/Mum/2011
A.Y.: 2008-09. Decided on: 23rd April, 2013.
Counsel for assessee/revenue: G. C. Lalka/Roopak Kumar

Section 22 – Notional income in respect of property belonging to the assessee, but used by the firm in which the assessee is a partner, is not chargeable to tax under the head `Income from House Property’.

Facts

The property of the assessee, located at Mahavir Market, Navi Mumbai, was utilised by the firm M/s Lakhmichand Cooverji & Co., in which assessee was a partner. The Assessing Officer (AO) charged to tax notional income in respect of this property. Accordingly, a sum of ₹ 1,68,000 was added to total income of 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 was covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for AY 2006-07 vide ITA No. 4032/Mum/2009. It noted the following observations in the said order –

“On the second issue of notional income in respect of property located at Mahalaxmi Market, Navi Mumbai. The Learned Counsel relied upon the decision of the CIT vs. Rabindranath Bhol (Ori) (1995) 211 ITR 299, in which on identical facts, the Hon’ble High Court of Orissa has held that the income from the house property owned by the assessee’s partner and used in the business carried out in the partnership firm in which the assessee is a partner would qualify for exemption u/s 22(2) (sic 22). We find that the facts of the present appeal are identical with the facts in as much as in the present appeal also the property of the assessee is being used by the firm in which the assessee is also a partner. Respectfully following the decision of the Hon’ble High Court, the addition of ₹1,68,000 is deleted.” Since the facts were identical the Tribunal deleted the addition made by the AO.

The appeal filed by the assessee was allowed.

ITO vs. Bajaj Bhavan Owners Premises C.S.L.
ITAT Mumbai `B’ Bench
Before B. R. Mittal (JM) and Rajendra (AM)
ITA Nos. 8067/M/2011
A.Y.: 2007-08.
Decided on: 18th April, 2013.
Counsel for revenue/assessee: Manjunath Karkihalli/M. A. Gohel

Section 22 – Rental receipts for letting out of terrace for erecting of antenna are chargeable to tax under the head `Income from House Property’ subject to deductions u/s. 24.

Facts

The assessee had received ₹ 16,39,284 as rent for letting out terrace of the building to six parties including Bharati Airtel, Hathway, etc. The amount of rent was claimed to be chargeable to tax under the head `Income from House Property’ subject to deduction u/s. 24(a). The Assessing Officer (AO) relying on the decision of the Calcutta High Court in the case of Model Manufacturing Co. Pvt. Ltd. (175 ITR 374) held that the amounts received by the assessee from six parties was chargeable under the head `Income from Other Sources’ and not `Income from House Property’ as returned. He did not allow any deduction u/s. 57 of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who following the order of ITAT for earlier years for the same issue in assessee’s own case held that rental of terrace has to be assessed under the head `Income from House Property’ subject to deduction u/s. 24. Aggrieved, the revenue preferred an appeal to theTribunal.

Held: The Tribunal noted the following observations made by the `B’ Bench of the Tribunal while deciding the appeals for the A.Y. 2001-02, 2002-03 and 2003- 04 (ITA/5048/Mum/2004, 1433/Mum/2007 and 1434/ Mum/2007) in assessee ‘s own case –

“35. Ground No. 5, 6,7 and 8 are against the sustenance of addition of rental income ₹ 5,93,700 as income from other sources.

36. The brief facts of the above issue are that it was found by the Assessing Officer that the assessee has allowed M/s. Hutchison Max Telecom Ltd. to erect the tower on their terrace in consideration of an amount of ₹ 5,93,700 and claimed as income from house property subject to deduction u/s. 24 of the Act. However, the Assessing Officer while observing that the assessee’s society has not provided any house property to the company and it is only the open terrace which has been let out, treated the same as assessable under the head income from other sources without allowing any expenditure in this regard. On appeal the ld. CIT(A) while confirming the Assessing Officer’s action treating the income from other sources directed the Assessing Officer to allow 20% of the gross receipts as expenses to earn such income.

39. After carefully hearing the submissions of the rival parties and perusing the material available on record we find that the facts are not in dispute. We further find that in the case of Sharda Chamber Premises vs. ITO in ITA No. 1234/M/08 dated 01-09-2009 for Assessment Year 2003-04 in which JM was one of the party, on the similar facts, the Tribunal after considering the decision in ITO vs. Cuffe Parade Sainara Premises Co-operative Society Ltd. 7225/Mum/05 dated 28th April, 2008 for Assessment Year 2002-03 and also the decision in the case of Sohan vs. ITO (1986) 16 ITD 272 supra has held vide para 6 and 7 of its order dated 01-09-2009 as under:

“6. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Counsel fo the assessee that in the case of M/s. Dalamal House Commercial Complex Premises Co-operative Society Ltd., the Tribunal while admitting the additional ground being a legal issue has also held that the letting out of the terrace, erection of antenna and income derived from letting out has to be taxed as `income from house property’ and not as `income from other sources’. The Tribunal while deciding the issue has followed the order of the Tribunal in the case of M/s. Cuffe Parade Sainara Premises Co-op. Society Ltd. ( supra).

7. In the absence of any distinguishing feature brought on record by the revenue we, respectfully following the order of the Tribunal (supra) and keeping in view the consistency while admitting the additional ground taken by the assessee hold that the letting out of terrace has to be assessed under the head `income from house property’ as against `income from other sources’ assessed by the Assessing Officer and also allow deduction provided u/s. 24 of the Act and accordingly the additional ground taken by the assessee is allowed.”

Respectfully following the order of the Tribunal supra, we are of the view that the letting out of terrace has to be assessed under the head income from house property subject to ded`uction u/s. 24 of the Act as against income from other sources assessed by the Assessing Officer. We hold and order accordingly. The grounds taken by the assessee are therefore allowed.”

Following the above mentioned observations, the Tribunal decided the issue in favor of the assessee.

The appeal filed by the Revenue was dismissed.

INTEREST

Sun Petrochemicals P. Ltd. v. ITO
ITA No.1010/Ahd/2009

S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal laid before it.

Facts

The assessee company while computing book profit u/s. 115JB of the Act deducted the deferred tax amounting to ₹ 4,94,21,478 and fringe benefit tax of ₹62,279. At the time when the assessee filed the return of income, there was no specific provision in the Section to the effect that deferred tax was not deductible while arriving at the book profit. However, by the Finance Act, 2008 an amendment was made to the Section with retrospective effect from 1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of the Act computed the book profits by adding back the amount of deferred tax and fringe benefit tax to book profits computed by the assessee and gave a direction to charge interest accordingly. Aggrieved the assessee filed an appeal to the CIT(A) on the ground that levy of interest was illegal since the amount of deferred tax became liable to be added to the book profit only because of the retrospective amendment made to the Section which could not be anticipated by the assessee.

The CIT(A) was of the view that levy of interest was mandatory and power was vested with the CBDT to waive or reduce the same, subject to certain conditions, one of which is that no interest can be charged if addition or disallowance is due to a retrospective amendment in law. He upheld the levy but held that it was open to the assessee to seek waiver/reduction from the CCIT/DGIT.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that the following judgments support the case of the assessee :

1. CIT v. Revathi Equipment Limited, (298 ITR 67) (Mad.)

2. Haryana Warehousing Corporation v. DCIT, (75 ITD 155) (TM)

3. Priyanka Overseas Ltd. v. DCIT, (79 ITD 353) (Del.)

4. ACIT v. Jindal Irrigation Systems Ltd., (56 ITD 164) (Hyd.)

It observed that the judgment of the Madras High Court is a case of liability arising on account of a retrospective amendment, as in the present case. It held that levy of interest in respect of the amount of deferred tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that since powers of reduction/waiver are vested in the CBDT whether the Tribunal can examine the validity of the levy of interest, the Tribunal having noted that the Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961) held that if the assessee denies his liability to pay interest the appeal on that point was maintainable. Based on the ratio of the decision of the Apex Court and also having noted that there is no express or implied restriction on the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is maintainable. It further held that the fact that the administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

BVQI (India) Pvt. Ltd. v. ACIT

ITAT ‘K’ Bench, Mumbai
Before G. C. Gupta (JM) and D. K. Srivastava (AM)
ITA No. 1309 /Mum./2005
A.Y. : 2003-04. Decided on : 7-11-2006
Counsel for assessee/revenue : K. Shivaram and Paras Savla/B. R. Kamat

S. 234C of the Income-tax Act, 1961 — Interest for deferment of advance tax — Assessee company incorporated on 4-12-2002 and commenced business in January — Whether liable to pay advance tax in December — Held, No.

Per G. C. Gupta

Facts

The assessee company was incorporated on 4-12-2002 and the first installment of advance tax was paid on 15-3-2003. According to the assessee, its business commenced only from January, 2003 when the first sales invoice was raised. However, according to the lower authorities, the assessee was liable to pay advance tax on 15-12-2002, accordingly, interest of ₹ 2.24 lakh (which was recomputed by the CIT(A) at ₹ 1.24 lakh) u/s. 234C was charged.

Held:

According to the Tribunal, as the assessee had not received any income till the first invoice was issued by it in January, to say that the assessee was liable to pay advance tax on 15-12-2002 was not sustainable on the facts of the case. It further added that the law does not oblige the taxpayer to do something which was impossible to perform. Accordingly, the assessee’s appeal was allowed.

Ultratech Cement Ltd. v. Dy. CIT

ITAT ‘E’ Bench, Mumbai
Before R.K. Gupta (JM) and D.K. Rao (AM)
ITA No. 7646 & 7647/Mum./2007
AY: 2004-05; Decided on: 20/8/2009
Counsel for assessee / revenue: Arvind Sonde & Sampat Kabra / K.K. Das

S. 234C — Interest u/s. 234C is not payable if, on the date of payment of advance tax it is not known whether the demerger scheme will be sanctioned or not and from which date it would be sanctioned .

Per R. K. Gupta

Facts

The assessee, pursuant to a demerger scheme, acquired cement business of L & T Limited from 1-4-2003. The scheme of demerger was sanctioned by the Bombay High Court on 22-4-2004 effective from 1-4-2003 as a result of which the income for the period from 1-4-2003 to 31-3-2004 became taxable in the hands of the assessee. The assessee had not paid advance tax in respect of this income. Consequently, the Assessing Officer charged interest of ₹ 44,94,392 u/s.234C.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that interest is not payable since on the due dates for payment of advance tax there was no liability to pay tax. It was further submitted that if the liability to pay advance tax arises on account of subsequent event, i.e. demerger sanctioned after the end of the previous year then in such an event it cannot be said that the assessee was liable to pay advance tax on due dates specified in S. 210. The CIT(A) dismissed the ground by observing that the assessee was liable for payment of advance tax u/s.208 with all consequences of law to pay interest u/s.234B and u/s.234C. He held that since there was a shortfall in payment of installments of advance tax, liability of interest u/s. 234C is automatically attracted.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was also contended on behalf of the assessee that it was impossible to pay advance tax as it was not aware whether the demerger scheme would be sanctioned and if yes, from which date.

Held

The Tribunal observed that the liability to pay advance tax in respect of cement business had arisen consequent to the sanction of the demerger scheme by the Bombay High Court on 22-4-2004 i.e. after the due dates of payments of advance tax. The Tribunal noted that the tax liability arising after the date of sanction of the demerger scheme has been paid by the assessee while filing its return of income along with interest u/s. 234A & B. It held that payment of advance tax in respect of cement division was an impossible situation. The Mumbai Bench of the Tribunal in the case of Reliance Energy Ltd. in ITA No. 218/Mum./05 (order dated 24-1-2008) has after considering several decisions of the Tribunal and discussing the doctrine of impossibility held that an assessee cannot be forced to do an impossible task.

The Tribunal directed the AO to recompute the charging of interest u/s. 234C in view of its observations. This ground of the assessee’s appeal was allowed.

ACIT v. L. & T. Ltd.

ITAT Mumbai ‘A’ Bench
Before R.S. Syal (AM) and Asha Vijayaraghvan (JM)
ITA No. 4499/Mum/2008
AY: 2000-01; Decided on: 22/7/2009
Counsel for assessee / revenue : Arvind Sonde / Mayank Priyadarshi

S. 115JA, S. 244A — While computing tax liability u/s.115JA credit for tax paid in foreign country is allowable — Grant of interest u/s. 244A can not be denied on the ground that the TDS certificate was filed in the course of assessment proceedings and not along with the return of income.

Per R. S. Syal

Facts

The assessment of total income of the assessee was completed u/s.143(3) of the Act on 31-3-2003 assessing the total income at ₹ 97,09,81,536 u/s.115JA. Subsequently, the AO observed that the assessee was allowed double tax relief while assessing the income u/s.115JA. Notice u/s.154 of the Act was issued and the credit for foreign tax given was denied on the ground that intention behind S. 115JA is that assessee should pay minimum tax in India on 30% of book profits and credit for taxes paid in foreign country could not be allowed against tax liability in India when income was assessed u/s.115JA of the Act.

In the rectification proceedings the AO did not allow interest in respect of TDS certificates on the ground that such certificates were not submitted along with the return of income, but were submitted in the course of assessment proceedings.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the income on which tax has been paid abroad was included in ‘book profit’ for the purpose of S. 115JA. The Tribunal held that once taxable income is determined either under the normal provisions or as per S. 115JA, subsequent portion relating to the computation of tax has to be governed by the normal provisions of the Act. It also held that there is no provision in the Act debarring granting of credit for tax paid abroad in case income is computed u/s.115JA. It held the assessee cannot be denied the set-off of tax relief of ₹ 22,88,464 against the tax liability determined u/s.115JA. It upheld the order of CIT(A) on this ground.

The Tribunal noted that tax was deducted at source at the right time. It was also deposited into the exchequer in time. The Tribunal noted that the AO had given credit for TDS, but had denied interest thereon u/s. 244A. The Tribunal held that interest u/s.244A cannot be denied only on the ground that TDS certificates were not furnished along with the return of income. It upheld the order of CIT(A) on this ground.

ACIT v. The Southern Paradise and Stud Developers Pvt. Ltd.

ITAT E-1 Bench, Mumbai
Before A.L. Ghelot (AM) and P. Madhavi Devi (JM)
ITA Nos. 2135 and 2136/Mum./2008
AY: 1995-96 & 1996-97; Decided on: 27/5/2009
Counsel for assessee / revenue : Arvind Dalal / Ajay

S. 220(2) — Liability to pay interest by assessee — AO not justified in charging interest for the intervening period when the CIT(A) allowed the appeal in favour of the assessee to the period when the Tribunal allowed the appeal in favour of the revenue.

Per P. Madhavi Devi

Facts

According to the Revenue the CIT(A) had erred in deleting the interest charged u/s. 220(2) for the intervening period when the CIT(A) allowed the appeal in favour of the assessee to the period when the Tribunal allowed the appeal in favour of the Revenue. It relied on the decisions of the Madras High Court in the case of Super Spinning Mills Ltd. and of the Karnataka High Court in the case of Vikrant Tyres Ltd. and the Board Circular.

Held

The Tribunal agreed with the assessee that the issue was covered by the decision of the Supreme Court in the case of Vikrant Tyres Ltd. The provisions of S. 220 only revives the old demand notice which had never been satisfied by the assessee and which notice got quashed during some stage of the appellate proceedings. In the case of the assessee, no such demand was pending. Accordingly, the appeal filed by the Revenue was dismissed.

Cases referred to :

1. Vikrant Tyres Ltd., 247 ITR 821 (SC);

2. Super Spinning Mills Ltd. v. CIT, 244 ITR 814 (Mad.);

3. Vikrant Tyres Ltd., 202 ITR 456 (Kar.);

4. Board Circular No. 334, dated 3-1-1982.

Narad Investment & Trading P. Ltd. v. DCIT

ITA Nos. 3360/Mum./2010

Section 220(2) — Interest payable by assessee — Manner of computing default period — Original assessment set aside and fresh assessment made by the AO — Whether period of levy of interest is to be reckoned from the date of default as per the original assessment order or as per the fresh assessment order — Held that interest payable is to be computed from the date of fresh assessment order.

When original assessment has been set aside by the Tribunal and fresh assessment has been made by the AO, the period of levy of interest u/s. 220(2) should be reckoned from the date of default as per the original assessment order or as per the fresh assessment order.

In the case of the assessee the original assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue was restored back to the AO. In the fresh assessment, the AO repeated the addition raising the same demand but interest u/s.220(2) was levied from the date of demand notice issued as per the original assessment order. The assessee disputed the AO’s action relying on the Board Circular No. 334, dated 3-4-1982, and contended that as the original assessment had been set aside by the Tribunal, the interest u/s.220(2) could be charged only from the date when the demand become due as per the fresh assessment order and not from the date of original assessment order.

Held

In terms of the Board Circular (supra), in case the assessment is set aside by the CIT(A) and setting aside become final, interest u/s.220(2) has to be charged only after expiry of 35 days from the date of service of demand notice pursuant to the fresh assessment order. In the case of the assessee, since the original order of assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue restored to the AO, it was held that in terms of the Circular, the interest u/s.220(2) had to be charged only from the date of the fresh assessment order.

Reliance Infrastructure Ltd. v. DDIT

ITA No.7509/Mum/2010

Income-tax Act, 1961, section 244A — Interest u/s.244A(1)(b) is allowable and should be granted on refund of tax paid in pursuance of an order u/s.201 of the Act.

Facts

The assessee hired M/s. Jardine Flemming as lead managers for the GDR issue and paid commission to them as well as to their associates without deducting tax at source u/s.195. The Assessing Officer (AO) in an order passed u/s.201, after issuing the requisite notice and considering the submissions made by the assessee, held that the assessee was liable to deduct tax at source and accordingly directed the assessee to pay USD 26,76,750. Aggrieved by the order of the AO the assessee preferred an appeal to the CIT(A) who partly allowed the appeal. On further appeal to the Tribunal, the Tribunal set aside the matter to the file of the AO. Consequently, the AO passed the impugned order dated 7-3-2008 and determined a refund but did not grant interest u/s.244A.

The CIT(A) rejected the claim by holding that the assessee could not show that TDS was voluntarily deposited by it or under protest u/s.195(2) and hence was not eligible for interest u/s. 244A.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held

The Tribunal held that the assessee is entitled to interest u/s. 244A. It was of the opinion that the issue stands covered in favour of the assessee by the judgment of the Supreme Court in the case of ITO v. Delhi Development Authority, (252 ITR 772) (SC) and also by the following orders of the Tribunal, on which reliance was placed on behalf of the assessee :

1. Tata Chemicals v. DCIT, 16 SOT 481 (Mum.)

2. ADIT (IT) v. Reliance Infocomm Ltd., (ITA No. 6100 to 6110/M/2008)

3. ADIT (IT) v. Reliance Infocomm Ltd., (ITA No. 5581/M/2008 and 5585/M/2008)

4. DDIT (IT) v. Star Cruises (India) Travel Services Pvt. Ltd., (ITA Nos. 6498 & 6500/M/06, C.O.os. 10 & 12/Mum./2009.)

The appeal filed by the assessee was allowed.

MUTUALITY – CO-OP. SOCIETY

ITO v. Grand Paradi CHS Ltd.

ITA No.521/Mum/2010

S. 2(24) of the Income-tax Act, 1961 — Income — Whether the receipts of non-occupancy charges, transfer fees and voluntary contribution from its members by the cooperative housing society is taxable — Held, No.

Facts

The assessee was a co-operative housing society. During the year under appeal, it had shown following receipts in its accounts which is the subject matter of dispute :

1. Non-occupancy charges (sub letting charges) — ₹ 13.24 lakh;

2. Transfer fees of ₹ 1.95 lakh;

3. Voluntary contribution (Donation) from outgoing members and incoming members ₹ 54.52 lakh;

The assessee contended that all the above three receipts were exempt from tax on the principle of mutuality. However, the AO, following the decisions of the Bombay High Court in the case of Presidency Co-op. Housing Society Ltd. (216 ITR 321) taxed the above receipts. On appeal, the CIT(A) relying on the decisions of the Bombay High Court in the cases of Shyam Co-op. Housing Society Ltd. (ITA Nos. 92, 93 and 206, dated 17-7-2009) and Su Prabhat Co-op. Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009, dated 1-10-2009), allowed the appeal of the assessee.

The Revenue challenged the order of the CIT(A) before the Tribunal on the ground that the two decisions relied on by the CIT(A) have not been accepted by the Department and the same is challenged before the higher authority. Thus, according to it, the matter was sub-judice.

Held

As regards non-occupancy charges - the Tribunal relying on the decision of the Bombay High Court in the cases of Su Prabhat Co-op. Housing Society Ltd. upheld the order of the CIT(A). With regard to transfer fee and voluntary contribution — it agreed with the assessee and held that its case was covered in favour of the assessee by the decision of the Bombay High Court in the case of Sind Co-op. Housing Society Ltd. v. ITO, (317 ITR 47).

According to the Tribunal, the decision of the Bombay High Court in the case of Presidency Coop. Housing Society Ltd. relied on by the Revenue, had been distinguished by the Bombay High Court in the case of Sind Co-op. Housing Society Ltd. Further, it observed that the Revenue was not able to show any other contrary decisions. As regards the Revenue’s contention about the nonacceptance of the Bombay High Court decisions, since the same have been challenged, the Tribunal based on the Bombay High Court decision in the case of Bank of Baroda v. H. C. Srivastava and another, (256 ITR 385) held that the ground taken by the Revenue was devoid of any merit and accordingly, the same was rejected.

ITO v. Damodar Bhuvan CHS Ltd.

ITA No. 1610/Mum./2010

Section 2(24) - Income - Taxability of receipt of transfer fees and non-occupancy charges from its members by the housing society - Amount received in excess of the limits prescribed under the law - Held that the sum received is exempt from tax on the principle of mutuality .

The assessee was a co-operative housing society. During the year under appeal, its claim to treat the receipt of the sum of ₹15 lac towards transfer charges (described as contribution to heavy repair fund) and ₹1.31 lac towards non-occupancy charges as exempt was negatived by the AO. On appeal, the CIT(A) held that these receipts are exempt under the principle of mutuality.

Held:

As regards the receipt of ₹ 15 lakh towards transfer charges, relying on the Bombay High Court decision in the case of theSind Co-operative Housing Society v. Income-tax Officer, (317 ITR 47), which was also followed in the cases of Suprabhat Co-operative Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009 dated 1-10-2009) as well as Shyam Co-operative Housing Society Ltd. v. CIT, (ITA Nos. 92, 93 and 206 of 2008, dated 17-7-2009), the Tribunal held that the principle of mutuality applies to the receipt of transfer fees. Similarly, in respect of the receipt of ₹ 1.31 lakh towards non-occupancy charges, the Tribunal relied on the decision of the Bombay High Court in the case of Mittal Court Premises Co-op Society v. ITO, (320 ITR 414) and held that the principle of mutuality equally applies to such receipt. It further held that the restriction on the quantum of receipt by an association from its members prescribed by any other law regulating the relationship between members and its association will not be relevant while taxing the receipts under the Act. Thus, according to it, the principle of mutuality will not cease to exist in respect of receipts from members by an association beyond the quantum restricted by any law regulating the relationship between members and its association.

Hatkesh Co-op. Housing Society Ltd. v. ACIT (ITAT Mumbai)

ITA No.67/Mum/2014; AY 2008-09
Bench ‘H’; order dated 29.03.2016

Sec.4 - Mutuality - TDR Premium – Exempted as covered by principle of mutuality

The learned CIT(A) relied on ITAT order for A.Y. 2006-07 (ITA No. 499/M/2011) & A.Y. 2007-08 (ITA No. 500/M/2011) and held that TDR Premium received by Society from its members was not covered by principle of Mutuality. The Tribunal for A.Y. 2008-09 reversed the order of Learned CIT(A) and held that TDR premium will be covered by the principle of mutuality. Hence, ITAT order for A.Y. 2006-07 (ITA No. 499/M/2011) and A.Y. 2007-08 (ITA No. 500/M/2011) in case of Hatkesh Co-op. Hsg. Society is no longer good law.

PENALTY

ACIT v. Enpack Motors Pvt. Ltd.

ITAT ‘E’ Bench, Mumbai
Before D. Manmohan (VP) and R.K. Panda (AM)
ITA No. 914/Mum./2008
AY: 2004-05; Decided on: 23/10/2009
Counsel for assessee / revenue : Arvind Dalal /S.K. Singh

S. 271(1)(c) — Penalty for concealment of income — Additions/disallowances sustained by the appellate authority — Whether sufficient ground for levy of penalty — Since full disclosure of particulars of transactions were made and additions were on account of different view adopted, penalty cannot be imposed.

Per R. K. Panda

Facts

The assessee was a company incorporated in 1983. During the year it had not carried on the business and it had returned a loss of ₹ 1.41 crore. On account of the flood which took place on 26/27 July in Mumbai, all its records and documents got destroyed and it was not able to produce documents asked for by the AO. However, a copy of the police complaint and the certificate issued by the Chartered Engineer evaluating the bad impact of the flood and loss of material were furnished by the assessee. The AO however, completed the assessment u/s. 144 determining income at Nil after setting off carried forward loss of ₹ 11.15 lakh. The major disallowances made were as under :

• Stock valuation : A plot of land of ₹ 6.56 crore, held as stock in trade, was mortgaged to a bank. In order to recover its dues, the bank had initiated the process of the sale of plot and the sale price mentioned was ₹ 5.2 crore. In view of the same, the assessee had valued the plot of land at the said price thereby resulting into a loss of ₹ 1.35 crore. The AO was not satisfied with the explanation and disregarded the downward valuation of stock;

• Depreciation : Since the Company was defunct, according to the AO, it cannot be allowed depreciation of ₹ 9.74 lakh.

The assessee did not prefer any appeal when the AO’s order was upheld by the CIT(A). The AO initiated penalty proceedings and after hearing, held that the assessee was in default u/s. 271(1)(c) read with Explanation 4(a). He accordingly, levied penalty of ₹ 54.46 lakh being the minimum penalty @100% of tax sought to be evaded.

The CIT(A) on appeal cancelled the penalty levied as according to him, no inaccurate particulars were furnished by the assessee and the disallowance was not based on any independent evidence brought on record by the AO.    

Before the Tribunal the Revenue submitted that the non-filing of any appeal against the assessment order amounted to the acceptance by the assessee that it had furnished inaccurate particulars Further, relying on the decision of the Supreme Court in the case of Dharmendra Textiles Processors & Others, it contended that mens rea was not an essential condition for levying of penalty.

Held

The Tribunal noted that the assessee had made full disclosure of all the particulars relating to the transactions in its accounts filed with the Income-tax Department. The additions were made merely because the AO did not share the views of the assessee. It was not disputed that the plot of land was treated as stock in trade and was sold at a loss. As regards claim for depreciation, it was noted that there were diverse decisions, both for and against the assessee when the business was discontinued. As regards the other expenses disallowed, it agreed with the assessee that in order to maintain the corporate entity, certain expenses need to be incurred. Thus, according to it, the decision of the Supreme Court in the case of Dharmendra Textiles was not applicable to the facts of the case of the assessee. Further, according to it there was sufficient force in the assessee’s submission that, in view of the huge amount of brought forward losses, no appeal was filed against the CIT(A)’s order. For the reasons stated as above, it was held that the CIT(A) was justified in cancelling the penalty.

Case referred to

Dharmendra Textiles Processors & Others, 306 ITR 277 (SC).

Nera (India) Limited v. DCIT
ITAT ‘F’ Bench, New Delhi
Before D.R. Singh (JM) and K.G. Bansal (AM)
ITA No. 107/Del./2009
AY: 2004-05; Decided on: 4/8/2009
Counsel for assessee / revenue: A.K. Mittal / Sunita Singh

S. 271(1)(c) — Penalty for concealment of income — Whether non bifurcation of short term capital loss from the overall business loss amounted to concealment of income and furnishing of inaccurate particulars of income — Held, No.

Per D. R. Singh

Facts

The assessee had filed return of income declaring business loss of ₹ 1.37 crore. During the course of assessment proceedings, it was noticed by the AO that the Auditors in Form No. 3CD had reported that debit to the Profit & Loss account included capital expenditure by way of fixed assets written off amounting to ₹ l0.17 lakh, which was not added back by the assessee. The same was added to the income (reduced from the loss) of the assessee and the business loss was assessed accordingly. According to the AO since the assessee accepted the mistake only after the show cause was issued, he was of the view that the assessee had concealed his income and furnished inaccurate particulars of income. He therefore levied penalty of ₹ 3.65 lakh u/s.271(1)(c) of the Act. On appeal, the CIT(A) confirmed the same.

Before the Tribunal the assessee explained that instead of classifying the sum of ₹ 10.17 lakh as short term capital loss, which was allowable to be carried forward u/s. 70 of the Act, the assessee in its return made a technical error of not bifurcating short term capital loss from the overall business loss of the company. The assessee claimed that the same cannot by any assumption be deemed to be concealment of income or furnishing of inaccurate particulars of the income.

Held

According to the Tribunal, a mere omission or negligence would not constitute a deliberate act of suppression. It agreed with the assessee that its explanation cannot be treated as false and inaccurate simply because of its mistake in wrongly classifying heads of loss. Accordingly, the penalty imposed was deleted.

Renu Hingorani v. ACIT

ITA No.2210/Mum/2010

Income-tax Act, 1961 — Section 271(1)(c). Penalty u/s.271(1)(c) is not leviable on addition arising u/s.50C.

Facts:

The assessee inter alia sold a residential flat for a consideration of ₹ 63,00,000, whereas the value of this flat as per the Stamp Valuation Authoritieswas ₹ 72,00,824. Thus, there was a difference of ₹ 9,00,824. The assessee in her return of income computed capital gains with reference to sale consideration as per sale agreement. In the course of the assessment proceedings, upon being asked to show cause why the difference should not be added back to the total income, the assessee agreed to the same. Accordingly, the said sum of ₹ 9,00,824 was added to the total income of the assessee by applying the provisions of section 50C of the Act. The AO initiated penalty proceedings u/s. 271(1)(c) and vide order dated 20-3-2009 levied the penalty of ₹ 1,98,181 (being 100% of tax sought to be evaded). Aggrieved by the levy of penalty, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

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

Held

The Tribunal having noted that — (i) the AO had not questioned the actual consideration received by the assessee, but the addition was purely on the basis of deeming provisions of section 50C of the Act; (ii) the AO had not given any finding that the actual sale consideration was more than the sale consideration admitted and mentioned in the sale agreement; and (iii) the assessee had furnished all the relevant facts, documents/material including the sale agreement, the genuineness and validity whereof was not doubted by the AO, observed that the assessee’s agreement to an addition on the basis of valuation by the Stamp Valuation Authority would not be a conclusive proof that the sale consideration as per agreement was incorrect and wrong. It held that the addition because of the deeming provisions does not ipso facto attract penalty u/s. 271(1)(c). In view of the decision of the Apex Court in the case of CIT v. Reliance Petroproducts Pvt. Ltd., (322 ITR 158) (SC), the penalty levied was held to be not sustainable. The appeal filed by the assessee was allowed.

Nayan Builders & Developers P. Ltd. v. ITO

ITA No. 2379/Mum/09
Mumbai Bench ‘B’, Order dated 18/3/2011
AY 1997-98

Penalty – S. 271(1)(c) – Admission of appeal by High Court – Admission itself show debatable issue – Sufficient to disbar penalty

In quantum proceedings, the Tribunal upheld the addition of three items of income. The assessee filed an appeal to the High Court which was admitted. The AO levied penalty u/s. 271(1)(c) in respect of the said three items. The penalty was upheld by the CIT (A). On appeal to the Tribunal, HELD allowing the appeal:

When the High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable . In such circumstances penalty cannot be levied u/s. 271(1) (c). The admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty.

Century Metal Recycling Pvt. Ltd. vs. DCIT

ITA No. 3212/Del/2014
[Ref-BCAJ-Nov – 2014]

Sections. 79, 271(1)(c) – Penalty u/s. 271(1)(c) is not leviable in a case where claim to carry forward capital loss was denied due to change in majority shareholding.

Facts: For assessment year 2007-08 the Assessing Officer (AO) in an order passed u/s.143(3) of the Act assessed the returned income to be the total income. However, the claim of carry forward of loss of ₹ 23,09,722 was denied on the ground that there was a change in majority shareholding of the assessee and therefore by virtue of section 79 the said loss cannot be carried forward.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. The assessee after receiving the order of CIT(A) did not carry forward the capital loss of ₹ 23,90,722 in its return of income for AY 2012-13. The AO levied a penalty of ₹8,05,000 u/s. 271(1)(c) 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 carry forward of long term capital loss of AY 2005-06 and 2006-07 had been duly accepted as correct as per returns filed and assessment orders passed by the AO in the relevant years In the AY 2006-07 the AO specifically mentioned that carry forward of long term capital loss is allowed.

The Tribunal also noted that in the assessment order of AY 2007-08 there was no mention that the assessee had furnished any inaccurate particulars of income or had made any wrong claim of carry forward of long term capital loss. The disallowance of carry forward of long term capital loss was on technical ground and not on account of any concealment of any particulars of income. The Tribunal noted that section 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income. It observed that the conduct of the assessee cannot be said to be contumacious so as to warrant levy of penalty. The Tribunal held that the levy of penalty was not justified. It set aside the orders of the authorities below and deleted the levy of penalty.

The appeal filed by the assessee was allowed.

Nath Holding & Investment P. Ltd. v. DCIT

ITA No. 5328/Mum./2006

Section 271(1)(c) — Penalty for concealment of income — During quantum proceedings assessee failed to explain certain discrepancies in respect of its claim for loss in share trading business — AO disallowed the loss and imposed penalty — Held that in the absence of the finding that the claim for loss was bogus or false, penalty cannot be imposed .

The impugned penalty was levied in respect of disallowance of loss in share trading business. The loss was disallowed on the ground of discrepancy in the distinctive number of shares purchased and sold and which could not be explained at the relevant point of time. It was only for the lack of explanation for discrepancy that quantum addition was finally confirmed.

Before the Tribunal the assessee furnished reconciliation in order to explain the discrepancy and it also filed an affidavit setting out the reasons as to why the same could not be explained earlier.

Held:

According to the Tribunal, once the assessee had given a reasonable explanation which was not found to be false, imposition of penalty in respect of the same cannot be justified. Further, it observed that the mere fact that the assessee could not explain its claim in the quantum proceedings and in the absence of any independent finding in the penalty order to the effect that claim for loss made by the assessee was bogus or false, it held that the penalty cannot be imposed.

Shri P. V. Ramana Reddy v. ITO

ITA Nos.1852 to 1857/Hyd/2011, AY 1999-2000 to 2005-06,
Hyderabad Bench ‘B’, order dated 06/01/2012

Penalty – Sec. 271(1)(c) – Surrender after detection in search while filing 153A return – Penalty can still be waived / deleted

Pursuant to a search & s. 153A assessment on the basis of seized papers, statements etc the assessee offered additional income of ₹ 2.68 crores on the basis that he was unable to explain the old records. Some of the other additions made by the AO were partly deleted by the CIT (A) & Tribunal. The AO & CIT (A) levied S. 271(1)(c) penalty on the ground that the assessee’s offer of additional income was not voluntary or bona fide. On appeal by the assessee to the Tribunal, Held allowing the appeal:

Though the assessee owned the unaccounted transactions only after search action, when an assessee admits his mistake and that he has committed a wrong and offers the additional income to tax, it cannot be said that his statement is false or not bona fide . Neither the CIT(A) nor the Tribunal were completely clear about the exact amount of concealment and there was no conclusive evidence as some additions had been deleted. S. 271(1)(c) gives discretion to the AO to exonerate the assessee from levy of penalty even in case where the assessee has concealed the income or furnished incorrect particulars of income. Penalty should not be imposed merely because it is lawful to do so. The AO has to exercise his discretion judiciously. If an assessee files a revised return though at a later stage or discloses true income, penalty need not be levied. No doubt, merely offering additional income will not automatically protect the assessee from levy of penalty but in a given case where the assessee came forward with additional income though after detection because he was not in a position to explain the seized material properly and expresses remorse in his conduct un-hesitantly, the AO has to exercise the discretion in favour of such assessee as otherwise the expression ‘may’ in s. 271(1)(c) becomes redundant . In a case of admitted income, concealment penalty is not automatic. The discretion vested in the AO should be used not to levy penalty. On facts, the case was most befitting to exercise such discretion because there was divergent opinion while deleting or sustaining the addition and there was no conclusive proof that the assessee concealed income or furnished inaccurate particulars of income. The assessee’s offer was to avoid litigation. If the AO had clinching evidence of concealment, he should not have accepted the assessee’s offer and should have proceeded on the basis of material on record. (VIP Industries 112 TTJ 289, Siddharth Enterprises 184 TM 460 (P&H) & Reliance Petro Products 322 ITR 158 (SC) followed).

I TO vs. Gope M. Rochlani
ITAT Mumbai `G’ Bench
Before Rajendra Singh (AM) and Amit Shukla (JM)
ITA No. 7737/Mum/2011
A.Y.: 2008-09. Decided on: 24th May, 2013.
Counsel for revenue/assessee: D. K. Sinha/ Dr. P. Daniel.

Explanation 5A to Section 271(1)(c). The expression “due date” in Explanation 5A encompasses a belated return filed u/s. 139(4). Even a belated return filed u/s. 139(4) will be entitled to the benefit of immunity from penalty.

Facts: The assessee, a partner of the firm M/s. Madhav Constructions, in its return of income for assessment year 2008-09, filed u/s. 139(4), returned a total income of ₹ 1,31,19,140. The returned income included a sum of ₹ 1,25,00,000 declared by it in the statement recorded u/s. 132(4) of the Act in the course of search action on Madhav Group. In an order passed u/s. 143(3) r.w.s. 153A, the income returned by the assessee was accepted by the Assessing Officer (AO). Thereafter, the AO initiated proceedings u/s. 271(1)(c) on the ground that the income was offered only as a consequence of search and the return of income in which it was declared was filed after due date u/s. 139(1). He held that the assessee’s case was covered by Explanation 5A to section 271(1)(c). He rejected the assessee’s contention that the sum of ₹ 1,25,00,000 declared was offered voluntarily on an estimated basis and the same was accepted in the assessment order and hence the provisions of section 271(1)(c) are not applicable.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee on the ground that income was offered on an estimated basis and therefore the additional income so offered and accepted could not be held to be concealed income nor could it amount to furnishing of inaccurate particula₹

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

In Explanation 5A, the legislature has not specified the due date as provided in section 139(1) but has merely envisaged the words “due date”. This “due date” can be very well inferred as due date of filing of return of income filed u/s. 139 which includes section 139(4). Where the legislature has provided the consequences of filing of return of income u/s. 139(4), then the same has also been specifically provided for eg., Section 139(3). Thus, the meaning of the words “due date” sans any limitation or restriction as given in clause (b) of Explanation 5A cannot be read as “due date as provided in section 139(1)”. The words “due date” can also mean date of filing of the return of income u/s. 139(4).

The Tribunal also noted that in the context of sections 54F and 54(2), in the case of CIT vs. Rajesh Kumar Jalan (286 ITR 276)(Gau); CIT vs. Jagriti Aggarwal (339 ITR 610)(P&H) and CIT vs. Jagtar Singh Chawla (ITA No. 71 of 2012, order dated 20^th March, 2013), it has been held that provisions of Section 139(4) are actually an extension of due date of Section 139(1) and therefore due date for filing return of income can also be reckoned with the date mentioned in section 139(4).

The Tribunal held that the assessee gets the benefit/ immunity under clause (b) of Explanation to section 271(1)(c), because the assessee has filed its return of income within “due date” and therefore, the penalty levied by the AO cannot be sustained on this ground. It held that it is not affirming the findings and conclusions of CIT (A). However, the penalty levied was deleted in view of the interpretation of Explanation 5A to section 271(1)(c).

The appeal filed by the revenue was dismisse.

Oxford Softech P. Ltd. v. ITO (ITAT Del.)

ITA No.5100/Del/2011; AY 2004-05
Bench ‘E’; Order dated 07.04.2016

S. 271(1)(c): Income-tax provisions are highly complicated and it is difficult for a layman to understand the same. Even seasoned tax professionals have difficulty in comprehending these provisions. Making a claim for deduction u/s S. 80 IA which has numerous conditions is a complicated affair & cannot attract penalty

Held

1. The assessee has made a claim u/s. 80 IA of the Act. Along with the return of income the assessee filed report from a Chartered Accountant in form no.10 CCB as required u/s 80 IA(7) of the Act. The claim was made on the advice of the auditors A perusal of this audit report demonstrates that the auditors of the assessee also believed that the assessee was eligible for deduction u/s 80 IA of the Act. It was a conscious claim made by the assessee supported by an audit report. The assessee has also made an application to STPI for setting up the infrastructure facilities under the STPI Scheme. All details of the claim made u/s 80 IA are filed by the assessee, along with the return of income. Under these circumstances we are of the considered opinion that the explanation given by the assessee that it was under a genuine belief that it was entitled for relief u/s 80 IA of the Act is bonafide. The assessee acted under the guidance and advice of a Chartered Accountant. Hence in our view it was under a bonafide belief that it is entitled to the claim for deduction under provisions of s.80 IA of the Act.

2. The provisions under the Income Tax Act are highly complicated and its different for a layman to understand the same. Even seasoned tax professionals have difficulty in comprehending these provisions. Making a claim for deduction under the provisions of S.80 IA of the Act which has numerous conditions attached, is a complicated affair. It is another matter that the assessing authorities have found that the claim is not admissible. Under these circumstances we hold that it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Neelkanth Township & Construction Pvt. Ltd. vs. ITO

ITA No. 6062 /Mum/2012

Section 271(1)(c) - Reduction of interest income from expenses / WIP being a debatable issue, penalty u/s. 271(1)(c) is not leviable notwithstanding that the assessee had not filed an appeal on quantum addition.

During the previous year relevant to the assessment year 2008-09, the assessee company received interest income of ₹ 5,99,644. In the return of income filed by the assessee, this income was reduced from expenses and the net expenses were carried forward as work-in-progress.

The Assessing Officer (AO) while assessing the total income treated this sum of ₹ 5,99,644 to be income of the assessee. The assessee accepted the addition. On the said addition, the AO levied penalty, u/s 271(1)(c), amounting to ₹ 1,82,289.

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 found that the assessee has disclosed the relevant facts in the return of income. The fact of not filing further appeal on quantum addition should not come in the way of deciding the penalty proceedings. The Tribunal was of the opinion that the issue whether interest income was rightly set off against the development expenses or was to be offered as income was a debatable issue. Accordingly, penalty u/s. 271(1)(c) is not sustainable. The Tribunal decided the appeal in favor of the assessee. The appeal filed by assessee was allowed.

DCIT vs. L & T Infrastructure Finance Co. Ltd.

ITA No. 5329 /Mum/2013

Sections 35AD, 271(1)(c) - Following the decision of Apex Court in Waterhouse Coopers Pvt. Ltd. vs. CIT (348 ITR 306)(SC), penalty deleted on the ground that that the assessee had committed bonafide error and it was not a case of concealment of income.

The assessee company was formed on 18.4.2006. The first return of income was filed for AY 2007-08. In the return of income the assessee had claimed, u/s. 35D, one-fifth of expenditure incurred towards ROC fees for increase in authorised share capital. In the course of assessment proceedings, on being called to explain the claim, the assessee withdrew the claim. The Assessing Officer (AO) thereafter levied penalty u/s. 271(1)(c) holding that the assessee had furnished inaccurate particulars of income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and in the course of appellate proceedings contended that since it was the first return of income, the expenditure was erroneously claimed and the fact that expenditure was incurred after commencement of business operations. Upon the same being noticed, the claim was withdrawn. The claim was not willful and was made inadvertently. The CIT(A) observed that the assessee had committed a bona fide error and it was not a case of concealment of income or furnishing of inaccurate particulars Relying on the decision of the Apex Court in the case of Waterhouse Coopers Pvt. Ltd. vs. CIT 348 ITR 306 (SC), he deleted the penalty levied by the AO.

Aggrieved, the revenue preferred an appeal to Tribunal.

Held:

The Tribunal observed that the assessee had explained that the error committed by it was inadvertent and due to a bona fide mistake. This was not a case for attraction of provisions of section 271(1)(c). The Tribunal agreed with the CIT(A) that the levy of penalty was not justified. The Tribunal upheld the order passed by CIT(A).

The appeal filed by revenue was dismissed.

K. Prakash Shetty vs. ACIT

ITA No. 265 to 267/Bang/2014
[Ref-BCAJ-Aug-2014]

S/s. 271(1)(c), 271AAA, 292BB – Show cause notice issued u/s. 274 of the Act not spelling out the grounds on which penalty is sought to be imposed is defective. Consequently, an order imposing penalty is invalid.

Facts

The assessee was an individual who belonged to M/s. Gold Finch Hotel Group. There was a search u/s. 132 of the Act on 20-11-2009 in the case of the assessee. On 30-12-2011, assessment orders were passed u/s. 143(3) r.w.s. 153A for AY 2006-07, 2008-09 and 2009-10. In each of these years, the income returned in response to notice issued u/s. 153A exceeded the returned income declared in return of income filed u/s. 139. The difference between the income returned u/s. 139 and income returned u/s. 153A of the Act was due to disclosure made by the assessee consequent to search u/s. 132 of the Act.

For AY 2006-07, the Assessing Officer (AO) initiated penalty proceedings u/s. 271(1)(c) of the Act and for AY 2008-09, he initiated penalty proceedings u/s. 271(1) (c)/271AAA of the Act and for A.Y. 2009-10, he initiated penalty proceedings u/s 271AAA of the Act. In respect of all the three years, the AO imposed penalty u/s. 271(1) (c) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal, where it challenged the validity of orders imposing penalty on the ground that the show cause notice issued u/s. 274 of the Act was defective for AY 2006-07 and that for AY s 2008-09 and 2009-10 notice u/s. 274 of the Act had been issued for imposing penalty u/s. 271AAA of the Act, but the order imposing penalty was passed u/s. 271(1)(c) of the Act.

Held

The show cause notice issued u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. The show cause notice is also bad for the reason that in A.Y.s 2008-09 and 2009-10 the show cause notice refers to imposition of penalty u/s. 271AAA whereas the order imposing penalty has been passed u/s. 271(1)(c) of the Act. It held that the aforesaid defect cannot be said to be curable u/s. 292BB of the Act, as the defect cannot be said to be a notice which is in substance and effect in conformity with or according to the intent and purpose of the Act. Following the decision of the Karnataka High Court in the case of CIT & Anr vs. Manjunatha Cotton and Ginning Factory (359 ITR 565) (Kar), the Tribunal held that the orders imposing penalty in all assessment years to be invalid and consequently it cancelled the penalty imposed.

The appeal filed by the assessee was allowed.

Raman Gupta Prop. M/s. Raman & Co. v. ACIT

ITA No. 05/ASR/2010

Section 271D r.w.s 269SS — Penalty for acceptance of loan/deposit otherwise than by account payee cheque/draft — Assessee’s bona fide belief and conduct established a sufficient and reasonable cause — Penalty deleted.

The assessee had taken cash deposit from three persons amounting to ₹ 2.5 lakh from each, aggregating to ₹ 7.5 lakh. In response to show cause notice, the assessee explained that on account of urgency, as otherwise the cheque issued by him to the third party would have bounced, he took the cash deposit. Further it was pleaded that he was under the genuine impression that the provisions of section 269SS applied only to the business transactions and not to the personal transactions. However, according to the ACIT, the cheque issued to the third party by the assessee was not for payments to a creditor or discharge of any liability, but the same was issued for payment of a loan to the third party. The ACIT further did not agree with the assessee that the personal transactions were not covered and pointed out that the provisions of section 269SS do not make such distinction. Thus, he imposed a penalty u/s.271D of ₹ 7.5 lakh.

According to the CIT(A) none of the exceptions provided u/s. 269SS apply to the case of the assessee and the assessee had no compelling reasons to violate the provisions of section 269SS. Accordingly, he confirmed the order imposing penalty.

Held:

The Tribunal noted that the assessee was under bona fide belief that the provisions of section 269SS do not apply to the personal transactions and this belief had not been found to be false or untrue. Secondly, it was noted that the loan so taken was immediately deposited in the bank account and the transactions were duly recorded by the assessee in his books of accounts. According to the Tribunal, the assessee had not consciously disregarded the provisions of section 269SS of the Act. Therefore, relying on the decisions of the Punjab & Haryana High Court in the case of CIT v. Speedways Rubber Pvt. Ltd., (326 ITR 31), it held that the assessee had been able to establish a sufficient and reasonable cause for not accepting the loan by account payee cheque/ draft, and accordingly the penalty imposed was deleted.

Note: In Hemendra Chandulal Shah v. ACIT, (ITA No. 1129/Ahd./2010), where on a direction of the bank a father had taken cash loan from his son to clear the debit balance in his bank account, according to the Ahmedabad Tribunal, there was reasonable cause and penalty u/s .271D could be imposed. The full text of the decision is available in the office of the Society.

DCIT vs. Chetan M. Kakaria
ITAT Mumbai `C’ Bench
Before N. K. Saini (AM) and Sanjay Garg (JM)
ITA No. 4961/Mum/2011

S/s. 269T, 271E – Amount given or taken from the firm by the partners cannot be treated as giving or taken of loan. Therefore, penalty u/s. 271E cannot be levied even if such amounts are given or taken in cash.

Facts

In the course of assessment proceedings the Assessing Officer noticed that the assessee had repaid loans, aggregating to ₹ 33,26,960
(₹ 2,00,000 + 31,26,960), in cash, to the two firms where he was a partner. Such repayment of loan in cash was also reflected in the tax audit report. The amounts borrowed from the firm were reflected in the balance sheet as unsecured loans. The AO considered these payments to be in violation of section 269T of the Act and proceedings for levy of penalty u/s. 271E of the Act. He levied penalty of ₹ 33,26,960 u/s. 71E of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The transactions between the firm and the assessee were treated by the AO as repayment of loan in cash. It held that there is no independent legal entity opf the firm apart from the rights and liability of the partners constituting it and if any amount is given or taken from the firm by the partners that cannot be treated as giving or taking of the loan. In the instant case, the assessee being a partner gave the money to the partnership firm when it was in need of business exigencies, later on the amount was received back. If the said amount had been routed through the capital account, there could have been no disallowance by the department because a partner can deposit cash in his capital account and he also has a right to receive it in cash. The Tribunal held that the AO was not justified in levying the penalty and CIT(A) has rightly deleted it.

It noted that on a similar issue, the Madras High Court has in the case of CIT vs. V. Sivakumar (354 ITR 9) (Mad) held as under:

“that there was no separate identity for the firm and the partner is entitled to use the funds of the firm. The assessee acted bona fide and there was a reasonable cause within the meaning of section 273B. Penalty could not be imposed.

It also noted that the Rajasthan High Court has in the case of CIT vs. Lokhpat Film Exchange (Cinema) (304 ITR 172)(Raj) held as under:

“the assessee had acted bona fide and its plea that inter se transactions between the partners and the firm were not governed by the provisions of sections 269SS and 269T was a reasonable explanation. Penalty could not be imposed.”

Considering the facts of the case and also the ratio of the above stated decisions the Tribunal held that the CIT(A) was justified in deleting the penalty levied by the AO u/s. 271E of the Act.

The appeal filed by the revenue was dismissed.

PENALTY u/s. 271B

Siroya Developers v. DCIT

ITA No.600/Mum/2010

Section 271B r.w.s. 44AB of the Income-tax Act, 1961 — Penalty for non-furnishing of Tax Audit Report — Assessee who was property developer, was following project completion method of accounting — During the year the project was not completed — Whether AO justified in holding that since the advance received against the flats sold exceeded the prescribed limit of ₹ 40 lakh, the assessee was liable to get the accounts audited u/s.44AB — Held, No.

Facts

The issue before the Tribunal was whether on the basis of the facts, the assessee was liable to get its accounts audited u/s. 44AB of the Act. The assessee, a property developer, was following project completion method of accounting. As per its accounts, the work in progress as at the beginning of the year was ₹ 4.35 crore and as at the end of the year was ₹ 10.07 crore. During the year it had received advances against the sale of flats of ₹ 4.03 crore. Referring to the Board Circular (No. 387, dated 6-7-1984), the authorities below contended that the legislative intent would be defeated if the provisions were applied only in the year when the project was completed. According to the Revenue, if the project takes the period as long as 10 years, then as contended by the assessee, the audit report would be filed in the said tenth year when it would not be possible for the AO to look into the details of 10 years Secondly, during the year under appeal, the value of the work in progress as well as the receipt of advances from the customers had exceeded the prescribed limit of ₹ 40 lakh.

Held

According to the Tribunal, when the assessee was following the project completion method of accounting, the advances received against booking of flats could not be treated as sale proceeds/turnover/gross receipts. For the purpose it relied on the Pune Tribunal decision in the case of ACIT v. B. K. Jhala & Associates and the views of the Institute of Chartered Accountants of India. Accordingly, the appeal filed by the assessee against the order for levy of penalty u/s. 271B was allowed.

Om Stock & Commodities Pvt. Ltd. vs. DCIT
ITAT Mumbai `C’ Bench
Before Sanjay Arora (AM) and Vijay Pal Rao (JM)
ITA No. 441/Mum/2011
A.Y.: 2008-09. Decided on: 10th July, 2013.
Counsel for assessee/revenue: Prakash Jhunjhunwala/T. Roumuan Paite

Sections 44AB, 271B — Value of transactions of online trading in commodities through MCX without taking delivery do not constitute turnover for computing the limits u/s. 44AB of the Act. There is no element of turnover where there is no physical delivery of commodities given or taken.

Facts

The assessee company, a member of Multi Commodity Exchange of India (MCX) was engaged in online business of trading in commodities. The transactions carried on by the assessee were speculative in nature. The bills issued by the Exchange on a daily basis represented mark to market bills and not actual sales/purchase turnover. The transactions were without taking delivery. The entire transaction was squared off at the end of the day or was carried forward to the subsequent day. The net amount, as per contract notes, was either debited or credited to the account of the assessee.

The Assessing Officer (AO), considering the value of the transactions carried out by the assessee on MCX to be the sales figure, invoked section 271B for violation of Section 44AB. He held that the turnover of the assessee was more than ₹ 40 lakh, being the limit prescribed u/s. 44AB for getting the accounts audited and obtaining and furnishing the report as required by the Act.

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 where it placed reliance on the following decisions:

Banwari Sitaram Pasari HUF vs. ACIT (29 Taxmann 137) (Pune ITAT)

Growmore Exports Ltd. vs. ACIT (72 TTJ 691) (Mum ITAT)

CIT vs. Growmore Exports Ltd . (Appeal No. 18 to 20 of 2001) (Mum HC).

Held

The Tribunal noted that the Pune Bench of ITAT has in the case of Banwari Sitaram Pasari (supra), following the decision of Mumbai Bench of the Tribunal in the case of Growmore Exports Ltd. (supra) held that the transaction of buying and selling of commodities where no physical delivery is taken or given is a speculative activity and there is no element of turnover in such transactions.

The Tribunal also noted that the view taken by the Tribunal in the case of Growmore Exports Ltd. has been confirmed by the Bombay High Court vide decision dated 19-12-2007 and speaking order has been passed in the connected case of CIT vs. Harsh Estate Pvt. Ltd. where the Court has observed as under:

“In other words the finding by the Commissioner (Appeals) that the purchase was coupled with delivery has been reversed by the order of ITAT. Nothing has been brought to our attention from the record that the said finding of reversal is perverse warranting this court to take a view different from the view of the Tribunal. We, therefore, proceed on the footing that though there was transaction of shares it was not coupled with delivery. Once there was no delivery, the sale price of the shares could not have been considered as the turnover but only the difference between the price at which the shares were purchased and consequently sold by the broker…

Considering the findings on merits namely that there was no delivery and consequently the sales prices of the shares could not have been considered, it is not necessary to go into the other aspects. In the light of the above, we find no merit in this appeal which is accordingly dismissed.”

The Tribunal considering the above mentioned decisions held that the value of sale transaction of commodity through MCX without delivery cannot be considered as turnover for the purpose of section 44AB. It deleted the penalty levied u/s. 271B.

The appeal filed by the assessee was allowed.

Pilot Construction Pvt. Ltd. v. ITO

ITA No. 5307/Mum/2011 [BCAJ – Jan-2013]

Ss. 44AB, 271B – In case of an assessee following project completion method, advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. Bona fide belief constitutes reasonable cause for non levy of penalty.

Facts

The assessee company was engaged in business of construction. It was following project completion method of accounting. In respect of a SRA project taken up by the assessee, it had received a booking advance of ₹ 11.25 crore from M/s Welspun Gujarat Stahi Robern Ltd. The advance was subsequently returned in 2010 since the property had several encroachments.

The assessee did not get its accounts audited as required u/s. 44AB of the Act since it was of the view that the provisions of section 44AB would apply only when sales, turnover or gross receipts exceed ₹ 40 lakh. Since the assessee had only received an advance which was later refunded and the assessee was following project completion method and the sales would be accounted in the year of completion of the project.

The Assessing Officer (AO) relying on the decision of Lucknow Bench of ITAT in the case of Gopal Krishan Builders (91 ITD 124) levied penalty u/s. 271B 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 assessee was following project completion method, the advance received has been subsequently returned, the project in respect of which advance was received had not commenced even when the matter was being heard by the Tribunal. It also noted that Section 44AB applies only when sales, turnover or gross receipts of business exceed ₹ 40 lakh. The amount of advance received was only from one party and also this advance was subsequently returned.

The Tribunal relying on the decision of the Delhi High Court in the case of Dinesh Kumar Goel (239 ITR 46) held that the advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. The decision of the Lucknow Bench of Tribunal in the case of Gopal Krishan (supra) cannot be followed in view of the decision of the Delhi High Court in Dinesh Kumar Goel. Moreover, the issue being debatable, the plea of the assessee that it was of the view that books were not required to be audited u/s 44AB has to be considered as bona fide. Bona fide belief constitutes a reasonable cause.

The Tribunal set aside the order of CIT(A) and deleted the penalty levied.

RECTIFICATION OF MISTAKES – ITAT

Jayendra P. Jhaveri vs. ITO

ITAT ‘B’ Bench, Mumbai
Before M.A. Bakshi (VP) & Abraham P. George (AM)
MA No. 814/M/08 arising out of ITA No. 68/Mum/2004 and CO 166/Mum/07
AY: Block Period 1/4/1989 to 14/9/1998; Decided on 2/4/2009
Counsel for Assessee/Revenue: Dharmesh Shah / R.S. Srivastava

Income-tax Act, 1961 - Section 254 - Whether an order of the Tribunal can be recalled on the ground that it has been passed without considering decision cited in the course of hearing — Held : Yes.

Per Abraham P. George

Facts

The assessee had filed an appeal to the Tribunal against the block assessment order passed in his case. The two issues raised by the assessee and the direction of the Tribunal thereon were as under :

The first issue was that the notice issued u/s. 158BD gave the assessee less than 15 days time to file the return and therefore was invalid. For this proposition the assessee had relied on the decision of Special Bench (SB) in the case of Manoj Aggarwal. The Tribunal decided this issue against the assessee by relying on the decision of the Bombay High Court in the case of Shirish Madhukar Dalvi, where it was held that technical defects mentioned in a notice u/s. 158BC would stand cured by S. 292B. The second issue was that a notice u/s. 143(2) was not issued and therefore the assessment was invalid. For this proposition reliance was placed on twelve decisions. The Tribunal in its order dealt with only one of the decisions viz. decision of the Gauhati High Court in the case of Bandana Gogoi and found it to be contrary to the decision of the Special Bench in Navalkishore & Sons. It set aside the assessment and remitted it back to the AO for completing it after observance of procedural law relating to issue of various notices under the Act.

The assessee filed a miscellaneous application requesting the Tribunal to recall its order on both the issues. On the first issue the assessee submitted that the decision of SB in the case of Manoj Aggarwal had made a distinction between the provisions of S. 158BC and S. 158BD and also that the decision of the Bombay High Court in Shirish Madhukar Dalvi dealt with S. 158BC. On the second issue the assessee submitted that the Tribunal had not considered the other decisions relied upon by the assessee. According to the assessee, non-consideration of the decisions cited constituted an error apparent from record. For this proposition reliance was placed on the decision of the Bombay High Court in the case of Stanlek Engineering Pvt. Ltd. The assessee vide this miscellaneous application requested that the order passed by the Tribunal be recalled.

Held

On the first issue the Tribunal, after noting that there was an amendment to the provisions of S. 158BD and that the present case was for a period before amendment of S. 158BD, held that there was a mistake apparent on record in not considering the correct position of law and the decision of SB in Manoj Aggarwal’s case in the correct perspective. On the second issue the Tribunal noted that it had considered only one of the decisions relied on by the assessee. Following the ratio of the decision of the Bombay High Court in the case of Stanlek Engineering it held there was an apparent mistake in the order of the Tribunal. The Tribunal recalled its order and directed hearing the appeal afresh.

Cases referred

1. Stanlek Engineering Pvt. Ltd vs. CCE 229 ELT 61 (Bom)(2008).

2. Manoj Aggarwal vs. DCIT 113TTJ 377 (Del)(SB).

3. Shirish Madhukar Dalvi vs. DCIT 287 ITR 242 (Bom).

4. Bandana Gogoi vs. CIT 289 ITR 28 (Gau.)

5. Navalkishore & Sons Jeweller vs. DCIT 87 ITD 407 (Lucknow)(SB).

Puja Agencies Pvt. Ltd. vs ACIT

ITAT Mumbai ‘C’ Bench
Before N.V. Vasudevan (JM) and Rajendra Singh (AM)
MA No. 452/Mum/2009
AY: 2003-04; Decided on: 6/1/2010
Counsel for assessee / revenue: Vijay Mehta / L.K. Agarwal

S. 254 — A request made at the time of hearing, which has not been dealt with in the order of the Tribunal, constitutes an error in the order—The action of the Tribunal in setting aside the order of CIT(A) and upholding the action of the AO in a case where the CIT(A) has not adjudicated on the specific grounds raised by the assessee and also on alternate grounds raised, constitutes a mistake apparent on record .

Per Rajendra Singh

Facts

The assessee filed a miscellaneous application requesting amendment of the order dated 20.4.2009 of the Tribunal, in ITA No. 1483/M/2007. The facts of the case and the mistakes pointed out by the assessee in the order of the Tribunal were as follows:

The assessee had shown a loss of ₹ 1,35,88,144 on account of trading in shares which the AO had treated as speculative loss in terms of Explanation to s. 73. Aggrieved, the assessee preferred an appeal to CIT(A).

In an appeal to the CIT(A), the assessee, inter alia, contended that its case was covered by the exceptions provided in Explanation to s. 73; and an alternate ground was raised regarding apportionment of expenses towards speculative businesses, in case the claim of the assessee was not accepted. The CIT(A) held that the provisions of Explanation to s. 73 were applicable only in case of purchases and sales of shares of group companies. And since the assessee was not trading in shares of group companies, the CIT(A), following the decision of the SMC Bench of the Tribunal in the case of Aman Portfolio, directed the AO to treat the loss as business loss. He did not adjudicate on the issue as to whether the assessee was covered by the exceptions provided in Explanation to s. 73. He also did not deal with the alternate ground raised by the assessee.

The revenue filed an appeal against the order of the CIT(A). The assessee did not prefer an appeal to the Tribunal.

The Tribunal, while disposing the revenue’s appeal, noted that the decision of the SMC Bench of the Tribunal in the case of Aman Portfolio, had been reversed by the SB of the Tribunal in the case of AMP Spinning and Weaving Mills Pvt. Ltd (100 ITD 142), in which it was held that Explanation to s. 73 was applicable to all transactions of purchases and sales of shares.

It also observed that the main business of the assessee was trading in shares and that loss had arisen on account of trading in shares.

The assessee contended that in the course of hearing, the members had expressed an opinion that the issue be set aside to the file of the AO, to be decided afresh after considering various decisions regarding applicability of Explanation to s. 73. The assessee was accordingly asked to file a letter mentioning the issues that required to be considered afresh before the AO. In compliance, the assessee filed a letter dated 18.3.2009. Therefore, the order of the Tribunal setting aside the order of the CIT(A) and confirming the order of the AO was contrary to the views expressed at the time of hearing; and, therefore, there was an apparent mistake.

Held:

1. The log book of hearing maintained by the Accountant Member did not show that the bench had expressed any view in the matter. The notings did show that the AR had made a request for restoring the matter to the AO, but the bench did not express any view in the matter. The log book of the Judicial Member was not available. In view of these facts, the Tribunal did not accept the point made in the MA that the members of the bench had expressed any view in the matter. However, since the request made by the AR for restoring the matter was not dealt with, there was an error in the order to that extent.

2. The Tribunal noted that the assessee had specifically mentioned to the CIT(A) that its case is covered by the exceptions provided to Explanation to s. 73, and had also raised an alternate ground regarding apportionment of expenses towards speculative businesses, in case the claim of the assessee was not accepted. Since the CIT(A) had decided the issue in favor of the assessee on technical grounds, he had not adjudicated on these issues. In spite of these facts, the Tribunal had stated in para 3 of its order that according to the findings by the AO, that the main business was trading in shares had become final, because the assessee had not appealed against the order of the CIT(A). This finding of the Tribunal constituted a mistake, apparent on record.

3. It is a settled legal position that the assessee, as a respondent, can support the order of the CIT(A) on alternate grounds also. The only limitation is that the assessee, as a respondent, cannot argue against the finding of the CIT(A) which is in favour of the revenue. In the present case, the CIT(A) had not given any finding on whether the case was covered by exceptions provided in Explanation to s. 73 and also regarding apportionment of expenses.

4. Once the Tribunal did not accept the technical ground, it was required to restore the matter to the file of the CIT(A) for deciding the issue on merits.

The order passed by the Tribunal was modified by holding that the order of the CIT(A) had been set aside and the matter restored back to him for adjudicating the specific grounds raised by the assessee with him. The miscellaneous application of the assessee was allowed.

REFUND:

Claridge Hotels Pvt. Ltd. v. ACIT

ITAT Delhi Bench ‘E’, New Delhi
Before N.S. Saini (AM) and P.K. Malhotra (JM)
ITA No. 4250 to 4252/Del/2004
AY 1999-2000 to 2001-02; Decided on 13-10-2006
Counsel for assessee/revenue : Ved Jain and Rani Jain / L.K.S. Dahiya

S.240 read with s.148 of the Income-tax Act, 1961 – Return filed in pursuance to notice u/s. 148 - No return filed u/s. 139(1) or u/s. 139(4) - On assessment and giving effect to prepaid taxes, assessee becoming entitled to refund of excess tax paid - Whether AO justified in refusing claim of applying provisions of s. 239 – Held, No.

Per P. K. Malhotra

Facts :

For the years under appeal, the assessee had not filed its return of income u/s.139(1) or u/s.139(4). The returns were filed in response to notice issued u/s.148 of the Act. One of the issues before the Tribunal was regarding the refund of taxes paid in excess. While the AO allowed the credit for prepaid taxes as per the law, he refused the refund of excess taxes paid, holding that the same was not allowable u/s.239 of the Act. The CIT(A) on appeal, relied on the Supreme Court decision in the case of Sun Engg. Works Pvt. Ltd. and also on the ground that the claim was barred by limitation u/s.239(2) of the Act, upheld the order of the AO.

Held :

Referring to the provisions of S. 240, the Tribunal noted that a refund becomes due to an assessee as a result of any order passed in appeal or other proceedings under the Act. Relying on the Gujarat High Court decisions in the cases of Laxmiben Hemdas Patel and Atmaram J. Hathiwala, it noted that the phrase ‘other proceedings’ used in S. 240 was of wide amplitude to cover any order passed in proceedings other than appeals under the Act. Secondly, as held by the Punjab High Court in the case of Inder Paul Khanna, the assessee was not required to make claim for the refund. Accordingly, it was held that the assessee was entitled to refund of excess taxes paid.

Cases referred to :

1. Laxmiben Hemdas Patel v. S. B. Rohtagi, ITO 209 ITR 267 (Guj.)

2. Atmaram J. Hathiwala v. S. Swarup, ITO 209 ITR 456 (Guj.)

3. Inder Paul Khanna v. ITO, 94 Taxman 396 (Punj.)

4. CIT v. Sun Engg. Works Pvt. Ltd., 198 ITR 297 (SC)

RE-ASSESSMENT:

The National Leather Mfg. Co. v. DCIT

ITAT ‘G’ Bench, Mumbai
Before Sunil Kumar Yadav (JM) and A.K. Garodia (AM)
ITA No. 2369/M/2003
AY 1993-94 : Decided on 16-10-2007
Counsel for assessee/revenue : B.V. Jhaveri / Sanjay Dutt

S. 148 of the Income tax Act, 1961 – Notice for re-assessment – No assessment made pursuant to first notice issued u/s.148 – Second notice u/s.148 issued after the time limit for assessment under the first notice expired – Whether the second notice so issued valid – Held, No

Per Sunil Kumar Yadav

Facts

The assessee’s return was processed u/s.143(1)(a) on 28-10-1994. Thereafter, notices u/s.154 were issued on 6-6-1996 and 8-8-1996, which were duly replied. Thereafter on 6-10-1997, notice u/s.148 was issued. The assessee vide its letter dated 13-11-1997 requested the AO to treat the original return filed as the return filed under the said notice. The time limit for completing the assessment expired on 31-3-2000 and no assessment was done. The AO again issued a notice u/s.148 on 25-5-2000. The assessee found that the AO had issued the second notice on the same reasons on which the earlier notice was issued. Therefore, the second notice issued was challenged as illegal and void.

Held

The Tribunal, following the decisions listed below, held that unless and until the earlier proceedings commenced on issuance of notice u/s.148 were disposed of, subsequent notice u/s.148 cannot be issued. Accordingly, the appeal filed by the assessee was allowed and the second notice issued by the AO was held as not valid and the assessment made thereunder was quashed.

Cases referred to :

1. Capt. M. A. Mistry (ITA No. 1085 & 1087/M/2003)

2. Trustees of H.E.H. Nizam’s Supplemental Family Trust v. CIT, 242 ITR 381 (SC)

3. Jaidev Jain & Co. v. ITO, 48 ITD 124

4. KLM Royal Dutch Airlines v. ADIT, 208 CTR 33 (Del.)

5. HP State Forest Corporation v. JCIT, 80 ITD 591 (Chandigarh)

Pirojsha Godrej Foundation v. ADIT (Exemption)

ITA No.1976/Mum/2008

Income-tax Act, 1961 — S. 143(1)(a), S. 147. Even when the original assessment is u/s.143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny.

Facts

The assessee was a charitable trust, registered u/s.12A of the Act, notified, for the relevant period, u/s.10(23C)(iv) of the Act. The assessee in its return of income filed on 29th October, 2001 declared exemption u/s.10(23C) and declared nil taxable income. This return was processed u/s. 143(1)(a). On 26th May, 2004, the assessee was served a notice u/s.148 and income of the assessee was proposed to be reassessed. The Assessing Officer (AO) had, in the reasons recorded, stated that since the assessee has not invested a sum of ₹1.02 crores in accordance with the provisions of S. 11(5), the said sum of ₹ 1.02 crores is chargeable to tax and has escaped assessment.

Aggrieved the assessee preferred an appeal to the CIT(A) and challenged the validity of the jurisdiction assumed u/s.147 of the Act on the ground that the AO had resorted to reassessment proceedings without having a valid reason to believe that the income had escaped assessment. The CIT(A) upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

1. The recorded reasons that the violation of S. 11(5) r.w.s. 13(1)(d) by the assessee leads to the amount of ₹ 1.02 crores to be included in the assessee’s total income are clearly contrary to the legal position which is that while the assessee may lose exemption u/s. 10(23)(c) for not adhering to the conditions of S. 11(5), this does not result in the said amount being chargeable to tax in the hands of the assessee. The Tribunal held that the reasons for reopening of assessment have been recorded without application of mind and without considering the applicable legal position, as expected of an AO while exercising his powers u/s. 147.

2. The Tribunal after examining the reasons recorded in the light of the observations of the Bombay High Court in the case of Hindustan Lever Ltd. (268 ITR 332) and of the Supreme Court in the case of Kelvinator of India Ltd. (320 ITR 561) concluded that there was no material before the AO that any income, leave aside the income of ₹ 1.02 crores has escaped assessment. The Tribunal observed that no reasonable person, with basic understanding of the scheme of income-tax law, can come to the conclusion that the AO has arrived at. It held that there was no cause and effect relationship between what the AO has noticed in the attachments to the income-tax return and the conclusion he has arrived at.

3. Even when the original assessment is u/s. 143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny. No doubt that at the stage of reassessment proceedings, it is not necessary to establish that there has been an escapement of income, but essentially there have to be valid reasons to believe that the income has escaped assessment and these reasons, on a standalone basis, must be considered appropriate for arriving at the conclusion arrived at by the Officer recording the reasons.

The Tribunal held the very initiation of the reassessment proceedings, on the facts of this case and on the basis of the reasons recorded by the AO to be bad in law and quashed the reassessment proceedings. The Tribunal allowed the appeal filed by the assessee.

Cases referred :

1. CIT v. Kelvinator of India Ltd., (320 ITR 561) (SC)

2. Prashant S. Joshi v. ITO, (Writ Petition No. 2287 of 2009, judgment dated 22-2-2010)

3. Hindustan Lever Ltd. v. R. B. Wadkar, (268 ITR 332) (Bom.)

Dr. (Mrs.) K.B. Kumar v. ITO

ITA No.4436/Del/2009

S. 148 — Reassessment completed by an AO on the basis of a notice u/s 148 issued by another AO who had no jurisdiction over the assessee is not valid.

Facts

The ITO Ward 21(3), Ghaziabad, based on information received by him from Additional Commissioner, Range 1, Ghaziabad, regarding receipt of ₹ 5 lakhs on 19-2-2000 from Sanjay Mohan Agarwal recorded reasons of income escaping assessment on 25-3-2008 and issued notice u/s.148 on 27-3-2008. In response thereto, the assessee submitted to ITO, Ghaziabad that she has filed her return of income with ITO, Range-48, New Delhi on 3-9-2001 and hence his notice was without jurisdiction. Subsequently, the assessee, at request of ITO, Ghaziabad, vide her letter dated 6-12-2008, submitted a copy of income-tax return for A.Y. 2007-08 along with acknowledgment of receipt of AO, Ward, 34(2), New Delhi.

The ITO, Ghaziabad transferred the case to the office of AO, Ward 34(2), New Delhi who issued a notice dated 16-12-2008 to the assessee u/s. 143(2) of the Act. In response thereto, the assessee submitted her reply mentioning that the proceedings had become time-barred and were illegal and the proceedings need to be filed. The assessee received a letter dated 2-12-2008 from the AO, New Delhi assessing the income at ₹9,6,380 by adding the gifted amount of ₹ 5,00,000.

The CIT(A) confirmed the order passed by the AO.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal following decisions in the cases of ITO v. Krishan Kumar Gupta, (2008) 16 DTR 1 (Del.) (Trib.) 1; Ranjeet Singh v. ACIT, (2009) 120 TTJ 517 (Del.) and CIT v. Smt. Anjali Dua, (2008) 174 Taxman 72 (Del.) held that the notice u/s.148 issued by ITO, Ghaziabad was without jurisdiction and consequently the reassessment framed by the AO, Delhi is invalid. The Tribunal quashed the order passed by the AO, Delhi.

HV Transmissions Ltd. v. ITO

ITA No. 2230/Mum./2010

Section 147 — Even an assessment completed u/s.143(1) cannot be reopened unless there is fresh material.

The assessee company, engaged in the business of manufacturing heavy gear boxes, filed its return of income, on 31-10-2001, declaring a loss of ₹ 73,57,95,273. This return of income was processed u/s. 143(1) on 28-1-2003. The assessee filed a revised return of income on 27-3-2003 declaring a loss of ₹ 74,22,78,281 after revising its claim u/s.35DDA in respect of employee separation cost. The AO, from the balance sheet filed by the assessee along with its return of income observed that the assessee had incurred expenses towards ERP software amounting to ₹ 95,14,000 and although 20% of the said expenses were only debited in P&L account, the entire amount of ₹ 95,14,000 was claimed as a deduction in computation of total income. He, accordingly, entertained a belief that to this extent income has escaped assessment and the assessment was reopened by issuing a notice u/s.148 on 3-3-2006.

In an order passed u/s.143(3) r.w.s. 147, the AO assessed the loss to be ₹ 50,17,47,153 after making addition inter alia on account of disallowance of expenses incurred on ERP software treating the same as of capital nature. He also disallowed claim for depreciation at 100% in respect of pollution control and energy saving devices at 100% valued at ₹ 29.27 crore holding that the same had been earlier used by sister concern of the assessee-company.

Aggrieved the assessee preferred an appeal to the CIT(A) challenging the validity of the said assessment and also the various additions/disallowances made therein. The CIT(A) upheld the validity of reassessment proceedings and also the addition on account of disallowance of expenses incurred on ERP software treating the same as capital in nature. He, however, allowed relief in respect of depreciation at the rate of 100% on pollution control and energy saving devices.

Aggrieved, the assessee preferred an appeal to the Tribunal challenging inter alia the validity of the assessment on the ground that initiation of reassessment proceedings was bad in law.

Held:

The Tribunal on perusal of the reasons recorded by the AO noted that there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s.143(1) was reopened. The Tribunal also noted that in the case of Telco Dadaji Dhackjee Ltd. v. DCIT, (ITA No. 4613/Mum./2005, dated 12th May, 2010) (Mum.) (TM), the Third Member, had relying on the decision of the Supreme Court in the case of CIT v. Kelvinator of India, (256 ITR 1) (SC), held that while resorting to section 147 even in a case where only an intimation had been issued u/s.143(1)(a), it is essential that the AO should have before him tangible material justifying his reason that income has escaped assessment. The Tribunal held that the TM decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable to the present case. Following this decision, it held that the initiation of reassessment proceedings by the AO itself was bad in law and reassessment completed in pursuance thereof is liable to be quashed being invalid.

Shri Sanjay Kumar Garg v. ACIT

ITA Nos.1501, 1502, 3531 to 3534/Del/2009
Delhi Bench ‘H’, order dated 28/1/2011
    AY 2000-01 to 2005-06

Reassessment – S. 148 - S. 148 notice, even if unserved, is valid & second s. 148 notice issued to meet assessee’s claim of non-service, is invalid & renders assessment void

For AY 2001-02 (and other years), the AO recorded reasons for reopening of assessment on 22.9.05 and issued s. 148 notice on 23.9.05. The notice was sent through speed post and was not returned undelivered. Though the assessee appeared before the AO on several occasions and wrote letters, he claimed vide Affidavit that the s. 148 notice was not received by him . Pursuant to the assessee’s claim, the AO issued another notice dated 25.9.06 u/s 148 and an assessment order u/s. 143(3)/147 was passed on 24.12.2007. The assessee challenged the reassessment on the ground that (i) with respect to the s. 148 notice dated 23.9.05, the assessment order passed on 24.12.07 was time-barred and (ii) with respect to the s. 148 notice dated 25.9.06 that it could not have been issued during the pendency of the first notice. The department argued that as the assessee had claimed that he had not received the first notice dated 23.9.05, only the second notice could be considered and if so, the assessment was valid. HELD allowing the appeal:

1. Though the assessee claimed by affidavit that he had not received the first s. 148 notice (and that formed the basis of the second 148 notice ), as the first notice was sent by speed post as permitted by s. 282, it is presumed to have been duly served upon the assessee and was valid;

2. There is a difference between “issue” and “service”. To obtain jurisdiction to assess/reassess the escaped income, the s. 148 notice has to be “issued” but need not be “served”. Service is not a condition precedent to conferment of jurisdiction on the AO but a condition precedent only to the making of the order of assessment . The word “issue” means that the notice must leave the custody of the AO and as the Post Office is not the department’s agent, sending it by post completes “issue”. Accordingly, though the first notice was not (according to the assessee & department) served on the assessee, the AO was vested with power to assess/reassess the escaped income (R. K. Upadhyaya 166 ITR 163 (SC) & Sheo Kumari Debi 157 ITR 13 (Pat) (FB) followed);

3. With regard to the second notice, as the first s. 148 notice was valid and reassessment proceedings were pending, the second S. 148 notice is a ‘nullity’. Unless the reassessment proceedings initiated u/s 147 are concluded & brought to a logical end, the AO cannot issue fresh notice u/s. 148. This is not an “irregularity” but a “nullity” (Ranchhoddas Karsandas 26 ITR 105 (SC) & Jai Dev Jain 227 ITR 301 (Raj) followed);

4. The result is that the limitation period has to be reckoned with reference to the first notice dated 23.09.05 as per which the assessment order dated 24.11.07 is beyond time.

UKT Software Technologies P. Ltd. v. ITO

ITA Nos.5293 & 5294/Del/2010
Delhi Bench ‘H’, Order dated 11/2/2011
AY 2005-06 & 2006-07

Reassessment – Ss.143(2) & 147 – Non-issue of notice u/s.143(2) – Assessment order u/s.143(2) invalid

The AO passed an assessment order u/s 143(3) r.w.s. 147 without issuing a notice u/s 143(2). The assessee challenged the reassessment order on the ground that the non-issue of the s. 143(2) notice rendered the order void. HELD upholding the challenge:

The law relating to validity of the assessment proceedings in absence of issuance of notice u/s. 143(2), in a case where the AO proceeded to frame the assessment in pursuance of a return is well established. If the assessment is framed u/s. 143 (3), either read with S. 158 BC or s. 147,it is mandatory for the AO to issue notice u/s 143 (2). The issuance and service of notice u/s. 143 (2) ismandatory and not procedural. If the notice is not served within the prescribed period, the assessment order is invalid (Pawan Gupta 318 ITR 322 (Del), Hotel Blue Moon 321 ITR 362 (SC) & C. Palaniappan 284 ITR 257 (Mad) followed).

Shri G. N. Mohan Raju vs. ITO

ITA No. 242 & 243/Bang/2013
[Ref-BCAJ-Nov – 2014]

Sections. 143(2), 147 - AO cannot suo moto treat the return of income filed before issue of notice u/s.  148 to be a return filed in response to the said notice. Notice u/s. 143(2) issued before the assessee has filed a return in response to notice u/s.  148 cannot be treated as a valid notice.

Facts:
For the assessment year 2006-07 the assessee filed his return of income u/s 139 on 10.7.2007. In the computation filed along with the said return the assessee stated that it has received ₹ 97,80,000 which has been treated as capital receipt. The said return of income was processed u/s. 143(1) of the Act.

On 24.12.2009, a notice u/s. 148 of the Act was issued for reopening the assessment. In response to the said notice the assessee did not file any return of income. On 23.9.2010, a notice u/s. 143(2) dated 17.9.2010 was dispatched by registered post. On 5.10.2010, an authorised representative of the assessee appeared before the AO and stated that the return of income originally filed could be treated as return filed pursuant to the notice u/s. 148 of the Act. On 5.10.2010, the AO issued a notice u/s. 142(1) of the Act but there was no notice u/s 143(2) of the Act.

The AO completed the assessment u/s 143(3) r.w.s. 147 of the Act.

Aggrieved by the action of the AO in framing an assessment u/s. 143(3) r.w.s. 147 without issue of a notice u/s. 143(2) of the Act, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to Tribunal.

Held

The Tribunal noted that in the case before it a notice u/s. 143(2) of the Act had been issued to the assessee, but on the date when such notice was issued viz. 23.9.2010, assessee had not filed any return pursuant to the reopening notice u/s. 148 of the Act. It, further, noted that the first instance when the assessee requested the AO to treat the returns originally filed by it as returns filed pursuant to the notices u/s. 148 of the Act, was on 5.10.2010 which was clear from the narration in the order sheet. It observed that the crux of the issue is whether notices u/s. 143(2) is mandatory in a reopened procedure and whether notices issued prior to the reopening would satisfy the requirement specified u/s. 143(2) of the Act.

The Tribunal noted that in the case of M/s. Amit Software Technologies Pvt. Ltd. (ITA No. 540(B)/2012 dated 7.2.2014), the co-ordinate Bench has after considering the decision of the Madras High Court in the case of Areva T and D India Ltd. and also the decision of the Delhi High Court in the case of M/s. Alpine Electronics Asia PTE Ltd. (341 ITR 247)(Del), held that section 143(2) of the Act was a mandatory requirement and not a procedural one.

If the income has been understated or the income has escaped assessment, an AO is having the power to issue notice u/s. 148 of the Act. Notice u/s. 148 of the Act issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow an AO to treat the return which was already subject to a processing u/s. 143(1) of the Act, as a return filed pursuant to a notice subsequently issued u/s. 148 of the Act. However, once an assessee itself declares before the AO that the earlier return could be treated as filed pursuant to a notice u/s. 148 of the Act, three results can follow. AO can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days time period being over I will not take cognisance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice u/s. 148 of the Act. In the former two scenarios, AO has to follow the procedure set out for a best judgment assessment and cannot make an assessment u/s. 143(3). On the other hand, if the AO chose to accept assessee’s request, he can indeed make an assessment u/s. 143(3). In the case before us, assessments were completed u/s. 143(3) r.w.s. 147. Or in other words AO accepted the request of the assessee. This in turn makes it obligatory to issue notice u/s. 143(2) after the request by the assessee to treat his earlier return as filed in pursuance to notices u/s. 148 of the Act was received. This request, in the given case, has been made only on 5.10.2010. Any issue of notice prior to that date cannot be treated as a notice on a return filed by the assessee pursuant to a notice u/s. 148 of the Act. In other words, there was no valid issue of notice u/s. 143(2) of the Act, and the assessments were done without following the mandatory requirement u/s. 143(2) of the Act. This, it held, renders the subsequent proceedings invalid. The Tribunal, quashed the assessment done for the impugned years

The appeals filed by the assessee were allowed.

Dy. CIT v. Duratex Export

ITA Nos. 3088 & 3089/Mum./2010 (C.O. Nos. 19 & 20/Mum./2011)

Section 148 — Reassessment proceedings — Assessee’s appeal allowed by the CIT(A) on merits — In the appellate proceedings whether the assessee can challenge the validity of the reassessment proceedings — Held, Yes.

The assessee firm was engaged in the business of manufacturing and trading in fabrics. Pursuant to the scrutiny assessment proceedings, the assessment for the A.Y. 2001-02 was finalised on 19-12-2003. In its return the assessee had claimed deduction u/s. 80HHC amounting to ₹ 3.18 crores which was computed after considering the sum of ₹ 24.03 lac received on account of sale of DEPB licence. The assessment for A.Y. 2002-03 was made u/s.143(1).

By the Taxation Laws (Amendment) Act, 2005, the receipt on account of the sale of DEPB licence was excluded from the definition of the term ‘total turnover’. The amendment made was retrospective from April 1, 1998. In view thereof, the AO reopened the assessment u/s. 147 and issued the notice dated 28-3-2008 u/s. 148. The assessee challenged validity of the action of the AO. On appeal, the CIT(A) treated the grievance against reopening of assessment as not pressed but gave relief to the assess on merits in respect of additions made on account of the sale of DEPB licence by following the Special Bench decision of the Mumbai Tribunal in the case of Topman Exports [318 ITR (AT) 87].

Before the Tribunal, the Revenue relied on the decision of the Bombay High Court in the case of Kalpataru Colours & Chemicals (328 ITR 451) whereunder the Special Bench decision of the Mumbai Tribunal in the case of Topman Exports was reversed. As regards the validity of reopening of assessment, it was contended that since the assessee did not object to reopening of assessment before the CIT(A), it was not open to do so now.

Held:

According to the Tribunal, the mere fact that the assessee was not allowed to, or did not, press the grievance against the reopening of assessment before the CIT(A), particularly in a situation in which the resultant addition on merits could not have been sustained because of binding judicial precedent then holding at the relevant point of time, the assessee cannot be deprived of his rights to adjudicate the reopening of assessment at a later stage. Accordingly, it proceeded to decide the validity of the reassessment proceedings.

Relying on the Mumbai Tribunal decision in the case of Dharmik Exim Pvt. Ltd. v. ACIT, (ITA No. 232/ Mum./2009), the Tribunal observed that it was a settled legal position that when the assessment is reopened beyond four years from the end of the relevant previous year and unless it cannot be established that the assessee had failed to disclose all the material facts necessary for the purpose of assessment, such reassessment proceedings cannot be upheld under the law. In the case of the assessee, the assessment for the A.Y. 2001-02 was made u/s.143(3) on 19-12-2003 while the notice u/s.148 was issued after 4 years on 28-3-2008. Therefore, the Tribunal upheld the grievance raised by the assessee in its cross-objection and allowed the same. According to it, the fact that the assessment for A.Y. 2002-03 was framed u/s.143(1) would not have any impact on the validity of reassessment proceedings. As per the decision of the Mumbai Tribunal in the case of Pirojsha Godrej Foundation v. ADIT, [133 TTJ (Mumbai) 194] where it was held that irrespective of whether the assessment was finalised u/s.143(1) or section 143(3), the requirements of section 147 have to be fulfilled, the Tribunal allowed the cross-objection of the assessee challenging the reassessment proceedings and the appeals filed by the Revenue was dismissed as infructuous.

ITO vs. Haresh Chand Agarwal (HUF)
ITAT Agra Bench Before A. Mohan Alankamony (AM) and Kul Bharat (JM)
ITA No. 282/Agra/2013

Ss. 50C, 147 – Failure to apply provisions of section 50C does not lead to escapement of income. Section 50C is not final determination to prove that it is a case of escapement of income.

Facts:

While assessing the total income of the assessee the Assessing Officer (AO) lost sight of the provisions of section 50C of the Act and computed long term capital gains, arising on transfer of property, by adopting agreement value of ₹ 6 lakh to be the sale consideration. The stamp duty value of this property was ₹ 25,89,000.

Subsequently, the AO recorded reasons and reopened the assessment on the ground that income has escaped assessment. In reassessment proceedings, the AO rejected the contentions of the assessee that the property was rented and since the assessee was in need of funds he had to sell the property to its tenant. The AO adopted the stamp duty value to be full value of consideration. He also did not accept cost of construction declared by the assessee at ₹ 6,42,558 for computation of capital gains.

Aggrieved, the assessee filed an appeal to CIT(A) where it challenged the reopening and also the additions on merits. The CIT(A) held that reopening was bad in law since it was based on change of opinion as the AO did not have any tangible material in his possession except the sale deed which has already been produced before the AO at the stage of original assessment proceedings.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The Tribunal after considering the ratio of the various decisions of the Apex Court and the High Courts held that it is clear that AO is not justified in reopening the assessment on mere change of opinion. It is admitted fact that there is no material available with the AO to form his opinion that income has escaped assessment. All material evidences were available at the stage of original assessment proceedings and the AO merely following the provisions of section 50C, as was not considered in the original assessment proceedings, reopened the assessment. The assessee has disclosed all the facts which were known all along to the Revenue. Section 50C is not final determination to prove that it is a case of escapement of income. The report of approved valuer may give estimated figure on the basis of facts of each case. Therefore, on mere applicability of section 50C would not disclose any escapement of income in the facts and circumstances of the case. The AO at the original assessment stage considered all the documents and material produced before him and has accepted the cost of property as was declared by the assessee. Therefore, on mere change of opinion, the AO was not justified in reopening the assessment. The CIT(A) on proper appreciation of facts and law correctly quashed the reassessment proceedings.

The appeal filed by the revenue was dismissed.

Anugrah Varshney v. ITO (Agra)

ITA No.134/Ag/2014, AY 2003-04
Order dated 05.04.2016

S. 147/ 148. Law laid down in Jet Airways India 331 ITR 236 and Ranbaxy 336 ITR 136 that if AO does not make any addition for the reason stated for reopening, he cannot add any other income holds good even for years when Explanation 3 to S. 147 is operative

Held

1. The argument of the Ld. DR that the ratio propounded in Jet Airways India vs. CIT 331 ITR 236 and Ranbaxy Laboratories Ltd. vs. CIT(2011) 336 ITR 136 does not apply since those cases related to assessment years when Explanation 3 to section 147 was not on the statute, we find has not merit since in the above mentioned decisions the Court has interpreted the provision of section 147 on first principle to hold that only if addition are made on account of income which the AO had reason to believe had escaped assessment that any other addition can be made. It is not Explanation 3 which had been interpreted in favour of the assessee in these cases. In fact we find that Explanation 3 empowers AO’s to make assessment on any matter which comes to their notice during assessment proceedings. But the same alongwith section 147 has been interpreted as stated above. Therefore, the presence or absence of Explanation 3 to section 147 does not nullify the interpretation given by the courts in the above stated judgments. Further the argument of the Ld. DR that the reason is not rendered invalid merely because no addition has been made on account of incomes which the AO had reason to believe had escaped assessment, is also of no consequence, since as is evident from the order cited above, the courts have not held the reasons to be invalid in such cases and quashed the proceedings. The validity of the reasons had not been in issue in these cases, but the courts have interpreted the provisions of section 147 on first principles and held that the AO had no power to assess any other income to tax unless addition is made of income which he had reason to believe had escaped assessment.

2. Respectfully following the above judgments, we hold that in the absence of any addition having been made on incomes which the AO had reason to believe had escaped assessment, no addition of any other income could have been made and that the AO had exceeded his jurisdiction in passing the impugned order u/s 147. The same is liable to be quashed. We quash accordingly

Banke Bihari Properties Pvt. Ltd vs. ITO (ITAT Delhi)

ITA No. 5128/Del/2015; A.Y. 2006-07
Bench ‘C’; Order dated 22.04.2016

S. 147/ 148, 151. Law on validity of reopening where S. 148 notice is issued in a mechanical manner, based on information received from another AO, and sanction is accorded by the CIT in a mechanical explained

Held

After going through the reasons recorded by the Assessing Officer for reopening and the approval thereof by the Addl. CIT we are of the view that AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. In our view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. Even otherwise, a perusal of the above demonstrates that the Addl. CIT has written “Approved” which establishes that he has not recorded proper satisfaction / approval, before issue of notice u/s. 148 of the I.T. Act. Thereafter, the AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed.

Sunil Gavaskar v. ITO (ITAT Mumbai)

ITA Nos.3970-71/Mum/2010; AYs 2001-02 & 2002-13
Bench ‘G’; Order dated 16.03.2016

S. 147. If the AO objects to the audit objection, he cannot have reason to believe that income has escaped assessment and is not entitled to reopen the assessment

Held:

The AO recorded reasons pursuant to an audit objection and reopened assessee’s assessment. However, the AO replied to the audit objection stating that the issue was debatable in nature. The AO replied that in principle the objections raised by the audit are not acceptable. However, still the AO proceeded to reopen the assessment. The Tribunal held that once the AO himself disagreed with the audit objections, reopening could not be done. The requirement of law for reopening of the case is that the AO should be in a position to form a belief about escapement of income. Although, it is true that at the stage of reopening, the belief need not be conclusive, but it is equally expected that the position of law should be clear in the mind of the AO, at least prima–facie. The belief need not be conclusive but it should be firm and clear. No belief can be formed out of confusion and doubtful thoughts.

One of the key sources of dispute is the existing arrangement for follow up on audit objections by Internal Audit Party and the Revenue Audit Party. In terms of the existing arrangement, the AO is required to take corrective steps following audit objections. The corrective measures take the form of rectification or reassessment (by reopening the case under section 147 or revision by the Principal Commissioner or Commissioner under section 263). In the case of rectification, these are general in the nature of correction for arithmetical errors and other mistakes which are apparent from the record. The problem arises when the AO seeks to take corrective measures by invoking the provisions of section 147 or 263 of the Income tax Act. Since the audit object ions are based on mater ial on record and there is no occasion for new mater ial to be brought on record in the course of audit, any reopening of assessment or review by the Pr incipal Commissioner constitutes “change of opinion” in the eyes of the law. This being so, the corrective measure under section 147 or section 263 of the Income tax Act is held to be invalid by Courts.

Golden Tabacco Ltd. v. DCIT (ITAT Mumbai)

ITA No.5858 & 5859/Mum/2012; AY 2005-06 & 2006-07
Bench ‘G’; order dated 28.10.2015

S. 147: Reopening of assessment is not permissible in the absence of "fresh tangible material". Entire law on the subject reiterated

Held:

In the present case, it was noticed by us that the case of the assesse is that there was no fresh tangible material in the possession of AO at the time of recording of impugned reasons. A perusal of the ‘Reasons’ recorded by the AO in this case reveals that at the time of recording of these ‘Reasons’ the AO had examined original assessment records only and no fresh material had come in the possession of the AO. In response to our specific query also, Ld DR could not point out any fresh material available with the AO at the time of reopening of the case of the assessee. Thus, assertion of the assessee that there was no fresh material with AO for reopening of this case, remained uncontroverted.

Under these facts and circumstances, let us now examine settled position of law on this issue. It has been held in various judgments coming from various courts that availability of fresh tangible material in the possession of AO at the time of recording of impugned reasons is a sine qua none, before the AO can record reasons for reopening of the case. We begin with the judgment of Hon’ble Supreme Court in the case of CIT vs. Kelvinator India Ltd. 320 ITR 561 (SC), laying down that for reopening of the assessment, the AO should have in its possession ‘tangible material’. The term ‘tangible material’ has been understood and explained by various courts subsequently. There has been unanimity of the courts on this issue that in absence of fresh material indicating escaped income, the AO cannot assume jurisdiction to reopen already concluded assessment.

REVISION:

Crompton Greaves Ltd. v. CIT (ITAT Mumbai)

ITA No.1994/Mum/2014; AY 2007-08
Bench ‘C’; order dated 01-02-2016

Explanation 2 to s. 263 (which supersedes the law that there is a difference between "lack of inquiry" and "inadequate inquiry") is "declaratory & clarificatory" in nature and is inserted to provide clarity on the issue as to which orders passed by the AO shall constitute erroneous and prejudicial to the interests of Revenue

Held:

The amendment to section 263 of the Act by insertion of Explanation 2 to Section 263 of the Act is declaratory & clarificatory in nature and is inserted to provide clarity on the issue as to which orders passed by the AO shall constitute erroneous and prejudicial to the interest of Revenue, it is, inter-alia, provided that if the order is passed without making inquiries or verifications by AO which, should have been made or the order is passed allowing any relief without inquiring into the claim; the order shall be deemed to be erroneous and prejudicial to the interest of Revenue. The Hon’ble Supreme Court in the case of Malabar Industrial Company Limited v. CIT (2000) 109 Taxman 66 (SC) held that if the AO has accepted the entry in the statement of account filed by the taxpayer without making enquiry, the said order of the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered opinion, the facts of the case of the assessee company are similar to the facts in the case of Malabar Industrial Co. Limited(supra) whereby no enquiry/verification is made by the AO whatsoever with respect to claim of deduction of ₹ 17.72 crores with respect to the provisions for warranty, excise duty , sales tax and liquidated damages. Moreover, now Explanation 2 to Section 263 of the Act is inserted in the statute which is declaratory and claraficatory in nature to declare the law and provide clarity on the issue whereby if the A.O. failed to make any enquiry or necessary verification which should have been made, the order becomes erroneous in so far as it is prejudicial to the interest of revenue.

A proviso added from 01-04-1988 to Section 43B of the Act from 01-04-1984 came up for consideration in Allied Motors Private Limited v. CIT (1997) 91 taxman 205(SC) before Hon’ble Supreme Court and it was given retrospective effect from the inception of the section on the reasoning that the proviso was added to remedy unintended consequences and supply an obvious omission so that the section may be given a reasonable interpretation and that in fact the amendment to insert the proviso would not serve its object unless it is construed as retrospective. In CIT v. Podar Cement Pvt. Limited (1997) 92 Taxman 541 (SC), the Hon’ble Supreme Court held that amendment introduced by the Finance Act,1987 in so far the related to Section 27(iii), (iiia) and (iiib) which redefined the expression ‘owner of house property’, in respect of which there was a sharp divergence of opinion amongst the High Courts, was clarificatory and declaratory in nature and consequently retrospective. Similarly, in Brij Mohan Das Laxman Das v. CIT (1997) 90 Taxman 41(SC), explanation 2 added to section 40 of the Act was held to be declaratory in nature and, therefore, retrospective.(Reference Page 569-570,Principles of Statutory Interpretation by Justice G.P.Singh, 13th Ed.).

In our considered view, the CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry, examination and verifications as warranted for the proper completion of the assessment, with respect to claim of deduction of ₹ 17.72 crore with respect to the provisions for warranty, excise duty, sales tax and liquidated damages.

Chennai Finance v. ITO

ITAT ‘F’ Bench, Mumbai
Before R.K. Gupta (JM) and V.K. Gupta (AM)
ITA No.8262/Mum/2003
AY 1997-98; Decided on 6-9-2007
Counsel for assessee/revenue : Pradeep Kapasi / B.K. Singh and Alpana Saxena

Ss. 68, 145 and 263 of the Income tax Act, 1961 – Assessee following project completion method of accounting – Loan treated as non-genuine, added u/s.68 – Addition accepted on the condition that the same was to be adjusted against expenditure capitalized – Whether CIT justified in treating the order of the AO as erroneous and prejudicial to the interest of the Revenue – Held, No

Per R. K. Gupta

Facts

During the course of assessment proceedings, the assessee was not able to produce the creditor as required by the AO and therefore, it agreed for addition of loan of ₹15 lakh received u/s.68 on the condition that the said amount should be adjusted against interest and other expense of ₹39.47 lakh capitalised in the accounts. The AO agreed and reduced the said capitalised sum to ₹24.47 lakh. However, according to the CIT, the order passed by the AO was erroneous and prejudicial to the interest of the Revenue, and therefore, the AO was directed to assess the said amount of ₹15 lakh independently without setting it off against the expenditure capitalised.

Held

The Tribunal noted that in the Tribunal decisions in the case of Sealink Construction Pvt. Ltd. and in the case of Silver Land Development Corpn., the ratio has been laid down that any income derived by the assessee has to be adjusted against its business expenditure of the same year, though the assessee may be maintaining its accounts on project completion method (which was the case with the assessee). According to the Tribunal, the sum of ₹ 15 lakh considered as income u/s.68 was business income of the assessee. Therefore, the AO was justified in adopting the view expressed by the Tribunals in the above-referred decisions, and adjusting the loan amount against the expenditure capitalised. Therefore, relying on the Supreme Court decision in the case of Malabar Industrial Co. Ltd., the Tribunal set aside the order of the CIT.

Cases referred to :

1. Sealink Construction Pvt. Ltd. (ITA No. 4433 dated 15-12-2001)

2. Silver Land Development Corpn. (ITA No. 510/Mum./2004 dated 28-7-2004)

3. Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC)

Milestone Tradelinks P. Ltd. v. ITO (Ahd)

ITA No. 1578/Ahd/2015, AY 2006-07
Order dated 04.03.2016

263 - An order of revision passed on a non-existing entity, even though the power of attorney and the adjournment and the reply to show cause notice was signed by the erstwhile company, is invalid. The Tribunal held that the case of estoppel relied on by the department cannot be applied to instant case as assessee did not behave in a notorious way to mislead the department. Taking cognizance of the intimation filed by the assessee to the jurisdictional AO that the company is not in existence, during the assessment proceedings, of the intervening assessment years, and there being no provision in law to intimate the CIT regarding the facts of merger, the ITAT held the order to be invalid.

Held

On due consideration of all these arguments, we are of the view that in the Income Tax Act, there is no provision to communicate this fact to the Commissioner. The assessee has already informed the AO. We have extracted the copy of the letter written by the assessee. We have also made reference of the assessment order vide which the AO has taken cognizance of this fact while he issued notice under section 143(2) of the Income Tax Act. In the order of the ITAT, Kolkata Bench itself has observed that legally when a company amalgamates with another, it loses its identity and no proceedings can be taken in its earlier name. The Bench had taken a different view on account of notorious facts available in that case. No such circumstances are before us. Apart from above, we are of the view that even if the assessee gave consent for taking up the proceedings under section 263 against it, that would not infuse jurisdiction in the ld.Commissioner. In other words, this adjournment application, reply to show cause notice would not infuse jurisdiction to ld.Commissioner. Jurisdiction should be by virtue of operation of the Act and not by the consent of an assessee. A perusal of section 263 would indicate that before taking any action under section 263, the ld.Commissioner has to pursue record and record would include the communication made by the assessee to the AO on 23.7.2013 intimating about the fact of amalgamation. Therefore, we are of the view that the issue in dispute is squarely covered in favour of the assessee by the decision of Hon’ble Gujarat High Court in the case of Khurana Engineering Ltd. (supra). Since we have arrived at a conclusion that initiation of proceedings against HEPL is void ab inito, therefore, we do not deem it necessary to adjudicate on other issues on merit. No proceedings under section 263 can be taken up against HEPL after its amalgamation with Milestone Tradelinks Pvt. Ltd. Therefore, we allow the appeal of the assessee and quash the order passed by the ld.Commissioner under section 263 of the Income Tax Act.

Neo Sports Broadcast P. Ltd. v. CIT (ITAT Mumbai)

ITA Nos .4010-11/Mum/2014; AYs 2010-11 & 2011-12
Bench ‘B’; Order dated 19.02.2016

S. 263. As issue of whether TDS should bee u/s 194C or 194H is subject to two views, revision is not possible

Held

The Assessee, was a step-down subsidiary of Zenith Sports Pvt. Ltd. which was a subsidiary of Nimbus Communications Ltd. (NCL) and the group was engaged in the business of broadcasting through two channels namely Neo Cricket and Neo Sports. NCL has acquired the telecast rights from BCCI in respect of cricket matches played in India for which as per terms of agreement between BCCI and NCL, NCL was under obligation to provide for the Bank Guarantee to BCCI for ₹ 2000 Crore. To secure this, NCL has been paying Bank Guarantee Commission to various banks year after year as per agreed terms. NCL has entered into another agreement with the assessee for telecast of the cricket matches for which NCL has set a condition that 80% of the BGC has to be reimbursed to it by the assessee. Accordingly during the F.Y.2009-10 relevant to A.Y.2010-2011 the assessee reimbursed ₹ 21,31,28,582/- to NCL without deduction of tax at source. In order passed u/s.201(1)/201(1A) dt.18.03.2012, ITO(TDS)-2(4) treated that these payments are subject to TDS u/s.194C and passed order accordingly.

However, the CIT did not accept the provisions of Section 194C invoked by the AO and held that payment of bank guarantee commission was in the nature of interest (sec. 194A) thereby invoking his powers u/s. 263. Held, by the Tribunal that in the original assessment proceedings, the AO had analysed the payment in detail and then concluded that the provisions of sec. 194C are applicable. Also, not two but three views were possible viz. (i) TDS u/s 194H which was discussed by the AO in original order; (ii) TDS u/s. 194C which was upheld by AO; and (iii) sec. 194A now sought to be taken by CIT. Since three views were possible, revision was not permissible. Furthermore, even on merits, it was held that view of the CIT was not correct because there was no money borrowed or debt incurred, and hence, payment made to NCL was not “income by way of interest”

Rachana Finance & Investments P. Ltd. (ITAT Mumbai)

ITA No. 2975/Mum/2014; AY 2004-05
Bench ‘D’; order dated 23.03.2016

S. 263 revision cannot be initiated to conduct roving inquiries whether share application money share premium constitute undisclosed income

Held:

1. The scope of interference u/s. 263 is not to set aside merely unfavaourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. Power under Section 263 cannot be exercised for starting fishing and roving enquiries. In the garb of exercising power under Section 263, the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquires in matters or orders which are already concluded.

2. We have also perused the orders passed by the coordinate Mumbai bench of ITA Nos. 4148 to 4152/Mum/2013 in case of ‘M/s. Turakhia Ferromet Pvt. Ltd. vs. CIT’ And ITA Nos.3966 to 3969/Mum/2013 in case of ‘M/s. Standard Conduits Pvt. Ltd. vs. CIT’ wherein also the issue before the coordinate bench of ITAT was same i.e. u/s 263 of the Act and the companies named above are the recipient companies who received the money and issued the shares. In their case also the CIT(A) for the year under consideration and for other years had passed orders u/s 263 of the Act on similar grounds and the coordinate bench in the case of recipient company had set aside the order of the CIT(A) u/s 263 of the Act and it is noteworthy that the coordinate bench orders setting aside the order under section 263 of the Act is in respect of recipient company who actually received the money from the assessee and issue the shares.

3. In the present case although the AO has mentioned regarding the submissions of documents and discussion carried out but still the CIT has mentioned while passing the order u/s 263 of the Act that the order of AO is erroneous and prejudicial to the interest of revenue. In this respect we would further like to mention that the order of AO in the present case may be brief but that by itself is not a sufficient reason to held the order of assessment as erroneous and prejudicial to the interest of the revenue. The scope of interference u/s 263 is not to set aside merely unfavaourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. Power under Section 263 cannot be exercised for starting fishing and roving enquiries. In the garb of exercising power under Section 263, the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquires in matters or orders which are already concluded.

4. We have also perused the judgement relied upon by the ld. DR decided by ITAT Kolkata Bench in case of ‘Bisakha Sales (P.) Ltd. vs. CIT’ however in the above cited case the assessee had received share application money with huge and unjustified share premium from corporate entities but in the present case the assessee has not received share application money or share premium from corporate entities. Since the facts of the cited case are different and are not similar to the facts of the present case hence the cited judgement is distinguishable and is not applicable to the facts of the present case. Similar is the position of another case decided by Kolkata High Court titled ‘CIT vs. Maithan International’ facts of the afore mentioned case are also different and distinguishable and therefore the said judgment is also not applicable to the facts of the present case.

SALARY OR BUSINESS/PROFESSION

DCIT v. Krishna Ram Mukerji

ITAT ‘D’ Bench, Mumbai
Before Sunil Kumar Yadav (JM) and
S.C. Tiwari (AM)
ITA No.45/Mum/2004
AY:2000-01, Decided on 28-2-2007
Counsel for revenue / assessee : Sandip Gar / B.V. Jhaveri

S.14 of the Income-tax Act, 1961 – Assessee rendering service of secretary to film star – Whether remuneration received is taxable as ‘Salary’ or as ‘Profits and gains of business or profession’ – On facts held that same is taxable as her professional income

Per S. C. Tiwari

Facts

The assessee was the mother of a film actress. She was rendering service as a secretary to her daughter. The issue before the Tribunal was — whether the sum of ₹ 7 lakh received by her from her daughter would be taxed as salary or as professional income. According to the AO, the assessee was merely attending to phone calls, fixing appointments and shooting schedules. He further observed that her assistance in fixation of contractual particulars, etc. could not be considered as rendering of professional service. Therefore, he held that the sum of ₹7 lakh was taxable as salary and not as professional income as claimed by the assessee. Accordingly, various expenditure claimed by the assessee were disallowed.

On appeal before the CIT(A), the CIT(A) noted that the assessee herself was a singer and had also earlier managed the affairs of her sister, the famous Bengali actress, Debashree Roy. Thus, she had a vast experience and knowledge of the film industry. Her role was not a role of grooming her daughter, but to build her career and assist her in carrying out her profession as a film actress. According to him, the role of a star secretary required the knowledge of the film industry and the work involved included selection of movies, arrangement of dates and to advise the star how to go about various things like which party to attend, with whom to be seen, etc. Thus, according to him the role of a secretary was professional in nature; hence he allowed the appeal of the assessee.

Before the Tribunal, the Revenue contended that the assessee did not have expertise in the film industry, nor any requisite professional skill or qualification. According to it, the emphasis given by the CIT(A) on the fact that the assessee was a singer or that she had earlier assisted her sister was unnecessary.

Held

The Tribunal noted that in the earlier assessment years as well as in the orders passed u/s. 143(3), subsequent to the date of filing of the appeal by the Revenue, the assessee’s claim of professional receipts was not disputed. This inconsistency in the view adopted by the Revenue, on the same set of facts, was not justifiable. On merits — the Tribunal noted that in the assessee’s case, there was no fixed time schedule or fixed nature of work, which is generally observed in the case of an employment. Her work involved rendering consultation and advice on a wide array of matte₹ According to it, since there was nothing on record to suggest that anyone else, other than the assessee herself, performed the duties of a secretary to the film star, it was immaterial as to what expertise and skill the assessee had, to perform the task as secretary. Considering the nature of the task performed by the assessee, the Tribunal upheld the order of the CIT(A).

SEARCH & SEIZURE

Shri Ram S. Sarda v. DCIT

ITA No.1172/Rjt/2010, AY 2008-09,
Rajkot Bench, Order dated 21/12/2011

Sec.132 -  Cash seized in search – To be adjusted against Advance Tax

Pursuant to a search u/s 132, cash was seized from the assessee and third parties and assessed as the assessee’s income. Though the assessee requested that the said seized cash be treated as payment of “advance tax”, the AO ignored the same and levied interest u/s.  234A, 234B & 234C on the basis that advance tax had not been paid . On appeal, the CIT (A) relied on Central Provinces Manganese 160 ITR 961 (SC) and held that the ground was not maintainable. It was also held that cash seized from third parties could not be treated as the assessee’s payment of advance tax. On appeal by the assessee, HELD allowing the appeal:

1. S. 246 permits an appeal to be filed when the assessee “denies his liability to be assessed”. The levy of interest u/s 234A to 234C is a part of the process of assessment. The expression “denies his liability to be assessed” does not mean a total denial of liability. Even a partial denial of the assessment i.e. of the liability to pay interest is covered and the appeal is maintainable ( C. P Manganese 160 ITR 961 (SC) explained, Kanpur Coal Syndicate 53 ITR 225 (SC) & JK Synthetics 119 CTR 222 (SC) followed);

2. On merits, s. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any “existing liability” and the liability determined on completion of the assessment. The expression “existing liability” cannot be ascribed a restricted meaning. The liability to pay advance tax is an “existing liability” and so the cash seized ought to have been adjusted against that liability . The cash seized from third parties, having been assessed in the assessee’s hands, retains the same character as cash seized from the assessee ( Sudhakar Shetty 10 DTR (Mum) 173 followed).

SET OFF OF LOSS:

Geetanjali Trading Ltd. vs ITO

ITAT Mumbai ‘G’ Bench
Before R.K. Gupta (JM) and J. Sudhakar Reddy (AM)
ITA No. 5428/Mum/2007
AY: 2004-05; Decided on: 24/12/2009
Counsel for assessee / revenue: Hariram Gilda / A.K. Singh

S. 74(1)(b) - The amendment to S. 74(1)(b) does not apply to long- term capital loss incurred prior to AY 2003-04 - Long-term capital loss of an assessment year prior to AY 2003-04 can be set-off even against short-term capital gain of AY 2003-04 or thereafter.

Per J. Sudhakar Reddy

Facts

The assessee had brought forward its long-term capital loss of AY 2002-03, which was set-off against the short-term capital gain of ₹ 4,34,330 of AY 2004-05. In view of the amendment to s. 74(1)(b) w.e.f. AY 2003-04, the AO held that long-term capital loss can be set-off only against long-term capital gain.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

Prior to amendment of s. 74(1)(b), w.e.f. AY 2003-04, if the net result of the computation was a loss under the head `Capital Gains’, the law, as it stood then, gave a right of set-off to the assessee against future capital gains income. This right to set-off vested in the assessee in the year in which the loss was incurred. There is nothing in the amendment which withdrew this vested right of the assessee. The Tribunal, after considering the ratio of the decision of the Apex Court in the case of Govinddas and Others, and also the ratio of the decision of the Bombay High Court in the case of Central Bank of India, held that the amendment to s. 74(1)(b) is prospective and not retrospective; and that the assessee is entitled to set-off long-term capital loss incurred in AY 2002-03 against any income assessable under the head `Capital Gains’ for any subsequent assessment year.

Cases referred to

1. Govinddas and Others vs ITO 103 ITR 123 (SC)

2. CIT vs Farida Shoes Ltd. 235 ITR 560

3. CIT vs Devang Bahadur Ram Gopal Mills Ltd. 41 ITR 280 (SC)

4. CIT vs Ganga Dayal Sarju Prasad 155 ITR 618 (Pat)

5. ACIT vs Central Bank of India 159 ITR 756 (Bom)

SPECULATION

Omega Securities & Trading Co. Pvt. Ltd. v. ITO

ITAT ‘D’ Bench, Mumbai
Before K. K. Boliya (AM) and P. Madhavi Devi (JM)
ITA No. 981/Mum./2004
A.Y. 2001-02. Decided on : 25-5-2006
Counsel for assessee/revenue : Jitendra Jain/D. Z. Patel

Explanation to S. 73 of the Income-tax Act, 1961 - Speculation loss - Whether income derived from bills discounting and vyaj badla could be considered as income from granting of loans and advances - Held, yes.

Per K. K. Boliya

Facts

The assessee was engaged in the business of advancing loans, bills discounting and trading in shares. During the year, its income comprised as under :

The AO did not agree with the assessee’s contention that its principal business was that of granting of loans and advances and held that Explanation to S. 73 was applicable to the assessee. Accordingly, the loss of ₹ 2.75 lakh was treated by him as a speculation loss.

Before the Tribunal, the Revenue justified the orders of the lower authorities and submitted that the assessee’s interest income was derived from bills discounting and vyaj badla, and this income cannot be considered as from the business of granting of loans and advances.

Held

According to the Tribunal, if the funds of any company were deployed or invested or advanced for any purpose, including for the purpose of bill discounting or vyaj badla, the same would amount to granting of loans and advances for the purpose of Explanation to S. 73. In coming to this conclusion, the Tribunal also relied on the observations of the Supreme Court in the case of Podar Cement Pvt. Ltd.

The Tribunal then referred to the details filed by the assessee, as given in the Table referred above.

According to the Tribunal, considering the above factual position, the decision of the Kolkata Special Bench in the case of Venkateswar Investment & Finance Pvt. Ltd. was applicable to the assessee. Accordingly, it was held that the Explanation to S. 73 was not applicable to the assessee.

Cases referred to

1. CIT v. Podar Cement Pvt. Ltd., 226 ITR 625 (SC)

2. DCIT v. Venkateswar Investment & Finance Pvt. Ltd., 93 ITD 177 [Kolkata SB].

Chik Mik Leasing & Investment Pvt. Ltd. v. Asst. DCIT

ITAT Delhi Bench ‘SMC’, New Delhi
Before N.S. Saini (AM)
ITA No. 104/Del./2003
AY 1997-98; Decided on 12/1/2007
Counsel for assessee/revenue : Ranu Jain/ N.J. Ansari

S. 73. of the Income tax Act, 1961 – Set-off of speculation loss against profit in speculation business of the same year – Assessee earning speculation profit from share trading and suffering deemed speculation loss under Explanation to s.73 – Whether set-off of loss against profit permissible – Held Yes

Facts :

During the year, the assessee had earned profit on sale of shares (without taking delivery) of ₹ 1.52 lakh. In the same year, it had suffered a loss of ₹ 4.24 lakh from trading in shares. In terms of the provisions of S. 73, including the Explanation thereto, the assessee adjusted the profit earned against the loss. However, the AO disallowed the adjustment and observed that the entire loss of ₹ 4.24 lakh would be carried forward to the next year for set-off against speculative income. On appeal, the CIT(A) confirmed the AO’s order.

Held :

The Tribunal referred to the Mumbai Tribunal decision in the case of Samba Trading & Investment Pvt. Ltd. and observed that there was no warrant in the language of the Section for distinction between speculative losses in one business and deemed speculation losses under Explanation to S. 73 of the Act. As per the said decision, the profit in another speculative business has to be set off against deemed speculation losses. Further, relying on the decision of the Special Bench, Ahmedabad Tribunal in the case of A. M. P. Spinning & Weaving Pvt. Ltd. and on the Board Circular No. 204, dated 24-7-1996, the Tribunal allowed the assessee’s appeal.

Cases referred to :

1. Samba Trading & Investment Pvt. Ltd. v. ACIT, 58 ITD 360 (Mum.)

2. A. M. P. Spinning & Weaving Pvt. Ltd., 100 ITD 142 (Ahd.) (SB)

Axis Capital Markets (India) Ltd. v. ITO

ITAT ‘A’ Bench, Mumbai
Before N.V. Vasudevan (JM) and R.K. Panda (AM)
ITA No. 4098/Mum./2007
AY: 2004-05; Decided on: 30/11/2009
Counsel for assessee / revenue: Rajan Vora & Sheetal Shah / Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

Facts :

The assessee was a public limited company engaged in the business of investment, dealing in shares/ securities/bonds, etc. The assessee during the impugned assessment year had shown income under the head capital gain at ₹ 22,98,229 the break-up of which was as under :

On being questioned the assessee explained that in the current year no shares were purchased or sold as stock in trade. It was only the shares held as investment that were sold during the year. However, the Assessing Officer did not accept the contention of the assessee on account of the reasons, amongst followings:

1. The assessee had claimed deduction of entire expenses on share dealings as business expenses though the transactions shown were for sale of investments;

2. In earlier years also the assessee had not shown any stock in trade, even though, shares were acquired for resale;

3. Memorandum of Association of the assessee company showed that it was formed with the main objective of carrying on the business of share trading along with other activities mentioned therein.

4. As per Note in Part I of Schedule VI of the Companies Act — for an investment company, shares take the character of stock in trade and as such, shares shown as investment in the balance sheet could be stock-in-trade also. The Companies Law does not differentiate between the capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing Officer concluded that Explanation to S. 73 of the Act was applicable to the transactions in question. He accordingly treated the net result of the profit and loss of such transactions as arising out of speculation business. He further did not allow any set-off of the brought forward long-term capital loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original intention of the assessee at the time of entering into share transactions was to earn dividend and hold them for appreciation in value. The shares were held as investment and not as stock-in-trade. However, the CIT(A) held that the claim of the assessee cannot be sustained on the following reasons :

1. Although the appellant admitted that in the earlier years as well as in the subsequent year, transactions in share trading were carried out but not during the current year, in earlier years also no stock-in-trade of shares was shown in the balance sheet. Shares were always shown as investments only;

2. All the expenses incurred on transactions in share investments were claimed as business expenses in the Profit and Loss A/c.;

3. The appellant had shown short-term capital loss of ₹6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

1. In the assessment order passed u/s. 143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

2. There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

3. The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of ₹ 4 lakhs out of the total expenses of ₹ 6.16 lakh on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

Virendra Kumar Jain v. ACIT

ITA No.1009/Mum/2010

S. 73—Any speculation loss computed for A. Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

Facts

In A.Y. 2001-02 the assessee suffered a speculation loss of ₹ 4,55,30,494 which loss was allowed to be carried forward to subsequent years u/s. 73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed that speculation loss brought forward from A.Y. 2001-02 should be set off against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO) denied the claim of the assessee on the ground that u/s. 73(4) no loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which it was first computed. He held that speculation loss for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

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

It is a settled rule of interpretation that a vested right can be taken away only by express language or by necessary implication. This is settled by the decision of the Privy Council in Delhi Cloth & General Mills Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval by the Supreme Court in the case of Jose Dacosta vs. Bascora Sadashiv Sinai Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward the speculation loss for a period of eight assessment years as per S. 73(4) as it stood before the amendment made by the Finance Act, 2005. That such a right is a vested right cannot be doubted after the judgment of the Supreme Court in the case of CIT vs. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any other provision there is no express language or any implication to the effect that the right of the assessee to carry forward the speculation loss for a period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later assessment years alone would be hit by the amendment and such loss can be carried forward only for four subsequent assessment years The vested right of the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006 is merely to substitute the words ‘four assessment years’ for the words ‘eight assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to be carried forward to the subsequent years It does not say anything about the set-off of the speculation loss brought forward from the earlier years There is a distinction between a loss brought forward from the earlier years and a loss to be carried forward to the subsequent years The sub-section deals only with the speculation loss to be carried forward to the subsequent years andin the very nature of the things, it cannot apply to speculation loss quantified in any assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules prescribing form of return of income and noted that the form in ITR 4 makes a distinction between loss brought forward and loss to be carried forward. It held that since in the present case it was concerned with the assessee’s right to set off the brought forward speculation losses against speculation profits for A.Y. 2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

Paramount Information Systems P. Ltd. v. ITO

ITA No.921/Mum/2008

Explanation to S. 73 — For the purpose of deciding whether the case of the assessee is covered by exceptions provided in Explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

Facts :

The assessee incurred speculation loss of ₹ 22,728. This speculation loss was in addition to the loss on trading in shares amounting to ₹ 6,66,971 separately shown in P & L Account. While assessing the total income u/s. 143(3) of the Act, in order to ascertain whether the Explanation to S. 73 applies, and therefore the loss of ₹ 6,66,971 on trading in shares is to be regarded as speculation loss, the Assessing Officer (AO) treated speculation loss of ₹ 22,728 as such and excluded it from computation under the head ‘Profits and Gains of Business’. In the computation filed by the assessee, there was a carried forward speculation business loss of ₹ 22,728 and unabsorbed depreciation of ₹36,992 which was to be carried forward. The assessee contended that depreciation on business premises of ₹ 38,881 on new office which was not put to use needs to be excluded since the same was claimed wrongly and is not allowable since the new office has not been put to use. The ITAT remanded this matter (of depreciation being not allowable) along with the issue of application of S. 73 to the AO.

In reassessment proceedings, AO reiterated the contentions in original assessment but the CIT(A) after admitting additional evidences and remanding the matter back to the AO gave a finding that the assessee had not put to use the office premises and the AO was directed to withdraw the depreciation on the new building and recompute business loss. However, the CIT(A) worked out gross total income by treating speculation loss of ₹ 22,728 as part of business income. He rejected the assessee’s contention that for computing gross total income, speculation loss of ₹ 22,728 should not form part of business income and therefore also for arriving at gross total income.

Aggrieved, the assessee preferred an appeal to the Tribunal. The question for consideration being whether the speculation loss of ₹ 22,728 is to be included as part of gross total income or to be excluded while computing business income and arriving at the gross total income.

Held :

The Tribunal after referring to the judgment in the case of IIT Invest Trust Ltd. 107 ITD 257, held that under the scheme of the Act whenever there is a separate loss which cannot be set off in the computation under each head, the same cannot be included in the gross total income and it does not enter in the computation of gross total income being a loss, unless set off against income under any other head. The Tribunal held that the speculation loss was to be treated separately under the provisions of the Act. Explanation 2 to S. 28 makes it mandatory that where speculative transactions carried on by the assessee are of such a nature as to constitute the business, the business shall be deemed to be distinct and separate from any other business. The Tribunal held that the speculation loss of ₹ 22,728 constituted a separate business and it cannot be set off from other business loss or profit including income from other sources. Accordingly, it was held that the same be excluded while working out gross total income. Upon excluding the speculation loss of ₹ 22,728 the gross total income became a positive figure of ₹2,957 and accordingly income from other sources was more than business profits and assessee’s loss on trading in shares was not attracted by provisions of S. 73. The assessee’s case was held to be covered by first exception in Explanation to S. 73. The Tribunal observed that this principle is also laid down in IIT Invest Trust Ltd. 107 ITD 257 and also in Concord Commercial Pvt. Ltd. 95 ITD 117 (SB).

The Tribunal allowed the appeal filed by the assessee.

Section 73 - Classification of business for the limited purpose of set off of past losses, into speculative and non-speculative is to be done on uniform basis and losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profit of the same business in the subsequent assessment years Accordingly, brought forward loses from business of dealing in derivatives, incurred in assessment years prior to A. Y. 2006-07 can be set off against profit of a non speculative business in the current year.

Arvind Kanji Chheda vs. ACIT
ITA No. 2295 /Mum/2012

During the previous year relevant to assessment year 2008-09, the assessee earned profit of ₹ 57,45,716 from transactions carried out in derivatives being futures and options. He had brought forward losses, amounting to ₹ 50,64,262, from this activity since AY 2004-05 to AY 2007-08. In the return of income filed, the assessee claimed set off of loss of earlier years incurred on derivative transactions out of profit of transactions of similar nature in the current year. The Assessing Officer (AO) while assessing the total income declined the claim on the plea that brought forward speculation loss cannot be set off against profit of a nonspeculative business in 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.

Held :

The Tribunal found that it was undisputed fact that during the year under consideration the assessee had entered into similar transactions as were entered into in the earlier years when the losses were suffered. The loss brought forward from the earlier years and the gain made in the current year is of the same nature. There is no change in the nature of income earned during the current year.

The classification of business for the limited purpose of set off of past losses into speculative and non-speculative is to be done on uniform basis and losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profit of the same business in the subsequent assessment years The Tribunal held that for this reason also the assessee deserves to be allowed set off of brought forward losses from business of dealing in derivatives, incurred in assessment years prior to AY 2006-07 against profit of the same business in current assessment year. Thus, speculative losses made on future and option transactions in earlier years are eligible to be allowed to be set off against the business income of future option transactions of current year. The Tribunal also noted that the Mumbai Bench of ITAT in Gajendra Kumar T. Agarwal vs. ITO (2011) 40 (II) ITCL 324 (Mum-Trib) vide order dated 31.5.2011 has held that loss incurred in derivative transactions up to AY 2005-06 can be set off against income from derivative transactions for AY 2006-07. The Tribunal decided the appeal in favor of the assessee.

The appeal filed by assessee was allowed.

J.G.A. Shah Brokers P. Ltd. v. DCIT (ITAT Mumbai)

ITA No. 4053/Mum/2013; AY 2009-10
Bench ‘J’; order dated 16.03.2016

S. 43(5), Explanation to S. 73: Where the assessee is a dealer in shares, the entire business of share trading and derivatives should be treated as a composite business and aggregated before applying Explanation to S. 73

The assessee was a member of two recognized Stock Exchange – BSE & NSE. Both Exchanges had two separate segments i.e. Capital Market Segment and Derivative Segment. In Capital market segment, assessee made trading of equity shares whereas in derivative segment, future and options. The AO held that the transactions done by the assessee which were not covered u/s 43(5) shall be hit by explanation to section 73 and shall be treated as speculative in nature and accordingly he disallowed a sum of ₹ 56,94,166/- as deemed speculative loss, applying explanation to section 73. CIT (A) held that derivative transactions were covered by sec. 43(5)(d) and therefore, could not be held as speculative transactions. On the other hand, share trading done in the cash market is hit by explanation to section 73, and therefore, any loss/profit arising there from shall be deemed to be speculative, and could only be set off against income of subsequent years

Held

Where the assessee is a dealer in shares, the entire business consists in sale purchase of shares, then, it should be treated as composite business. Also, assessee’s stand of treating the whole business as composite business has always been accepted by the revenue in earlier as well as subsequent years Accordingly, whole of assessee’s business was treated as speculative and loss of current year was allowed to be set off against profits of the current year

STAY

Pancard Clubs Ltd. vs DCIT

ITAT Mumbai ‘C’ Bench
Before S.V. Mehrotra (AM) & D.K. Agarwal (JM)
SA No. 235/Mum/2009
AY: 2004-05 & 2005-06; Decided on: 18/12/2009
Counsel for assessee / revenue: S.E. Dastur, Nitesh Joshi & D.V. Lakhani / Vikram Gaur

Proviso to S. 254(2A) — Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to S. 254(2A)—The Tribunal disposed the stay application by directing the AO to pass the assessment order by 31.12.2009 in accordance with law, but not to serve the same on the assessee; and, thus, not to give effect to the same for a period of six months from the date of passing of its order or till date of passing of the appellate order by the Tribunal

Per S. V. Mehrotra:

Facts :

For the assessment years 2004-05 and 2005-06, the CIT passed orders u/s. 263 of the Act directing the AO to: (i) Tax the advances towards sale of room nights by the assessee from its card members under the Holiday Membership schemes, in the year in which such advances are received; and (ii) Not allow deduction for the provision in respect of the prorata amount relatable to the difference between the offer price and the surrender value.

The assessee preferred an appeal to the Tribunal against the orders passed by CIT u/s. 263 of the Act. The appeals filed by the assessee came up for hearing on 15.12.2009, but the Tribunal adjourned the hearing to 24.3.2010 to await the decision of the Special Bench constituted in Chennai in the case of Mahindra Holiday Resorts Ltd.

The AO was required to complete the assessment proceedings by 31.12.2009 to give effect to the orders of the CIT. As a result of the said additions/disallowances, there would be an addition to the total income of ₹ 195,07,77,400, thereby creating a huge demand against the assessee. Accordingly, the assessee filed an application for stay of the assessment proceedings before the AO.

Held:

It is trite law that the Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to s. 254(2A). The Tribunal noted that similar power had been exercised by the Tribunal in the case of M/s Reliance Communications Infrastructures Ltd. in S.A. No. 135/M/2009, for the assessment year 2004-5, vide its order dated 24.4.2009. The Tribunal directed the AO to pass the assessment order by 31.12.2009 in accordance with the law, but not to serve the same on the assessee; and, thus, not to give effect to the same for a period of six months from the date of its order or till the date of passing of the appellate order by the Tribunal, whichever is earlier.

Cases referred to

1. ITO vs M. K. Mohammed Kunhi, 71 ITR 8265 (SC)

2. Lipton India Ltd. vs ACIT, (1994) 95 STC 216 (Mad)

3. State of Andra Pradesh vs V.B.C. Fertilisers & Chemicals Ltd., (1994) (2) ALT 487.

4. M/s. Reliance Communications Infrastructure Ltd. vs ACIT, (S.A.No.133/M/09)

DHL Express (India) P. Ltd. v. ACIT

ITA No.7360/Mum/2010
Bench ‘D’, AY 2006-07, order dated 19/11/2010

Stay Application in Tribunal maintainable despite non-filing of stay petition before lower authorities

The assessee filed an application in the Tribunal seeking stay on recovery of demand of ₹ 7.05 crores raised pursuant to the order of the Dispute Resolution Tribunal. The stay application was filed without approaching the lower authorities for stay. The department, relying on RPG Enterprises Ltd vs. DCIT 251 ITR 20 (AT) (Bom), opposed the application on the ground that the assessee ought to have approached the lower authorities first so that “the department would get an opportunity to study the situation and gather the necessary data for evaluating the application for stay and may also get an opportunity in protecting the interests of the Revenue”. HELD rejecting the objection:

There are differences in the approach of the Tribunal on whether the tribunal can be directly approached for stay of demand without approaching the lower authorities. In view of the decision in Broswel Pharmaceutical Inc vs. ITO 83 TTJ 126 (All) it is not mandatory on the part of the assessee to move application before the Revenue Authorities for granting of stay of outstanding demand. Accordingly, there is no merit in the argument of the department that the stay application should be rejected outright since the assessee has not moved any petition before the Revenue Authorities seeking stay of the demand. Seeking stay before the lower authorities is directory and not mandatory.

SURVEY

Anchal Apparels Pvt. Ltd. v. ACIT

ITAT ‘J’ Bench, Mumbai
Before O. K. Narayanan (AM) and Madhavi Devi (JM)
ITA No.362/Mum./2004
AY 1999-00 : Decided on 21-9-2007
Counsel for assessee/revenue : B. V. Jhaveri / Ajay Pande

S. 133 A of the Income tax Act, 1961 – Assessee’s declaration that additional income invested in trading stock ignored and income was assessed independently – Whether AO justified – Held, No

Per O. K. Narayanan

Facts

During the course of survey, the assessee had offered an additional income of ₹ 34.56 lakh. It was then made clear to the assessing authority that the additional income offered was in respect of its trading stock. The Assessing Officer completed the assessment accepting the additional income offered, but he treated the same as an independent income without adding it to the closing stock. As there was no additional demand on account of this adjustment, the assessee did not prefer an appeal. It was only when the assessment of the succeeding year came up for consideration, the assessee understood its impact and filed an appeal. In order to condone the delay, an affidavit confirming the above explanation of the consultant, who also owned up the lacuna in the professional advice given to the assessee, was filed. The Tribunal accepted the explanation offered and condoned the delay.

Held

The Tribunal noted that the assessee, by its letter filed before the assessing authority, had clearly stated that the income offered was in respect of additional stock. Therefore, according to the Tribunal, the AO was not justified in ignoring the declaration made by the assessee. Accordingly, the AO was directed to treat the undisclosed income by way of enhanced value of closing stock.

Satish Builders v. ACIT,

ITA No.4095(Del)2005, Bench ‘C’,
AY 2002-03, Order dated 13/02/2009

Survey – Section 133A – Assessee, a civil contractor doing construction work of Government as well as of private parties – In survey, surrendered ₹ 25 lakhs and paid taxes – Return of income filed without offering the amount surrendered in survey – Explanation of assessee that surrender made under pressure and mentally disturbed state of mind – No material or evidence found in survey to support the amount surrendered – Addition made only on basis of surrender deleted

A survey was conducted u/s. 133A on 6/3/2002. In the course of survey, the assessee surrendered ₹ 25 lakhs even though no material / evidence were found in survey action supporting such disclosure. No discrepancy or defects were pointed out by the AO in the entire assessment order. The trading results were accepted by the AO and the same was better that those of the immediate preceding years The books of account were audited and no purchases or sales have been found to be made outside the books of account. As per the instructions issued by the CBDT dated 10.3.2003, the same would apply to pending assessments and AO should rely upon the evidence or material gathered in search/seizure and survey operations while framing assessment order rather than on confessions obtained as to undisclosed income. In Paul Mathews & Sons v. CIT [2003] 263 ITR 101 (Ker) it has been held that a statement recorded at the time of survey does not carry any evidentiary value whatsoever. In respect of the contention of the DR that by making the surrender, it pre-empted the department from carrying on investigations does not hold water for the reason that statement was made at the behest of the department even though no inventory of stock was prepared & no site of assessee was visited. The another plea of department that the retraction came about after a gap of 8 months have no force since the retraction was made immediately at the time of filing the return of income by entering a note at the end of the return itself and distinguished the case of Hiralal Maganlal & Co. v. DVIT [2005] 96 ITD 113 (Mum) that the statement cannot be said to be voluntary disclosure. In view of the same, it was held that the surrender made was successfully retracted and the addition was therefore deleted.

TDS

DCIT v. Mahanagar Gas Ltd. (ITAT Mumbai)

ITA No.:1945/Mum/2013; A.Y. 2009-10
Bench ‘B’; Order dated 15.4.2016

S. 40(a)(ia)/ 192: Employees deputed pursuant to a secondment agreement are not "employees" of the assessee and so the amounts paid by way of reimbursement of their salary is not subject to TDS in the assessee's hands

Held

The employees are not the employees of assessee Mahanagar Gas Ltd. but employees of British Gas and they are working with assessee only in view of secondment agreement. As per joint venture agreement GAIL and British Gas have agreed to second, therefore, employees to the joint venture company i.e. Mahanagar Gas Ltd. on secondment basis and under secondment agreement certain employees have been seconded to the assessee. Since the employers were seconded for limited time of 2 to 3 years, the remuneration payable to these seconded employees were being paid by British Gas or GAIL recoverable from assessee on cost to cost basis. The nature of secondment agreement make clear the duties of second employees, their liabilities towards assessee and reimbursement of actual cost of remuneration, benefits and disbursement by assessee to the joint venture partners These are reimbursements. Also the employee’s remuneration was allowable to tax in India then there would be tax deduction obligation on the employer who was responsible for making payment to the employees. In the present case, there was subsisting employer employee relation between British Gas and expatriate. British Gas was also person responsible for making payment to expatriate and application for deducting tax at source from salary was on British Gas. British Gas has deducted TDS on these remunerations paid to seconded employees and also deposited in the treasury of the Govt. of India. The TDS on salary payment to expatriate seconded employees to assessee have been given certificate to assessee stating the above fact which is available in the paper book of the assessee. All taxes have been paid by British Gas and second time TDS cannot be deducted on the same amount. CBDT Circular No. 720 dated 30.8.1995 clarifies that any sum payable shall be liable for deduction of tax only under one section. - (CIT vs. Kotak Securities Ltd. (2012) 340 ITR 333 (Bom) & IDS Software Solutions (India) (P) Ltd. vs. ITO (International Taxation) (2009) 122 TTJ 410 (Bang) followed)

Larsen & Toubro Ltd. v. ITO

ITAT Ahmedabad Bench ‘B’
Before I.S. Verma (JM) and
P.K. Bansal (AM)
ITA Nos.:824 and 904/Ahd./2002
AY 2000-01; Decided on 31-10-2006
Counsels for assessee/revenue : Kishore R. Gheewala/ S.N. Bhatia

S. 17 r.w.s. 192 of the Income tax Act, 1961 – Motor car expenses reimbursed to employers – AO holding that same amounted to perquisite liable to deduction of tax at source u/s. 192 – Assessee considered as assessee in default u/s. 191 for failure to deduct tax from perquisite value – Whether AO justified – Held, No

Per I. S. Verma

Facts

According to the ITO(TDS), u/s. 192 the assessee was liable to deduct tax at source from the monthly payments made to its employees towards reimbursement of motor car expenses incurred by them. On appeal, the CIT(A) held that only 20% of the amount reimbursed could be considered as perquisite, liable to tax. Accordingly, the assessee was treated as assessee in default.

Held

Relying on the Ahmedabad Tribunal decision in the case of Balsara Home Products Ltd. the Tribunal held that since the assessee’s case was for the period prior to 1-6-2003 i.e., the date when Explanation to S. 191 was inserted, the Revenue cannot recover the tax, even if the assessee was liable to deduct the tax. It was further held that on merits also, the assessee was entitled to succeed, as it was not liable to deduct tax based on the decisions listed at S. Nos. 2 to 7.

Cases referred to

1. Balsara Home Products Ltd. v. ITO, (2005) 94 TTJ (Ahd.) 970;

2. DCIT v. HCL Info System Ltd., (2004) 95 TTJ (Del.) 1093;

3. CIT v. Oil & Natural Gas Corpn., (2002) 254 ITR 121 (Guj.);

4. ITO v. Gujarat Narmada Fertilizer Corpn. Ltd., (2001) 247 ITR 305 (Guj.);

5. DCIT v. HCL Info System Ltd., (2005) 146 Taxman 227 (Del.);

6. CIT v. Nestle India Ltd., (2000) 243 ITR 435 (Del.);

7. Associated Cement Corpn. Ltd. v. ITO, (2000) 74 ITD 369 (Mum.)

Asst. CIT v. Infosys Technologies Ltd.

ITAT ‘B’ Bench, Bangalore
Before P. Mohanarajan (JM) and N.L. Kalra (AM)
ITA Nos. 653 & 969/Bang./2006
AYs 2002-03 & 2003-04 : Decided on 17-10-2007
Counsel for revenue/assessee : P.K. Prasad / Padam Chand Khincha

S. 40(a)(i) of the Income tax Act, 1961 – Disallowance of expense for no deduction of tax at source – Whether tax is required to be deducted from payments made to (i) telecom operators for down-linking (bandwidth) charges and (ii) subscription fees paid by way of an access fee to database maintained outside India – Held, No

Per P. Mohanarajan

Facts

Amongst the various issues decided by the Tribunal, the following issues as to whether the assessee was liable to deduct tax at source from the following payments were considered :

1. Amounts paid to foreign companies viz., AT&T and MCI Telecommunication, for down-linking (bandwidth) charges.

2. Subscription payments made to Gartner group and others, which entitled the assessee to be a licensed user which enabled it to pose queries to analysts around the globe via the web, conference calls and face-to-face meetings. According to the AO, the assessee got the benefit of technical consultation and therefore, the payments fall within the ambit of S. 195.

Held :

Based on the decision of the same Tribunal in the assessee’s own case, (which decision was based on the Bangalore Bench of Tribunal decision in the case of Wipro Ltd.), it was held that :

1. The services provided by the telecom operators to the customers did not amount to technical service or royalty u/s.9(1)(vii) of the Act. Accordingly, it was held that the assessee was not liable to deduct tax at source.

2. The subscription paid to Gartner and others was an access fee to Gartner database maintained outside India. The payment was for obtaining data. It was for use of copy-righted information, like book, which could not be passed on to anyone else. Secondly, it was noted that since the copyright was not for literary, artistic or scientific work, the payment could not be classified as royalty. Accordingly, it was held that the assessee was not liable to deduct tax at source.

Cases referred to :

1. Wipro Ltd. v. ITO, (2003) 80 TTJ 191 (Bang.);

2. Wipro Ltd. 94 ITD 9 (Bang.)

SKIL Infrastructure Ltd. v. ITO (TDS)

ITA Nos.3419 & 3420/Mum/2010, AY 2007-08 & 2008-09,
Bench ‘E’, Order dated 31/10/2011

TDS – 194I – Distinction between “hire of vehicles” & “transportation contract”

The assessee paid “hire charges” for hiring helicopter & aircraft services and deducted TDS at 2% u/s 194C. The AO & CIT (A) held that the assessee ought to have deducted TDS at 22.44% u/s 194-I on the ground that “vehicles” were “plant and machinery” and the assessee had “hired” the vehicles and not merely taken services for carrying passengers or goods. The assessee was held liable to pay the deficit u/s 201. On appeal by the assessee, Held allowing the appeal:

The department’s argument that the assessee has hired helicopter/air craft/vehicle is not correct because these were not hired on a periodic basis or on day-to-day basis. Instead, the transport services provided by the transporters were availed of. The assessee paid charges on the basis of flying hours, cost of landing charges and refuelling charges, etc. The crew, fuel, maintenance operation licences, etc. were all under the control of the service providers and not under the control of the assessee. If the assessee does not enjoy control over the vehicles and if the running and maintenance expenditure is borne by the transport service providers, the contract is not one for the “hiring” but is merely for availing transportation services . Payment for transportation services is not covered by s. 194-I (Accenture Services 44 SOT 290 (Mum), Tata AIG 43 SOT 215 (Mum) and Ahmedabad Urban Development Authority followed).

ITO (TDS) v. Indian Oil Corporation

ITA Nos.1829 to 1834/Del/2011, AY 2008-09 to 2010-11,
Bench ‘C’, Order dated 16/11/2011

Ss.194C v. 194I – Test to distinguish “transportation contract” from “hire contract”

The assessee entered into contracts with transporters for transporting petroleum products from the plant to various destinations. The assessee deducted TDS u/s 194C at 2% on the basis that the transportation contract was “work”. The AO held that the contract was a “ hiring” of vehicles on the basis that (i) the assessee had exclusive possession and usage, (ii) the use was for a fixed tenure, (iii) the tankers were customized to the assessee’s requirements and that TDS ought to have been u/s 194-I at 10%. The assessee was held to be in default u/s 201. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

To decide whether a contract is one for “transportation” or for “hiring”, the crucial thing is to see who is doing the transportation work . If the assessee takes the trucks and does the work of transportation himself, it would amount to hiring. However, if the services of the carrier were used and the payment was for actual transportation work, the contract is for transportation of goods and not an arrangement for hiring of vehicles. On facts, the agreement was of the nature of transport agreement and not one for hiring of vehicles because the tank truck owners did not simply confine themselves to providing vehicles at the disposal of the assessee in lieu of rent but also engaged their drivers in driving such vehicles and thereby in transporting petroleum products from one place to the other. In effect, the truck remained in the possession of the staff of the carrier. Further, the assessee was required to pay for the transportation work on the basis of distance and no idle charges were payable. There was no transfer of the right to use the vehicle involved in the agreement. The agreement was merely for carriage of petroleum products and so s. 194-I was not applicable.

Asst. CIT (TDS) vs. Oil and Natural Gas Corporation Ltd.

I.T.A. No. 5808/Mum/2012

Section 194-I – Payments towards lease premium and additional Floor Space Index (FSI) charges not subjected to TDS.

The issue before the Tribunal was about the exigibility to Tax Deduction at Source (TDS) u/s.194-I of the sum, described as lease premium and additional Floor Space Index (FSI) charges paid by the assessee to Mumbai Metropolitan Regional Development Authority (MMRDA) during the relevant year.

The Revenue’s case was that u/s.194-I the ‘rent’ is very comprehensively defined to include any payment made under the lease, sub-lease, tenancy or any such agreement or arrangement for use (either separately or together) of any land, building, plant, machinery, etc. By legal fiction, therefore, the scope of the term ‘rent’ stands thus extended beyond its common meaning. The same would include not only the payments on revenue account, but on capital account as well, as long as the sum paid is toward the use of any of the assets specified under the provision. For the purpose, the reliance was placed on the decisions in the case of CIT vs. Reebok India Co. [2007] 291 ITR 455 (Del);United Airlines vs. CIT [2006] 287 ITR 281 (Del); Krishna Oberoi vs. Union of India [2002] 257 ITR 105 (AP); and CIT vs. H.M.T. Ltd. [1993] 203 ITR 820 (Kar).

The CIT(A) on appeal, had held that the lease premium in the instant case was only toward acquisition of lease hold rights and additional FSI in the leased plots and thus, the payment made was not in the nature of rent hence, not covered u/s. 194(I).

Held

The Tribunal noted that the amount charged by MMRDA as lease premium was equal to the rate prevailing as per the stamp duty ready reckoner for the acquisition of commercial premises. Further, it was also noted that there was no provision in the lease agreement for termination of the lease at the instance of the lessee and hence, for the refund of lease premium under normal circumstances. It noted that even the charges levied for additional FSI was as per the ready reckoner rate. Thus, according to the Tribunal, the whole transaction was for grant of leasehold rights or transfer of property; the lease premium paid by the assessee was the consideration for acquiring leasehold rights, which comprise a bundle of rights, including the right of possession, exploitation and its long term enjoyment. It further observed that the charges for FSI also partake the character of capital assets in the form of Transferable Development Rights (TDRs), such that the owner (of land) transfers the rights of development and exploitation of land, which rights are again capital in nature.

On the basis as discussed above and relying on the decisions in the cases of ITO vs. Naman BKC CHS Ltd. (in ITA Nos. 708 & 709/Mum/2012 dated 12-9-2013) and TRO vs. Shelton Infrastructure Pvt. Ltd. (in ITA No. 5678/ Mum/2012 dated 19-5-2014), the Tribunal upheld the decision of the CIT(A) and dismissed the appeal filed by the revenue. Referring to the decisions of the Tribunal in ITO vs. Dhirendra Ramji Vora (in ITA No.3179/Mum/2012 dated 9-4-2014) and Naman BKC CHS Ltd. (supra), it further observed that the decisions relied on by the A.O. were distinguishable and cannot be applied to the case of the assessee.

DCIT vs. Telco Construction Equipment Co. Ltd.
ITAT Bangalore `C’ Bench
Before P. Madhavi Devi (JM) and Jason P. Boaz (AM)
ITA No. 478/Bang/2012

Section 194H – Provisions of section 194 H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

Facts

The assessee-company was carrying on the business of manufacturing, purchase and sale of excavators, loaders, cranes, dumpers and spare parts etc. For the relevant assessment year, the assessee filed its return of income declaring income of ₹ 282,44,84,066/-. In the course of the assessment proceedings, the Assessing Officer (AO) observed that the assessee has debited a sum of ₹ 14,84,26,424 as sales commission, out of which a sum of ₹ 6,46,11,000/- relates to the provision made towards commission.

The assessee was asked to explain as to how the provision has been made and on what basis it is worked out and as to why no TDS was made from this amount.

The assessee explained that the provision was made on the basis of sales made during the year from different sales offices of the company and on the basis of communication received from these offices regarding commission payable on such sales.

As to why no TDS was made from this amount, it was clarified that no TDS was made from the provision but as and when the commission payments were made in the subsequent year, TDS was made and remitted to the Government account.

The AO disallowed a sum of ₹ 6,46,11,000 u/s. 40(a) (ia) since according to him the provisions of section 194H were applicable and the assessee failed to comply with the same.

Aggrieved, the assessee filed an appeal to CIT(A) who relying on the decision of the jurisdictional High Court in the case of ACIT vs. Motor Industries Co. (249 ITR 141) held that the amount credited by the assessee is only a provision and not actual payment of commission to the party and till the amounts are credited to the respective party’s account, it cannot be said that the same have become finally quantified and hence, the provisions of section 194H are not attracted.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held : The amount credited by the assessee is to the provision account and not to the respective agent’s accounts. Therefore, it is clear that the assessee has not made any payment to the agents. The provisions of section 194H would apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account. As rightly pointed out by the learned counsel for assessee, the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission. We find that the CIT(A) has properly appreciated theissue before deleting the addition made by the AO. In view of the same, we do not see any reason to interfere with the finding of the CIT(A) on this issue.

This ground of appeal of the revenue was dismissed.

ITO v. M. Far Hotels Ltd. (Cochin)

ITA Nos. 430 to 435/Coch/2011; AY 2003-04 to 2008-09; order dated 5/4/2013

S. 195: If DTAA is silent, no obligation to deduct surcharge & education cess

The assessee made a remittance of management fee and interest to a resident of France. The AO held that in deducting TDS thereon u/s 195, the assessee ought to have deducted surcharge and education cess. The assessee claimed that as the India-France DTAA was silent about inclusion of surcharge & education cess, it was under no obligation to do so. Held by the Tribunal upholding the assessee’s plea:

The India-France DTAA does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and the DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess. u/s. 90(2) if the provisions of the DTAA are more beneficial to the taxpayer, the DTAA prevails over the Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA for deduction of tax.

Citicorp Finance (India) Ltd. vs. ACIT
ITAT “C” Bench, Mumbai
Before R. K. Gupta (J. M.) and Rajendra Singh (A. M.)
ITA No. 8532 / Mum / 2011
Asst. Year : 2007-08. Decided on 13-09-2013
Counsel for Assessee / Revenue: A. V. Sonde /Deepak Kumar Sinha

Section 199 – Assessee entitled to TDS credit based on the evidences even if the same is not shown in Form 26AS

Facts

In the original return filed the assessee claimed TDS of ₹ 165.21 crore. In the revised return, the assessee made further claim of TDS of ₹ 1.43 crore. Thereafter, during the course of the assessment proceedings, it claimed further sum of TDS of ₹ 3.57 crore by its letter dated 28-12-2010. The AO, however, gave credit of TDS only to the extent of ₹ 11.9 crore, the amount as appearing in Form 26AS. On appeal, the CIT(A) directed the AO to give credit of TDS as per original challans available and/ or the details available in the computer system of the department.

The assessee had also claimed petitioned that it is entitled to interest on excess amount of TDS and in case the interest is not granted by due date, it was entitled to interest on delayed payment of interest.

Held

The tribunal referred to the Bombay high court decision in the case of Yashpal Sawhney vs. ACIT (293 ITR 539) where it was held that even if the deductor had not issued a TDS certificate, the claim of the assessee has to be considered on the basis of the evidence produced for deduction of tax at source. Further, the tribunal noted that the Delhi High Court has also in Court On Its Own Motion vs. CIT 352 ITR 273 directed the department to ensure that credit is given to the assessee even where the deductor had failed to upload the correct details in Form 26AS, on the basis of evidence produced before the department. Therefore, the tribunal allowed the appeal of the assessee on this point and held that the department is required to give credit for TDS once valid TDS certificate had been produced or even where the deductor had not issued TDS certificates on the basis of evidence produced by assessee regarding deduction of tax at source and on the basis of indemnity bond.

As regards the claim for interest on delayed payment of interest, the tribunal relying on the decision of the Supreme court in the case of Sandvik Asia Ltd. vs. CIT (280 ITR 643) held in favour of the assessee.

Parmanand Tiwari vs. Income-tax Officer

I.T.A No.2417/Kol/2013
[Ref-BCAJ-Nov-2014]

Section 199 and Rule 37BA – Credit for TDS granted even though the certificates issued were not in the name of the assessee.

Facts:
The assessee is an individual and a professional Chartered Accountant. Earlier, the assessee was a partner in the firm M/s. Tiwari & Co.The said firm was dissolved w.e.f. 30.12.2006 and the assessee became proprietor of this firm fromthe said date. During the course of assessment proceedings the AO found that all the TDS certificates were issued in the name of M/s. Tiwari & Co. with PAN which belonged to the erstwhile partnership firm.The assessee contended before the AO that he has included the underlying income in the TDS certificates in his return of income and accordingly, the credit for TDS should also be allowed to him in accordance with Rule 37BA of the Rules. The AO disallowed the claim of the assessee by observing that Rule 37BA of the Rules was inserted w.e.f. 01.04.2009 only and hence, the credit in the hand of the assessee cannot be allowed.

On appeal the CIT(A) upheld the order of the AO stating that the credit of TDS cannot be given to the assessee as the deductee (in this case M/s. Tiwari & Co., partnership firm), had failed to file a declaration with the deductor as required under Rule 37BA.

Held

The Tribunal noted that the total income of the assessee included income qua the TDS certificates which were issued in the name of M/s. Tiwari & Co., the erstwhile partnership firm. It also noted that these receipts were earned by M/s. Tiwari & Co., as proprietary concern of the assessee. Further, the AO had also completed the assessment including therein the said income. However, the AO did not allow the credit for TDS on the ground that the TDS certificate is not in the PAN of Parmanand Tiwari, in his individual capacity. According to the tribunal the TDS certificates not being in the name of the assessee was only a technical breach. According to it, wrong submission of PAN by deductor does not debar the assessee from claiming credit of TDS deducted particularly when the income is assessed in the hands of the assessee. Further, according to the Tribunal, the insertion of the proviso to sub-Rule (2) of Rule 37BA was to mitigate the hardship faced by assessee for claiming credit of TDS. As regards whether the amended Rule is a beneficial provision and in turn could be declared as retrospective and applicable to all pending matters, the Tribunal referred to the decision of the Supreme Court in the case of Allied Motors Pvt.Ltd. vs. CIT (1997) 224 ITR 677 and held that the said amended Rule was retrospective in nature and would apply to all pending matter. The Tribunal allowed the appeal filed by the assessee.

TRANSFER PRICING

Siro Clinpharm P. Ltd. v. DCIT (Mum)

ITA No.2618/M/2014; AY 2009-10
Bench ‘K’, Order dated 31.03.2016

Transfer Pricing of Corporate Guarantees: Explanation i(c) to S. 92 B, though stated to be clarificatory and stated to be effective from 1.4.2002, has to be necessarily treated as effective from at best AY 2013-14 as it is an "anti abuse" provision. Dept’s submission that Bharti Airtel 161 TTJ 428 is “per incuriam” is not acceptable. Law laid down in Micro Ink 176 TTJ 8 (Ahd) on transfer pricing implications of corporate guarantees reiterated

Held

1. Learned Departmental Representative, in his written note, accepts that “the legislature brought in amendment (in Section 92B) by the Finance Act, 2012, after the decision of Four Soft Ltd dated 14/09/2011”. He points out that the decision of the Tribunal, in the case of Bharti Airtel 161 TTJ 428 , is per incurium because there were two decisions of this Tribunal, in the case of Everest Kanto Cylinders Ltd vs. DCIT [(2012) 34 taxmann.com 9 (Mum)] and Mahindra & Mahindra Ltd vs. DCIT [2012- TII-70-ITAT-Mum], which were not considered by the Bharti Airtel decision. Our attention is also invited to the rectification petition filed by the Assessing Officer, which is said to be pending for disposal before the Tribunal. We donot find merits in this plea. Mahindra & Mahindra decision (supra) was passed on 6th June 2012, though at a point of time when Finance Act 2012 had just come into force i.e. post 28th May 2012, without even being aware whether or not the Finance Act 2012 was passed as it gave certain directions depending upon the exact amendment by the said Finance Act. The matter was remitted to the file of the Assessing Officer in a rather summary manner. It cannot be, by any stretch of logic, an authority on any legal question arising out of the law which, as per the Tribunal- wrongly though, was not even in existence. As for the Everest Kanto decision (supra), the issue was decided against the assessee as, to borrow the words of the coordinate bench, “Here in this case, it is undisputed that the assessee in its T.P. Study Report and also the TPO, have accepted that it is an international transaction and CUP is the most appropriate method for benchmarking the charging of guarantee fee”, and, it was for this short reason that the matter was decided against the assessee. The co-ordinate bench had further observed “in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not”.

2. In the Micro Ink decision 176 TTJ 8 (Ahd) , we had, amongst other things, taken not of the judicial developments leading to the insertion of Explanation to Section 92B and how within four months of Four Soft decision (supra) being announced, it was nullified by a legislative amendment. This aspect of the matter has been dealt with in paragraph 46 and 47 of this decision, which has been reproduced earlier in this order, at considerable length. It assumes even more significance in the light of a new judicial development that we will deal with in a short while now. In the present case, we are dealing with a situation in which the amendment was made with retrospective effect and it covered certain issues which were already subjected to judicial interpretation in a particular manner;

3. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday.

4. When this is put to the learned Departmental Representative that as to how the transfer pricing legislation can be expected to have a retrospective amendment, which is almost like telling people how they should have benchmarked their international transactions in past and thus expecting them to do the impossible, his stock reply is that the amendment only clarifies the law, it does not expand the law.

5. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not- as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, as is our considered view, there is no way it could be implemented for the period prior to this law coming on the statute i.e. 28th May 2012. The law is well settled. It does not expect anyone to perform an impossibility.

6. It is for this reason that the Explanation to Section 92 B, though stated to be clarificatory and stated to be effective from 1st April 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of Hon’ble Delhi High Court’s guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of ‘international transaction’, cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon’ble Delhi High Court, would not alter the situation, and it can only be treated as prospective.

Topsgrup Electronic Systems v. ITO (ITAT Mumbai)

ITA No.2115/Mum/2015; AY 2009-10
Bench ‘K’; order dated 19.02.2016

Transfer Pricing - alleged excess investment in share capital of wholly owned subsidiary cannot be termed as loan and notional interest charged thereon

Held

The Tribunal deleted TP addition on account of a) alleged excess consideration paid on investment in share capital of wholly owned subsidiary re-characterized as loan b) and notional interest thereon on the ground that

1. Chapter X of the Act is inapplicable to an international transaction on capital account which does not result in income chargeable to tax

2. Re-characterisation of the transaction is not permitted under the Act, and

3. That potential income, to qualify as income subject to transfer pricing under the Act, should arise from the impugned international transaction which is before the TPO for consideration and not out of a hypothetical transaction that may or may not take place in the future.

UNEXPLAINED CREDITS / EXPENDITURE / BOGUS PURCHASES

DCIT v. Overseas Infrastructure (ITAT Mumbai)

ITA No.1470/Mum/2011 ; AY 2007-08
Bench ‘C’; Order dated 30.03.2016

S. 68: Share application money received from an associate concern cannot be assessed as cash credits if assessee has discharged its initial onus to prove the identity, creditworthiness and genuineness of the transaction

Held

CIT(A) dealt with issue all the objections raised by the AO and after considering the documents placed on record, recorded a categorical finding to the effect that amount payable and receivable by the assessee was squared off which was in accordance with the provisions of Companies Act. Further finding was recorded to the effect that these companies were assessed with I.T. Department for several years The identity and genuineness of the transaction was duly accepted. The detailed finding recorded by CIT(A) are as per material on record. Moreover the issue is also covered by the decision of the coordinate bench in the case of Sinhal Products (P) Ltd., ITA No.3852/Del/2009, dated 7-3-2012, wherein under similar facts and circumstances, the Tribunal has held that the assessee has discharged its initial onus to prove the identity, creditworthiness and genuineness of the transaction. We also found that it is not a case where department has received any information with regard to the fact that the share application were bogus entry or it is in the shape of accommodation entry. The share application is by the associate concern of the assessee which is also assessed with IT Department. Respectfully following the decision of coordinate bench vis-à-vis finding recorded by CIT(A), we do not find any reason to interfere in the order of CIT(A) resulting into deletion of addition of ₹14 crores.

ACIT v. Dhanlaxmi Equipment P. Ltd. (ITAT Jaipur)

ITA No.1103/Jp/2011; AY 2008-09
order dated 21.03.2016

S. 68: Law on when share application moneys and share premium from private companies can be treated as bogus and assessed as cash credits explained

The Assessing Officer had not considered the evidence filed by the assessee during the course of assessment proceedings i.e. affidavits confirming the transaction, PAN number, complete addresses of creditors, copy of balance sheet, ITR for A.Y. 2008-09, bank statement and form No. 18. The assessee had discharged its onus by providing the requisite evidences to prove the identity, genuineness and creditworthiness of the cash creditors The Assessing Officer herself had accepted the remaining cash creditors to the tune of ₹ 3.95 crore explained on the basis of similar evidences produced by the assessee as genuine. The loan/share capitals were received from the private limited companies. They also are filing return under the company’s law and all information is available on MCA website. The ADIT report was not conclusive to held that the cash creditors were not genuine. It is not required under the law to prove the source of source us. 68 of the Act. Primary burden lies on the assessee has been discharged by filing the requisite evidences before the Assessing Officer and shifted on the Assessing Officer to disprove the cash creditors’ transactions are not genuine or bogus. The share application money was received by the appellant and subsequently returned though banking channel. In case of 7 companies, the notices were served on it on given addresses. There is no evidence directly or indirectly with the Assessing Officer that the assessee had routed undisclosed money in the guise of share application money or loan.

The Assessing Officer heavily relied on the Inspector’s report in confirming the addition but result of the enquiry of the Inspector has not been communicated to the assessee, which is against the principles of natural justice. As per Assessing Officer, in case of 5 companies, the source of fund was not found explained. The ld Assessing Officer again gave show cause notice on 23/12/2010. The assessee filed reply on 27/12/2010 and it was claimed before the Assessing Officer that no enquiry has been made by the Assessing Officer on changed addresses. The Assessing Officer had not considered the evidence filed by the assessee during the course of assessment proceedings i.e. affidavits confirming the transaction, PAN number, complete addresses of creditors, copy of balance sheet, ITR for A.Y. 2008-09, bank statement and form No. 18. The assessee had discharged its onus by providing the requisite evidences to prove the identity, genuineness and creditworthiness of the cash creditors The Assessing Officer herself had accepted the remaining cash creditors to the tune of ₹ 3.95 crores explained on the basis of similar evidences produced by the assessee as genuine. The loan/share capitals were received from the private limited companies. They also are filing return under the company’s law and all information is available on MCA website. The ADIT report was not conclusive to held that the cash creditors were not genuine. It is not required under the law to prove the source of source u/s. 68 of the Act. Primary burden lies on the assessee has been discharged by filing the requisite evidences before the Assessing Officer and shifted on the Assessing Officer to disprove the cash creditors’ transactions are not genuine or bogus. The share application money was received by the appellant and subsequently returned though banking channel. In case of 7 companies, the notices were served on it on given addresses. There is no evidence directly or indirectly with the Assessing Officer that the assessee had routed undisclosed money in the guise of share application money or loan. The ld DR’s argument have also not convinced us that these parties were in accommodation entries in form of loan and share application money after charging certain commission as such no survey/search has been carried out on the creditors to prove that these companies are habitual to provide loan/share application money even there is no evidence with the ld DR for making such allegation during the course of written submissions. The case laws relied by the ld AR are squarely applicable on the given facts and circumstances.

Muscovite Construction v. ACIT

ITA No.2856/Mum/2009

S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s. 69C.

Facts :

The assessee was carrying on business of civil construction contract work and labour contract. It filed its return of income declaring an income of ₹ 14,29,579. In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had debited labour charges of ₹ 1.10 crores in the P & L Account and in the balance sheet out of the said expenditure a sum of ₹ 54,56,235 was shown as outstanding. The outstanding labour charges were for the months of Jan, Feb and March 2005. In response to the show cause notice issued by the AO asking the assessee to explain why outstanding labour charges/ wages should not be treated as unexplained, the assessee submitted that it was facing a financial crunch in the business and the break-up of monthly wages in respect of each type of labour like carpenter, mason, etc. was furnished. The AO, not being satisfied with the explanation furnished, added the amount of ₹ 54,56,235 as unexplained expenditure u/s. 69C.

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 nothing has been brought on record by the AO to show that the assessee has used the money which was not reflected in the books of account. It also noted that in the immediate next year the assessee has paid the outstanding wages/labour charges and also that in the assessment order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as per the language used by the Legislature in S. 69C, if there is a dispute of the source of the expenditure, then the addition can be made. Since the payment of outstanding wages has been accepted by the AO in the next year, hence no addition can be made u/s. 69C of the Act. It also noted that it was not that the expenditure was bogus or non-genuine and the AO has also not examined any of the labourers to support his case. It held that merely because labour charges are shown as outstanding that cannot be a ground to make the addition u/s. 69C.

The Tribunal deleted the addition and decided the ground in favour of the assessee.

ACIT vs. Gopalan Enterprises

ITA No. 241/Bang/2013 A.Y.: 2004-05

S/s. 28, 37, 80IB (10) – Even in an assessment u/s 143(3) r.w.s. 147 addition to income on account of bogus purchases will qualify for deduction u/s. 80IB (10)

The assessment of total income of the assessee, a partnership firm, engaged in the business of property development was completed vide order dated 26-12-2006 passed u/s. 143(3) of the Act.

The Assessing Officer based on information received from AO of a sister concern of the assessee reopened the assessment u/s. 147 of the Act.

The assessee raised objections regarding validity of the service of notice u/s. 148 of the Act and non-furnishing of reasons recorded. The assessee was furnished with the reasons recorded by the AO on 24-12-2010.

The assessee did not participate in the proceedings for assessment and the assessment was completed u/s. 144 of the Act. In the assessment order, the AO having discussed about fictitious purchases found in the case of assessee’s sister concern concluded that an addition of ₹ 1,66,41,525 was required to be made on account of fictitious purchases. He also stated that since there was no reply from the assessee, the fictitious purchases are treated as debited to revenue/income for which section 80IB is not applicable. He, accordingly, added ₹ 1,66,41,525 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) where without prejudice to its contention that the expenditure is incurred for the purpose of business and therefore is allowable prayed that in view of the decision of Tribunal in the case of S. B. Builders & Developers vs. ITO (45 SOT 335)(Mum) the deduction u/s. 80IB(10) be allowed on enhanced profits. The CIT(A) upheld the addition but allowed the alternative claim of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held

The AO came to the conclusion that the fictitious claim of purchases to the extent of ₹ 1,61,41,525 was considered as not relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act because the assessee did not give any reply or participate in the assessment proceedings. In our view, such conclusion by the AO was without any basis. The AO ought to have identified it with reference to the evidence available on record as to whether fictitious purchases are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act.

Be that as it may, in the proceedings before the CIT(A), the assessee has categorically made a claim that the fictitious expenses are relatable to the receipts which are eligible for deduction u/s. 80IB(10) of the Act. The CIT(A), in our view, has only directed to verify the claim of the assessee and if it is found correct to allow deduction u/s. 80IB(10) of the Act in respect of enhanced income. In our view, the claim made by the assessee was that the expenses disallowed were inextricably linked with the profits on which the claim for deduction u/s. 80IB(10) was made. As rightly pointed out by the ld. Counsel for the assessee, the Hon’ble Supreme Court in its decision in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (198 ITR 297) (SC) has visualised a situation where the assessee cannot be permitted to challenge reassessment proceedings at an appellate or revisional proceeding and seek relief in respect of items earlier rejected or claimed relief in respect of items not claimed in the original assessment proceedings. The Hon’ble Court has, however, given a rider that if such claims are relatable to escaped income, the same can be agitated. In our view, the claim for fictitious purchases if it is relatable to profits/receipts which are eligible for deduction u/s. 80IB(10) of the Act, the disallowance of such expenses will go to enhance the income/ profits eligible for deduction u/s. 80IB(10) of the Act on which the assessee will be entitled to claim deduction u/s. 80IB(10) of the Act. It cannot be said that the disallowed expenditure cannot be considered as profits derived from the housing project or as operational profit.

The Tribunal confirmed the directions given by CIT(A).

The appeal filed by the revenue was dismissed.

Mere declaration by Sales tax Department as Hawala dealers and on the basis of List published, disallowance of purchases cannot be made unless further investigations are made revealing non genuineness of transaction

A) Shri Ganpatraj A. Sanghavi v. ACIT

ITA No. 2826/Mum/2013, AY 2009-10, Bench ‘G’, order dated 5/11/2014

A perusal of the orders passed by the tax authorities would show that they have suspected the genuineness of the purchases only for the reason that the above said five parties were not available in the given addresses. It is pertinent to note that the AO himself, during the course of remand proceedings, have obtained the bank statements of the above said five parties. It is in the common knowledge of everybody that the bank account, now a days, could be opened only on submission of proper documents. Further the assessee has furnished the Sales tax documents of the above said five parties and also their income tax details to prove their existence. Thus, it is seen that the assessee has furnished many documents to prove the existence of the parties and they have not been controverted by the assessing officer.

Be that as it may, another important factor the bank account copies collected by the assessing officer shows that the assessee had made the payments to the above said parties by way of account payee cheques. Thus, it is seen that the transactions have been routed through the bank accounts. Further, it is not the case of the assessing officer that the assessee has indulged in accounting of bogus purchases. When the assessee submitted that he could not have effected the sales without making corresponding purchases, the AO has taken the view that the assessee could have effected purchases in the grey market, which conclusion is, in fact, not supported by any material. Under this impression only, the AO has further expressed the view that the assessee would have purchased the materials by paying cash thus violating the provisions of sec. 40A(3) of the Act, which is again based on only surmises. In the absence of any material to support the said view, we are unable to agree with the view taken by the tax authorities that the purchases amount is liable to be disallowed u/s 40A(3) of the Act. On the same impression only, the AO has expressed the view in the remand report that the purchases amount is also liable to assessed u/s 69C of the Act as the source of purchases were not proved. Again the said conclusion is based upon only surmises, which could not be sustained. Thus, it is seen that the assessing officer has accepted the fact that the quantity details of purchases and sales have been reconciled by the assessee. Further, various case law relied upon by the assessee also supports his case. Under these set of facts, we are of the view that the Ld CIT(A) was not justified in confirming the disallowance of purchases. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance of purchases.

B) Ramesh Kumar & Co. v. ACIT

ITA No. 2959/Mum/2014, Bench ‘D’, AY 2010-11, order dated 28.11.2014

We have carefully perused the orders of the lower authorities and the relevant documentary evidences brought before us. We find that the AO has made the addition as some of the suppliers of the assessee were declared Hawala dealer by the Sales tax Department. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done. The Ld. CIT(A) has also confirmed the addition made by the AO by going on the suspicion and the belief that the suppliers of the assessee are Hawala traders We also find that no effort has been made to verify the work done by the assessee from the Municipal Corporation of Greater Mumbai. We agree with the submissions of the Ld. Counsel that if there were no purchases, the assessee would not have been in a position to complete the civil work.

On civil contract receipts of ₹ 32.05 crore, the assessee has shown gross profit at 14.2% and net profit at 9.72%.

Even if for the sake of argument, the books of accounts are rejected, the profit has to be computed on the sales made by the assessee U/s. 44AD of the Act, the presumptive profit in case of civil contractors is 8% and in case of a partnership firm, a further deduction is allowed in respect of salary and interest paid to the partners The ratio analysis of the profitability is also in favour of the assessee. In our considered opinion, the purchases are supported by proper invoices duly reflected in the books of account. The payments have been made by account payee cheque which are duly reflected in the bank statement of the assessee. There is no evidence to show that the assessee has received cash book from the suppliers The additions have been made merely on the report of the Sales tax Department but at the same time it cannot be said that purchases are bogus. We, therefore, set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition of ₹ 4,98,80,892/-.

C) ITO v. Deepak Popatlal Gada

ITA No.5920/Mum/2013, AY 2010-11, Bench ‘D’, order dated 31.3.2015

On the other hand, the ld. AR submitted that the additions made in the case of some other assesses on identical reasons have been deleted by the Co-ordinate Benches of the Tribunal in the following cases :

1. Ramesh Kumar and Co vs. ACIT in ITA No.2959/Mum/2014 (AY-2010-11) dated 28.11.2014;

2. DCIT vs. Shri Rajeev G Kalathil in ITA No.6727/Mum/2012 (AY-2009-10) dated 20.8.2014; and

3. Shri Ganpatraj A Sanghavi vs. ACIT in ITA No. 2826/Mum/2013 (AY-2009-10) dated 5.11.2014

In all the above said cases, the Co-ordinate Benches of the Tribunal has held that the AO was not justified in making the addition on the basis of statements given by the third parties before the Sales Tax Department, without conducting any other investigation. In the instant case also, the assessing officer has made the impugned addition on the basis of statements given by the parties before the Sales tax department. We notice that the ld.CIT(A) has taken note of the fact that no sales could be effected without purchases. He has further placed reliance on the decision rendered by Hon’ble Gujarat High Court in the case of CIT vs. M.K. Brothers (163 ITR 249). He has further relied upon the decision rendered by the Tribunal in the cae of ITO vs. Premanand (2008)(25 SOT 11)(Jodh), wherein it has been held that where the AO has made addition merely on the basis of observations made by the Sales tax dept and has not conducted any independent enquiries for making the addition especially in a case where the assessee has discharged its primary onus of showing books of account, payment by way of account payee cheque and producing vouchers for sale of goods, such an addition could not be sustained. The Ld CIT(A) has also appreciated the contentions of the assessee that he was not provided with an opportunity to cross examine the sellers, which is required to be given as per the decision of Hon’ble Kerala High Court in the case of Ponkunnam Traders (83 ITR 508 & 102 ITR 366). Accordingly, the Ld CIT(A) has deleted the impugned addition. On a careful perusal of the decision rendered by Ld CIT(A) would show that the first appellate authority has analysed the issue in all angles and applied the ratio laid down by the High Courts and Tribunals in deciding this issue. Hence, we do not find any reason to interfere with his order on this issue.

D) ITO v. Shri Rajkumar Agarwal

ITA No.5233/Mum/2013, AY 2010-11, Bench ‘D’, order dated 10.4.2015

We heard the parties on this issue and perused the record. We notice that this bench of Tribunal has considered an identical issue in the case of Deepak Popatlal Gala, in ITA No. 5920/M/13 and Tribunal, vide its order dated 27.3.2015, has held as under:-

10. The next issue relates to disallowance made out of purchases and assessed u/s 69C of the Act. We heard the parties and perused the record. The total purchase expenditure claimed by the assessee during the year under consideration was ₹ 7,36,27,555/-. The AO noticed that the Sales Tax Department of Government of Maharashtra has listed out names of certain dealers, who were alleged to have been providing accommodation entries without doing actual business. The AO noticed that the assessee made purchases to the tune of ₹ 38.69 lakhs from two parties named M/s. Umiya Sales Agency Pvt Ltd and M/s Mercury Enterprises, whose names found place in the list provided by the Sales Tax Department. The AO placed full reliance on the enquiries conducted by Sales Tax Department in respect of the parties, referred above. Accordingly, the AO took the view that the purchases to the tune of ₹ 38.69 lakhs have to be treated as unexplained expenditure. Accordingly, he assessed the same u/s 69C of the Act.

11. The ld. CIT(A) deleted the addition and hence the Revenue is in appeal before the Tribunal.

12. The ld. DR strongly placed reliance on the order of Assessing Officer.

13. On the other hand, the ld. AR submitted that the additions made in the case of some other assesses on identical reasons have been deleted by the Co-ordinate Benches of the Tribunal in the following cases :

1. Ramesh Kumar and Co V/s ACIT in ITA No.2959/Mum/2014 (AY-2010-11) dated 28.11.2014;

2. DCIT V/s Shri Rajeev G Kalathil in ITA No.6727/Mum/2012 (AY-2009-10) dated 20.8.2014; and

3. Shri Ganpatraj A Sanghavi V/s ACIT in ITA No. 2826/Mum/2013 (AY-2009-10) dated 5.11.2014

In all the above said cases, the Co-ordinate Benches of the Tribunal has held that the AO was not justified in making the addition on the basis of statements given by the third parties before the Sales Tax Department, without conducting any other investigation. In the instant case also, the assessing officer has made the impugned addition on the basis of statements given by the parties before the Sales tax department. We notice that the ld.CIT(A) has taken note of the fact that no sales could be effected without purchases. He has further placed reliance on the decision rendered by Hon’ble Gujarat High Court in the case of CIT Vs. M.K. Brothers (163 ITR 249). He has further relied upon the decision rendered by the Tribunal in the case of ITO Vs. Premanand (2008)(25 SOT 11)(Jodh), wherein it has been held that where the AO has made addition merely on the basis of observations made by the Sales tax dept and has not conducted any independent enquiries for making the addition especially in a case where the assessee has discharged its primary onus of showing books of account, payment by way of account payee cheque and producing vouchers for sale of goods, such an addition could not be sustained. The Ld CIT(A) has also appreciated the contentions of the assessee that he was not provided with an opportunity to cross examine the sellers, which is required to be given as per the decision of Hon’ble Kerala High Court in the case of Ponkunnam Traders (83 ITR 508 & 102 ITR 366). Accordingly, the Ld CIT(A) has deleted the impugned addition. On a careful perusal of the decision rendered by Ld CIT(A) would show that the first appellate authority has analysed the issue in all angles and applied the ratio laid down by the High Courts and Tribunals in deciding this issue. Hence, we do not find any reason to interfere with his order on this issue.”

In the instant case also, the facts are identical, i.e., the assessing officer has made the impugned addition only on the basis of information given by the Sales tax department, he did not make independent enquiry with the sales tax department, the assessee was not given opportunity to cross examine the officials of sales tax department, the evidences furnished by the assessee to prove purchases of sands and its movement were not disproved, the evidences furnished by the assessee to prove the payments made against purchases by way of account payee cheques were also not disproved. Under these set of facts, by following the decision rendered by this bench of Tribunal in the case of Deepak Popatlal Gala (supra), we uphold the order of Ld CIT(A) on this issue.

E) Other decisions on similar issue-

1. Hiralal Chunilal Jain v. ITO, ITA No. 4547/M/2014, AY 2009-10, Bench ‘ H ’ , order dated 1.1.2016

2. Imperial Imp & Exp v. ITO, ITA No. 5427/Mum/2015, AY 2009-10, Bench ‘I’, order dated 18.3.2016

F) ACIT v. Tristar Jewellery, ITA No.7593/Mum/2011, AY 2006-07, Bench ‘ E ’ , order dated 31.7.2015

Facts

The completed assessment of the assessee was reopened on the basis of the statement of Shri Hiten L. Rawal, the proprietor of M/s. Zalak Impex. In this statement recorded u/s. 131 of the Act, Shri Rawal confessed to have provided accommodation entries in the form of sales and purchases, to various parties. The assessee was stated to have obtained bills for nonexisting parties, amounting to ₹ 4,09,12,718/-, during the year under consideration. The assessment order dated 21-12-2010 was passed pursuant to the said reopening.

Held:

It remains undisputed that the assessee was never provided any opportunity to cross examine Shri Hiten L. Rawal, though he specifically asked for such cross examination. On the other hand, the burden was sought to be shifted on the assessee by the A.O., by asking him to produce Shri Rawal, even though it was the A.O. who had relied on the statement of Shri Rawal, without either confronting this statement to the assessee, or providing opportunity to the assessee to cross examine Shri Rawal. Therefore, the reassessment order is as a result of violation of the natural principle of audi alteram partem. A statement recorded at the back of a party cannot be used against such party without confronting such statement to the party. Hence, on this score alone, the reassessment order is unsustainable in the eye of law and we hereby cancel the same. As a consequence, the order of the ld. CIT(A) is also cancelled in toto.

Further, even otherwise, before the A.O., the assessee had contended, by written submissions filed on 25-11-2010, inter alia, that during the year, they had purchased diamonds worth ₹ 4,09,12,718/- from M/s Zalak Impex; that the assessee being in an export promotion zone, the movement of its goods is controlled and customs approved; that the purchases being approved purchases, there was no question of their being bogus purchases. The assessee enclosed the custom approved invoices in respect of purchases from Zalak Impex. These invoices have been produced before us also, in the paper book filed by the assessee. As per these invoices, the goods purchased had been verified and approved by the Customs Authority. This clearly shows that the goods had actually been purchased and received by the assessee. As such, these purchases could not have, by any stretch of imagination, been treated as bogus purchases. It is also noteworthy that the payments made by the assessee to Zalak Impex were through account payee cheques only. Neither of the Taxing Authorities, however, took these invoices into consideration and wrongly held the assessee’s purchases from Zalak Impex to be bogus purchases. Nothing has been brought on record to show that these invoices were self made or fabricated. Moreover, the comparative chart of purchases made during the year and the selling price (page 141-144), as filed before the ld. CIT(A) has not been refuted and this also goes to prove the theory of bogus bills and accommodation entries to be wrong. Therefore, the order under appeal is a result of complete misreading and non-reading of cogent documentary evidence brought on record by the assessee. For this reason also, along with the reason that the sales made by the assessee were never questioned, the addition is deleted in toto.

G. M/s. Maruti Impex v. JCIT (ITAT Mumbai)

ITA No.3823/Mum/2014; A.Y. 2009-10
Bench ‘B’; Order dated 09.03.2016

Bogus Purchases: Theory that transaction "defies human probabilities" cannot be applied to purchases in isolation but has to be applied to the entire transaction in the light of documentary evidence produced by the assessee

Held:

1. The tax authorities have not accepted the claim of purchases of diamonds from TTPL on the reasoning that the said transaction defies the human probabilities. The tax authorities have, accordingly, rejected the various evidences furnished by the assessee in support of claim of purchases. We also notice that the tax authorities have arrived at such a conclusion only by considering the purchase transaction and did not prefer to examine the claim of export of same goods in the succeeding year and re-import of the same goods thereafter. In our view, the surrounding circumstances and human probabilities attached to a transaction should be examined by considering the transactions as a whole. Examination of part of transactions alone in the context of human probabilities/surrounding circumstances, some times, would give misleading results;

2. The assessee has furnished various documents before the assessing officer during the course of remand proceedings to support the claim of purchases. The assessee has also proved that the said purchases were available in stock by linking the closing stock available as at the year end with the relevant invoices. When the assessee is able to so link the closing stock with the purchase bills, the said claim should not have been rejected by Ld CIT(A) without examining the stock register and further without disproving the said claim by bringing any other credible material. If closing stock available with the assessee was not accepted as the materials purchased from TTPL, then the tax authorities should have pointed out that the closing stock represented some other purchases. The assessee has also shown that the said goods were exported subsequently. It is pertinent to note that the tax authorities have ignored the claim of export, since they have doubted the claim of purchases from TTPL. There should not be any doubt that a person cannot sell any goods without purchasing the same. In the instant case, the claim of sales in the succeeding year has not been doubted with or disproved. As a matter of fact, the sales cannot be disproved, since the assessee has exported the goods by obtaining clearances from RBI and Customs authorities. We have noticed that the assessing officer has suspected the correspondences exchanged between the assessee and the client, who imported the goods from the assessee, under the impression that those papers should have been fabricated and accordingly sent them for examination to CFSL, Hyderabad. According to Ld A.R, the assessing officer has since received report from CFSL and it has not given any adverse report against those documents, which fact has not been controverted by the revenue. Thus, one of the basis for suspecting the transactions has been proved wrong. When the evidences are available with the assessee and when the tax authorities have not brought any material to contradict the same, we are of the view that the tax authorities are not justified in rejecting the evidences furnished by the assessee to support the transactions of purchases.

3. The Hon’ble Jurisdictional Bombay High Court has considered an identical issue of allegation of bogus purchases in the case of CIT vs. Nikunj Eximp Enterprieses Pvt Ltd (372 ITR 619). In the instant case also, the claim of the assessee is that the purchases made from TTPL was available as closing stock as at the year end and they were exported in the succeeding years The fact that the assessee has exported the goods was not controverted. It is a known fact that the claim of export cannot be considered to be not-genuine, since the export cannot take place without clearance from Customs Authorities, another arm of Government of India. Hence, the claim of export has to be necessarily accepted on the basis of relevant documents. In the instant case also, the assessee has furnished the copies of purchase invoices, confirmation letters, copies of ledger accounts, copies of export bills, the details of re-import of the same and details of payment of customs duty on re-import, the details of purchase return. All these chronological events have not been disproved by the tax authorities.

4. In view of the foregoing discussions, we are of the view that there is no reason to suspect the claim of purchases of goods from TTPL, particularly when the assessee is able to support the said claim with documentary evidences, stock register, confirmations etc and more particularly in view of the fact that the assessee has exported the very same goods. In our view, the theory of human probability has been applied to only part of transactions and not to the whole round of transactions. In any case, it cannot be said that the claim of the assessee defies the human probabilities, when one examines the documents furnished by the assessee. Accordingly, we are of the view that the Ld CIT(A) was not justified in confirming the addition made by the AO. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the impugned addition.

WEALTH TAX

Umaben Shaileshbhai Sheth vs. DCWT
ITAT Ahmedabad `D’ Bench
Before A. Mohan Alankamony (AM) and Kul Bharat (JM)
ITA No. 44 to 49/Ahd/2010
A.Y.: 2000-01 to 2005-06. Decided on: 4^th October, 2013.
Counsel for assessee/revenue: Vijay Ranjan/K. C. Mathews.

Proviso to section 5(1)(vi) of the Wealth-tax Act, 1957. If the assessee’ s share in the plot of land is less than 500 sq. mts., the benefit of the proviso cannot be denied to the assessee on the ground that the area of the entire plot is more than 500 sq. mts.

Facts: The assessee had joint share in a plot of land, admeasuring 567 sq. mts., allotted by Urmi Society, along with her husband. She was a joint shareholder as well. The Assessing Officer (AO) accepted that the assessee is the owner of half portion of the land but he denied the benefit of exemption to section 5(1)(vi) in an order passed u/s 24 r.w.s. 17 r.w.s. 16(3) of the Wealth-tax Act, 1957 (WT Act).

Aggrieved, the assessee preferred an appeal to the CWT(A) who dismissed the appeal filed by the assessee on the ground that the assessee and her husband had disclosed the value of the plot of land in their taxable wealth while filing returns of net wealth for AYs 2006- 07 and 2007-08 and therefore, how can the value of the said plot be exempt in earlier years He held that the market value of the plot of land allotted by Urmi Society is includible in taxable wealth.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held: The Tribunal noted that the CWT(A) had not given any basis as to how the proviso to section 5(1)(vi) is not applicable when there is a finding of fact by the AO that the assessee is treated owner of land less than 500 sq. mts. The only basis of denial of exemption by the CWT(A) was that the assessee had not filed the wealth-tax return for the earlier period. The Revenue had not placed reliance on any judicial pronouncement or on any provision of law to deny exemption. It further noted that as per proviso to section 5(1)(vi) of the WT Act, if plot of land is comprising an area of 500 sq. mts or less then no wealth-tax shall be payable by an assessee.

The Tribunal held that admittedly, the assessee has been treated as owner of one-half share in a plot of land admeasuring 567 sq. mts, therefore the right of the assessee is lesser than 500 sq. mts. The assessee cannot be fastened with a liability of tax which otherwise cannot be fastened under the WT Act. It held that on this piece of land, no wealth-tax is payable by the assessee in terms of proviso to section 5(1)(vi). It held that the CWT(A) erred in not granting exemption under proviso to section 5(1)(vi) of the WT Act. It directed the AO to allow exemption.

The appeal filed by the assessee was allowed.